SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(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, 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 number 0-994
[GRAPHIC OMITTED][GRAPHIC OMITTED]
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, 2002
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Preference Stock, without par value 250,000
Preferred Stock, without par value 90,000
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, 2002 was: $657,199,300.
Indicate number of shares outstanding of each of registrant's classes of common
stock as of February 28, 2002: Common Stock, $3 1/6 par value, and Common Share
Purchase Rights 25,289,590
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
2002 Annual Meeting of Shareholders, are incorporated by reference in Part III.
NORTHWEST NATURAL GAS COMPANY
Annual Report to Securities and Exchange Commission
on Form 10-K
for the year 2001
TABLE OF CONTENTS
PART I Page
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Item 1. Business
General................................................................................... 3
Gas Supply................................................................................ 3
Regulation and Rates...................................................................... 6
Competition and Marketing................................................................. 8
Acquisition of Portland General Electric Company.......................................... 10
Environment............................................................................... 13
Employees................................................................................. 13
Item 2. Properties.................................................................................... 13
Item 3. Legal Proceedings............................................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders........................................... 15
Additional Item
Executive Officers of the Registrant.......................................................... 15
PART II
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Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..................... 16
Item 6. Selected Financial Data....................................................................... 17
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition....................................................................... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ................................... 31
Item 8. Financial Statements and Supplementary Data................................................... 34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...................................................................... 66
PART III
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Items 10. - 13. Incorporated by Reference to Proxy Statement.................................................. 66
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 66
SIGNATURES .............................................................................................. 72
2
NORTHWEST NATURAL GAS COMPANY
PART I
ITEM 1. BUSINESS
General
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Northwest Natural Gas Company (NW Natural or the Company) was
incorporated under the laws of Oregon in 1910. The Company and its predecessors
have supplied gas service to the public since 1859. Since September 1997, it has
been doing business as NW Natural.
NW Natural is principally engaged in the distribution of natural gas.
The Oregon Public Utility Commission (OPUC) has allocated to NW Natural as its
exclusive service area a major portion of western Oregon, including the Portland
metropolitan area, most of the Willamette Valley and the coastal area from
Astoria to Coos Bay. NW Natural also holds certificates from the Washington
Utilities and Transportation Commission (WUTC) granting it exclusive rights to
serve portions of three Washington counties bordering the Columbia River. Gas
service is provided in 96 cities, together with neighboring communities, in 15
Oregon counties, and in nine cities, together with neighboring communities, in
three Washington counties. The city of Portland is the principal retail and
manufacturing center in the Columbia River Basin, and is a major port and
nucleus for trade with Pacific Rim nations such as Japan, Taiwan and Korea.
NW Natural also is engaged in providing natural gas storage services
which, prior to Jan. 1, 2001, were immaterial. Gas storage services are provided
to interstate customers using storage capacity not required from time to time
for utility services. In 2001, the Federal Energy Regulatory Commission (FERC)
granted NW Natural a certificate permitting it to provide storage services to
customers outside of NW Natural's service area. NW Natural retains 80 percent of
the net income before tax from storage services and credits the remaining 20
percent to its utility customers.
At year-end 2001, NW Natural had 485,207 residential customers, 55,096
commercial customers and 628 industrial customers. Industries served include
pulp, paper and other forest products; the manufacture of electronic,
electrochemical and electrometallurgical products; the processing of farm and
food products; the production of various mineral products; metal fabrication and
casting; and the production of machine tools, machinery and textiles.
The Company operated only one subsidiary during 2001, NNG Financial
Corporation (Financial Corporation). Financial Corporation, a wholly-owned
subsidiary of the Company incorporated in Oregon, holds financial investments as
a limited partner in three solar electric generating plants, four wind power
electric generation projects and a hydroelectric project, all located in
California, and in two low-income housing projects in Portland. In 2000,
Financial Corporation sold its remaining interests in certain gas producing
properties in the western United States, and, by year-end 2001, had disposed of
its interests in one of the wind power electric generation projects and the
hydroelectric project.
A second wholly-owned subsidiary of the Company, Northwest Energy
Corporation (Northwest Energy or Holding Company), also an Oregon corporation,
was formed in 2001 to serve as the holding company of NW Natural and Portland
General Electric Company (PGE) if the proposed acquisition of PGE is completed.
Northwest Energy had no active operations in 2001. See "Acquisition of Portland
General Electric Company," below.
Gas Supply -- General
- ---------------------
NW Natural meets the needs of its core market (residential, commercial
and industrial firm) sales customers through natural gas purchases from a
variety of suppliers. NW Natural has a diverse portfolio of short- and long-term
firm gas supply contracts which is supplemented, during periods of peak demand,
with gas from storage facilities either owned by or contractually committed to
NW Natural.
3
Natural gas for NW Natural's core market is transported over the
interstate pipeline system of Williams Gas Pipeline - West (WGP), also known as
Northwest Pipeline Corporation. Most supplies also move over other pipelines
upstream of WGP's system in the U.S. and Canada. Rates for service under
transportation agreements between NW Natural and the U. S. interstate pipelines
are established by the FERC, and by Canadian federal or provincial authorities
for the Canadian pipelines over which NW Natural transports gas.
The largest of the transportation agreements with WGP expires in 2013
and provides for firm transportation capacity of up to 2,148,890 therms(1) per
day. This agreement provides access to natural gas supplies in British Columbia
and the U.S. Rocky Mountains.
The Company's second largest transportation agreement with WGP expires
in 2011. It provides 1,020,000 therms per day of firm transportation capacity
from the point of interconnection of the WGP and PG&E Gas Transmission Northwest
(PG&E GT-NW) systems in eastern Oregon to NW Natural's service territory. PG&E
GT-NW's pipeline runs from the U.S./Canadian border through northern Idaho,
southeastern Washington and central Oregon to the California/Oregon border. NW
Natural's total capacity on PG&E GT-NW and two upstream pipelines (Alberta
Natural Gas Company and NOVA Corporation of Alberta, now both units of
TransCanada PipeLines Limited) matches this amount of WGP capacity northward
into Alberta, Canada.
NW Natural also has an agreement with WGP expiring in 2013, for
351,550 therms per day of firm transportation capacity for the Company's core
market. This agreement accesses gas supplies in the U.S. Rocky Mountain region.
The cost to NW Natural of gas to supply its core market consists of
the purchase price paid to suppliers plus charges paid to pipelines to transport
such gas to NW Natural's distribution system. While the rates for pipeline
transportation and storage services are subject to federal regulation, the
purchase price of gas is not. Although pipeline rates have been relatively
stable in recent years, natural gas commodity prices have fluctuated
dramatically over the past several years. NW Natural mitigated the effect on
core market customers of these increased costs, in part, through the use of its
underground storage facilities, by entering into long-term supply contracts and
gas commodity hedging contracts, and by credits in the form of revenues from
off-system sales of commodity and released transportation capacity in periods
when core market customers do not fully utilize firm pipeline capacity.
NW Natural supplies many of its non-core customers (larger industrial
interruptible customers with full or partial dual fuel capabilities) through gas
transportation service, delivering gas purchased by these customers directly
from suppliers. (See "Gas Supply -- Transportation.")
Gas Supply -- Core Market Basic Supply
- --------------------------------------
NW Natural purchases gas for its core market from a variety of
suppliers located in the western United States and Canada. About 80 percent of
the annual supply comes from Canada, with almost all of the rest from the U.S.
Rocky Mountain region. At Jan. 1, 2002, NW Natural had 16 firm contracts with 9
suppliers with remaining terms of from three months to four years, which
provided for a maximum of 3,468,300 therms of firm gas per day during the peak
winter season and 1,601,300 therms per day during the remainder of the year.
These contracts have a variety of pricing structures and purchase obligations.
NW Natural's largest core market gas supply contract is an agreement
expiring Nov. 1, 2003, with CanWest Gas Supply, Inc. (CanWest), an aggregator
for gas producers in British Columbia, Canada. This contract entitles NW Natural
to purchase up to 960,000 therms of firm gas per day. The contract contains a
demand and commodity pricing structure and a provision for annual renegotiations
of the commodity price to reflect then-prevailing market prices. The demand
charges reflect the reservation of firm transportation space on the Westcoast
Energy, Inc. pipeline system in British Columbia. These demand charges are
subject to change as approved by the Canadian National Energy Board (NEB) in
- ----------
(1) One therm is equivalent to 100 cubic feet of natural gas at an
assumed heat content of 1,000 British Thermal Units (Btu's) per cubic
foot.
4
rate proceedings similar to those conducted in the United States by the FERC.
The CanWest contract contains minimum purchase obligations.
The terms of NW Natural's other principal gas purchase agreements are
summarized as follows:
o An agreement also expiring Nov. 1, 2003 with BP (formerly Amoco
Canada Petroleum Company, Ltd.), on terms similar to the CanWest
agreement, entitles NW Natural to purchase up to 83,300 therms of firm
gas per day. This gas is aggregated from production in the Canadian
province of Alberta and the Yukon and Northwest Territories. This
contract contains minimum purchase obligations.
o An agreement expiring Sept. 30, 2003 with Burlington Resources Canada
(formerly Poco Petroleums, Ltd.), a Canadian producer, entitles NW
Natural to purchase up to 162,000 therms per day during the winter and
up to 115,000 therms per day during the remainder of the year of gas
produced in Alberta.
o Two agreements expiring Sept. 30, 2003 with Engage Energy (formerly
Westcoast Gas Services) entitle NW Natural to purchase up to 140,000
therms per day year-round, plus up to 92,750 therms per day as winter
season supply, of gas produced in Alberta. Pricing for supplies under
these agreements can be renegotiated annually. The current pricing
arrangement includes demand charges for upstream capacity on the
Canadian pipeline systems and a monthly reservation charge. The
commodity pricing consists of a portion of the daily contract quantity
at a fixed price and the remaining daily contract quantity tied to a
monthly Canadian index.
During 2001, new short-term (5 month) purchase agreements for firm gas
were entered into with six suppliers, which provided for a total of 1,270,000
therms per day during the 2001-2002 heating season. These contracts have a
variety of pricing structures and purchase obligations. NW Natural intends to
enter into new short-term purchase agreements in 2002 for equivalent volumes of
gas with these or other similar suppliers to be available during the 2002-2003
winter season.
NW Natural also buys gas on the spot market (30 days or less) as
needed to meet demand. Some flexibility is provided under the terms of NW
Natural's firm supply contracts, permitting the purchase of spot gas in lieu of
firm contract volumes and allowing NW Natural to take advantage of favorable
pricing on the spot market from time to time.
NW Natural continues to purchase gas from the Mist gas field in
Oregon, located about 60 miles northwest of Portland. The production area is
situated near NW Natural's existing underground gas storage facility. The price
for this gas is tied to NW Natural's weighted average cost of gas. Current
production is approximately 23,000 therms per day from about 18 wells, supplying
about 1 percent of NW Natural's total annual purchase requirements. Production
from these wells varies as existing wells are depleted and new wells are
drilled.
NW Natural's goal in purchasing gas for its core market is to meet
customers' needs at reasonable prices. NW Natural believes that gas supplies
available from suppliers in the western United States and Canada are adequate to
serve its core market customers for the foreseeable future, and that the cost of
such gas generally will track market prices.
Gas Supply -- Core Market Peaking Supply
- ----------------------------------------
NW Natural supplements its firm gas supplies with gas from
Company-owned or contracted peaking facilities in which gas is stored during
periods of low demand for use during periods of peak demand. In addition to
enabling NW Natural to meet its peak demand, these facilities make it possible
to lower the annual average cost of gas by allowing NW Natural both to minimize
its pipeline transportation contract demand and to purchase gas for storage
during the summer months when prices are generally at their lowest.
5
NW Natural has contracts with WGP which expire in 2004 for firm
storage services from the underground gas storage field at Jackson Prairie near
Centralia, Washington, and the liquefied natural gas (LNG) facility at Plymouth,
Washington. Together, these facilities provide NW Natural with daily firm
deliverability of 1,061,300 therms and total seasonal capacity of 15,991,880
therms. Separate contracts with WGP provide for the transportation of these
storage supplies to NW Natural's service territory.
NW Natural owns and operates two LNG plants which liquefy gas during
the summer months for storage until the peak winter season. These two plants,
one located in Portland and the other near Newport, Oregon, provide a maximum
daily deliverability of 1.8 million therms and a total seasonal capacity of 17
million therms.
NW Natural also owns and operates an underground gas storage facility
at Mist, Oregon. This facility has a maximum daily deliverability of 3.2 million
therms and a total seasonal working gas capacity of 105 million therms. NW
Natural is engaged in a multi-year, major expansion of the Mist storage
facility. The plan for expansion of NW Natural's storage capability includes an
extension of its South Mist Pipeline that is scheduled for construction between
2003 and 2005.
NW Natural also has contracts with an electric generator, three
industrial customers, and two gas marketing companies that together provide a
total of 102,000 therms per day of year-round capacity, plus 910,000 therms per
day of recallable capacity and supply. These contracts have remaining terms
ranging from one to nine years.
Gas Supply -- Hedge Program
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NW Natural has an active natural gas commodity-price hedge program
which is intended to reduce commodity price risk. Under this program, the
Company generally enters into commodity swap and call option agreements during
the spring and summer seasons, when natural gas prices may be lower. Gains
(losses) from commodity hedges are treated for accounting and rate purposes as
reductions (increases) to the cost of gas. The intended effect of this program
is to lock in the price for a large portion of NW Natural's gas supply portfolio
for the following year, at prevailing market prices at the time the swap and
call option agreements are entered into.
Gas Supply -- Transportation
- ----------------------------
Since WGP opened its system to the transportation of customer-owned
gas in the late 1980s, most of NW Natural's large industrial customers have
switched from sales service to transportation service whereby they purchase gas
directly from suppliers and ship the gas on the Company's system and those of
its pipeline suppliers for a fee. The ability of industrial customers to switch
between sales service and transportation service has made it possible for NW
Natural to retain some of these customers. Switching between sales and
transportation service by these customers has not had a material effect on NW
Natural's results of operations (see "Competition and Marketing").
Regulation and Rates
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NW Natural is subject to regulation with respect to, among other
matters, rates, systems of accounts and issuance of securities by the OPUC and
the WUTC. In 2001, 93 percent of NW Natural's gas deliveries and 91 percent of
its utility operating revenues were derived from Oregon customers and the
balance from Washington customers. The Company is exempt from the provisions of
the Natural Gas Act by order of the Federal Power Commission (now the FERC).
NW Natural's most recent general rate increase in Oregon, which was
effective Dec. 1, 1999, authorized rates designed to produce a return on common
shareholders' equity (ROE) of 10.25 percent. The OPUC approved a revenue
increase of $0.2 million per year, or 0.1 percent of Oregon revenues. The most
recent general rate increase in Washington, which was effective Nov. 1, 2000,
authorized rates designed to produce an ROE of 10.8 percent. The WUTC approved a
revenue increase of $3.0 million effective Nov. 1, 2000, and a subsequent
revenue increase of $1.3 million effective Oct. 1, 2001. Actual revenues
resulting from the OPUC's and the WUTC's general rate orders are dependent on
weather, economic conditions, customer growth, competition and other factors
6
affecting gas usage in NW Natural's service area. NW Natural's returns on
average common equity from utility operations were 10.6 percent in 2000 and 10.2
percent in 2001. The Company's returns from consolidated operations, including
subsidiary results, were 10.8 percent in 2000 and 10.4 percent in 2001.
In Oregon, NW Natural has a Purchased Gas Adjustment (PGA) tariff
under which net income derived from Oregon operations may be affected within
defined limits by changes in purchased gas costs. The PGA tariff provides for
periodic revisions in rates due to changes in the Company's cost of purchased
gas. Costs included in the PGA adjustments are based on NW Natural's gas
requirements for the 12-month period ended each June 30. Any resulting rate
adjustments, derived from gas prices negotiated for the upcoming gas supply
contract year are made effective on Oct. 1. In August 2001, NW Natural filed
under its Oregon PGA tariff to increase rates for Oregon customers by an average
of 22.4 percent. The OPUC approved a substitute filing increasing rates by an
average of 21.7 percent effective Oct. 1, 2001, with the balance of gas cost
deferrals to be recovered in future filings.
The Oregon PGA tariff provides that 67 percent of any difference
between actual purchased gas costs and estimated purchased gas costs
incorporated into rates will be deferred for amortization in subsequent periods.
If actual gas commodity costs exceed those incorporated in rates, NW Natural
subsequently will adjust its rates upward to recover 67 percent of the
deficiency from core market customers. Similarly, if actual gas commodity costs
are lower than those reflected in rates, rates will be adjusted downward to
distribute to core market customers 67 percent of such gas commodity cost
savings.
In Washington, NW Natural is permitted to track increases and
decreases in gas commodity costs coincidental with their occurrence, with the
result that net income is not directly affected by changes in commodity costs.
In August 2001, NW Natural filed under its Washington PGA tariff to increase
rates for Washington customers by an average of 19.6 percent. The WUTC approved
a substitute filing increasing rates by an average of 18.7 percent effective
Oct. 1, 2001.
In both Oregon and Washington, the PGA permits NW Natural to recover
100 percent of FERC-approved pipeline transportation cost increases.
In a regulatory proceeding related to the PGA tariff in Oregon, 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 commodity costs. Under the OPUC's order, issued in 1999, NW Natural retains
all of its earnings up to a threshold level equal to its authorized ROE plus 300
basis points. If earnings exceed the threshold, NW Natural shares one-third of
the "excess" amount with customers. The OPUC confirmed NW Natural's ability to
pass through 100 percent of any changes from year to year in its prudently
negotiated gas costs into rates. The excess earnings threshold is subject to
adjustment up or down each year depending on movements in interest rates.
