SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ________ to ________
Commission File No. 0-994
[LOGO] NW NATURAL
NORTHWEST NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
OREGON 93-0256722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 N.W. SECOND AVENUE, PORTLAND, OREGON 97209
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (503) 226-4211
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
At August 6, 2001, 25,115,249 shares of the registrant's Common Stock, $3-1/6
par value (the only class of Common Stock) were outstanding.
NORTHWEST NATURAL GAS COMPANY
June 30, 2001
Summary of Information Reported
The registrant submits herewith the following information:
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements Number
------
(1) Consolidated Statements of Income for the three and
six-month periods ended June 30, 2001 and 2000 3
(2) Consolidated Statements of Earnings Invested in the
Business for the six-month periods ended June 30, 2001
and 2000 4
(3) Consolidated Balance Sheets at June 30, 2001 and 2000
and Dec. 31, 2000 5
(4) Consolidated Statements of Cash Flows for the
six-month periods ended June 30, 2001 and 2000 7
(5) Consolidated Statements of Capitalization at
June 30, 2001 and 2000 and Dec. 31, 2000 8
(6) Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 23
Signature 23
2
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(1) Consolidated Statements of Income
(Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2001 2000 2001 2000
---- ---- ---- ----
Operating Revenues:
Gross operating revenues $ 114,717 $ 86,136 $ 332,058 $ 272,785
Cost of sales 59,991 40,250 185,679 133,811
--------- --------- --------- ---------
Net operating revenues 54,726 45,886 146,379 138,974
Operating Expenses:
Operations and maintenance 20,986 18,571 42,029 37,577
Taxes other than income taxes 6,265 5,722 15,959 14,386
Depreciation, depletion and amortization 12,287 11,779 24,415 23,218
--------- --------- --------- ---------
Total operating expenses 39,538 36,072 82,403 75,181
--------- --------- --------- ---------
Income from Operations 15,188 9,814 63,976 63,793
Other Income (Expense) (9) 1,426 597 2,115
Interest Charges - net 7,926 7,936 16,186 16,501
--------- --------- --------- ---------
Income Before Income Taxes 7,253 3,304 48,387 49,407
Income Taxes 2,388 806 17,615 17,717
--------- --------- --------- ---------
Net Income from Continuing Operations 4,865 2,498 30,772 31,690
Discontinued Segment:
Gain (loss) on sale of discontinued segment - net of tax - (35) - 2,435
--------- --------- --------- ---------
Net Income 4,865 2,463 30,772 34,125
Redeemable preferred and preference stock
dividend requirements 604 622 1,212 1,244
--------- --------- --------- ---------
Earnings Applicable to Common Stock $ 4,261 $ 1,841 $ 29,560 $ 32,881
========= ========= ========= =========
Average Common Shares Outstanding 25,103 25,195 25,155 25,162
Basic Earnings Per Share of Common Stock:
From continuing operations $ 0.17 $ 0.07 $ 1.18 $ 1.21
From gain on sale of discontinued segment - - - 0.10
--------- --------- --------- ---------
Total basic earnings per share $ 0.17 $ 0.07 $ 1.18 $ 1.31
========= ========= ========= =========
Diluted Earnings Per Share of Common Stock:
From continuing operations $ 0.17 $ 0.07 $ 1.16 $ 1.19
From gain on sale of discontinued segment - - - 0.10
--------- --------- --------- ---------
Total diluted earnings per share $ 0.17 $ 0.07 $ 1.16 $ 1.29
========= ========= ========= =========
Dividends Per Share of Common Stock $ 0.31 $ 0.31 $ 0.62 $ 0.62
========= ========= ========= =========
----------------------------------------------
See Notes to Consolidated Financial Statements
3
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Statements of Earnings Invested in the Business
(Thousands of Dollars)
(Unaudited)
Six Months Ended June 30, 2001 2000
- ----------------------------------------------------------------------------------------
Earnings Invested in the Business:
Balance at Beginning of Period $ 134,189 $ 118,711
Net Income 30,772 $ 30,772 34,125 $ 34,125
Cash Dividends Paid:
Redeemable preferred and preference stock (1,221) (1,249)
Common stock (15,592) (15,585)
Common Stock Repurchased (2,688) (459)
--------- ---------
Balance at End of Period $ 145,460 $ 135,543
========= =========
Accumulated Other Comprehensive Income (Loss):
Balance at Beginning of Period
$ - $ (3,181)
Other comprehensive income - net of tax:
Unrealized gain on securities
- - 37 37
Recognition of foreign currency
translation adjustment included
in gain on sale of discontinued segment - - 3,181 3,181
------------------- -------------------
Comprehensive Income $ 30,772 $ 37,343
======== ========
Balance at End of Period $ - $ 37
========= =========
----------------------------------------------
See Notes to Consolidated Financial Statements
4
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited) (Unaudited)
June 30, June 30, Dec. 31,
2001 2000 2000
- ------------------------------------------------------------------------------------
Assets:
Plant and Property :
Utility plant $ 1,438,183 $ 1,367,202 $ 1,406,970
Less accumulated depreciation 497,489 457,040 478,138
----------- ----------- -----------
Utility plant - net 940,694 910,162 928,832
----------- ----------- -----------
Non-utility property 8,653 8,532 8,649
Less accumulated depreciation and depletion 3,499 7,706 3,451
----------- ----------- -----------
Non-utility property - net 5,154 826 5,198
----------- ----------- -----------
Total plant and property 945,848 910,988 934,030
Investments and Other 13,877 15,716 14,526
Current Assets:
Cash and cash equivalents 17,812 10,419 11,283
Accounts receivable 30,698 24,145 62,620
Allowance for doubtful accounts (2,257) (1,663) (1,867)
Accrued unbilled revenue 10,346 7,201 45,619
Inventories of gas, materials and supplies 32,274 29,121 46,883
Property held for sale - 17,286 -
Prepayments and other current assets 19,683 14,054 22,834
----------- ----------- -----------
Total current assets 108,556 100,563 187,372
Regulatory Assets:
Income tax asset 49,515 51,060 49,515
Deferred gas costs receivable 15,244 17,520 16,973
Non-trading derivative assets 76,502 - -
Unamortized loss on debt redemption 7,202 4,934 7,433
Other 6,585 14,345 9,524
----------- ----------- -----------
Total regulatory assets 155,048 87,859 83,445
----------- ----------- -----------
Other Assets:
Investment in life insurance 51,098 47,075 49,112
Other 10,998 9,976 10,228
----------- ----------- -----------
Total other assets 62,096 57,051 59,340
----------- ----------- -----------
Total Assets $ 1,285,425 $ 1,172,177 $ 1,278,713
=========== =========== ===========
----------------------------------------------
See Notes to Consolidated Financial Statements
5
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited) (Unaudited)
June 30, June 30, Dec. 31,
2001 2000 2000
- ------------------------------------------------------------------------------------
Capitalization and Liabilities:
Capitalization:
Common stock $ 317,748 $ 316,347 $ 318,120
Earnings invested in the business 145,460 135,543 134,189
Accumulated other comprehensive income - 37 -
----------- ----------- -----------
Total common stock equity 463,208 451,927 452,309
Redeemable preference stock 25,000 25,000 25,000
Redeemable preferred stock 9,000 9,793 9,750
Long-term debt 408,498 396,080 400,790
----------- ----------- -----------
Total capitalization 905,706 882,800 887,849
----------- ----------- -----------
Current Liabilities:
Notes payable 17,961 10,307 56,263
Accounts payable 47,692 51,805 110,698
Long-term debt due within one year 30,000 10,000 20,000
Taxes accrued 10,020 5,380 8,066
Interest accrued 2,689 4,707 2,696
Other current and accrued liabilities 24,825 39,899 23,638
----------- ----------- -----------
Total current liabilities 133,187 122,098 221,361
Regulatory Liabilities 1,766 1,743 1,720
Other Liabilities:
Deferred income tax liabilities 142,185 140,828 141,656
Deferred investment tax credits 8,983 9,821 9,538
Other 93,598 14,887 16,589
----------- ----------- -----------
Total other liabilities 244,766 165,536 167,783
----------- ----------- -----------
Commitments and Contingencies - - -
----------- ----------- -----------
Total Capitalization and Liabilities $ 1,285,425 $ 1,172,177 $ 1,278,713
=========== =========== ===========
----------------------------------------------
See Notes to Consolidated Financial Statements
6
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Cash Flows
(Thousands of Dollars)
(Unaudited)
Six Months Ended June 30, 2001 2000
- ---------------------------------------------------------------------------------------------
Operating Activities:
Net income from continuing operations $ 30,772 $ 31,690
Adjustments to reconcile net income to cash provided by operations:
Depreciation, depletion and amortization 24,415 23,218
Deferred income taxes and investment tax credits (26) 4,106
Equity in (earnings) losses of investments (233) 166
Allowance for funds used during construction (414) (251)
Deferred gas costs receivable 1,729 3,430
Regulatory accounts and other - net 967 1,076
-------- --------
Cash from continuing operations before working capital changes 57,210 63,435
Changes in operating assets and liabilities:
Accounts receivable - net 32,312 20,867
Accrued unbilled revenue 35,273 24,349
Inventories of gas, materials and supplies 14,609 4,798
Accounts payable (63,006) (16,358)
Accrued interest and taxes 1,947 1,313
Other current assets and liabilities 4,338 5,041
-------- --------
Cash Provided By Continuing Operating Activities 82,683 103,445
-------- --------
Investing Activities:
Acquisition and construction of utility plant assets (35,815) (38,005)
Investment in non-utility property (4) (601)
Proceeds from sale of discontinued segment - 34,779
Investments and other 882 675
-------- --------
Cash Used In Investing Activities (34,937) (3,152)
-------- --------
Financing Activities:
Common stock issued 2,440 2,544
Common stock repurchased (5,792) (1,021)
Redeemable preferred stock retired (750) (771)
Long-term debt issued 18,000 -
Change in short-term debt (38,302) (83,842)
Cash dividend payments:
Redeemable preferred and preference stock (1,221) (1,249)
Common stock (15,592) (15,585)
Foreign currency translation and capital stock expense - 37
-------- --------
Cash Used in Financing Activities (41,217) (99,887)
-------- --------
Increase In Cash and Cash Equivalents 6,529 406
Cash and Cash Equivalents - Beginning of Period 11,283 10,013
-------- --------
Cash and Cash Equivalents - End of Period $ 17,812 $ 10,419
======== ========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest $ 16,213 $ 16,607
Income Taxes $ 13,402 $ 17,391
Supplemental Disclosure of Non-cash Financing Activities:
Conversion to common stock:
7-1/4 % Series of Convertible Debentures $ 292 $ 299
----------------------------------------------
See Notes to Consolidated Financial Statements
7
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(5) Consolidated Statements of Capitalization
(Thousands, Except Per Share Amounts)
(Unaudited) (Unaudited)
June 30, 2001 June 30, 2000 Dec. 31, 2000
- ------------------------------------------------------------------------------------------------
COMMON STOCK EQUITY:
Common stock - par value $3-1/6 per share $ 79,502 $ 79,750 $ 79,905
Premium on common stock 238,246 236,597 238,215
Earnings invested in the business 145,460 135,543 134,189
Accumulated other comprehensive income - 37 -
-------- -------- --------
Total common stock equity 463,208 51% 451,927 51% 452,309 51%
-------- -------- --------
PREFERENCE STOCK:
$6.95 Series, stated value $100 per share 25,000 3% 25,000 3% 25,000 3%
-------- -------- --------
Total redeemable preference stock 25,000 25,000 25,000
REDEEMABLE PREFERRED STOCK:
Stated value $100 per share:
$4.75 Series - 43 -
$7.125 Series 9,000 9,750 9,750
-------- -------- --------
Total redeemable preferred stock 9,000 1% 9,793 1% 9,750 1%
-------- -------- --------
LONG-TERM DEBT:
First Mortgage Bonds
9-3/4% Series due 2015 - 50,000 -
Medium-Term Notes
First Mortgage Bonds:
5.960% Series B due 2000 - 5,000 -
5.980% Series B due 2000 - 5,000 -
6.620% Series B due 2001 10,000 10,000 10,000
8.050% Series A due 2002 10,000 10,000 10,000
6.750% Series B due 2002 10,000 10,000 10,000
5.550% Series B due 2002 20,000 20,000 20,000
6.400% Series B due 2003 20,000 20,000 20,000
6.340% Series B due 2005 5,000 5,000 5,000
6.380% Series B due 2005 5,000 5,000 5,000
6.450% Series B due 2005 5,000 5,000 5,000
6.050% Series B due 2006 8,000 - -
6.800% Series B due 2007 10,000 10,000 10,000
6.500% Series B due 2008 5,000 5,000 5,000
7.450% Series B due 2010 25,000 - 25,000
6.665% Series B due 2011 10,000 - -
8.260% Series B due 2014 10,000 10,000 10,000
7.000% Series B due 2017 40,000 40,000 40,000
6.600% Series B due 2018 22,000 22,000 22,000
8.310% Series B due 2019 10,000 10,000 10,000
7.630% Series B due 2019 20,000 20,000 20,000
9.050% Series A due 2021 10,000 10,000 10,000
7.250% Series B due 2023 20,000 20,000 20,000
7.500% Series B due 2023 4,000 4,000 4,000
7.520% Series B due 2023 11,000 11,000 11,000
7.720% Series B due 2025 20,000 - 20,000
6.520% Series B due 2025 10,000 10,000 10,000
7.050% Series B due 2026 20,000 20,000 20,000
7.000% Series B due 2027 20,000 20,000 20,000
6.650% Series B due 2027 20,000 20,000 20,000
6.650% Series B due 2028 10,000 10,000 10,000
7.740% Series B due 2030 20,000 - 20,000
7.850% Series B due 2030 10,000 - 10,000
Unsecured:
8.47% Series A due 2001 10,000 10,000 10,000
Convertible Debentures
7-1/4% Series due 2012 8,498 9,080 8,790
-------- -------- --------
438,498 406,080 420,790
Less long-term debt due within one year 30,000 10,000 20,000
-------- -------- --------
Total long-term debt 408,498 45% 396,080 45% 400,790 45%
-------- ---- -------- ---- -------- ----
TOTAL CAPITALIZATION $905,706 100% $882,800 100% $887,849 100%
======== ==== ======== ==== ======== ====
----------------------------------------------
See Notes to Consolidated Financial Statements
8
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(6) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Financial Statements
The information presented in the consolidated financial statements is
unaudited, but includes all adjustments, consisting of only normal recurring
accruals, which the management of the Company considers necessary for a fair
presentation of the results of such periods. These consolidated financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's 2000 Annual Report on Form 10-K, as
amended (2000 Form 10-K). A significant part of the business of the Company is
of a seasonal nature; therefore, results of operations for the interim periods
are not necessarily indicative of the results for a full year.