In 2001, NW Natural filed with the OPUC for approval of a new
regulatory mechanism that is intended to stabilize margin revenues caused by
variable consumption patterns, thereby assuring NW Natural of fixed cost
recovery and more predictable earnings. Residential and commercial customers'
consumptions per degree day were about 3 percent lower in 2001 than in 2000. NW
Natural believes the reduction in its weather-sensitive customers' gas usage per
degree day is due to the higher cost of purchased gas which is passed on to
customers through rate increases, and to efforts by such customers to conserve
energy. If the proposed mechanism is approved, it would increase margin revenues
during periods when residential and commercial customers' consumptions are less
than the average assumed in the Company's latest general rate case. Conversely,
margin revenues would be reduced when consumptions were higher than such
average. NW Natural has proposed that this be accomplished through a balancing
account that would compare actual usage of residential and commercial customers
against their normal usage levels and treat any variations as refunds or
collections of revenues. In February 2002, the administrative law judge in this
proceeding issued a memorandum to the parties advising them that the OPUC has
decided to hold the docket regarding the proposed regulatory mechanism in
abeyance, along with a docket involving a similar filing by PGE, pending its
review of NW Natural's application to acquire PGE. NW Natural estimates that if
customers' gas consumption patterns as experienced in 2001 were to continue for
the year 2002 but a margin stabilization mechanism were not approved, margin
7
revenues could be reduced by the equivalent of 24 cents a share of earnings
compared to results with such a mechanism in place.
The OPUC and WUTC have implemented "integrated resource planning"
processes under which utilities develop plans defining alternative growth
scenarios and resource acquisition strategies. In 2000, the OPUC acknowledged
and accepted NW Natural's submission of its fourth Integrated Resource Plan. In
2001, the WUTC acknowledged and accepted NW Natural's fourth Integrated Resource
Plan. Elements of the Plan include an evaluation of supply and demand resources;
the consideration of uncertainties in the planning process and the need for
flexibility to respond to changes; a primary goal of "least cost" service; and
consistency with state energy policy. Although the OPUC's order acknowledging an
earlier Integrated Resource Plan indicated the order did not constitute
ratemaking approval of any specific resource acquisition or expenditure, the
OPUC did indicate that it would give considerable weight in prudency reviews to
utility actions that are consistent with acknowledged plans. Elements of NW
Natural's fourth Plan demonstrated that the continued development of the Mist
underground gas storage facility is the least-cost option for serving customer
growth. The OPUC's acceptance of the Plan indicates to the Oregon Energy
Facility Siting Council (EFSC) that NW Natural requires the South Mist Pipeline
extension to best serve its customers, thereby satisfying the requirement that
NW Natural prove the need for the facility in order to obtain the EFSC's
approval to build the pipeline extension.
Competition and Marketing
- -------------------------
NW Natural has no direct competition in its service area from other
natural gas distributors. For residential customers' heating needs, however, NW
Natural competes with electricity, fuel oil, and, to a lesser extent, wood. It
also competes with electricity and fuel oil for commercial applications.
Competition among these forms of energy is based on price, reliability,
efficiency and performance.
Overall, in 2001 NW Natural maintained its competitive price advantage
compared to electricity in both the residential and commercial markets.
Throughout 2001, natural gas rates continued to be lower than rates for
electricity provided by the investor-owned utilities which serve approximately
75 percent of the homes in NW Natural's Oregon service area. Even with the
commodity-related rate increases approved in Oregon and Washington in recent
years, NW Natural expects to maintain a price advantage compared to electricity
provided by the investor-owned electric utilities in its service territory
because much of the electricity sold by these utilities is generated from
natural gas. There were fewer residential conversions from heating oil to
natural gas in 2001, however, because NW Natural's commodity-related rate
increases resulted in a price disadvantage for gas compared to oil during this
period.
The relatively low market saturation of natural gas in residential
single-family and attached dwellings in NW Natural's service territory,
estimated at 40 to 50 percent, together with the price advantage of natural gas
compared with electricity and its operating convenience over fuel oil, provides
the potential for continuing growth in the residential and conversion markets.
In 2001, 17,120 net residential customers (after subtracting disconnected or
terminated services) were added, including 6,210 units of existing residential
housing which were converted from oil or electric appliances to natural gas. Of
the new heating conversions from other fuels, about 71 percent also converted to
gas for water heating. In addition, 412 net commercial customers were connected
in 2001. The net total of all new customers added in 2001, including a net
reduction of seven industrial sales and transportation customers, was 17,525.
This constituted a growth rate of 3.3 percent, or about two times the national
average for local gas distribution companies (LDCs) as reported by the American
Gas Association.
Due to weather which was about 2 percent warmer than in 2000, and a
decrease in weather-sensitive customer consumption due to rate increases and
conservation efforts, natural gas sales volumes to residential and commercial
customers in 2001 were about the same as in 2000. Temperatures in NW Natural's
service territory in 2001, based on heating degree days, were 3 percent colder
than the 20-year average.
The Pacific Northwest has historically enjoyed some of the lowest
electric rates in the nation, primarily due to the proximity of federal
hydropower facilities. Due to a number of environmental, economic and political
limitations on the future use of the hydroelectric infrastructure that has
dominated the Pacific Northwest energy supply for decades, a few large gas-fired
generation projects are currently in various stages of construction or
8
development to meet the region's future electricity load growth forecasts. These
projects present opportunities for NW Natural to serve new loads. The
availability of interstate pipeline capacity and gas storage capacity will play
significant roles in the future development of generation projects.
As a result of the deregulation and restructuring of the energy
markets during the past decade, the natural gas industry, including producers,
interstate pipelines and LDCs, has undergone many changes. These changes, which
are continuing, are intended to promote competition where it is economically
beneficial to consumers.
Traditionally, LDCs have sold a "bundled" product which included both
the natural gas commodity and delivery to the meter. However, beginning in the
late 1980s, large customers sought to achieve savings by procuring their own
supplies of natural gas from producers and contracting with pipelines and LDCs
for transportation. While NW Natural's ability to obtain competitively-priced
gas commodity has enabled it to retain its residential, commercial and many
industrial customers as sales customers, further deregulation of gas
transportation may bring an unbundled product offering to a greater number of
customers, such that an increasing number of suppliers will actively compete for
customers' gas commodity business. However, since the final delivery of
customer-owned gas will continue to be through regulated distribution systems,
no material impact on NW Natural's profitability is anticipated.
Competition to serve the industrial and large commercial market in the
Pacific Northwest has been relatively steady since the early 1990s in terms of
numbers and types of competitors. Competitors consist of gas marketers,
oil/propane sellers and electric utilities. Wood-based fuels continue to lose
market share primarily due to environmental concerns and restrictions.
The OPUC and WUTC have approved transportation tariffs under which NW
Natural may contract with customers to deliver customer-owned gas.
Transportation tariffs are available to industrial customers and are priced at
the Company's cost of providing transportation service. Generally, the Company
is unaffected financially if industrial customers transport customer-owned gas
rather than purchasing gas from NW Natural. However, industrial customers may
choose different levels or qualities of service, and these choices can
positively or negatively affect margin revenue from such customers. Volatile
prices in the natural gas commodity markets and limited interstate pipeline
capacity have caused some customers to return to higher quality, higher margin
service.
Total industrial throughput, including both sales and transportation
of firm and interruptible gas, was 529 million therms in 2001, down 6 percent
from 564 million therms in 2000. This decrease was primarily due to a soft
regional economy and high energy prices. NW Natural's industrial base consists
largely of forest products and high-tech manufacturing firms, both of which are
sensitive to economic conditions. In addition, the California energy crisis
impacted the Pacific Northwest in 2001, precipitating dramatic price increases
for electricity. The Bonneville Power Administration increased its rates to
utilities and large wholesale customers by 45 percent and PGE increased its
retail rates to industrial customers by more than 50 percent. These electric
price increases triggered the closure of several aluminum and forest products
mills and resulted in the loss of several thousand jobs and production cutbacks
across a broad cross-section of process users of natural gas. Regional retail
natural gas prices in excess of $4 per MMBtu also contributed to the consumption
decline.
Industrial firm gas sales and transportation deliveries during 2001
totaled 201 million therms, down 7 percent from 2000. Industrial interruptible
gas sales and transportation deliveries during 2001 totaled 328 million therms,
down 5 percent from 2000. In 2001, 29 percent of total therms delivered but only
7 percent of total utility operating revenues were from sales and transportation
deliveries to industrial interruptible customers.
NW Natural and many of its largest industrial customers have entered
into negotiated transportation service agreements. These agreements are designed
to provide rates that are competitive with either the costs of alternative
fuels, such as heavy oil, or the customer's bypass alternatives. The agreements
generally prohibit bypass during their terms. Due to the cost pressures that
confront a number of the Company's largest customers which compete globally,
bypass continues to be a threat. Although NW Natural does not expect a
significant number of its large customers to bypass its system in the
foreseeable future, it may experience further deterioration of margin associated
9
with customers' transfers to contracts with pricing designed to be competitive
with the capital and operating costs of direct connections to WGP's system.
NW Natural is authorized by the OPUC to make upstream commodity sales
and to release portions of its firm interstate pipeline capacity at discounted
rates when seasonal demand is low. This authorization allows NW Natural to
compete effectively with independent gas marketers. Sixty-seven percent of all
positive net revenues (gross revenues less the actual cost of gas or pipeline
capacity) generated from these sales and capacity releases ($2.1 million in
2001) have been credited to Oregon core market customer gas costs, with the
balance benefiting shareholders.
NW Natural has completed the latest expansion of the Mist underground
gas storage facility. Completed in December 2001, the $10 million project
increases the facility's total daily delivery capacity to 317 MMcfd, an increase
of 29 percent from the prior year. The newly developed deliverability capacity
will be used to serve the needs of NW Natural's core utility customers as well
as its interstate storage service customers. As the needs of the core customers
grow, the amount of this delivery capacity available for interstate storage
services will be reduced.
In May 2001, the FERC issued an order granting NW Natural's
application for a limited jurisdiction blanket certificate to provide FERC
jurisdictional firm and interruptible gas storage service and related
transportation to and from storage to customers in interstate commerce. FERC
conditioned the certificate authorization on the subsequent filing and approval
of cost-based recourse rates. On July 18, 2001 NWN filed its proposed cost-based
rates and on Oct. 26, 2001, the FERC authorized NW Natural to commence the
provision of the interstate storage and related transportation services, subject
to refund, pending a final determination on the filing. FERC has approved the
rates filed by NW Natural as part of a settlement agreement in that docket. The
FERC authorization to provide storage and related transportation services in
interstate commerce enables NW Natural to make its underground storage capacity
that is excess to its core customer needs available to help address the region's
energy challenges. NW Natural has entered into contracts for the FERC
jurisdictional storage and related transportation services with five customers.
In addition to storage services, NW Natural occasionally has the
opportunity to optimize the use of its upstream assets through the sale of
unused capacity. In 2001, NW Natural realized net income of $2.1 million from
the optimization of upstream capacity and from the sale of FERC jurisdictional
storage and related transportation services.
During 2001, NW Natural also used its excess upstream capacity to help
alleviate short-term electricity shortages by supplying natural gas for electric
generation to three customers at favorable rates, including a public utility
district (PUD) in Vancouver, Washington. The PUD, which found itself without
adequate energy contracts for the summer of 2001, leased a number of
reciprocating engines fueled by natural gas rather than pay premium rates for
electricity on the wholesale market. The PUD, which already operates a natural
gas turbine, was not able to contract for additional pipeline capacity with its
interstate pipeline provider for the additional load. NW Natural provided firm
service during peak demand times by transporting natural gas to supply the PUD's
reciprocating engines. Contracts for service to the three electric generation
customers contributed $4.7 million of margin revenues in 2001, or 11 cents a
share, compared to margin revenues from electric generation of $0.1 million in
2000.
Acquisition of Portland General Electric Company
- ------------------------------------------------
Stock Purchase Agreement
------------------------
On Oct. 5, 2001, NW Natural and Enron Corp., an Oregon corporation
(Enron), entered into an agreement (the Stock Purchase Agreement) providing for
the acquisition, by a wholly-owned subsidiary of NW Natural formed to serve as a
holding company (Holding Company), of all of the issued and outstanding common
stock of PGE, an Oregon corporation and wholly-owned subsidiary of Enron.
10
To facilitate this transaction, NW Natural, Holding Company and a
wholly-owned subsidiary of Holding Company have entered into an Agreement and
Plan of Merger and Reorganization (the Plan of Merger) whereby NW Natural would
become a subsidiary of Holding Company. Following the establishment of the
holding company structure, Holding Company would acquire the PGE common stock
and, as a result, would own two operating utilities - PGE and NW Natural.
Pursuant to the Plan of Merger, each outstanding share of common stock of NW
Natural would be converted into one share of common stock of Holding Company. NW
Natural's outstanding shares of preferred stock and preference stock would
remain outstanding. Holding Company would have two classes of common equity -
common stock and Class B common stock. Each class of common equity would have
identical rights in all respects except that the Class B common stock would be
non-voting. Each share of Class B common stock would be convertible at any time
into one share of common stock except that the conversion cannot result in any
holder of such converted stock beneficially owning 5 percent or more of the
outstanding shares of common stock.
The Stock Purchase Agreement provides that Enron will sell PGE to
Holding Company for $1.8 billion, comprised of $1.55 billion in cash and $250
million of equity securities to be issued to Enron ($50 million in the form of
common stock and Class B common stock of Holding Company and $200 million in the
form of FELINE PRIDES(SM) of Holding Company). The cash portion of the purchase
price will be raised through loans to Holding Company from commercial banks and
institutional lenders arranged, pursuant to a written financing commitment (the
Financing Commitment), by Merrill Lynch and Credit Suisse First Boston. A $75
million payment obligation from Enron to PGE, remaining from Enron's purchase of
PGE in 1997, would be assumed by Holding Company. PGE would retain its
approximately $1.1 billion in existing debt and preferred stock.
The Stock Purchase Agreement provides that, if the closing has not
occurred by Dec. 8, 2002, NW Natural and Holding Company have the obligation to
use their best efforts to obtain an extension of the Financing Commitment or
enter into or extend a new financing commitment which provides for similar
financing, and Holding Company shall accept any such extended Financing
Commitment or new financing commitment if the funding conditions and other terms
are not materially adverse to Holding Company in comparison to the Financing
Commitment originally issued.
Required Approvals and Conditions
---------------------------------
The proposed transaction is subject to certain conditions, including,
without limitation, (i) the absence of any injunction, order, law or regulation
preventing consummation of the sale of the PGE shares, (ii) receipt by Enron, NW
Natural and Holding Company of required regulatory approvals, (iii) the approval
of NW Natural's shareholders, (iv) the availability of the debt financing
described above on the conditions stated in the Stock Purchase Agreement, (v)
the performance of obligations of Enron and NW Natural pursuant to the Stock
Purchase Agreement, (vi) the accuracy of Enron's and NW Natural's
representations and warranties, and (vii) no event having occurred that has a
material adverse effect on PGE.
Required regulatory approvals include the OPUC, the WUTC, the FERC,
the Nuclear Regulatory Commission and the Securities and Exchange Commission. It
is contemplated that Holding Company would be exempt from registration under the
Public Utility Holding Company Act of 1935, as amended. Applications and filings
seeking all such approvals have been made with the appropriate regulatory
authorities. On Feb. 13, 2002, the FERC issued its order approving Holding
Company's acquisition of PGE. In addition, the applicable waiting period under a
federal antitrust law, the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, has expired. All other regulatory proceedings are pending.
Enron's Bankruptcy
------------------
On Dec. 2, 2001, Enron, along with certain of its subsidiaries, filed
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code in the U.S. Bankruptcy Court for the Southern District of New York. PGE has
not filed for reorganization under Chapter 11.
At this time, it is difficult to assess the impact of Enron's
bankruptcy filing on PGE. It is possible that Enron's situation could adversely
affect PGE, because, as a subsidiary of Enron, PGE has relationships with Enron
11
that could expose PGE to liability. PGE adopted and participated in certain
Enron employee benefit plans, including its 401(k) plan which contained
investments in Enron common stock, and was a member of Enron's consolidated tax
group for U.S. federal income tax purposes. PGE may have liabilities in
connection with such employee plans and is liable for any taxes assessed against
the Enron consolidated tax group for the periods it participated as a member of
such group. It is possible that PGE could be exposed to additional liabilities
from its relationship with Enron.
If the Company determines that PGE is exposed to liabilities in
connection with Enron's bankruptcy that have a material adverse effect on PGE,
the Company may choose not to acquire PGE. Furthermore, it is possible that PGE
liabilities arising in connection with Enron's bankruptcy could result in
Holding Company's inability to satisfy the conditions to obtaining financing for
the $1.55 billion cash portion of the purchase price for PGE, which would result
in Holding Company's inability to complete the acquisition. At this time, the
potential magnitude of any such liabilities has not been determined.