Certain amounts from prior periods have been reclassified to conform
with the 2001 presentation. These reclassifications had no impact on prior
period results of operations.
2. 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 in 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. Guaranteed minimum
obligations for gas storage services are recognized over the term of the
contract.
3. Derivatives Policy
NW Natural's Derivatives Policy allows the use of selected financial
derivative products to support prudent risk management strategies within
designated parameters for natural gas commodity prices, for foreign currency
exchange rates related to the Company's natural gas purchase commitments, for
oil or propane commodity prices related to natural gas sales or transportation
under rate schedules pegged to commodities other than natural gas, and for
interest rates on outstanding long-term debt instruments maturing in less than
five years. The objective is to use derivative products to structure "hedge"
positions as defined by the policy. Use of derivatives is permitted only after
the purchase price, exchange rate, oil or propane index price, and interest rate
exposures that have been identified are determined to exceed defined tolerance
levels and are considered to be unavoidable because they are necessary or
support normal business activities.
The Derivatives Policy is intended to decrease the Company's net
exposures to commodity price, exchange rate and interest rate risks (market
risks) by using hedging strategies and derivative structures within certain
limitations. The policy is intended to prevent speculative risk. The Company
believes that any increase in market risk created by the use of the derivatives
should be offset by the exposures they modify.
9
4. New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedge accounting. It
requires that an entity measure all derivatives at fair value and recognize
those derivatives as either assets or liabilities on the balance sheet. If the
derivative is designated as a fair value hedge, the net changes in the fair
value of the derivative and of the hedged item attributable to the hedged risk
are recognized in current earnings. If the derivative is designated as a cash
flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive income (OCI), or in deferred
asset accounts for regulated activities (see Note 5, below), and recognized in
the income statement when the hedged item affects earnings. Ineffective portions
of changes in the fair value of cash flow hedges are recognized in current
earnings. Some of the Company's gas purchase, sales and transportation contracts
are derivative instruments as defined under SFAS No. 133.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," amending portions of
SFAS No. 133. Among other things, SFAS No. 138 provides an exception for
contracts intended for the normal purchase and normal sale of something other
than a financial instrument or derivative instrument, for which physical
delivery is probable.
5. Adoption of New Accounting Standard
The Company adopted SFAS No. 133, as amended, on Jan. 1, 2001. The
Company's primary derivatives hedging activities are being accounted for as cash
flow hedges under this statement. Unrealized gains or losses resulting from
mark-to-market valuations of the underlying hedge contracts are subject to
deferral under the Company's tariffs with the Oregon Public Utility Commission
(OPUC) and the Washington Utilities and Transportation Commission (WUTC).
Pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of
Regulation," contracts representing unrealized gain or loss positions are
reported as derivative assets or liabilities and are offset by a corresponding
deferred account included under "Regulatory Assets" or "Regulatory Liabilities."
Due to their regulatory deferral treatment, effective portions of changes in the
fair value of these derivatives are not recorded in OCI, but are deferred as a
regulatory asset or liability. Effectiveness is measured by comparing changes in
cash flows of the hedged item to gains or losses on derivative instruments.
The Company formally documents all relationships between hedging
contracts and hedged items, as well as its risk management objective and
strategy for undertaking the hedge. This process includes specific
identification of the hedging contract and the hedge transaction, the nature of
the risk being hedged and how the hedging instrument's effectiveness will be
measured. Both at the inception of the hedge and on an ongoing basis, the
Company measures effectiveness of the derivatives used in hedging transactions.
NW Natural enters into short-term and long-term natural gas purchase
contracts with demand and commodity fixed-price and variable-price components,
along with associated short-term and long-term natural gas transportation
contracts. The prices of natural gas commodity are subject to fluctuations due
to unpredictable factors including weather, pipeline transportation congestion
and the economy, each of which affects short-term supply and demand. NW Natural
uses natural gas commodity swap and cap agreements to convert certain of its
long-term purchase contracts from floating prices to fixed prices.
10
Many of the purchases made under these gas purchase contracts are
priced in Canadian dollars. The costs of natural gas commodity and pipeline
services purchased from certain Canadian suppliers are subject to changes in the
value of Canadian currency in relation to U.S. currency. NW Natural uses foreign
currency forward contracts to hedge against fluctuations in currency exchange
rates with respect to its purchases of natural gas from suppliers in Canada.
The adoption of SFAS No. 133 effective Jan. 1, 2001 resulted in the
Company recording a one-time transition adjustment by debiting a derivative
asset account and crediting an offsetting regulatory asset account on the
balance sheet for approximately $165 million. This transition adjustment
represented the initial recognition of the fair values of hedge derivatives
outstanding on the adoption date.
At June 30, 2001, the Company had two types of natural gas commodity
cash flow hedges open: a series of 17 natural gas price swap agreements and four
call option agreements. The net decrease in the fair value of these hedge
derivatives for the six months ended June 30, 2001 ($241.5 million), included
net gains of $86.9 million realized as reductions to the cost of gas upon
settlement of various cash flow hedges. During the six months ended June 30,
2001, the amount of hedge ineffectiveness recognized in earnings from
derivatives that are designated and qualify as cash flow hedges was negligible.
All remaining outstanding derivative instruments in these categories at June 30,
2001, were determined to be 100 percent effective (see Part I, Item 2., "Results
of Operations - Cost of Gas," below).
The estimated fair values for these derivative hedge instruments at
Jan. 1 and June 30, 2001 are presented below:
Jan. 1, June 30,
--------- ---------
2001 2001
--------- ---------
Non-trading derivative assets ($000):
Fixed-price natural gas commodity swaps $ 122,588 $ 404
Fixed-price natural gas call options 41,980 152
Foreign currency forward contracts 405 79
Non-trading derivative liabilities ($000):
Fixed-price natural gas commodity swaps - (77,137)
Fixed-price natural gas call options - -
Foreign currency forward contracts - -
--------- ---------
Total non-trading derivative assets (liabilities) $ 164,973 $ (76,502)
========= =========
The fair value of fixed-price contracts as of June 30, 2001 was
estimated based on market prices for the periods covered by the contracts. The
net differential between the prices in each contract and market prices for
future periods, as adjusted for estimated basis, where applicable, has been
applied to the volumes stipulated in each contract to arrive at an estimated
future value. As of June 30, 2001, a total of nine natural gas price swap
agreements have contract periods that extend beyond Dec. 31, 2001. As of June
30, 2001, the Company had not entered into any natural gas call option contracts
extending beyond Dec. 31, 2001.
The Company recorded a $0.1 million loss for the first six months of
2001, representing the change in value of an embedded derivative relating to a
contract for an equipment financing program under which NW Natural guarantees a
minimum level of return for the lender.
The Derivatives Implementation Group (DIG), a group sponsored by the
FASB, continues to develop interpretive guidance relating to SFAS No. 133.
11
Future interpretations of SFAS No. 133 by the DIG or the FASB could impact the
Company's application of the standard and, thereby, its financial statement
disclosures.
6. Segment Reporting
The Company principally operates in a segment of business consisting
of the distribution of natural gas ("Utility"). Another segment, which was
immaterial prior to Jan. 1, 2001, represents natural gas storage services
provided to upstream customers using storage capacity not required from time to
time for service to utility customers ("Gas Storage"). The remaining segment
primarily consists of non-regulated investments in alternative energy projects
in California, the oil and gas exploration properties sold in 2000 and a Boeing
737-300 aircraft which is leased to Continental Airlines ("Other").
The following table presents information about the reportable segments
for the three and six months ended June 30, 2001 and 2000. Inter-segment
transactions are insignificant.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------ --------------------------------------------
Thousands Utility Gas Storage Other Total Utility Gas Storage Other Total
- ----------------------------------------------------------------------- --------------------------------------------
2001
- ----
Net operating revenues $ 53,936 $ 769 $ 21 $ 54,726 $ 144,320 $ 1,992 $ 67 $ 146,379
Depreciation, depletion
and amortization 12,263 24 - 12,287 24,367 48 - 24,415
Other operating expenses 27,179 53 19 27,251 57,972 86 (70) 57,988
Income from operations 14,494 692 2 15,188 61,981 1,858 137 63,976
Net income from continuing
operations 4,246 392 227 4,865 29,305 1,085 382 30,772
Income (loss) from financial
investments - - (91) (91) - - (233) (233)
Total assets 1,259,914 4,871 20,640 1,285,425 1,259,914 4,871 20,640 1,285,425
2000
- ----
Net operating revenues $ 45,724 $ 72 $ 90 $ 45,886 $ 138,727 $ 72 $ 175 $ 138,974
Depreciation, depletion
and amortization 11,706 - 73 11,779 23,123 - 95 23,218
Other operating expenses 24,226 50 17 24,293 51,955 50 (42) 51,963
Income from operations 9,792 22 - 9,814 63,649 22 122 63,793
Net income (loss) from
continuing operations 2,849 22 (373) 2,498 31,821 22 (153) 31,690
Income (loss) from financial
investments - - (33) (33) - - (111) (111)
Gain (loss) on sale of
discontinued segment - - (35) (35) - - 2,435 2,435
Total assets 1,151,221 - 20,956 1,172,177 1,151,221 - 20,956 1,172,177
7. Property Held for Sale
Property held for sale at June 30, 2000 consisted of a new
headquarters building that was constructed for the Port of Portland. This
property was sold during the third quarter of 2000 (see Part II, Item 7.,
"Financial Condition - Cash Flows - Port of Portland Building," in the 2000 Form
10-K).
12
8. Discontinued Segment
On Jan. 26, 2000, the Company sold its interest in Canor Energy, Ltd.
(Canor), an Alberta, Canada corporation engaged in natural gas and oil
exploration, development and production in Alberta and Saskatchewan, Canada. As
of March 31, 2000, the Company realized an after-tax gain from the sale of Canor
of $2.4 million, net of Canadian tax on dividends ($0.6 million) and U.S. income
tax ($2.8 million) (see Part II, Item 8., Note 2, "Canor Energy, Ltd.," in the
2000 Form 10-K).
Proceeds from the sale of Canor are reflected in the statement of cash
flows (Investing Activities) as proceeds from sale of discontinued segment.
9. Contingencies
Environmental Matters
---------------------
The Company owns property in Linnton, Oregon that is the site of a
former gas manufacturing plant that was closed in 1956 (the Linnton site). The
Company previously owned property adjacent to the Linnton site that now is the
location of a manufacturing plant owned by Wacker Siltronic Corporation (the
Wacker site). The Linnton site and the Wacker site have been under investigation
by the Company under program oversight by the Oregon Department of Environmental
Quality (ODEQ). In 1998, the ODEQ and the U.S. Environmental Protection Agency
(EPA) completed a study of sediments in a 5.5 mile segment of the Willamette
River (the Portland Harbor) that includes the area adjacent to the Linnton site
and the Wacker site. In 2000, the EPA listed the Portland Harbor as a Superfund
site. See Part II, Item 8., Note 12, "Notes to Consolidated Financial
Statements," in the 2000 Form 10-K.
NW Natural has accrued all material loss contingencies which it
believes to be probable of assertion, including those relating to the Linnton
site, the Wacker site and the Portland Harbor Superfund site. However, due to
the preliminary nature of these environmental investigations, the range of any
additional possible loss cannot be presently estimated. The Company expects that
its costs of investigation and any remediation for which it may be responsible
with respect to the Linnton site, the Wacker site and the Portland Harbor
Superfund site should be recoverable, in large part, from insurance. In the
event these costs are not recovered from insurance, NW Natural will seek
recovery through future rates.