Notwithstanding Enron's bankruptcy, the Stock Purchase Agreement
remains a valid contractual obligation of Enron to sell, and for Holding Company
to acquire, the common stock of PGE. However, in the Enron bankruptcy case,
Enron must decide to either assume or reject the Stock Purchase Agreement. If
Enron elects to reject the Stock Purchase Agreement, Enron could either retain
ownership of PGE or sell PGE to another party. Although a rejection of the Stock
Purchase Agreement would be treated as a breach of contract and Enron would be
liable to the Company for damages resulting from such breach, the Company's
claim against Enron would be a pre-bankruptcy general unsecured claim that may
have little or no value. If Enron assumes the Stock Purchase Agreement, it would
continue to be obligated to perform all of the terms and conditions of the Stock
Purchase Agreement. If Enron assumes the Stock Purchase Agreement and then
breaches an obligation in the agreement, the Company would have a
post-bankruptcy claim against Enron's bankruptcy estate which is referred to as
an administrative expense. Administrative expenses would also include Enron's
post-bankruptcy expenses of doing business, including the costs of administering
the bankruptcy proceedings. In the bankruptcy, claims for administrative
expenses rank behind secured claims and ahead of pre-bankruptcy unsecured
claims. Enron's determination whether to assume or reject the Stock Purchase
Agreement is a business judgment to be made by Enron on the basis of the best
interests of the bankruptcy estate and Enron's creditors. Furthermore, the
decision is subject to approval by the Bankruptcy Court.
It is the Company's understanding that Enron sought other purchasers
of PGE prior to concluding that the sale to the Company under the terms of the
Stock Purchase Agreement represented the most attractive opportunity for Enron
to sell PGE. Accordingly, if Enron concludes that it will not retain ownership
of PGE, the Company expects that Enron will determine that a sale of PGE to
Holding Company is in the best interest of Enron and will seek to complete the
proposed transaction. It is not clear whether Enron will be able to successfully
reorganize in its bankruptcy proceeding and emerge from Chapter 11 with
continuing business operations or be forced to liquidate all of its assets. If
Enron can successfully reorganize and continue business operations, it is
possible that Enron could elect to reject the Stock Purchase Agreement and
retain ownership of PGE.
The Company cannot predict when the determination to assume or reject
the Stock Purchase Agreement will be made or whether Enron will solicit new
offers to acquire PGE.
If Enron elects to assume the Stock Purchase Agreement, the Company
would expect the Bankruptcy Court to issue an order providing that the transfer
of the PGE common stock to Holding Company will be free and clear of liens and
creditor claims. Such an order would probably not, however, protect PGE from any
claims that may arise directly against PGE as a result of its relationship with
Enron.
As previously noted, if the Company determines that PGE is exposed to
liabilities that have a material adverse effect on PGE or that would result in
Holding Company's inability to obtain the financing required for the
acquisition, the Company may choose not to acquire PGE. Alternatively, the
Company may choose to seek to renegotiate the terms of the Stock Purchase
Agreement in light of such liabilities.
At this time, the Company is seeking to determine the potential
magnitude of any liabilities to which PGE may be exposed, to assess whether the
closing conditions for the acquisition can be satisfied and to explore with
12
Enron potential modifications to the terms of the Stock Purchase Agreement which
would attempt to address any such liabilities. There can be no assurance as to
whether, or upon what terms and conditions, an acquisition of PGE can proceed.
The Company will continue to evaluate the impact of Enron's Chapter 11
bankruptcy filing on PGE and on the proposed acquisition of PGE. The ultimate
impact of Enron's bankruptcy filing on PGE and on the acquisition cannot be
determined at this time and may be materially different from the assessment
contained herein. The Company cannot be certain that these events will have no
effect on Holding Company or that such effects will not be material. In
addition, the Company does not know the extent to which these events will delay
or impede the acquisition of PGE.
Through Dec. 31, 2001, the Company has recorded approximately $9.6
million of costs relating to the PGE acquisition as deferred costs for the
purchase of PGE. In the event that the acquisition is terminated, the Company
would recognize these costs and any subsequent costs incurred as current
expense.
Environment
- -----------
NW Natural owns property in Linnton, Oregon that is the site of a
former gas manufacturing plant that was closed in 1956 (the Linnton site). In
recent years, the Linnton site has been under voluntary investigation by NW
Natural for environmental contaminants under program oversight by the Oregon
Department of Environmental Quality (ODEQ). NW Natural has recorded liabilities
totaling $4.0 million for the estimated costs of investigation and interim
remediation at the Linnton site, including consultants' fees, ODEQ oversight
reimbursement and legal fees, of which $3.0 million had been spent as of Dec.
31, 2001. In 2000, NW Natural recorded a $1.4 million receivable representing an
estimate of the costs for investigation and interim remediation at the Linnton
site that NW Natural expects to recover from insurance.
NW Natural 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. NW
Natural has recorded a liability of $0.3 million for its 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. NW Natural
recorded a liability of $0.6 million in 2000 and, based on a revised estimate of
NW Natural's share at the lower end of a range of probable liability, recorded
an additional $0.5 million in 2001 for its estimated share of the costs of the
remedial investigation of the Portland Harbor. Available information is
insufficient to determine either the total amount of liability for investigation
and remediation of the Portland Harbor or the higher end of a range for NW
Natural's estimated share of that liability.
NW Natural expects that its costs of further 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.
Employees
- ---------
At year-end 2001, NW Natural had 1,284 employees, of which 900 were
members of the Office and Professional Employees International Union, Local No.
11. These union employees are working under a seven-year Joint Accord covering
wages, benefits and working conditions which will expire March 31, 2004.
ITEM 2. PROPERTIES
NW Natural's natural gas distribution system consists of approximately
12,060 miles of distribution and transmission mains. In addition, the
distribution system includes service pipes, meters and regulators, and gas
regulating and metering stations. The mains and feeder lines are located in
municipal streets or alleys pursuant to valid franchise or occupation
13
ordinances, in county roads or state highways pursuant to valid agreements or
permits granted pursuant to statute, or on lands of others pursuant to valid
easements obtained from the owners of such lands. NW Natural also holds all
necessary permits for the crossing of the Willamette River and a number of
smaller rivers by its mains.
NW Natural owns service facilities in Portland, as well as various
satellite service centers, garages, warehouses and other buildings necessary and
useful in the conduct of its business. It leases office space in Portland for
its corporate headquarters. District offices are maintained on owned or leased
premises at convenient points in the distribution system. NW Natural owns LNG
facilities in Portland and near Newport, Oregon, and also owns underground
natural gas storage facilities located near Mist, Oregon.
NW Natural considers all of its properties currently used in its
operations, both owned and leased, to be well maintained, in good operating
condition, and adequate for its present and foreseeable future needs. In order
to reduce risks associated with gas leakage in older parts of its system, NW
Natural undertook an accelerated pipe replacement program in the 1980s under
which it removed or replaced 100 percent of its cast iron main by October 2000.
In 2001, NW Natural initiated an accelerated pipe replacement program under
which it will reduce the amount of bare steel main in the system.
NW Natural's Mortgage and Deed of Trust constitutes a first mortgage
lien on substantially all of the real property constituting its utility plant.
NW Natural holds interests in 5,531 net acres of underground natural
gas storage and 2,210 net acres of oil and gas leases in Oregon. NW Natural owns
depleted gas reservoirs near Mist, Oregon, that are continuing to be developed
as underground gas storage facilities. It also holds an option to purchase
future storage rights in certain other areas of the Mist gas field. The Company
also holds an equity investment in an aircraft leveraged lease.
ITEM 3. LEGAL PROCEEDINGS
Litigation
- ----------
NW Natural was a 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 1995, a jury returned verdicts against NW
Natural for $5.1 million on the customer's tort claim or, alternatively, for
$1.9 million on its contract claim, along with a verdict in favor of NW Natural
for $0.2 million on its own contract claim. In 1999, the Oregon Supreme Court
ruled in NW Natural's favor on the customer's tort claim and the Oregon Court of
Appeals ruled in NW Natural's favor on its contract claim. The Oregon Supreme
Court initially declined to review the Court of Appeals' decision on the
contract claim. On reconsideration, however, in December 2000, the Supreme Court
agreed to review the Court of Appeals' decision on the contract claim.
In February 2002, the Supreme Court issued a decision adverse to NW
Natural on the customer's contract claim and remanded the case to the circuit
court for further proceedings. Based on the Supreme Court's February 2002
decision, NW Natural recorded charges to operating expense and interest expense
totaling $2.7 million for the year ended Dec. 31, 2001, equivalent to 6 cents a
diluted share, as a reserve against payment of the net judgment, related costs
and post-judgment interest. In March 2002, NW Natural entered into a final
settlement in the case, resulting in NW Natural's payment to Chase in the amount
of $2.65 million.
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 expect
disposition of these matters to have a materially adverse effect on the
Company's financial position, results of operations or cash flows.
14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the year
ended Dec. 31, 2001.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Age at
Name December 31, 2001 Positions held during last five years
---- ----------------- -------------------------------------
Richard G. Reiten 62 Chairman (2000- ); Chief Executive Officer (1997- );
President (1996-01); Chief Operating Officer (1996).
Mark S. Dodson 56 President, Chief Operating Officer and General Counsel
(2001- ); Senior Vice President, Public Affairs and
General Counsel (1998-01); Senior Vice President (1997);
Partner, Ater Wynne Hewitt Dodson & Skerritt LLP (1981-97).
Michael S. McCoy 58 Executive Vice President, Customer and Utility Operations
(2000- ); Senior Vice President, Customer and Utility
Operations (1999-00); Senior Vice President, Customer
Services (1992-99).
Bruce R. DeBolt 54 Senior Vice President, Finance, and Chief Financial Officer
(1990- ).
Lea Anne Doolittle 46 Vice President, Human Resources (2000- ); Director of
Compensation (1993-2000), PacifiCorp.
Stephen P. Feltz 46 Treasurer and Controller (1999- ); Assistant Treasurer
(1996-99); Manager, General Accounting (1996-99).
Gregg S. Kantor 44 Vice President, Public Affairs and Communications (1998- );
Director, Public Affairs and Communications (1996-97).
C. J. Rue 56 Secretary (1982- ); Assistant Treasurer (1987- ).
Each executive officer serves successive annual terms; present terms
end May 23, 2002.
There are no family relationships among the Company's executive
officers.
15
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(A) Effective July 27, 2000, NW Natural's common stock was listed and
began trading on the New York Stock Exchange under the symbol "NWN." Prior
thereto, the common stock was traded on the National Market tier of the Nasdaq
Stock Market under the symbol "NWNG."
The quarterly high and low trades for NW Natural's common stock during
the past two years were as follows:
2001 2000
--------------------------------- ---------------------------------
---------------- ---------------- ----------------- ---------------
Quarter Ended High Low High Low
- -------------------------------------------------------------------------------------------------------------
March 31 $26.69 $23.05 $22.50 $17.75
June 30 25.25 21.65 23.88 18.88
September 30 25.85 22.39 24.63 21.63
December 31 26.30 22.00 27.50 21.88
The closing quotation for the common stock on Dec. 31, 2001 was
$25.50. The closing quotation on Dec. 29, 2000 was $26.50.
(B) As of Dec. 31, 2001, there were 10,359 holders of record of the
Company's common stock.
(C) NW Natural has paid quarterly dividends on its common stock in
each year since the stock first was issued to the public in 1951. Annual common
dividend payments have increased each year since 1956. Dividends per share paid
during the past two years were as follows:
Payment Date 2001 2000
------------ ---- ----
February 15 $0.310 $0.310
May 15 $0.310 $0.310
August 15 $0.310 $0.310
November 15 $0.315 $0.310
------ ------
Total per share $1.245 $1.240
It is the intention of the Board of Directors to continue to pay cash
dividends on the Company's common stock on a quarterly basis. However, future
dividends will be dependent upon NW Natural's earnings, its financial condition
and other factors.
NW Natural's Dividend Reinvestment and Stock Purchase Plan permits
registered owners of common stock to reinvest all or a portion of their
quarterly dividends in additional shares of NW Natural's common stock at the
current market price. Shareholders also may invest cash on a monthly basis, up
to $50,000 per calendar year, in additional shares at the current market price.
During 2001, dividend reinvestments and optional cash investments under the Plan
aggregated $4.3 million and resulted in the issuance of 177,624 shares of common
stock. During the 24 years the Plan has been available, the Company has issued
and sold 4,161,310 shares of common stock which produced $88.8 million in
additional capital.
16
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data concerning the Company's
operations and financial condition.
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Thousands, except per share amounts
- -----------------------------------
Sales revenues:
Residential ............................. $ 329,905 $ 280,642 $ 242,952 $ 205,388 $ 177,835
Commercial .............................. 190,236 159,660 139,425 117,889 100,677
Industrial - firm ....................... 49,662 37,378 35,857 34,303 27,025
Industrial - interruptible .............. 34,283 23,483 17,182 15,337 13,944
Unbilled revenues ....................... 13,774 12,661 (2,671) 8,314 1,647
----------- ----------- ----------- ----------- -----------
Total gas sales revenues 617,860 513,824 432,745 381,231 321,128
Transportation .......................... 20,637 21,491 21,351 19,958 22,029
Other ................................... (2,325) (3,976) 1,194 2,617 7,884
----------- ----------- ----------- ----------- -----------
Total utility operating revenues 636,172 531,339 455,290 403,806 351,041
Cost of gas ................................ 364,699 273,978 212,021 173,242 130,381
----------- ----------- ----------- ----------- -----------
Net utility operating revenues ..... 271,473 257,361 243,269 230,564 220,660
Non-utility net operating revenues . 4,538 589 368 402 450
----------- ----------- ----------- ----------- -----------
Net operating revenues .................. $ 276,011 $ 257,950 $ 243,637 $ 230,966 $ 221,110
=========== =========== =========== =========== ===========
Net income ................................. $ 50,187 $ 50,224 $ 45,296 $ 27,301 $ 43,059
Preferred and preference redeemable stock
dividend requirements ................... 2,401 2,456 2,515 2,577 2,646
----------- ----------- ----------- ----------- -----------
Earnings applicable to common stock ........ $ 47,786 $ 47,768 $ 42,781 $ 24,724 $ 40,413
=========== =========== =========== =========== ===========
Average common shares outstanding .......... 25,159 25,183 24,976 24,233 22,698
=========== =========== =========== =========== ===========
Basic earnings per share of common stock ... $ 1.90 $ 1.90 $ 1.71 $ 1.02 $ 1.78
=========== =========== =========== =========== ===========
Diluted earnings per share of common stock . $ 1.88 $ 1.88 $ 1.70 $ 1.02 $ 1.76
=========== =========== =========== =========== ===========
Dividends per share of common stock ........ $ 1.245 $ 1.24 $ 1.225 $ 1.22 $ 1.205
=========== =========== =========== =========== ===========
Total assets - at end of period ............ $ 1,435,022 $ 1,278,713 $ 1,244,423 $ 1,191,736 $ 1,111,617
=========== =========== =========== =========== ===========
Ratio of Earnings to Fixed Charges* ........ 3.14 3.14 3.12 2.20 2.99
=========== =========== =========== =========== ===========
* Computed using the Securities and Exchange Commission method. 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.
17
SELECTED FINANCIAL DATA (continued)
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Thousands, except customer and gas cost
per therm data
- ----------------------------------------------
Capitalization - at end of period
Common stock equity .............................. $ 468,161 $ 452,309 $ 429,596 $ 412,404 $ 366,265
Redeemable preference stock ...................... 25,000 25,000 25,000 25,000 25,000
Redeemable preferred stock ....................... 9,000 9,750 10,564 11,499 12,429
Long-term debt ................................... 378,377 400,790 396,379 366,738 344,303
---------- ---------- ---------- ---------- ----------
Total capitalization ...................... $ 880,538 $ 887,849 $ 861,539 $ 815,641 $ 747,997
========== ========== ========== ========== ==========
Gas sales and transportation deliveries (000 therms):
Residential ...................................... 350,065 356,375 352,969 315,686 306,356
Commercial ....................................... 242,293 250,380 252,382 229,124 225,249
Industrial - firm ................................ 79,778 76,559 84,630 87,275 84,523
Industrial - interruptible ....................... 63,597 56,632 52,938 51,521 53,929
Unbilled therms .................................. 1,771 8,691 (9,343) 8,645 3,615
---------- ---------- ---------- ---------- ----------
Total gas sales ........................... 737,504 748,637 733,576 692,251 673,672
Transportation ................................... 385,783 431,136 480,570 446,165 440,452
---------- ---------- ---------- ---------- ----------
Total volumes delivered ................... 1,123,287 1,179,773 1,214,146 1,138,416 1,114,124
========== ========== ========== ========== ==========
Customers (average for period):
Residential ...................................... 474,373 456,449 435,959 413,714 394,415
Commercial ....................................... 54,628 53,617 52,029 50,469 48,232
Industrial - firm ................................ 377 375 396 404 411
Industrial - interruptible ....................... 141 118 118 114 119
Transportation ................................... 111 125 127 122 120
---------- ---------- ---------- ---------- ----------
Total customers ........................... 529,630 510,684 488,629 464,823 443,297
========== ========== ========== ========== ==========
Customer statistics:
Heat requirements**
Actual degree days ........................ 4,325 4,418 4,256 4,011 4,092
20-year average degree days ............... 4,202 4,197 4,193 4,234 4,264
Average annual use per customer in therms:
Residential ............................... 738 781 810 749 777
Commercial ................................ 4,435 4,670 4,851 4,540 4,670
Gas purchased cost per therm - net (cents) .......... 47.19 37.68 27.85 25.09 24.05
** A degree day is the measure of the coldness of the weather experienced
based on the extent to which the average of the high and low temperatures
for a day falls below 65 degrees Fahrenheit.
18
ITEM 7. 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
Northwest Energy Corporation (Northwest Energy or Holding
Company), a wholly-owned subsidiary formed in 2001
Canor Energy, Ltd. (Canor), a majority-owned subsidiary,
reclassified as a discontinued segment in 1999 and sold
in 2000
Together these businesses are referred to herein as the "Company" (see
"Non-utility Operations" below, and Note 2 to the Consolidated Financial
Statements).
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, 2001.
Highlights
- ----------
Among its accomplishments in 2001, NW Natural:
o grew the customer base by more than 3 percent, adding 17,525
customers to its gas distribution system during the year;
o commenced interstate gas storage services under a certificate
granted by the Federal Energy Regulatory Commission, enabled by
an expansion of the Company's Mist gas storage facilities;
o extended natural gas service to the South Beach district of
Newport, Oregon, and made progress toward its goal of providing
natural gas service to Coos Bay, Oregon, in late 2002 or early
2003;
o streamlined operations and improved service and productivity by
combining call centers, replacing the general ledger accounting
system and migrating away from a contract mainframe computer;
o negotiated an agreement to purchase the stock of Portland General
Electric Company (PGE) from Enron Corp., a transaction that, if
completed, would create one of the largest energy companies in
the Northwest with $5 billion in assets and more than 1.25
million electric and gas customers; and
o increased the quarterly dividend on common stock, making 2001 the
46th consecutive year in which the Company's dividend payments
have increased.
Earnings and Dividends
- ----------------------
The Company's earnings applicable to common stock in both 2001 and
2000 were $47.8 million, up from $42.8 million in 1999. Earnings for 2001 and
2000 set new records for the Company while earnings for 1999 were its fourth
highest on record. Diluted earnings per share from consolidated operations were
$1.88 a share in both 2001 and 2000, compared to $1.70 a share in 1999.
NW Natural earned $1.76 a diluted share from gas utility operations in
2001 compared to $1.78 in 2000 and $1.66 in 1999. Weather conditions in its
service territory in 2001 were 2 percent warmer than 2000 and 3 percent colder
than the 20-year average. Weather in 2000 was 4 percent colder than in 1999 and
5 percent colder than the 20-year average. Weather in 1999 was 2 percent colder
than the 20-year average.
19
Non-utility operating results for 2001 were earnings of 12 cents a
share, including 8 cents a share from gas storage services. Non-utility
operating results for 2000, excluding Canor, were earnings of 1 cent a share
compared to earnings of 3 cents a share in 1999. The Company recognized a gain
equivalent to 9 cents a share from the sale of Canor in 2000. Operating results
from Canor in 1999 were earnings of 1 cent a share (see "Non-utility
Operations," below).
2001 was the 46th consecutive year in which the Company's dividends
paid have increased. Dividends paid on common stock were $1.245 a share in 2001
compared to $1.24 a share in 2000 and $1.225 a share in 1999.
Critical Accounting Policies
- ----------------------------
In preparing the Company's financial statements using generally
accepted accounting principles in the United States of America (GAAP),
management exercises judgment in the selection and application of accounting
principles, including making estimates and assumptions. Management considers
Critical Accounting Policies to be those that could result in materially
different financial statement results if the Company's assumptions regarding
application of accounting principles were different. The Company's Critical
Accounting Policies are described below. Other significant accounting policies
and recent accounting pronouncements are discussed in Note 1 to the Consolidated
Financial Statements.
Regulatory Accounting
---------------------
NW Natural generally uses the same accounting policies and practices
used by unregulated companies for financial reporting under GAAP. However,
sometimes these principles, such as Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation,"
require special accounting treatment for regulated companies to show the effect
of regulation. For example, in setting NW Natural's retail rates, the OPUC may
not allow NW Natural to currently charge its customers to recover certain
expenses, but instead requires that these expenses be charged to customers in
the future. In this situation, SFAS No. 71 requires NW Natural to defer these
items and show them as regulatory assets on the balance sheet until NW Natural
is allowed to charge its customers. NW Natural then amortizes these items as
expense to the income statement as those charges are recovered from customers.
Similarly, certain revenue items may be deferred as regulatory liabilities,
which are also eventually amortized to the income statement as rates to
customers are reduced.
The conditions a regulated company must satisfy to apply the
accounting policies and practices of SFAS No. 71 include:
o an independent regulator sets rates;
o the regulator sets the rates to cover specific costs of delivering
service; and
o the service territory lacks competitive pressures to reduce rates below
the rates set by the regulator.
NW Natural applies SFAS No. 71 in accounting for its regulated
operations. The Company periodically assesses whether it can continue to apply
SFAS No. 71. If NW Natural should determine in the future that all or a portion
of its regulatory assets and liabilities no longer meet the criteria for
continued application of SFAS No. 71, it would be required to write off the
related balances of its regulatory assets as a charge to its income statement.
Revenue Recognition
-------------------
Utility revenues are derived primarily from the sale and
transportation of natural gas. Utility revenue from gas sales and transportation
is recognized when the gas is delivered to and received by the customer.
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 recognized in 2001, 2000
20
and 1999 included the net change in unbilled utility revenue of $13.8 million,
$12.7 million and negative $2.7 million, respectively.
Revenues from non-utility services, including gas storage services,
are recognized upon delivery of the service to customers.
Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," on Jan. 1, 2001. This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 requires that an entity recognize derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
SFAS No. 133 also requires that changes in the fair value of a derivative be
recognized currently in earnings unless specific hedge accounting criteria are
met.
NW Natural's Derivatives Policy sets forth the guidelines for using
selected financial derivative products to support prudent risk management
strategies within designated parameters (see Note 1). NW Natural's primary
hedging activities, i.e. natural gas commodity price and foreign currency
exchange rates, are accounted for as cash flow hedges under SFAS No. 133 and are
subject to regulatory deferral pursuant to SFAS No. 71. Unrealized gains and
losses from mark-to-market valuations of these contracts are not recognized in
the income statement but are reported as derivative assets or liabilities and
offset by a corresponding deferred account balance included under "Regulatory
assets."
Upon adoption of SFAS No. 133, NW Natural recorded a one-time
transition adjustment by debiting receivables from counterparties (a regulatory
asset account) and crediting recoverable gas costs (an offsetting regulatory
asset account) on the balance sheet for approximately $165 million, representing
the initial recognition of the fair values of hedge derivatives outstanding on
the adoption date. The financial statements for periods prior to 2001 do not
reflect the requirements of SFAS No. 133.
At Dec. 31, 2001, NW Natural had derivatives outstanding covering its
exposures to commodity and foreign currency prices (see Note 11). The fair value
of the hedge derivatives outstanding on that date was a net loss of about $112
million. NW Natural had six natural gas commodity-price swap contracts extending
beyond Dec. 31, 2002, but none extends longer than Oct. 31, 2003. None of the
natural gas commodity price call option contracts extends beyond Dec. 31, 2002.
In 2001, NW Natural realized net gains of $57.6 million from the
settlement of natural gas commodity-price swap and call option contracts, which
were recorded as reductions to the cost of gas, compared to net gains of $56.2
million during 2000. The currency exchange rate in all foreign currency forward
purchase contracts is included in NW Natural's cost of gas at settlement;
therefore, no gain or loss was recorded from the settlement of those contracts.
The fair value of derivative instruments at Dec. 31, 2001 was
determined using estimated or quoted market prices for the periods covered by
the contracts. Market prices for the natural gas commodity-price swap and call
option contracts were obtained from external sources. These third-party
valuations are reviewed for reasonableness by the Company using fair value
calculations for other contracts with similar terms and conditions. The market
prices for the foreign currency forward contracts were based on the currency
exchange rates quoted by The Bank of Canada.
Results of Operations
- ---------------------
Regulatory Matters
------------------
NW Natural provides gas utility service in Oregon and Washington, with
Oregon representing over 90 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, the ability to
remain price competitive in the large industrial market, to control expenses,
21
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
became 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 industrial and large commercial customers. The
OPUC authorized and based rates on an ROE of 10.25 percent. On Dec. 1, 2000,
rates were reduced in Oregon by $3.0 million per year to implement the cost
allocation study that produced the equivalent rate increase in Washington.
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. The OPUC approved rate increases averaging
21.7 percent for Oregon sales customers and the WUTC approved rate increases
averaging 21.3 percent for Washington sales customers, both effective on Oct. 1,
2001. These rate increases primarily reflect increases in the costs 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 23 percent effective Oct. 1, 2000, and
increases averaging 9.1 percent effective Dec. 1, 1999. The WUTC approved rate
increases averaging 23 percent effective Aug. 1, 2000, and increases averaging
11.1 percent effective Dec. 1, 1999.
NW Natural believes that reductions in recent years in its customers'
gas consumptions per degree day (see "Residential and Commercial," below) are
caused by the higher cost of purchased gas, which is passed on to customers as
rate increases, and to efforts throughout the region to conserve energy. NW
Natural filed with the OPUC in 2001 for approval of a new regulatory mechanism
that is intended to stabilize margin revenues in the face of variable
consumption patterns. The proposed regulatory mechanism is intended to stabilize
margin revenues to assure NW Natural of fixed cost recovery and more predictable
shareholder earnings. NW Natural has proposed that this be accomplished through
a balancing account that would compare actual usage of residential and
commercial customers against their normal usage levels and treat any variations
as refunds or collections of revenues. In February 2002, the administrative law
judge in this proceeding issued a memorandum to the parties advising them that
the OPUC has decided to hold the docket regarding NW Natural's proposed
regulatory mechanism in abeyance, along with a docket involving a similar filing
by PGE, pending its review of NW Natural's application to acquire PGE. NW
Natural estimates that if customers' gas consumption patterns as experienced in
2001 were to continue for the full year but a margin stabilization mechanism
were not approved, it could reduce margin revenues in 2002 by the equivalent of
24 cents a share of earnings compared to results with a mechanism in place.
In an order issued in 1999, the OPUC formalized a process that tests
for excessive earnings in connection with gas utilities' annual filings for 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.
22
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) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
Gas Sales and Transportation Volumes - Therms:
- ----------------------------------------------
Residential and commercial sales 592,358 606,755 605,351
Unbilled volumes 1,771 8,691 (9,343)
---------- --------- ---------
Weather-sensitive volumes 594,129 53% 615,446 52% 596,008 49%
Industrial firm sales 79,778 7% 76,559 6% 84,630 7%
Industrial interruptible sales 63,597 6% 56,632 5% 52,938 4%
---------- ---- --------- --- --------- ----
Total gas sales 737,504 66% 748,637 63% 733,576 60%
Transportation deliveries 385,783 34% 431,136 37% 480,570 40%
---------- ---- --------- --- --------- ----
Total volumes sold and delivered 1,123,287 100% 1,179,773 100% 1,214,146 100%
========== ==== ========= ==== ========= ====
Utility Operating Revenues - Dollars:
Residential and commercial sales $ 520,141 $ 440,302 $ 382,377
Unbilled revenues 13,774 12,661 (2,671)
---------- --------- ---------
Weather-sensitive revenues 533,915 84% 452,963 85% 379,706 83%
Industrial firm sales 49,662 8% 37,378 7% 35,857 8%
Industrial interruptible sales 34,283 5% 23,483 5% 17,182 4%
---------- ---- --------- ---- --------- ----
Total gas sales 617,860 97% 513,824 97% 432,745 95%
Transportation revenues 20,637 3% 21,491 4% 21,351 5%
Other revenues (2,325) - (3,976) (1%) 1,194 -
---------- ---- --------- ---- --------- ----
Total utility operating revenues $ 636,172 100% $ 531,339 100% $ 455,290 100%
========== ==== ========= ==== ========= ====
Cost of gas sold $ 364,699 $ 273,978 $ 212,021
========== ========= =========
Total number of customers
(end of period) 540,931 523,406 501,163
========== ========= =========
Actual degree days 4,325 4,418 4,256
========== ========= =========
20-year average degree days 4,202 4,197 4,193
========== ========= =========
23
Residential and Commercial
--------------------------
NW Natural continued to grow its customer base, with 17,525 customers
added during 2001. This represents a growth rate of 3.3 percent, compared to 4.4
percent in 2000 and 5 percent in 1999. NW Natural believes that the lower growth
rate in 2001 reflects the effects of higher gas prices and the economic
recession. In the three years ended Dec. 31, 2001, more than 63,000 customers
were added to the system, representing an average annual growth rate of 4.4
percent.
Typically, 80 percent or more of NW Natural's annual utility 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 3 percent colder than average in 2001, 5
percent colder than average in 2000 and 2 percent colder than average in 1999.
Average weather conditions are calculated from the most recent 20 years of
temperature data measured by heating degree days. Weather in 2001 was 2 percent
warmer than 2000 while 2000 was 4 percent colder than 1999.
The volumes of gas sold to residential and commercial customers were 3
percent lower in 2001 than in 2000, reflecting warmer weather as well as lower
consumption patterns by customers due to higher gas commodity prices tracked
into rates in the fall of 2000 and again in October 2001. Lower consumptions per
degree day by temperature-sensitive customers reduced sales for the year by an
estimated 39 million therms and reduced margin (revenues less cost of gas) by
approximately $11 million, equivalent to 26 cents a share. The volumes of gas
sold to residential and commercial customers were 3 percent higher in 2000 than
in 1999, reflecting the continued customer growth and colder weather. Revenue
from residential and commercial customers was up 18 percent in 2001 due to rate
increases effective in 2000 and 2001, and up 19 percent in 2000 due to increased
volumes and rate increases effective in 1999 and 2000.
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 and electric generation
customers were 6 percent lower in 2001 than in 2000 and 9 percent lower in 2000
than in 1999. During 2001, industrial volumes included 43 million therms
delivered to electric generation customers, up from 4 million therms in 2000 and
33 million therms in 1999. The overall decline in industrial sales and
transportation volumes during 2001 was due to several large customers switching
to oil from gas and to plant shut-downs and cut-backs in the manufacturing
sector because of economic conditions. Contracts for service to three electric
generation customers contributed $4.7 million of margin in 2001, or 11 cents a
share, compared to margin from electric generation of $0.1 million and $0.4
million in 2000 and 1999, respectively. Industrial revenues in 2000 included the
positive effects of higher oil prices in an industrial schedule in which rates
vary with oil prices.
Other revenues include amortizations from regulatory accounts and
miscellaneous fee income. In 2001, other revenues amounted to a net reduction to
utility operating revenues of $2.3 million, including amortizations from
regulatory accounts covering conservation programs ($4.9 million), Year 2000
costs ($1.2 million) and property taxes ($0.2 million), partially offset by
increased revenues from customer late payment and collection fees ($2.9 million)
and miscellaneous revenues ($1.3 million).
In 2000, other revenues amounted to a net reduction to utility
operating revenues of $4.0 million, including amortizations from regulatory
accounts covering conservation programs ($2.8 million), property taxes ($2.4
million) and Year 2000 costs ($1.2 million), partially offset by increased
revenues from customer late payment and collection fees ($1.5 million) and
miscellaneous revenues ($0.9 million).
24
Cost of Gas
-----------
The cost per therm of gas sold was 35 percent higher in 2001 than in
2000, and 27 percent higher in 2000 than in 1999, primarily due to higher prices
in the natural gas commodity market. The cost per therm of gas sold includes gas
purchases, gas drawn from storage inventory, gains or losses from commodity
hedges, demand costs, regulatory deferrals and company use.
NW Natural uses an active natural gas commodity hedge program under
the terms of its Derivatives Policy (see Note 1) to help manage its gas
commodity costs. During 2001, realized net gains from commodity swap and call
option contracts were $57.6 million, compared to net gains of $56.2 million in
2000. Net losses of $20.6 million were realized in the fourth quarter of 2001,
compared to net gains of $45.7 million in the fourth quarter of 2000. Gains
(losses) from commodity hedges are recorded as reductions (increases) to the
cost of gas.
NW Natural has a Purchased Gas Adjustment (PGA) tariff under which its
net income from Oregon operations is affected 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. Net savings realized from
gas purchases in 2001 totaled $12.3 million, of which $8.2 million was deferred
for refund to customers and $4.1 million was recorded to earnings. These gas
cost savings contributed 10 cents a share to earnings in 2001, while excess gas
costs in 2000 reduced earnings by 7 cents a share.
Under an agreement with the OPUC, revenues from off-system gas sales
are treated as a reduction of gas costs. These sales reduced the cost of gas
sold by $2.6 million in 2001, $3.0 million in 2000 and $1.7 million in 1999.
Non-utility Operations
----------------------
At Dec. 31, 2001 and 2000, the Company had one active wholly-owned
subsidiary, Financial Corporation. Northwest Energy, which was formed in 2001 to
serve as the holding company for NW Natural and PGE if the acquisition of PGE is
completed, had no active operations in 2001. One discontinued segment, Canor, a
majority-owned subsidiary, was sold in 2000 (see "Discontinued Segment," below).
Financial Corporation
---------------------
Financial Corporation's operating results in 2001 were net income of
$0.7 million, compared to $0.1 million in 2000 and $0.5 million in 1999. The
increase in net income from 2000 to 2001 was related to operating results from
Financial Corporation's investments in limited partnerships in solar electric,
wind-power electric and hydroelectric generation projects in California. The
decrease in income from 1999 to 2000 was primarily due to an adjustment to
deferred taxes in 2000. The Company's investment in Financial Corporation at
Dec. 31, 2001, was $7.9 million, compared to $7.2 million and $7.1 million at
Dec. 31, 2000 and 1999, respectively.
Discontinued Segment
--------------------
During 2000, the Company sold its interest in Canor at a gain of $2.4
million, equivalent to 9 cents a share (see Note 2). Net income from Canor for
1999 was $0.4 million.
Gas Storage Services
--------------------
NW Natural realized net income from gas storage services in 2001 of
$2.1 million, or 8 cents a share, up from $0.1 million, or negligible earnings
per share in 2000. Gas storage services are provided to customers using storage
25
capacity not required from time to time for utility services. NW Natural retains
80 percent of the net income before tax from storage services and credits the
remaining 20 percent to its utility customers.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Consolidated operations and maintenance expenses were $6.1 million, or
8 percent, higher in 2001 than in 2000. The increase was caused primarily by
higher payroll costs due to wage and salary increases ($1.9 million), higher
costs for employees' health and pension benefits ($1.9 million), a charge to a
litigation reserve ($1.7 million) resulting from an unfavorable decision by the
Oregon Supreme Court in a case involving a claim by a commercial customer (see
Note 12) and higher uncollectible accounts expense ($1.0 million).