Litigation
----------
NW Natural is party to a lawsuit, Northwest Natural Gas Company v.
Chase Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370), involving
claims by a commercial customer. In 1999, the Oregon Supreme Court ruled in the
Company's favor on the larger of the two claims in the case and the Oregon Court
of Appeals ruled in the Company's favor on the smaller (contract) claims. The
Oregon Supreme Court initially declined to review the Court of Appeals' decision
on the contract claims, including a verdict against the Company in the amount of
$2.0 million plus interest. On reconsideration, however, in December 2000 the
Supreme Court agreed to review the Court of Appeals' decision on the contract
claims and is expected to issue an opinion in 2001. See Part I, Item 3., "Legal
Proceedings," in the 2000 Form 10-K.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The consolidated financial statements include:
Regulated utility:
Northwest Natural Gas Company (NW Natural)
Non-regulated subsidiary businesses:
NNG Financial Corporation (Financial Corporation), a wholly-owned
subsidiary
Canor Energy, Ltd. (Canor), a majority-owned subsidiary, reclassified
as a discontinued segment and sold in the first quarter of 2000
Together these businesses are referred to herein as the "Company" (see
"Non-utility Operations," below, and Part II, Item 8., Note 2, "Notes to
Consolidated Financial Statements," in the Company's 2000 Annual Report on Form
10-K, as amended (2000 Form 10-K)).
The following is management's assessment of the Company's financial
condition including the principal factors that affect results of operations. The
discussion refers to the consolidated activities of the Company for the three
and six months ended June 30, 2001 and 2000.
Earnings and Dividends
- ----------------------
The Company's earnings applicable to common stock were $4.3 million or
17 cents a diluted share in the quarter ended June 30, 2001, up from $1.8
million or 7 cents a diluted share in the second quarter of 2000.
NW Natural earned 14 cents a diluted share from gas utility operations
in the second quarter of 2001, compared to 9 cents in the same period in 2000.
Weather conditions in its service territory in the second quarter of 2001 were
19 percent colder than the 20-year average and 29 percent colder than the second
quarter of 2000. Sales to residential customers were 12 percent higher in the
second quarter of 2001 than in the second quarter of 2000. However, reflecting
the effect of recent tracking rate increases to recover higher gas costs (see
"Results of Operations - Comparison of Gas Operations - Residential and
Commercial," below), residential customers' consumptions per heating degree day
were about 10 percent lower during the second quarter of 2001 than in the second
quarter of 2000. Sales to commercial customers were 9 percent higher in the
second quarter of 2001 than in the second quarter of 2000, but their
consumptions per heating degree day were about 11 percent lower.
The Company earned $29.6 million, or $1.16 a diluted share, and $32.9
million, or $1.29 a diluted share, for the six months ended June 30, 2001 and
2000, respectively. Year-to-date, NW Natural earned $1.10 a share from utility
operations compared to $1.20 a share in the same period in 2000. Weather in the
first half of the year was 8 percent colder than the 20-year average and 3.5
percent colder than in 2000. Residential customers' consumptions per heating
degree day were about 9 percent lower during the first six months of 2001 than
in the first half of 2000, while commercial customers' consumptions were about
8.5 percent lower.
Non-utility operating results for the second quarter of 2001 were
earnings of 3 cents a share compared to a loss of 2 cents a share from these
operations in 2000. Non-utility operating results year-to-date were earnings of
6 cents a share compared to a loss of 1 cent a share from these operations
during the comparable period in 2000. See "Non-utility Operations," below.
14
Dividends paid on common stock were 31 cents a share for each of the
three-month periods ended June 30, 2001 and 2000. In July 2001, the Company's
Board of Directors declared a quarterly dividend of 31 cents a share on the
common stock, payable Aug. 15, 2001, to shareholders of record on July 31, 2001.
The current indicated annual dividend rate is $1.24 a share.
Results of Operations
- ---------------------
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility volumes
and revenues:
Thousands Three Months Ended Six Months Ended
(Except customers and degree days) June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
---------------------- ----------------------
Gas Sales and Transportation Volumes - Therms:
- ----------------------------------------------
Residential and commercial sales 127,105 114,246 385,978 382,334
Unbilled volumes (20,678) (19,044) (44,901) (38,403)
--------- --------- --------- ---------
Weather-sensitive volumes 106,427 95,202 341,077 343,931
Industrial firm sales 18,830 17,843 42,294 41,909
Industrial interruptible sales 14,761 12,950 28,559 28,520
--------- --------- --------- ---------
Total gas sales 140,018 125,995 411,930 414,360
Transportation deliveries 91,866 109,829 204,339 237,660
--------- --------- --------- ---------
Total volumes sold and delivered 231,884 235,824 616,269 652,020
========= ========= ========= =========
Utility Operating Revenues - Dollars:
- -------------------------------------
Residential and commercial sales $ 107,406 $ 79,995 $ 318,287 $ 258,347
Unbilled revenues (15,645) (11,687) (33,984) (24,336)
--------- --------- --------- ---------
Weather-sensitive revenues 91,761 68,308 284,303 234,011
Industrial firm sales 11,008 8,099 24,666 19,058
Industrial interruptible sales 7,273 4,861 14,498 10,694
--------- --------- --------- ---------
Total gas sales 110,042 81,268 323,467 263,763
Transportation revenues 4,299 5,208 8,718 11,193
Other revenues (466) (548) (2,248) (2,516)
--------- --------- --------- ---------
Total utility operating revenues $ 113,875 $ 85,928 $ 329,937 $ 272,440
========= ========= ========= =========
Cost of gas sold $ 59,942 $ 40,204 $ 185,620 $ 133,713
========= ========= ========= =========
Total number of customers (end of period) 528,602 508,795 528,602 508,795
========= ========= ========= =========
Actual degree days 796 616 2,686 2,595
========= ========= ========= =========
20-year average degree days 670 673 2,497 2,508
========= ========= ========= =========
15
Residential and Commercial
--------------------------
NW Natural continues to experience rapid customer growth, with 19,807
customers added since June 30, 2000, for a growth rate of 3.9 percent. In the
three years ended Dec. 31, 2000, more than 65,000 customers were added to the
system, representing an average annual growth rate of 4.6 percent.
Typically, 75 percent or more of NW Natural's annual operating
revenues are derived from gas sales to weather-sensitive residential and
commercial customers. Accordingly, variations in temperatures between periods
will affect volumes of gas sold to these customers. Average weather conditions
are calculated from the most recent 20 years of temperature data measured by
heating degree-days. Weather conditions in the second quarter of 2001 were 19
percent colder than average and 29 percent colder than in the second quarter of
2000. For the first six months of 2001, weather was 8 percent colder than
average and 3.5 percent colder than in the first six months of 2000.