Operations and maintenance expenses in 2000 were $4.6 million, or 6
percent, higher than in 1999. The increase was primarily due to credits to a
litigation reserve in 1999 ($4.9 million), 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.
Taxes Other Than Income
-----------------------
Taxes other than income, which are comprised of property, franchise,
payroll and other taxes, increased $3.9 million, or 14 percent, in 2001.
Property tax expense was $1.8 million, or 18 percent, higher than in 2000 due to
higher property tax rates and an increase in utility plant. Franchise taxes,
which are based on gross revenues, increased $1.5 million, or 12 percent,
reflecting higher revenues due to an increase in NW Natural's customer base and
rate increases effective in late 2000 and 2001. Regulatory fees and payroll tax
expenses accounted for the remaining $0.6 million increase in 2001.
Taxes other than income increased $3.7 million, or 15 percent, in 2000
compared to 1999. Franchise taxes increased $2.6 million, or 25 percent,
reflecting higher revenues due to an increase in NW Natural'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 increased plant in service.
Payroll tax expense was $0.3 million, or 9 percent, higher than in 1999 due to
increased payroll.
Depreciation, Depletion and Amortization
----------------------------------------
Depreciation, depletion and amortization expense increased
$2.2 million, or 5 percent, in 2001, primarily due to a 5 percent
($67.7 million) increase in utility plant and non-utility property.
Depreciation, depletion and amortization expense decreased $3.6
million, or 7 percent, in 2000 compared to 1999, primarily due to charges in NW
Natural's 1999 depreciation expense relating to regulatory treatment of a
customer information system (CIS). CIS assets were written down by $6.5 million
in 1999 pursuant to the OPUC's order in the Oregon general rate case concluded
in November 1999, and by a further $0.4 million in 2000 pursuant to the WUTC's
order in the Washington general rate case concluded in October 2000. Exclusive
of these regulatory mandated charges, depreciation, depletion and amortization
expense increased $2.6 million, or 6 percent, in 2000 compared to 1999 due to an
increase in utility plant.
As a percentage of average plant and property, depreciation, depletion
and amortization expense was 3.5 percent in both 2001 and 2000 and 4.0 percent
in 1999.
Other Income
------------
Other income was $1.3 million in 2001, or $2.5 million lower than in
2000, primarily due to lower interest income on deferred regulatory account
balances ($1.9 million) and lower miscellaneous non-operating income
($0.6 million).
26
Other income was $3.9 million in 2000, $1.0 million lower than in
1999, primarily due to a reduction in interest income on deferred regulatory
account balances.
Interest Charges - Net
----------------------
Net interest expense was $0.2 million higher in 2001 than in 2000.
Exclusive of a $1.0 million charge to interest expense as the result of an
unfavorable litigation decision (see Note 12), interest expense decreased $0.8
million in 2001 due to lower average interest rates.
Interest charges increased $3.5 million, or 12 percent, in 2000
compared to 1999, primarily due to an increase in long-term debt outstanding in
2000 and a $1.7 million credit adjustment in 1999 relating to favorable
decisions in litigation.
Allowance for Funds Used During Construction (AFUDC) represents the
cost of funds used during the construction of utility plant (see Note 1). In
2001, AFUDC reduced interest expense by $1.0 million compared to $0.8 million in
2000 and $1.2 million in 1999. The weighted average AFUDC rates were 6.2 percent
in 2001 and 6.0 percent in both 2000 and 1999 (see "Financing Activities,"
below).
Income Taxes
------------
The effective corporate income tax rates for 2001, 2000 and 1999 were
35.4 percent, 35.9 percent and 35.4 percent, respectively.
Redeemable Preferred and Preference Stock Dividend Requirements
---------------------------------------------------------------
Redeemable preferred and preference stock dividend requirements for
2001 and 2000 were both lower by $0.1 million, or 2 percent, compared to 2000
and 1999, respectively, due to annual sinking fund redemptions.
27
Financial Condition
- -------------------
Capital Structure
-----------------
The Company's 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, debt or equity securities are issued depending upon both
the target capital structure and market conditions. These sources also are used
to meet long-term debt and preferred and preference stock redemption
requirements (see Notes 3 and 5).
Liquidity and Capital Resources
-------------------------------
At Dec. 31, 2001, the Company had $10.4 million in cash and cash
equivalents compared to $11.3 million at Dec. 31, 2000. Short-term liquidity is
provided by cash from operations and from the sale of the Company's commercial
paper notes, which are supported by commercial bank lines of credit (see
Note 6). The Company has available through Sept. 30, 2002 committed lines of
credit totaling $170 million. The Company's lines of credit are renewed
annually.
NW Natural's lines of credit require that credit ratings be maintained
in effect at all times and that notice be given of any change in its commercial
paper ratings. A change in NW Natural's commercial paper rating is not an event
of default, nor is the maintenance of a specific minimum level of credit rating
a condition to drawing upon the lines of credit. However, interest rates on any
loans outstanding under NW Natural's bank lines are tied to credit ratings,
which would increase or decrease the cost of bank debt, if any, when ratings are
changed. The lines of credit require NW Natural to maintain a specified ratio of
indebtedness to total capitalization. Failure to comply with this covenant would
entitle the banks to terminate their lending commitments and to accelerate the
maturity of all amounts outstanding. At Dec. 31, 2001, NW Natural was in
compliance with this covenant.
The following table shows NW Natural's contractual obligations by
maturity and type of obligation:
Commercial
Paper
Thousands Supported by Capital Long-term Gas Total
Payments due in Years Lines of Preferred and Long-term Lease Operating Supply Purchase Contractual
Ending Dec. 31, Credit Preference Stock Debt Obligations Leases Obligations Cash Obligations
- -----------------------------------------------------------------------------------------------------------------------------
2002 $108,291 $25,750 $40,000 $919 $2,930 $85,012 $154,611
2003 - 750 20,000 272 2,760 76,539 100,321
2004 - 750 - 35 2,643 49,906 53,334
2005 - 750 15,000 - 2,571 45,501 63,822
2006 - 750 8,000 - 966 40,948 50,664
------------------------------------------------------------------------------------------------------
Total 2002 - 2006 108,291 28,750 83,000 1,226 11,870 297,906 422,752
Thereafter - 5,250 335,377 - 3,447 302,455 646,529
Less: imputed interest - - - (80) - (130,087) (130,167)
------------------------------------------------------------------------------------------------------
Total $108,291 $34,000 $ 418,377 $ 1,146 $15,317 $470,274 $939,114
======================================================================================================
One of Financial Corporation's lines of credit in the amount of $10
million, which is guaranteed by NW Natural, provides that it is an event of
default if any governmental authority takes action which the bank believes has a
material adverse effect on NW Natural's financial condition or ability to repay,
or if a material adverse change occurs in NW Natural's business condition.
NW Natural's capital expenditures are primarily related to utility
construction resulting from customer growth and system improvements. Over the
five-year period 2002 through 2006, these expenditures are estimated at between
$450 million and $500 million. In addition, NW Natural has certain long-term
contractual obligations that require an adequate source of funding. These
capital and contractual expenditures are financed through cash from operations
and from the issuance of short-term debt, which is periodically refinanced
through the sale of long-term debt or equity securities.
28
There are no credit rating triggers or stock price provisions that
require the acceleration of debt repayment under the Company's Mortgage and Deed
of Trust or other long-term indebtedness. Also, there are no rating triggers or
stock price provisions contained in contracts or other agreements with third
parties, except for commodity-price swap agreements with two approved
counter-parties under NW Natural's Derivatives Policy, which require the
affected party to provide substitute collateral such as cash, guaranty or
letters of credit if credit ratings are lowered to non-investment grade. The
Company has no other material off-balance sheet obligations, except for certain
lease and purchase commitments (see table above, and Note 12).
The financing commitment obtained to provide loans to finance the cash
portion of the purchase price for PGE requires, as a condition to making such
loans, that PGE, NW Natural and Holding Company have credit ratings meeting
specified levels at the time such loans are to be made and that other criteria
of expected financial performance be demonstrated to the satisfaction of the
lenders.
Cash Flows
----------
Operating Activities
--------------------
Continuing operations provided net cash of $71.5 million in 2001
compared to $87.2 million in 2000. The 18 percent decrease was due to increased
cash from operations before working capital changes ($8.0 million), offset by
higher working capital requirements ($23.7 million). The increase in cash from
continuing operations before working capital changes was due to a larger
decrease in deferred gas costs ($23.1 million), an increase in income from
continuing operations ($2.4 million) and an increase in depreciation, depletion
and amortization in 2001 ($2.2 million), partially offset by a decrease in
deferred investment tax credits and income taxes ($16.7 million) and a smaller
decrease in regulatory accounts and other ($3.0 million). The increase in
working capital requirements was due to a decrease in accounts payable ($82.5
million), partially offset by smaller increases in other current assets and
liabilities ($19.5 million), accounts receivable ($13.4 million), inventories
($10.5 million), accrued unbilled revenues ($1.9 million), and a larger increase
in accrued interest and taxes ($13.4 million).
Cash provided by continuing operations in 2000 was $87.2 million
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 reduction in cash provided by continuing
operations between 1999 and 2000 was primarily due to cash flows relating to NW
Natural's construction pursuant to a development contract of a new headquarters
building for the Port of Portland. Progress payments by the Port totaling $18.8
million in 1999 had the effect of reducing working capital requirements in that
year. The Port's final payment of $1.2 million at closing on the sale of the
building in 2000 increased working capital requirements by that amount in 2000.
Cash used in construction of the building was recorded in both 1999 and 2000 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.
The Company has lease and purchase commitments relating to its
operating activities which are financed with cash flows from operations (see
Note 12).
Investing Activities
--------------------
Cash requirements for investing activities in 2001 totaled $87.3
million, up from $31.0 million in 2000, primarily due to proceeds from the sales
of Canor ($35 million) and the Port of Portland building ($20 million) in 2000.
Cash requirements for utility construction totaled $71.9 million, down
$8.5 million from 2000. The decrease in cash requirements for utility
construction in 2001 was primarily the result of the completion of another phase
in the expansion of NW Natural's Mist gas storage system in December 2000
($8.7 million).
Cash requirements for investing activities in 2000 totaled $31.0
million, down from $118.9 million in 1999. Cash requirements for utility
29
construction totaled $80.4 million, down $28.7 million from 1999. The decrease
in cash requirements for utility construction in 2000 resulted primarily from
lower expenditures for completion of another expansion of the Mist gas storage
system ($24.8 million), lower construction overhead ($1.9 million) and reduced
expenditures for computer hardware and software ($1.6 million).
NW Natural's utility construction expenditures are estimated to total
$83 million for 2002. Over the five-year period 2002 through 2006, these
expenditures are estimated at between $450 million and $500 million. The level
of capital expenditures over the next five years reflects projected customer
growth, system replacement and reinforcement projects, and the development of
additional gas storage facilities including the extension of a pipeline that
moves gas from NW Natural's Mist Storage Field into growing portions of its
service area. 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 in 2001 ($9.6 million) and 2000
($6.9 million) included expenditures for the Company's gas storage expansion
project utilized for interstate storage services. Investments in non-utility
property in 2000 also included final payments 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.
Investing activities in 2001 also included $9.6 million in financial
advisory and legal fees, loan arrangement fees and other costs relating to the
Company's contract for the purchase of PGE. In the event that the acquisition is
terminated, the Company would recognize these costs as current expenses.
The discontinued segment provided net cash of $34.8 million in 2000
from the sale of Canor.
Financing Activities
--------------------
Cash provided by financing activities in 2001 totaled $15 million,
compared to cash used in financing activities in 2000 of $55 million. Factors
contributing to the $70 million difference were retirements of long-term debt of
$20 million in 2001 compared to $60 million in 2000, and an increase in
short-term debt ($52 million) in 2001 compared to a reduction in short-term debt
($38 million) in 2000, partially offset by a reduction in long-term debt issued
($18 million) in 2001 compared to 2000 ($75 million).
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 $18 million of its secured Medium-Term Notes, Series B
(MTNs), in June 2001 and used the proceeds, together with a $52 million increase
in short-term borrowings, to re-fund long-term debt ($20 million) and provide
cash for investments in utility plant.
NW Natural sold $75 million of its MTNs in 2000. It used $50 million
of the proceeds to redeem higher-cost debt, $10 million to re-fund maturing
long-term debt and the remainder to meet capital requirements for the Company's
ongoing construction program and 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 which has been extended through May 2002. The
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 2001. No shares were repurchased during the six months
ended Dec. 31, 2001 while the Company was negotiating the purchase of PGE. Since
the program's inception in 2000, the Company has repurchased 355,400 shares of
common stock at a total cost of $8.2 million.
30
Ratios of Earnings to Fixed Charges
-----------------------------------
For the years ended Dec. 31, 2001, 2000 and 1999, the Company's ratios
of earnings to fixed charges, computed using the Securities and Exchange
Commission method, were 3.14, 3.14 and 3.12, respectively. For this purpose,
earnings consist of net income before taxes plus fixed charges. Fixed charges
consist of interest on all indebtedness, the amortization of debt expense and
discount or premium, and the estimated interest portion of rentals charged to
income.
Contingent Liabilities
- ----------------------
Environmental Matters
---------------------
NW Natural owns property in Linnton, Oregon that is the site of a
former gas manufacturing plant that was closed in 1956 (the Linnton site). In
recent years, the Linnton site has been under voluntary investigation by NW
Natural for environmental contaminants under program oversight by the Oregon
Department of Environmental Quality (ODEQ). NW Natural has recorded liabilities
totaling $4.0 million for the estimated costs of investigation and interim
remediation at the Linnton site, including consultants' fees, ODEQ oversight
reimbursement and legal fees, of which $3.0 million had been spent as of
Dec. 31, 2001. In 2000, NW Natural recorded a $1.4 million receivable
representing an estimate of the costs for investigation and interim remediation
at the Linnton site that NW Natural expects to recover from insurance.
NW Natural 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. NW
Natural has recorded a liability of $0.3 million for its 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. NW Natural
recorded a liability of $0.6 million in 2000 and, based on a revised estimate of
NW Natural's share of the lower end of a range of probable liability, recorded
an additional $0.5 million in 2001 for its estimated share of the costs of
remedial investigation of the Portland Harbor. Available information is
insufficient to determine either the total amount of liability for investigation
and remediation of the Portland Harbor or the higher end of a range for NW
Natural's estimated share of that liability.
NW Natural expects that its costs of further investigation and
remediation for which it may be responsible with respect to the Linnton site,
the Wacker site and the Portland Harbor Superfund site, if any, 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures associated with activities
involving derivative financial instruments and other financial instruments are
natural gas commodity price risk, foreign currency exchange risk and interest
rate risk. Derivative financial instruments are used as tools to mitigate
certain of these market risks (see Note 11). Such instruments are used for
hedging purposes, not for trading purposes. Market risks associated with the
derivative financial instruments are monitored by management personnel who do
not directly enter into these contracts and by a committee of the Board of
Directors.
31
Physical and Financial Commodity, Foreign Currency and Interest Rate
Transactions
--------------------------------------------------------------------
NW Natural enters into short-term and long-term natural gas purchase
contracts with demand and commodity fixed-price and floating-price components,
along with associated short-term and long-term natural gas transportation
contracts. Foreign currency forward contracts are used to hedge against foreign
exchange rate fluctuations on purchases made under these contracts that are
denominated in Canadian dollars.
Historically, NW Natural has taken physical delivery of at least the
minimum quantities specified in its natural gas purchase contracts. The
contracts are subject to annual re-pricing, a process that is intended to
reflect anticipated market price trends during the next year. NW Natural's PGA
mechanism in Oregon provides for the recovery from customers of actual commodity
costs in comparison with established benchmark costs, except that 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.
At Dec. 31, 2001, differences between notional values and fair values
with respect to NW Natural's open positions in derivative financial instruments
were not material to the Company's financial position or results of operations
because of the treatment of these instruments in regulatory mechanisms relating
to gas costs (see "Cost of Gas," above, and Notes 1 and 11). However, to the
degree that market risks exist due to potential adverse changes in commodity
prices and foreign exchange rates in relation to these financial and physical
contracts, the Company considers the risks to be:
Commodity Price Risk
--------------------
The prices of natural gas commodity are subject to fluctuations due to
unpredictable factors including weather, pipeline transportation congestion and
other factors that affect short-term supply and demand. Natural gas commodity
swap and cap agreements are used to convert certain long-term gas purchase
contracts from floating prices to fixed prices. At Dec. 31, 2001 and 2000,
notional amounts under natural gas commodity swap and cap agreements totaled
$260.6 million and $157.8 million, respectively. As of Dec. 31, 2001, six
commodity agreements extended beyond Dec. 31, 2002. If all of the commodity swap
and cap agreements had been settled on Dec. 31, 2001, a loss of $111.8 million
would have been realized (see Note 11).
Foreign Currency Risk
---------------------
The costs of natural gas commodity and certain pipeline services
purchased from Canadian suppliers are subject to changes in the value of
Canadian currency in relation to U. S. currency. Foreign currency forward
contracts are used to hedge against fluctuations in exchange rates with respect
to purchases of natural gas from Canadian suppliers. At Dec. 31, 2001 and 2000,
notional amounts under foreign currency forward contracts totaled $10.2 million
and $34.1 million, respectively. As of Dec. 31, 2001, no foreign currency
forward contracts extended beyond Dec. 31, 2002. If all of the foreign currency
forward contracts had been settled on Dec. 31, 2001, a loss of $0.1 million
would have been realized (see Note 11).
Interest Rate Risk
------------------
Interest rate risk relates to new debt financing needed to fund
capital requirements, including maturing debt securities, and to the issuance of
commercial paper. Interest rate risk is managed through the issuance of
fixed-rate debt with varying maturities and the re-funding of debt through
optional redemption when interest rates are favorable. No derivative financial
instruments to hedge interest rates were in place at Dec. 31, 2001 or 2000.
32
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 that are other than statements of
historical facts. The Company's expectations, beliefs and projections are
expressed in good faith and are believed 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) risks and
uncertainties relating to delays in obtaining, or adverse conditions contained
in, regulatory approvals necessary for the plan of reorganization and
acquisition of PGE; (iii) failure to realize the synergies and other benefits
expected from the acquisition of PGE; (iv) risks relating to the interest rate
environment as it may affect the financing commitment and interest rates borne
by the debt financing for the PGE transaction; (v) weather conditions and other
natural phenomena; (vi) unanticipated population growth or decline, and changes
in market demand and demographic patterns; (vii) competition for retail and
wholesale customers; (viii) pricing of natural gas relative to other energy
sources; (ix) changes in customer consumption patterns due to gas commodity
price changes; (x) unanticipated changes in interest or foreign currency
exchange rates or in rates of inflation; (xi) economic factors that could cause
a severe downturn in certain key industries, thus affecting demand for natural
gas; (xii) unanticipated changes in operating expenses and capital expenditures;
(xiii) capital market conditions; (xiv) competition for new energy development
opportunities; (xv) legal and administrative proceedings and settlements; and
(xvi) the impact of Enron's bankruptcy filing on PGE and on the proposed
acquisition of PGE. 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.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Table of Contents
Page
----
1. Management's Responsibility for Financial Statements.................. 35
2. Report of Independent Accountants..................................... 36
3. Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31,
2001, 2000 and 1999................................................... 37
Consolidated Statements of Earnings Invested in the Business for
the Years Ended December 31, 2001, 2000 and 1999...................... 38
Consolidated Balance Sheets, December 31, 2001 and 2000............... 39
Consolidated Statements of Cash Flows for the Years Ended December 31,
2001, 2000 and 1999................................................... 41
Consolidated Statements of Capitalization, December 31, 2001 and 2000. 42
Notes to Consolidated Financial Statements............................ 43
4. Quarterly Financial Information (unaudited)........................... 64
5. Supplementary Data:
Financial Statement Schedules for the Years Ended December 31, 2001,
2000 and 1999:
Schedule II - Valuation and Qualifying Accounts and Reserves.......... 65
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.
34
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 in the
United States of America 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 in
the United States of America 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 (the 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 independent
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
Chairman and
Chief Executive Officer
/s/ Bruce R. DeBolt
---------------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
35
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, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001 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.
As discussed in Notes 1 and 11 to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments as of
January 1, 2001.
/s/PricewaterhouseCoopers LLP
Portland, Oregon
February 15, 2002
36
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Thousands, except per share amounts (year ended December 31) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------
Operating revenues:
Gross operating revenues ....................................... $650,252 $532,110 $455,834
Cost of sales .................................................. 374,241 274,160 212,197
-------- -------- --------
Net operating revenues..................................... 276,011 257,950 243,637
Operating expenses:
Operations and maintenance ..................................... 83,920 77,817 73,209
Taxes other than income taxes .................................. 32,240 28,351 24,652
Depreciation, depletion and amortization ....................... 49,640 47,440 51,008
-------- -------- --------
Total operating expenses .................................. 165,800 153,608 148,869
-------- -------- --------
Income from continuing operations.................................. 110,211 104,342 94,768
Other income ...................................................... 1,334 3,860 4,816
Interest charges - net ............................................ 33,805 33,561 30,052
-------- -------- --------
Income before income taxes......................................... 77,740 74,641 69,532
Income taxes ...................................................... 27,553 26,829 24,591
-------- -------- --------
Net income from continuing operations ............................. 50,187 47,812 44,941
Discontinued segment:
Income from discontinued segment - net of tax ................. -- -- 355
Gain on sale of discontinued segment - net of tax ............. -- 2,412 --
-------- -------- --------
Net income......................................................... 50,187 50,224 45,296
Redeemable preferred and preference stock dividend requirements 2,401 2,456 2,515
-------- -------- --------
Earnings applicable to common stock ............................... $ 47,786 $ 47,768 $ 42,781
======== ======== ========
Average common shares outstanding ................................. 25,159 25,183 24,976
Basic earnings per share of common stock:
From continuing operations ..................................... $ 1.90 $ 1.80 $ 1.70
From discontinued segment ...................................... -- -- 0.01
From gain on sale of discontinued segment ...................... -- 0.10 --
-------- -------- --------
Total basic earnings per share ............................... $ 1.90 $ 1.90 $ 1.71
======== ======== ========
Diluted earnings per share of common stock:
From continuing operations ..................................... $ 1.88 $ 1.79 $ 1.69
From discontinued segment ...................................... -- -- 0.01
From gain on sale of discontinued segment ...................... -- 0.09 --
-------- -------- --------
Total diluted earnings per share ............................. $ 1.88 $ 1.88 $ 1.70
======== ======== ========
Dividends per share of common stock ............................... $ 1.245 $ 1.24 $ 1.225
======== ======== ========
------------------------------------
See Notes to Consolidated Financial Statements.
37
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS INVESTED IN THE BUSINESS
Thousands (year ended December 31) 2001 2000 1999
-----------------------------------------------------------------------
Earnings invested in the business:
Balance at beginning of year $ 134,189 $ 118,711 $ 106,513
Net income 50,187 $ 50,187 50,224 $ 50,224 45,296 $ 45,296
Cash dividends paid:
Redeemable preferred and preference stock (2,410) (2,466) (2,525)
Common stock (31,307) (31,198) (30,569)
Common stock repurchased (2,688) (1,080) -
Common stock expense (21) (2) (4)
--------- ---------- ----------
Balance at end of year $ 147,950 $ 134,189 $ 118,711
========= ========== ==========
Accumulated other comprehensive income (loss):
Balance at beginning of year $ - $ (3,181) $ (2,460)
Other comprehensive income (loss) - net of tax:
Foreign currency translation adjustments
from discontinued segment - - - - (721) (721)
Recognition of foreign currency translation
adjustment included in gain on sale of
discontinued segment - - 3,181 3,181 - -
Minimum pension liability adjustment (148) (148) - - - -
Unrealized loss from price risk management
activities (227) (227) - - - -
--------------------------------------------- -------------------------
Comprehensive income $ 49,812 $ 53,405 $ 44,575
======== ======== =========
Balance at end of year $ (375) $ - $ (3,181)
========= ========== =========
------------------------------------
See Notes to Consolidated Financial Statements.
38
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
Thousands (December 31) 2001 2000
- --------------------------------------------------------------------------------
Assets:
Plant and property:
Utility plant .................................... $1,465,079 $1,406,970
Less accumulated depreciation .................... 514,629 478,138
---------- ----------
Utility plant - net ......................... 950,450 928,832
---------- ----------
Non-utility property 18,203 8,649
Less accumulated depreciation and depletion ....... 3,677 3,451
---------- ----------
Non-utility property - net .................. 14,526 5,198
---------- ----------
Total plant and property .................... 964,976 934,030
---------- ----------
Other investments ................................... 23,233 14,526
---------- ----------
Current assets:
Cash and cash equivalents ......................... 10,440 11,283
Accounts receivable, less allowance
for uncollectible accounts of $1,962 in
2001 and $1,867 in 2000 ...................... 64,722 60,753
Accrued unbilled revenue .......................... 57,749 45,619
Inventories of gas, materials and supplies ........ 49,337 46,883
Prepayments and other current assets .............. 28,086 22,834
---------- ----------
Total current assets ........................ 210,334 187,372
---------- ----------
Regulatory assets:
Income tax asset .................................. 48,469 49,515
Deferred gas costs receivable ..................... -- 16,973
Unrealized loss on non-trading derivatives ........ 111,641 --
Unamortized loss on debt redemption ............... 6,970 7,433
Other ............................................. 5,302 9,524
---------- ----------
Total regulatory assets ..................... 172,382 83,445
---------- ----------
Other assets:
Investment in life insurance ...................... 53,033 49,112
Other ............................................. 11,064 10,228
---------- ----------
Total other assets .......................... 64,097 59,340
---------- ----------
Total assets ................................ $1,435,022 $1,278,713
========== ==========
-----------------------------------
See Notes to Consolidated Financial Statements.
39
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
Thousands (December 31) 2001 2000
- --------------------------------------------------------------------------------------------
Capitalization and liabilities:
Capitalization (See Consolidated Statements of Capitalization):
Common stock ................................................ $ 79,889 $ 79,905
Premium on common stock ..................................... 240,697 238,215
Earnings invested in the business ........................... 147,950 134,189
Accumulated other comprehensive income (loss) ............... (375) --
----------- -----------
Total common stock equity ............................. 468,161 452,309
Redeemable preference stock ................................. 25,000 25,000
Redeemable preferred stock .................................. 9,000 9,750
Long-term debt .............................................. 378,377 400,790
----------- -----------
Total capitalization .................................. 880,538 887,849
----------- -----------
Current liabilities:
Notes payable ............................................... 108,291 56,263
Accounts payable ............................................ 70,698 110,698
Long-term debt due within one year .......................... 40,000 20,000
Taxes accrued ............................................... 22,539 8,066
Interest accrued ............................................ 3,658 2,696
Other current and accrued liabilities ....................... 28,396 23,638
----------- -----------
Total current liabilities ............................. 273,582 221,361
----------- -----------
Regulatory liabilities:
Customer advances ........................................... 1,985 1,720
Deferred gas costs payable .................................. 10,089 --
----------- -----------
Total regulatory liabilities .......................... 12,074 1,720
----------- -----------
Other liabilities:
Deferred income taxes ....................................... 130,424 141,656
Fair value of non-trading derivatives ....................... 111,868 --
Deferred investment tax credits ............................. 8,682 9,538
Other ....................................................... 17,854 16,589
----------- -----------
Total other liabilities ............................... 268,828 167,783
----------- -----------
Commitments and contingencies (see Note 12) ................... -- --
----------- -----------
Total capitalization and liabilities ..................... $ 1,435,022 $ 1,278,713
=========== ===========
-----------------------------------
See Notes to Consolidated Financial Statements.
40
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Thousands (year ended December 31) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
Operating activities:
Net income from continuing operations ............................... $ 50,187 $ 47,812 $ 44,941
Adjustments to reconcile net income to cash provided by continuing
operations:
Depreciation, depletion and amortization ......................... 49,640 47,440 51,008
Gain on sale of assets ........................................... -- (491) --
Minimum pension liability adjustment ............................. (148) -- --
Unrealized loss from price risk management activities ............ (227) -- --
Deferred income taxes and investment tax credits ................. (12,088) 4,651 (5,015)
Equity in (earnings) losses of investments ....................... 321 221 (490)
Allowance for funds used during construction ..................... (959) (789) (1,153)
Deferred gas costs - net ......................................... 27,062 3,977 6,845
Regulatory accounts and other - net .............................. 1,345 4,333 (3,795)
--------- --------- ---------
Cash from continuing operations before working capital changes 115,133 107,154
92,341
Changes in operating assets and liabilities:
Accounts receivable - net .................................... (3,969) (17,404) 792
Accrued unbilled revenue ..................................... (12,130) (14,069) 2,708
Inventories of gas, materials and supplies ................... (2,454) (12,964) (12,661)
Accounts payable ............................................. (40,000) 42,535 16,910
Accrued interest and taxes ................................... 15,435 1,988 (4,916)
Other current assets and liabilities ......................... (494) (20,000) 12,992
--------- --------- ---------
Cash provided by continuing operating activities ................. 71,521 87,240 108,166
--------- --------- ---------
Cash provided by operations of discontinued segment .............. -- -- 46
--------- --------- ---------
Investing activities:
Acquisition and construction of utility plant assets ................ (71,943) (80,444) (109,144)
Investment in non-utility property .................................. (9,554) (6,923) (10,713)
Deferred costs for pending purchase of PGE .......................... (9,557) -- --
Proceeds from sale of discontinued segment .......................... -- 34,756 --
Proceeds from sale of assets ........................................ 3,256 21,012 --
Other investments ................................................... 529 610 956
--------- --------- ---------
Cash used in investing activities ................................ (87,269) (30,989) (118,901)
Financing activities:
Common stock issued ................................................. 5,157 4,826 5,356
Common stock repurchased ............................................ (5,792) (2,441) --
Redeemable preferred stock retired .................................. (750) (814) (935)
Long-term debt issued ............................................... 18,000 75,000 40,000
Long-term debt retired .............................................. (20,000) (60,000) (10,000)
Change in short-term debt ........................................... 52,028 (37,886) 12,717
Cash dividend payments:
Redeemable preferred and preference stock ........................ (2,410) (2,466) (2,525)
Common stock ..................................................... (31,307) (31,198) (30,569)
Foreign currency translation and capital stock expense .............. (21) (2) (725)
--------- --------- ---------
Cash provided by (used in) financing activities .................. 14,905 (54,981) 13,319
Increase (decrease) in cash and cash equivalents ....................... (843) 1,270 2,630
Cash and cash equivalents - beginning of year .......................... 11,283 10,013 7,383
--------- --------- ---------
Cash and cash equivalents - end of year ................................ $ 10,440 $ 11,283 $ 10,013
========= ========= =========
- --------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ......................................................... $ 33,034 $ 35,592 $ 30,506
Income taxes ..................................................... $ 25,201 $ 22,552 $ 27,302
- --------------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash financing activities:
Conversion to common stock:
7-1/4 % Series of Convertible Debentures ......................... $ 413 $ 589 $ 359
------------------------------------
See Notes to Consolidated Financial Statements
41
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Thousands, except share amounts (December 31) 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
Common stock equity:
Common stock - par value $3-1/6 per share, authorized 60,000,000 shares: $ 79,889 $ 79,905
outstanding - 2001, 25,228,074 shares; 2000, 25,233,424 shares
Premium on common stock 240,697 238,215
Earnings invested in the business 147,950 134,189
Accumulated other comprehensive income (loss) (375) -
--------- ---------
Total common stock equity 468,161 53% 452,309 51%
--------- ---------
Redeemable preference stock, authorized 2,000,000 shares;
$6.95 Series, stated value $100 per share; outstanding - 2001, 250,000
shares; 2000, 250,000 shares 25,000 3% 25,000 3%
Reedemable preferred stock, authorized 1,500,000 shares; $7.125 Series, stated
value $100 per share; outstanding - 2001, 90,000
shares; 2000, 97,500 shares 9,000 1% 9,750 1%
Long-term debt:
Medium-Term Notes
First Mortgage Bonds:
6.620% Series B due 2001 - 10,000
8.050% Series A due 2002 10,000 10,000
6.750% Series B due 2002 10,000 10,000
5.550% Series B due 2002 20,000 20,000
6.400% Series B due 2003 20,000 20,000
6.340% Series B due 2005 5,000 5,000
6.380% Series B due 2005 5,000 5,000
6.450% Series B due 2005 5,000 5,000
6.050% Series B due 2006 8,000 -
6.800% Series B due 2007 10,000 10,000
6.500% Series B due 2008 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
7.000% Series B due 2017 40,000 40,000
6.600% Series B due 2018 22,000 22,000
8.310% Series B due 2019 10,000 10,000
7.630% Series B due 2019 20,000 20,000
9.050% Series A due 2021 10,000 10,000
7.250% Series B due 2023 20,000 20,000
7.500% Series B due 2023 4,000 4,000
7.520% Series B due 2023 11,000 11,000
7.720% Series B due 2025 20,000 20,000
6.520% Series B due 2025 10,000 10,000
7.050% Series B due 2026 20,000 20,000
7.000% Series B due 2027 20,000 20,000
6.650% Series B due 2027 20,000 20,000
6.650% Series B due 2028 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:
8.470% Series A due 2001 - 10,000
Convertible Debentures
7-1/4% Series due 2012 8,377 8,790
--------- ---------
418,377 420,790
Less long-term debt due within one year 40,000 20,000
--------- ---------
Total long-term debt 378,377 43% 400,790 45%
--------- ---- --------- ----
Total capitalization $ 880,538 100% $ 887,849 100%
========= ==== ========= ====
------------------------------------
See Notes to Consolidated Financial Statements.
42
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
Northwest Energy Corporation (Northwest Energy or Holding Company), a
wholly-owned subsidiary formed in 2001
Canor Energy, Ltd. (Canor), a majority-owned subsidiary reclassified
as a discontinued segment in 1999 and sold in 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 interest is 50 percent or less and over which the
Company does not exercise control, 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
2001 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 in the United States of America requires
management to make estimates and assumptions that affect reported amounts
in the consolidated financial statements and accompanying notes. Actual
amounts could differ from those estimates and changes would be reported in
future periods. Management believes that the estimates used are reasonable.
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."
In applying SFAS No. 71, NW Natural has capitalized certain costs and
benefits as regulatory assets and liabilities pursuant to orders of the
OPUC or WUTC in general rate or expense deferral proceedings, to provide
for recovery of revenues or expenses from, or refunds to, utility customers
in future periods. At Dec. 31, 2001 and 2000, regulatory tax assets were
$48.5 million and $49.5 million, respectively, while other regulatory
assets and liabilities (net) were $111.8 million and $32.2 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, it would be required to write off the related
balances of its regulatory assets as a charge to its income statement.