Volumes of gas sold to residential and commercial customers increased
11.2 million therms, or 12 percent, in the second quarter of 2001 compared to
the second quarter of 2000. Related revenues increased $23.5 million, or 34
percent, due to the higher volumes of gas sold and to rate increases averaging
23 percent during 2000. (See Part II, Item 7, "Results of Operations -
Regulatory Matters," in the 2000 Form 10-K.) Customer growth in the residential
and commercial segments since June 30, 2000 contributed an estimated 3 million
therms in sales volumes and $1.4 million in additional margin during the first
six months of 2001.
NW Natural believes the recent reductions in its customers' gas
consumptions per degree day (see "Earnings and Dividends," above) are caused by
the Company's much higher cost of purchased gas, which NW Natural passed through
to customers as rate increases last fall, and to efforts throughout the region
to conserve energy. NW Natural has filed with the Oregon Public Utility
Commission (OPUC) for approval of a new regulatory mechanism that is intended to
stabilize margin revenues in the face of variable consumption patterns. If
approved, this mechanism would increase margin revenues during periods when
residential and commercial customers' consumptions are less than the average
assumed in the Company's 1998 general rate case. Conversely, margin revenues
would be reduced when consumptions were higher than the average. The mechanism
also would allow the Company to be more proactive in encouraging customers'
efforts to use energy efficiently in their homes and businesses and to manage
their energy bills. The Company's goal is to have such a mechanism in place
before the next heating season starts in October, thereby reducing future
earnings volatility.
Industrial, Transportation and Other Revenues
---------------------------------------------
Total volumes delivered to industrial firm, industrial interruptible,
and transportation customers were 11 percent lower in the second quarter of 2001
than in the same period of 2000. Margin from these customers decreased from
$10.8 million in the second quarter of 2000 to $10.3 million in the second
quarter of 2001. The primary factor contributing to this decrease was a $0.5
million decrease in margin from customers who used oil during this period
because the cost of oil was lower than the cost of natural gas purchased on the
spot market.
Besides its core market, another developing market for NW Natural is
the delivery of natural gas for use in the generation of electricity. A number
of generation projects are being developed in the Company's service area in
order to help meet the demand for power in the western United States. NW Natural
commenced gas deliveries in July 2001 to Clark Public Utility District (Clark
PUD) in Vancouver, Washington, for a one-year term of service. Clark PUD will
use the gas to produce up to 50 megawatts of electricity.
16
Other revenues include amortizations from regulatory accounts and
miscellaneous fees charged to gas sales customers (see Part II, Item 8., Note 1,
"Notes to Consolidated Financial Statements," in the 2000 Form 10-K). Other
revenues increased $0.1 million during the second quarter of 2001 compared to
the second quarter of 2000. Year-to-date, other revenues increased $0.3 million
compared to the first six months of 2000. Factors contributing to the increase
in the first six months of 2001 were higher amortizations from regulatory
accounts covering conservation programs ($2.6 million), partially offset by
higher property tax amortizations ($1.7 million) and higher revenues from
customer late payment and reconnection fees ($1.1 million).
Cost of Gas
-----------
The cost per therm of gas sold was 34 percent higher during the second
quarter of 2001 than in the second quarter of 2000, primarily due to higher
prices in the natural gas commodity market. The cost of gas sold includes
current gas purchases, gas drawn from storage inventory, gains or losses from
commodity hedges, demand cost equalization, regulatory deferrals and company
use.
Results for the three months ended June 30, 2001 include an adjustment
reducing the cost of gas and a partially offsetting adjustment reducing interest
income (see "Other Income (Expense)," below). These adjustments were based on a
clarification of the treatment of gas storage inventory, approved by the OPUC
effective June 30, 2001, under NW Natural's Purchased Gas Adjustment (PGA)
mechanism in Oregon. Excluding this adjustment ($3.0 million), the cost per
therm of gas sold was 41 percent higher during the second quarter of 2001 than
in the second quarter of 2000 and was 40 percent higher year-to-date. Of the
total adjustment to the cost of gas, $1.6 million applied to deferrals in the
first and second quarters of 2001 and $1.4 million applied to a prior period
from Dec. 1, 1999 through Dec. 31, 2000. Under an agreement between the Company
and the OPUC staff, the methodology applied in this adjustment to cost of gas
will continue to be applied in the future.
NW Natural offset some of the impact of its higher gas costs during
the second quarter of 2001 through an active natural gas commodity hedge program
conducted under the terms of the Company's Derivatives Policy (see Item 1, Note
3., "Notes to Consolidated Financial Statements," above). NW Natural recorded
net gains from commodity swap and call option contracts of $13.4 million in the
second quarter of 2001, compared to net gains of $4.1 million in the second
quarter of 2000. Year-to-date, NW Natural recorded net gains of $86.9 million,
compared to net gains of $3.2 million during the first six months of 2000. Gains
(losses) from commodity hedges are recorded as reductions (increases) to the
cost of gas. The cost of gas sold also was reduced by off-system gas sales of
$1.2 million and $1.4 million for the first six months of 2001 and 2000,
respectively. Under an agreement with the OPUC, revenues from these sales are
treated as a reduction of gas costs.
NW Natural has a PGA tariff in Oregon 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 is recorded as
deferred debits or credits (regulatory assets or liabilities) for recovery from
or refund to customers in future rates. NW Natural deferred $2.3 million of
higher gas costs during the second quarter of 2001 and $6.2 million
year-to-date, and expects to recover these amounts from customers during the
next two years. The combined impact of NW Natural's higher gas costs and its
partially offsetting off-system gas sales under the PGA sharing mechanism during
the second quarter of 2001 was that the Company absorbed $0.7 million of its
higher gas costs, reducing earnings by about 2 cents a share.
17
Non-utility Operations
----------------------
At June 30, 2001 and 2000, the Company had one active subsidiary,
Financial Corporation, a wholly-owned subsidiary. One discontinued segment,
Canor, a majority-owned subsidiary, was sold in January 2000 (see "Discontinued
Segment," below).
Financial Corporation
---------------------
Financial Corporation's operating results for the three months ended
June 30, 2001 were net income of $0.2 million, equivalent to 1 cent a share,
compared to a loss of $0.4 million, or 2 cents a share, for the second quarter
of 2000. Year-to-date, operating results were net income of $0.3 million,
compared to a loss of $0.2 million for the comparable period in 2000. Results
were weaker for the six months ended June 30, 2000 due to adjustments totaling
$0.6 million to Financial Corporation's deferred income tax accounts recorded in
the second quarter of 2000. Financial Corporation's net assets at June 30, 2001
were $7.6 million, compared to $7.0 million at June 30, 2000.