43
Recent Accounting Pronouncements
- --------------------------------
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 requires business combinations initiated
after June 30, 2001 to be accounted for using the purchase method of
accounting. It also specifies the types of acquired intangible assets that
are required to be recognized and reported separately from goodwill. SFAS
No. 142 requires goodwill and other intangibles with indefinite lives to be
tested for impairment at least annually rather than being amortized as
previously required. SFAS No. 142 is effective for fiscal years beginning
after Dec. 15, 2001. The Company is evaluating the impact these new
standards may have on its financial position or results of operations upon
adoption effective Jan. 1, 2002.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143, which is effective for fiscal years
beginning after June 15, 2002, requires that obligations associated with
the retirement of a tangible long-lived asset be recorded as a liability
when those obligations are incurred, with the amount of the liability
initially measured at fair value. The liability for the asset retirement
obligation is recorded as a capitalized cost increasing the carrying amount
of the related long-lived asset. Over time, the liability is accreted to
its present value each period and the capitalized cost is depreciated over
the useful life of the related asset. The Company is currently evaluating
the impact of this statement upon its financial position and results of
operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after Dec. 15, 2001. SFAS No. 144 develops a single
accounting model for all long-lived assets disposed of and requires that
these assets be measured at the lower of book value or fair value less
selling costs. SFAS No. 144 also expands the scope of discontinued
operations to include all components of an entity that can be distinguished
from the rest of the entity and will be eliminated from the ongoing
operations of the entity in a disposal transaction. Implementation of this
statement is not expected to have a material impact upon either the
Company's financial position or results of operations.
Utility Plant
- -------------
Utility plant for NW Natural is stated at cost (see Note 9). When a
depreciable unit of property is retired, the cost is removed from both
utility plant and accumulated 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 both 2001 and 2000
and 4.0 percent in 1999. The depreciation rate approximates the economic
life of the utility property.
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 construction 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
6.2 percent in 2001 and 6.0 percent for both 2000 and 1999.
44
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and highly liquid temporary investments with original maturity
dates of three months or less.
Revenue Recognition
- -------------------
Utility revenues are derived primarily from the sale and transportation of
natural gas. Utility revenue from gas sales and transportation is
recognized when the gas is delivered to and received by the customer.
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
- -----------
Inventories, consisting primarily of natural gas in storage, are stated at
the lower of average cost or net realizable value.
Derivatives Policy
- ------------------
NW Natural's Derivatives Policy sets forth the guidelines for using
selected financial derivative products to support prudent risk management
strategies within designated parameters. The Policy allows for the use of
derivatives to manage commodity prices related to natural gas purchases,
foreign currency prices related to gas purchase commitments from Canada,
oil or propane commodity prices related to gas sales and transportation
services under rate schedules pegged to other commodities, and interest
rates related to long-term debt maturing in less than five years or
expected to be issued in future periods. NW Natural's objectives for using
derivatives are to decrease the volatility of earnings and cash flows
associated with changes in commodity prices, foreign currency prices and
interest rates. Use of derivatives is permitted only after the commodity
price, exchange rate, and interest rate exposures have been identified, are
determined to exceed defined tolerance levels and are considered to be
unavoidable because they are necessary to support normal business
activities (see Note 11). The Policy is intended to prevent speculative
risk. NW Natural does not enter into derivative instruments for trading
purposes and believes that any increase in market risk created by holding
derivatives should be offset by the exposures they modify.
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," on Jan. 1, 2001. This statement establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133 requires that an entity recognize derivatives as
either assets or liabilities on the balance sheet and measure those
instruments at fair value. SFAS No. 133 also requires that changes in the
fair value of a derivative be recognized currently in earnings unless
specific hedge accounting criteria are met.
NW Natural designates its derivatives as fair value or cash flow hedges
based upon criteria established by SFAS No. 133. For a derivative
designated as a fair value hedge, the gain or loss is recognized in
earnings in the period of change. For a derivative designated as a cash
flow hedge, the effective portion of the derivative gain or loss is
initially reported in accumulated other comprehensive income (OCI) unless
the derivative is subject to deferral under NW Natural's regulated tariffs
with the OPUC or the WUTC. The ineffective portion of the gain or loss in a
cash flow hedge is reported in earnings immediately. Effectiveness is
measured by comparing changes in cash flows of the hedged item to gains or
losses on derivative instruments.
NW Natural's primary hedging activities, i.e. natural gas commodity price
and foreign currency exchange rates, are accounted for as cash flow hedges
under SFAS No. 133 and are subject to regulatory deferral pursuant to
45
SFAS No. 71. Unrealized gains and losses from mark-to-market valuations of
these contracts are reported as derivative assets or liabilities and offset
by a corresponding deferred account balance included under "Regulatory
assets." Due to their regulatory deferral treatment, effective portions of
changes in the fair value of these derivatives are not recorded in OCI but
are recognized as a regulatory asset or liability. Ineffective portions of
changes in the fair value for these contracts are recognized in current
earnings.
NW Natural documents all relationships between its hedge contracts and
hedged items, as well as its risk management objective and strategy. This
process includes specific identification of the type of contract, the
details of 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, NW Natural measures the
effectiveness of the derivatives used in hedge transactions.
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 orders 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
bases of net utility plant in service. This asset balance was $48.5 million
and $49.5 million at Dec. 31, 2001 and 2000, 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.
Other Income
- ------------
Other income consists of interest income, gain on sale of assets,
investment income of Financial Corporation, 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 convertible debentures and the
exercise of stock options. Diluted earnings are calculated as follows:
Thousands, except per share amounts 2001 2000 1999
----------------------------------------------------------------------------------------
Earnings applicable to common stock $ 47,786 $ 47,768 $ 42,781
Debenture interest less taxes 370 389 415
--------- --------- ---------
Net income available for diluted common stock $ 48,156 48,157 43,196
========= ========= =========
Average common shares outstanding 25,159 25,183 24,976
Stock options 32 13 21
Convertible debentures 421 442 471
--------- --------- ---------
Diluted average common shares outstanding 25,612 25,638 25,468
========= ========= =========
Diluted earnings per share of common stock $ 1.88 $ 1.88 $ 1.70
========= ========= =========
46
2. CONSOLIDATED SUBSIDIARY OPERATIONS AND SEGMENT INFORMATION:
- ----------------------------------------------------------------
At Dec. 31, 2001, the Company had one active subsidiary, Financial
Corporation, a wholly-owned subsidiary. Northwest Energy, which was formed
in 2001 to serve as the holding company for NW Natural and PGE if the
acquisition of PGE is completed, had no active operations in 2001. One
discontinued segment, Canor, a majority-owned subsidiary, was sold in
January 2000.
The Company principally operates in a business segment consisting of the
distribution of natural gas ("Utility"). Another segment, which was
immaterial prior to Jan. 1, 2001, consists of natural gas storage services
provided to interstate customers using certain storage capacity not
required from time to time for service to utility customers ("Gas
Storage"). The remaining segment primarily consists of non-regulated
investments, including alternative energy projects in California, oil and
gas exploration properties which were sold in 2000, a Boeing 737-300
aircraft leased to Continental Airlines and deferred costs in the pending
purchase of PGE ("Other").
NNG Financial Corporation
- -------------------------
Financial Corporation 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. In 2000, Financial Corporation sold its
remaining interests in certain gas producing properties in the western
United States (see Note 9).
Canor Energy, Ltd.
- ------------------
On Jan. 26, 2000, the Company sold its interest in Canor, an Alberta,
Canada corporation that had been 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 Company's consolidated financial statements for 1999 were reclassified
to reflect Canor as a discontinued segment. Accordingly, Canor's operating
revenues and expenses are included in income from discontinued segment for
1999, and its cash flows are reported as cash provided by operations of,
and proceeds from sale of, discontinued segment.
47
Segment Information
- -------------------
The following table presents information about reportable segments for
2001, 2000 and 1999. Inter-segment transactions are insignificant.
Thousands Utility Gas Storage Other Total
--------------------------------------------------------------------------------------------------------------
2001
----
Net operating revenues $ 271,473 $ 4,368 $ 170 $ 276,011
Depreciation, depletion and amortization 49,413 227 - 49,640
Other operating expenses (income) 115,708 489 (37) 116,160
Income from operations 106,352 3,652 207 110,211
Income (loss) from financial investments - - (321) (321)
Net income from continuing operations 47,313 2,112 762 50,187
Total assets at Dec. 31 1,391,156 14,243 29,623 1,435,022
2000
----
Net operating revenues $ 257,361 $ 258 $ 331 $ 257,950
Depreciation, depletion and amortization 47,430 10 - 47,440
Other operating expenses 106,027 81 60 106,168
Income from operations 103,904 167 271 104,342
Income (loss) from financial investments - - (221) (221)
Net income from continuing operations 47,519 102 191 47,812
Gain on sale of discontinued segment - - 2,412 2,412
Total assets at Dec. 31 1,252,747 4,919 21,047 1,278,713
1999
-----
Net operating revenues $ 243,269 $ - $ 368 $ 243,637
Depreciation, depletion and amortization 50,841 - 167 51,008
Other operating expenses 97,684 - 177 97,861
Income from operations 94,744 - 24 94,768
Income (loss) from financial investments - - (82) (82)
Net income from continuing operations 44,323 - 618 44,941
Net income from discontinued segment - - 355 355
Total assets at Dec. 31 1,197,673 - 46,750 1,244,423
3. CAPITAL STOCK:
- -------------------
Common Stock
- ------------
At Dec. 31, 2001, NW Natural had reserved 191,277 shares of common stock
for issuance under the Employee Stock Purchase Plan, 725,953 shares under
its Dividend Reinvestment and Stock Purchase Plan, 769,058 shares under its
Restated Stock Option Plan (formerly the 1985 Stock Option Plan) (see Note
4), 481,571 shares for future conversions of its 7-1/4% Convertible
Debentures and 3,000,000 shares under the Shareholder Rights Plan.
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 each of 2002, 2003, 2004, 2005 and 2006. These requirements are
non-cumulative. At any time NW Natural is in default on any of its
48
obligations to make the prescribed sinking fund payments, it may not pay
cash dividends on the common stock or the preference stock. Upon
involuntary liquidation, all series of redeemable preferred stock are
entitled to their stated value.
The redeemable preferred stock is callable at stipulated prices, plus
accrued dividends. On or after May 1, 2001, shares of the $7.125 Series are
redeemable 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 that was extended through May 2002. Purchases are made
in the open market or through privately negotiated transactions. As of Dec.
31, 2001, the Company had repurchased 355,400 shares of common stock at a
total cost of $8.2 million.
49
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 2001, 2000 and 1999:
------------- --------Shares------------------- Premium on
Redeemable Redeemable common
Common preference preferred stock
stock stock stock (thousands)
-------------- ---------------- --------------- ------------
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 repurchases (108,700) - - (1,016)
Sinking fund purchases - - (8,143) -
-------------- ---------------- --------------- -----------
Balance, Dec. 31, 2000 25,233,424 250,000 97,500 238,215
Sales to employees 30,952 - - 498
Sales to stockholders 177,624 - - 3,854
Exercise of stock options - net 12,289 - - 110
Conversion of convertible
debentures to common 20,485 - - 343
Stock repurchases (246,700) - - (2,323)
Sinking fund purchases - - (7,500) -
-------------- ---------------- --------------- -----------
Balance, Dec. 31, 2001 25,228,074 250,000 90,000 $ 240,697
============== ================ =============== ============
4. STOCK-BASED COMPENSATION:
- -----------------------------
NW Natural has the following stock-based compensation plans: the Long-Term
Incentive Plan (LTIP); the Restated Stock Option Plan (Restated SOP); the
Employee Stock Purchase Plan (ESPP); and the Non-Employee Directors Stock
Compensation Plan (NEDSCP). These plans are designed to promote stock
ownership in the Company by employees, officers and directors. NW Natural
applies Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in its accounting
for stock-based compensation plans.
50
NW Natural's shareholders approved the LTIP effective Jan. 1, 2001, to
provide a flexible, competitive compensation program for employees,
officers and outside directors. An aggregate of 500,000 shares of common
stock was authorized for grants under the LTIP as stock bonus, restricted
stock or performance-based stock awards. Shares awarded under the LTIP are
purchased on the open market. To date, NW Natural has granted two
performance-based awards, one based on a two-year performance period
(2001-2002) and the other based on a three-year performance period
(2001-2003), and a restricted stock award. At Dec. 31, 2001, the aggregate
target award for each of the performance-based awards was 40,000 shares and
the maximum award was 80,000 shares each. The final award depends on the
attainment of certain return on equity performance goals. The restricted
stock award consists of 4,500 shares granted in 2001 with a vesting period
of 65 months. The LTIP stock awards are compensatory awards for which
compensation expense is accrued based upon the market value for performance
shares earned, or a pro rata amortization over the vesting period for
restricted shares. Total compensation expense accrued under the LTIP in
2001 was $0.2 million, including accrued dividends.
The Restated SOP 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 inception in 1985, options on 937,171 shares of common stock have
been granted at prices ranging from $11.75 to $27.875 per share, and
options on 110,921 shares have expired. In accordance with APB No. 25, no
compensation expense is recognized for the Restated SOP or the ESPP. If
compensation expense for awards under the Restated SOP and the ESPP had
been determined based on 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:
2001 2000 1999
---- ---- ----
Earnings applicable to common stock ($000):
-------------------------------------------
As reported $ 47,786 $ 47,768 $ 42,781
Pro forma 47,232 47,190 42,525
Basic earnings per share
As reported $ 1.90 $ 1.90 $ 1.71
Pro forma 1.88 1.87 1.70
Diluted earnings per share
As reported $ 1.88 $ 1.88 $ 1.70
Pro forma 1.86 1.86 1.69
For purposes of determining the pro forma expense, the fair value of each
stock option is estimated on the grant date using the Black-Scholes option
pricing model with the following weighted-average assumptions used for
grants in 2001 and 2000, respectively: a dividend yield of 4.9 and 4.7
percent; expected volatility of 31.0 and 31.4 percent; and, for grants made
in both years, a risk-free interest rate of 5 percent and expected lives of
seven years. No stock options were granted in 1999. The fair value at Dec.
31, 2001 of stock options granted during 2001 was $17.34.
51
Information regarding the Restated SOP's activity is summarized as follows:
Exercise Price Per Share
-------------------------------------
Weighted
Shares Range Average
---------------------------------------------------------
Options outstanding at Dec. 31, 1998 320,032 $16.59-27.875 24.06
Exercised (19,820) 20.17-24.000 21.81
Expired (10,000) 27.875 27.88
---------------
Options outstanding at Dec. 31, 1999 290,212 16.59-27.875 24.08
Granted 153,000 20.25-22.875 20.36
Exercised (14,207) 16.59-24.000 22.63
Expired (13,000) 20.25-27.875 24.36
---------------
Options outstanding at Dec. 31, 2000 416,005 20.17-27.875 22.75
Granted 15,000 24.91 24.91
Exercised (12,289) 20.17-20.920 20.36
Expired (31,625) 20.25-27.875 24.31
---------------
Options outstanding at Dec. 31, 2001 387,091 20.25-27.875 22.79
The weighted average characteristics of outstanding stock options at Dec.
31, 2001 were as follows:
Outstanding Options Exercisable Options
------------------------------------------------------------------------- -------------------------------------
Range of Weighted
Exercise Remaining Average
Prices Shares Life Shares Price
------------------------------------------------------------------------- -------------------------------------
$20.250 - $27.875 387,091 6.10 273,891 $23.54
The ESPP, 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.
Non-employee directors are granted stock awards annually under the
Company's NEDSCP. These director stock awards are vested over five years,
and compensation expense is amortized over the vesting period. Non-employee
directors also may elect to receive shares of common stock instead of a
cash payment for their fees and retainers under a separate plan.
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,
retained 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, 2006 on the long-term
debt outstanding at Dec. 31, 2001 amount to: $40 million in 2002, $20
million in 2003, no maturity in 2004, $15 million in 2005 and $8
52
million in 2006. Holders of certain medium-term notes have put options
that, if exercised, would accelerate the maturity of long-term debt by $10
million in 2002 and 2005.
6. NOTES PAYABLE AND LINES OF CREDIT:
- ---------------------------------------
The Company's primary source of short-term funds is commercial paper notes
payable. Both NW Natural and Financial Corporation issue commercial paper
under agency agreements with a commercial bank. NW Natural's commercial
paper is supported by its committed bank lines of credit (see below), while
Financial Corporation's commercial paper is supported by committed bank
lines of credit and the guaranty of NW Natural. The amounts and average
interest rates of commercial paper outstanding at Dec. 31 were as follows:
-----------2001---------- ------------2000----------
Thousands Amount Rate Amount Rate
- --------- ------ ---- ------ ----
NW Natural $ 108,291 2.6% $ 56,263 6.5%
Financial Corporation - -
------------- -------------
Total $ 108,291 $ 56,263
============= =============
NW Natural has available through Sept. 30, 2002 committed lines of credit
with four commercial banks totaling $150 million. In addition, Financial
Corporation has available through Sept. 30, 2002 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, 2001 or 2000.