Discontinued Segment
--------------------
During the first quarter of 2000, the Company sold its interest in
Canor at a gain of $2.5 million, equivalent to 10 cents a share (see Item 1,
Note 8., "Notes to Consolidated Financial Statements," above, and Part II, Item
7., "Results of Operations - Discontinued Segment," in the 2000 Form 10-K).
Gas Storage Services
--------------------
The Company realized net income after-tax of $0.4 million, or 1 cent a
share, in the three months ended June 30, 2001 and $1.1 million, or 4 cents a
share, year-to-date, from gas storage services to customers using storage
capacity not required from time to time for utility services. Gas storage net
income for the three and six months ended June 30, 2000 was negligible.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Operations and maintenance expenses increased $2.4 million, or 13
percent, and $4.5 million, or 12 percent, in the three and six month periods
ended June 30, 2001, respectively, compared to the same periods in 2000. Key
factors that contributed to the increases in the current year periods were
higher employees' health and life insurance benefit costs, higher uncollectible
accounts expense, higher payroll costs due to wage and salary increases and
increases in weatherization program costs.
Taxes Other than Income Taxes
-----------------------------
Taxes other than income taxes increased $1.6 million, or 11 percent,
in the first six months of 2001 compared to the first half of 2000. Franchise
tax expense increased $0.9 million due to higher utility operating revenues and
property taxes increased $0.4 million due to utility plant additions. Also,
regulatory fees and payroll tax expenses increased slightly.
Depreciation, Depletion and Amortization
----------------------------------------
The Company's depreciation, depletion and amortization expense
increased $1.2 million, or 5 percent, compared to the first six months of 2000.
The increase was primarily due to a 5 percent increase in utility plant in
service. Depreciation, depletion and amortization expense was approximately 2
percent of average plant and property for the six months ended June 30, 2001 and
2000.
18
Other Income (Expense)
----------------------
The Company's other income (expense) decreased $1.4 million and $1.5
million in the three and six month periods ended June 30, 2001, respectively,
compared to the same periods in 2000. The decreases in both periods were
primarily due to lower interest income on deferred regulatory account balances,
miscellaneous non-operating income and investment income from Company-owned life
insurance policies, offset by higher net rental income. During the three months
ended June 30, 2001, an adjustment relating to the treatment of gas storage
inventory under NW Natural's PGA mechanism reduced interest income by $0.4
million (see "Cost of Gas," above).
Interest Charges - net
----------------------
The Company's net interest expense decreased by $0.3 million, or 2
percent, in the six months ended June 30, 2001 compared to the same period in
2000 due to lower average balances of short term debt and lower average interest
rates.
Income Taxes
------------
The effective corporate income tax rates from continuing operations
for the three months ended June 30, 2001 and 2000, were 32.9 percent and 24.4
percent, respectively. The difference in tax rates between the respective
quarters was primarily due to a reduction in income tax expense ($0.2 million)
at June 30, 2000 as a result of true-up adjustments to the 1999 federal and
state income tax returns. Year-to-date, the effective corporate income tax rates
from continuing operations was 36.4 percent, compared to 35.9 percent at June
30, 2000.
Financial Condition
- -------------------
Capital Structure
-----------------
NW Natural's capital expenditures are primarily related to utility
construction resulting from customer growth and system improvements. NW Natural
finances these expenditures from cash provided by operations and from short-term
borrowings which are periodically refinanced through the sale of long-term debt
or equity securities. In addition to its capital expenditures, the
weather-sensitive nature of revenue derived from gas usage by NW Natural's
residential and commercial customers influences the Company's financing
requirements from one quarter to the next. Short-term liquidity is satisfied
primarily through the sale of commercial paper, which is supported by commercial
bank lines of credit (see Part II, Item 8., Note 6, "Notes to Consolidated
Financial Statements," in the 2000 Form 10-K).
The Company's long-term goal is to maintain a capital structure
comprised of 45 to 50 percent common stock equity, 5 to 10 percent preferred and
preference stock and 45 to 50 percent short-term and long-term debt. When
additional capital is required, the Company issues debt or equity securities
depending upon both the target capital structure and market conditions. The
Company also uses these sources to meet long-term debt and preferred stock
redemption requirements (see Part II, Item 8., Notes 3 and 5, "Notes to
Consolidated Financial Statements," in the 2000 Form 10-K).
19
Cash Flows
----------
Operating Activities
--------------------
Continuing operations provided net cash of $82.7 million in the six
months ended June 30, 2001, compared to $103.4 million in the first six months
of 2000. The 20 percent decrease was due to decreased cash from operations
before working capital changes ($6.2 million) and higher working capital
requirements ($14.5 million). The decrease in cash from continuing operations
before working capital changes was due to a larger increase in deferred income
taxes and investment tax credits in 2001 ($4.1 million), lower income from
continuing operations ($0.9 million) and smaller reductions in deferred gas cost
receivable ($1.7 million) and earnings of equity investments ($0.4 million) in
2001, partially offset by an increase in depreciation, depletion and
amortization in 2001 ($1.2 million). The increase in working capital
requirements was primarily due to a larger reduction in accounts payable ($46.6
million), partially offset by larger reductions in accounts receivable ($11.4
million), accrued unbilled revenues ($10.9 million) and inventories of gas,
materials and supplies ($9.8 million).
The Company has lease and purchase commitments relating to its
operating activities which are financed with cash flows from operations (see
Part II, Item 8., Note 12, "Notes to Consolidated Financial Statements," in the
2000 Form 10-K).
Investing Activities
--------------------
Cash requirements for utility construction in the first six months of
2001 totaled $35.8 million, down $2.2 million from the first six months of 2000.
NW Natural's construction expenditures for 2001 were initially
estimated at $75 million. In April 2001, however, the Company accelerated plans
for an additional $10 million investment in storage facilities, increasing the
projected total construction budget for 2001 to $85 million. 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.
Investments in non-utility property during the first six months of
2001 were negligible. The $0.6 million investment in non-utility property in the
first six months of 2000 consisted of final costs for the construction of the
new headquarters building for the Port of Portland (see Item 1, Note 7, "Notes
to Consolidated Financial Statements," above). The discontinued segment provided
net cash of $34.8 million in the first quarter of 2000 from sale of the
Company's interest in Canor.
Financing Activities
--------------------
Cash used for financing activities in the first six months of 2001
totaled $41.2 million, a decrease of $58.7 million from the first six months of
2000. Proceeds from the sales of $18 million of Medium-Term Notes, Series B, in
June 2001, together with internally generated cash, were used to reduce
short-term debt ($38.3 million). Internally generated cash, including proceeds
from the sale of Canor ($34.8 million), was used to reduce short-term debt
($83.8 million) in the first six months of 2000.
In May 2000, the Company commenced a program to repurchase up to 2
million shares, or up to $35 million in value, of NW Natural's common stock
through a repurchase program which has been extended through May 2002. The
20
purchases are made in the open market or through privately negotiated
transactions. The Company used $5.8 million for the repurchase of 246,700 shares
under the program in the first six months of 2001. The Company has repurchased
355,400 shares of common stock at a total cost of $8.2 million from the
program's inception through June 30, 2001.
Commercial Paper
----------------
The Company's primary source of short-term funds is commercial paper.
Both NW Natural and Financial Corporation issue commercial paper under agency
agreements with a commercial bank. The commercial paper is supported by bank
lines of credit (see "Lines of Credit," below). Financial Corporation's
commercial paper is supported by the guaranty of NW Natural (see Part II, Item
8., Note 6, "Notes to Consolidated Financial Statements," in the 2000 Form
10-K). NW Natural had $18.0 million of commercial paper notes outstanding at
June 30, 2001, compared to $10.3 million and $56.3 million at June 30 and Dec.
31, 2000, respectively. Financial Corporation had no commercial paper notes
outstanding at Dec. 31, 2000, or June 30, 2001 or 2000.
Lines of Credit
---------------
NW Natural has available through Sept. 30, 2001 committed lines of
credit with four commercial banks totaling $120 million which are used as backup
lines for the commercial paper program. In addition, Financial Corporation has
available through Sept. 30, 2001 committed lines of credit with two commercial
banks totaling $20 million. Financial Corporation's lines are supported by the
guaranty of NW Natural.
Under the terms of these lines of credit, NW Natural and Financial
Corporation pay commitment fees but are not required to maintain compensating
bank balances. The interest rates on borrowings are based on current market
rates as negotiated. There were no outstanding balances on either the NW Natural
or Financial Corporation lines of credit as of Dec. 31, 2000, or June 30, 2001
or 2000.
Ratios of Earnings to Fixed Charges
-----------------------------------
For the 6 months and 12 months ended June 30, 2001, and the 12 months
ended Dec. 31, 2000, the Company's ratios of earnings to fixed charges, computed
using the Securities and Exchange Commission method, were 3.77, 3.05 and 3.14,
respectively. For this purpose, earnings consist of net income before taxes plus
fixed charges, and fixed charges consist of interest on all indebtedness, the
amortization of debt expense and discount or premium and the estimated interest
portion of rentals charged to income.
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
21
compliance with environmental and safety laws and policies; (ii) weather
conditions and other natural phenomena; (iii) unanticipated population growth or
decline, and changes in market demand and demographic patterns; (iv) competition
for retail and wholesale customers; (v) pricing of natural gas relative to other
energy sources; (vi) unanticipated changes in interest or foreign currency
exchange rates or in rates of inflation; (vii) unanticipated changes in
operating expenses and capital expenditures; (viii) capital market conditions;
(ix) competition for new energy development opportunities; and (x) legal and
administrative proceedings and settlements. All subsequent forward-looking
statements, whether written or oral and whether made by or on behalf of the
Company, also are expressly qualified by these cautionary statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for the
Company to predict all such factors, nor can it assess the impact of each such
factor or the extent to which any factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking
statement.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the information provided in
Part II, Item 7A., "Quantitative and Qualitative Disclosures About Market Risk,"
in the 2000 Form 10-K.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NW Natural's Annual Meeting of Shareholders was held in Portland,
Oregon on May 24, 2001. At the meeting, one Class I director-nominee was elected
to a two-year term and four Class II director-nominees were elected to
three-year terms, as follows:
Term Share Votes Share Votes
Director-nominee Expiring For Withheld
------------------------------------------------------------------
Richard L. Woolworth 2003 21,573,535 395,214
Tod R. Hamachek 2004 21,579,293 389,456
Wayne D. Kuni 2004 21,562,407 406,342
Melody C. Teppola 2004 21,584,761 383,988
Russell F. Tromley 2004 21,589,296 379,453
The other seven directors whose terms of office as directors continued
after the Annual Meeting are: Mary Arnstad, Thomas E. Dewey, Jr., Randall C.
Pape, Richard G. Reiten, Robert L. Ridgley, Dwight A. Sangrey and Benjamin R.
Whiteley. In accordance with the Company's Bylaws, Richard B. Keller retired as
a director at the conclusion of the meeting following 18 years of distinguished
service.
22
The shareholders approved the Company's Long-Term Incentive Plan by
the following vote: 19,252,474 shares voted for; 2,195,521 shares voted against;
and 520,453 shares abstained from voting.
The shareholders also elected PricewaterhouseCoopers LLP, certified
public accountants, as NW Natural's independent auditors for the year 2001 by
the following vote: 21,716,631 shares for; 99,495 against; and 152,623
abstained.
There were no broker non-votes on either the election of directors or
auditors at the 2001 annual meeting. There were 301 shares that were broker
non-votes with respect to the approval of the Company's Long-Term Incentive
Plan.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10(a) - Form of amended and restated executive change in control
severance agreement as entered into between the Company
and each executive officer
Exhibit 10(b) - Restricted stock retention agreement, dated August 1,
2001, as entered into between the Company and an executive
officer
Exhibit 10(c) - Long-Term Incentive Plan as amended and restated
July 26, 2001
Exhibit 11 - Statement re: Computation of Per Share Earnings
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
On April 5, 2001 and May 24, 2001, the Company filed its Current
Reports on Form 8-K relating, respectively, to (a) estimated first quarter 2001
earnings and the potential effect on earnings for the year 2001 of declining
customer consumptions, and (b) the appointment of a new president and chief
operating officer.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
(Registrant)
Dated: August 13, 2001 /s/ Stephen P. Feltz
--------------------------------------
Stephen P. Feltz
Principal Accounting Officer
Treasurer and Controller
23
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Quarterly Report on Form 10-Q
For Quarter Ended
June 30, 2001
Exhibit
Number
-------
Document
- --------
Form of amended and restated executive change in control severance
agreement as entered into between the Company and each executive officer 10(a)
Restricted stock retention agreement, dated August 1, 2001, as entered
into between the Company and an executive officer 10(b)
Long-Term Incentive Plan as amended and restated July 26, 2001 10(c)
Statement re: Computation of Per Share Earnings 11
Computation of Ratios of Earnings to Fixed Charges 12