53
7. PENSION AND OTHER POSTRETIREMENT BENEFITS:
- -----------------------------------------------
NW Natural has two qualified non-contributory defined benefit pension 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, 2001 and
a statement of the funded status and amounts recognized in the consolidated
balance sheets as of Dec. 31, 2001, 2000 and 1999:
Pension Benefits Other Benefits
---------------------------------------------------------------------------
Thousands 2001 2000 1999 2001 2000 1999
- --------- ---- ---- ---- ---- ---- ----
Change in benefit obligation:
Benefit obligation at Jan. 1 $146,802 $136,198 $142,619 $ 14,069 $ 11,902 $ 15,717
Service cost 3,964 3,475 4,259 325 234 162
Interest cost 11,332 10,312 9,379 1,116 995 715
Expected benefits paid (9,152) (8,035) (6,911) (942) (878) (766)
Plan amendments 1,838 12 4,057 2,419 - (1,583)
Net actuarial (gain) loss 11,967 4,840 (17,205) - 1,816 (2,343)
-------- -------- -------- --------- --------- ---------
Benefit obligation at Dec. 31 166,751 146,802 136,198 16,987 14,069 11,902
-------- -------- -------- --------- --------- ---------
Change in plan assets:
Fair value of plan assets at Jan. 1 190,451 193,427 175,554 - - -
Actual return on plan assets (13,077) 4,351 24,104 - - -
Employer contributions 742 708 680 942 878 766
Benefits paid (9,152) (8,035) (6,911) (942) (878) (766)
-------- -------- -------- --------- --------- ---------
Fair value of plan assets at Dec. 31 168,964 190,451 193,427 - - -
-------- -------- -------- --------- --------- ---------
Funded status:
Funded status at Dec. 31 2,212 43,649 57,229 (16,987) (14,069) (11,902)
Unrecognized transition obligation 351 701 1,035 4,795 5,232 5,667
Unrecognized prior service cost 8,575 8,022 9,184 172 191 210
Unrecognized net actuarial
(gain) loss (2,956) (47,661) (67,656) 3,405 1,061 (755)
-------- -------- -------- --------- --------- ---------
Net amount recognized $ 8,182 $ 4,711 $ (208) $ (8,615) $(7,585) $(6,780)
========= ========= ========= ========= ========= =========
Amounts recognized in the
consolidated balance sheets
at Dec. 31:
Prepaid benefit cost $ 17,211 $ 13,150 $ 7,712 $ - $ - $ -
Accrued benefit liability (9,346) (8,932) (8,578) (8,615) (7,585) (6,780)
Intangible asset 169 493 658 - - -
Other comprehensive loss 148 - - - - -
-------- -------- --------- ---------- -------- --------
Net amount recognized $ 8,182 $ 4,711 $ (208) $ (8,615) $(7,585) $ (6,780)
========= ========= ========= ========== ========= =========
For each of the periods presented, 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 aggregate accumulated
benefit obligation was $10.7 million, $10.4 million and $9.8 million at
Dec. 31, 2001, 2000 and 1999, 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 providing postretirement
benefits other than pensions also have no plan assets. The aggregate
benefit obligation for those plans is $17.0 million, $14.1 million and
$11.9 million at Dec. 31, 2001, 2000 and 1999, respectively.
54
The following tables provide the components of net periodic cost (benefit)
for the plans for the years ended Dec. 31, 2001, 2000 and 1999, and the
assumptions used in the measurement of these costs and the Company's
benefit obligations:
Pension Benefits Other Benefits
---------------------------------------------------------------------------
Thousands 2001 2000 1999 2001 2000 1999
- --------- ---- ---- ---- ---- ---- ----
Service cost $ 3,964 $ 3,475 $ 4,259 $ 325 $ 234 $ 162
Interest cost 11,332 10,312 9,379 1,116 995 715
Expected return on plan assets (17,198) (16,056) (15,570) - - -
Amortization of transition
obligation 351 334 37 436 436 436
Amortization of prior service cost 1,284 1,174 827 19 19 -
Recognized actuarial (gain) loss (2,464) (3,449) (781) 75 - (35)
Special termination benefits - - 1,410 - - -
-------- -------- -------- --------- --------- ---------
Net periodic cost (benefit) $(2,731) $(4,210) $ (439) $ 1,971 $ 1,684 $ 1,278
========= ========= ========= ========= ========= =========
Weighted average assumptions as
of Dec. 31:
Discount rate 7.25% 7.50% 7.75% 7.25% 7.50% 7.75%
Expected return on plan assets 9.00% 9.00% 10.00% n/a n/a n/a
Rate of compensation increase 4.25-5.00% 4.25-5.00% 4.25-5.00% n/a n/a n/a
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8.0 percent during 2001. 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 $ 66 $ (60)
Effect on the health care component of the
accumulated postretirement benefit obligation $ 402 $ (365)
NW Natural also has a qualified defined 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 matching
contributions to these plans totaled $1.3 million in both 2001 and 2000, and
$1.0 million in 1999.
55
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 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Computed income taxes based on statutory federal income
tax rate of 35% $ 27,209 $ 26,124 $ 24,336
Increase (reduction) in taxes resulting from:
Difference between book and tax depreciation 222 222 222
Current state income tax, net of federal tax benefit 2,672 2,622 2,450
Federal income tax credits (362) (357) (357)
Amortization of investment tax credits (855) (855) (855)
Removal costs (508) (480) (485)
Reversal of amounts provided in prior years (72) (25) (655)
Gains on Company and trust-owned life insurance (576) (611) (703)
Other - net (177) 189 638
--------- --------- ---------
Total provision for income taxes $ 27,553 $ 26,829 $ 24,591
========= ========= =========
Total income taxes paid $ 25,201 $ 22,552 $ 27,302
========= ========= =========
56
The provision for income taxes consists of the following:
Thousands 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Income taxes currently payable:
Federal $ 32,682 $ 18,228 $ 20,518
State 5,912 2,444 3,288
--------- --------- ---------
Total 38,594 20,672 23,806
--------- --------- ---------
Deferred taxes - net:
Federal (8,606) 7,495 1,283
State (1,580) (483) 357
--------- --------- ---------
Total (10,186) 7,012 1,640
--------- --------- ---------
Investment and energy tax credits restored:
From utility operations (800) (800) (800)
From subsidiary operations (55) (55) (55)
--------- --------- ---------
Total (855) (855) (855)
--------- --------- ---------
Total provision for income taxes $ 27,553 $ 26,829 $ 24,591
========= ========= =========
Percentage of pretax income 35.4% 35.9% 35.4%
========= ========= =========
Deferred tax assets and liabilities are comprised of the following:
Thousands 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $ 127,787 $ 123,559 $ 114,664
Regulatory asset 13,303 14,349 15,894
--------- --------- ---------
Total 141,090 137,908 130,558
--------- --------- ---------
Deferred tax assets:
Regulatory asset (liability) 2,270 (9,558) (10,784)
Other deferred assets 8,396 5,810 5,192
--------- --------- ---------
Total 10,666 (3,748) (5,592)
--------- --------- ---------
Net accumulated deferred income tax liability $ 130,424 $ 141,656 $ 136,150
========= ========= =========
57
9. PROPERTY AND INVESTMENTS:
- ------------------------------
The following table sets forth the major classifications of NW Natural's
utility plant and accumulated depreciation at Dec. 31:
2001 2000
-------------------------- --------------------------
Average Average
Depreciation Depreciation
Thousands Amount Rate Amount Rate
--------------------------------------------------------------------------------------------------------
Transmission and distribution $ 1,196,825 3.4% $ 1,144,107 3.3%
Utility storage 104,603 2.6% 103,506 2.7%
General 80,411 2.9% 82,723 6.3%
Intangible and other 52,170 9.8% 46,344 5.5%
------------ ------------
Utility plant in service 1,434,009 3.5% 1,376,680 3.5%
Gas stored long-term 11,301 11,301
Construction work in progress 19,769 18,989
------------ ------------
Total utility plant 1,465,079 1,406,970
Less accumulated depreciation 514,629 478,138
------------ ------------
Utility plant - net $ 950,450 $ 928,832
============ ============
The following table summarizes the Company's investments in non-utility
plant at Dec. 31:
Thousands 2001 2000
-------------------------------------------------------------------------------------------
Non-utility storage $ 14,480 $ 4,929
Dock, land and oil station 3,716 3,713
Other 7 7
------------ -----------
Total non-utility plant 18,203 8,649
Less accumulated depreciation 3,677 3,451
------------ -----------
Non-utility plant - net $ 14,526 $ 5,198
============ ===========
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 in other non-utility plant as of Dec. 31, 1999 ($4.9 million).
The following table summarizes the Company's investments in entities
accounted for under the equity and cost methods, and its investment in an
aircraft leveraged lease at Dec. 31:
Thousands 2001 2000
-------------------------------------------------------------------------------------------
Deferred costs for pending purchase of PGE $ 9,557 $ -
Aircraft leveraged lease 6,987 7,479
Gas pipeline and other 3,234 1,776
Electric generation 3,155 4,898
Long-term notes receivable 300 373
------------ -----------
Total investments and other $ 23,233 $ 14,526
============ ===========
58
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. Financial Corporation also has
ownership interests ranging from 25 to 41 percent in windpower 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 is 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 are financial instruments whose carrying
values are sensitive to market conditions:
Dec. 31, 2001 Dec. 31, 2000
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Thousands Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------------------------------
Redeemable preference stock $ 25,000 $ 25,347 $ 25,000 $ 22,750
Redeemable preferred stock $ 9,000 $ 9,256 $ 9,750 $ 9,750
Long-term debt including amount due
within one year $ 418,377 $ 407,239 $ 420,790 $ 460,929
--------------------------------------------------------------------------------------------------
Fair value of the redeemable preference stock and the redeemable preferred
stock was estimated using quoted market prices. Interest rates for debt
with similar terms and remaining maturities were used to estimate fair
value for debt issues.
The carrying amount of long-term notes receivable approximated fair value
at Dec. 31, 2001 and 2000.
59
11. USE OF FINANCIAL DERIVATIVES:
- ----------------------------------
NW Natural enters into short-term and long-term natural gas purchase
contracts with suppliers, including contracts tied to floating prices. As
such, NW Natural is exposed to changes in commodity prices. Natural gas
prices are subject to fluctuations due to unpredictable factors including
weather, inventory levels, pipeline transportation availability, and the
economy, each of which affects short-term supply and demand. As part of its
overall strategy to maintain an acceptable level of exposure to gas price
fluctuations, the Company uses a targeted mix of fixed-rate and
cap-protected derivatives to hedge the exposure under floating price gas
supply contracts. Swap contracts are used to convert certain long-term gas
purchase contracts from floating prices to fixed prices, and call option
contracts are used to limit the maximum adverse impact from floating price
contracts while retaining the potential favorable impact from declining gas
prices. These commodity hedge contracts are usually embedded in NW
Natural's annual gas rate to customers, pursuant to its Oregon Purchased
Gas Adjustment tariff (PGA), which is intended to limit customers' exposure
to frequent changes in purchased gas costs. The estimated fair value gains
and losses from commodity hedge contracts are recorded as a derivative
asset or liability, and are offset by a corresponding amount recorded to a
deferred regulatory asset or liability account for the effective portion of
each hedge contract. The actual gains and losses realized at settlement of
the hedge contract are used to offset the actual purchase cost from NW
Natural's physical supply contract.
Certain natural gas purchases from Canadian suppliers are invoiced in
Canadian dollars, including both commodity and demand charges, thereby
exposing NW Natural to adverse changes in foreign currency rates. Foreign
currency forward contracts are used to minimize the impact of fluctuations
in currency rates. Foreign currency contracts for commodity costs are
purchased on a month-to-month basis because the Canadian cost is priced at
the noonday exchange rate. Foreign currency contracts for demand costs have
terms ranging up to 24 months. The gains and losses on the shorter-term
currency contracts for commodity costs are recognized immediately in cost
of gas. The gains and losses on the longer-term currency contracts for
demand charges are subject to a regulatory deferral tariff and, as such,
are recorded as a derivative asset or liability which is offset by a
corresponding amount to a deferred asset or liability account.
NW Natural did not use any derivative instruments to hedge oil or propane
prices or interest rates during 2001.
At Dec. 31, 2001, NW Natural had the following derivatives outstanding
covering its exposures to commodity and foreign currency prices: a series
of 14 natural gas price swap contracts, two natural gas price call option
contracts, and 14 foreign currency forward contracts. Each of these
contracts was designated as a cash flow hedge. The estimated fair values
and the notional amounts of derivative instruments outstanding were as
follows:
Jan. 1, 2001 Dec. 31, 2001
---------------------- ----------------------
Fair Value Notional Fair Value Notional
Gain (Loss) Amount Gain (Loss) Amount
---------------------- ----------------------
Thousands
Fixed-price natural gas commodity price swaps $ 122,588 $ 106,735 $ (110,935) $ 254,209
Fixed-price natural gas call options 41,980 51,103 (832) 6,390
Foreign currency forward purchase contracts 405 34,057 (101) 10,223
---------------------- ----------------------
Total $ 164,973 $ 191,895 $ (111,868) $ 270,822
====================== ======================
In 2001, NW Natural realized net gains of $57.6 million from the settlement
of natural gas commodity swap and call option contracts, which were
recorded as reductions to the cost of gas, compared to net gains of $56.2
million during 2000. The currency exchange rate in all foreign currency
forward purchase contracts is included in NW Natural's cost of gas at
settlement; therefore, no gain or loss was recorded from the settlement of
those contracts. The change in value of cash flow hedge contracts, not
included in regulatory recovery, is included in OCI. In 2001, the Company
recognized a $0.2 million loss in OCI.
60
The fair value of derivative instruments at Dec. 31, 2001 (see table above)
was determined using estimated or quoted market prices for the periods
covered by the contracts. Market prices for the natural gas commodity-price
swap and call option contracts were obtained from external sources. These
third-party valuations are reviewed for reasonableness by the Company using
fair value calculations for other contracts with similar terms and
conditions. The market prices for the foreign currency forward contracts
were based on the currency exchange rates quoted by The Bank of Canada.
As of Dec. 31, 2001, NW Natural had six natural gas commodity-price swap
contracts extending beyond Dec. 31, 2002, but none extends longer than Oct.
31, 2003. None of the natural gas commodity-price call option contracts
extends beyond Dec. 31, 2002.
NW Natural has entered into a contract with a third party lender to provide
natural gas equipment financing to customers of NW Natural. Under the terms
of this agreement, NW Natural guarantees a minimum level of return to the
lender, which constitutes an embedded derivative under SFAS No. 133. This
derivative is a fair value hedge, and as such any change in valuation is
recognized in current earnings. NW Natural recorded a loss from this
contract of less than $0.1 million for 2001.
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 $4.7 million, $4.9 million and $5.2 million for the years ended Dec.
31, 2001, 2000 and 1999, respectively. The table below reflects the future
minimum lease payments due under non-cancelable leases at Dec. 31, 2001.
Such payments total $15.3 million for operating leases. The net present
value of payments on capital leases was $1.1 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 equipment.
Later
Millions 2002 2003 2004 2005 2006 years
----------------------------------------------------------------------------------------
Operating leases $2.9 $2.7 $2.7 $2.6 $1.0 $3.4
Capital leases $0.9 $0.3 $ - $ - $ - $ -
---- ---- ---- ---- ---- ----
Minimum lease payments $3.8 $3.0 $2.7 $2.6 $1.0 $3.4
==== ==== ==== ==== ==== ====
Acquisition of Portland General Electric Company
------------------------------------------------
On Oct. 5, 2001, NW Natural and Enron Corp., an Oregon corporation (Enron),
entered into an agreement (the Stock Purchase Agreement) providing for the
acquisition, by a wholly-owned subsidiary of NW Natural formed to serve as
a holding company (Holding Company), of all of the issued and outstanding
common stock of PGE, an Oregon corporation and wholly-owned subsidiary of
Enron.
The terms of the Stock Purchase Agreement provide that Enron will sell PGE
to Holding Company for $1.8 billion, comprised of $1.55 billion in cash and
$250 million of equity securities to be issued to Enron ($50 million in the
form of common stock and Class B common stock of Holding Company and $200
million in the form of FELINE PRIDES(SM) of Holding Company). The cash
portion of the purchase price will be raised through loans to Holding
Company from commercial banks and institutional lenders arranged, pursuant
to a written financing commitment, by Merrill Lynch and Credit Suisse First
Boston. A $75 million payment obligation from Enron to PGE, remaining from
Enron's purchase of PGE in 1996, will be assumed by Holding Company. PGE
will retain its approximately $1.1 billion in existing debt and preferred
stock.
61
The proposed transaction is subject to certain conditions, including,
without limitation, (i) the absence of any injunction, order, law or
regulation preventing consummation of the sale of the PGE shares, (ii)
receipt by Enron, NW Natural and Holding Company of required regulatory
approvals, (iii) the approval of NW Natural's shareholders, (iv) the
availability of the debt financing described above on the conditions stated
in the Stock Purchase Agreement, (v) performance of obligations of Enron
and NW Natural pursuant to the Stock Purchase Agreement, and (vi) the
accuracy of Enron's and NW Natural's representations and warranties.
Required regulatory approvals include the OPUC, the WUTC, the Federal
Energy Regulatory Commission, the Nuclear Regulatory Commission and the
Securities and Exchange Commission.
On Dec. 2, 2001, Enron, along with certain of its subsidiaries, filed
petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of
New York. PGE has not filed for reorganization under Chapter 11. Enron's
bankruptcy filing and its impact on PGE may delay or impede the acquisition
of PGE.
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, 2001:
Capacity Capacity
Purchase Release
Thousands Agreements Agreements
----------------------------------------------------------------------------------
2002 $ 81,175 $ 3,837
2003 72,702 3,837
2004 46,068 3,838
2005 41,663 3,838
2006 37,110 3,838
2007 through 2023 287,744 14,711
---------- ---------
Total 566,462 33,899
Less: Amount representing interest 123,524 6,563
---------- ---------
Total at present value $ 442,938 $ 27,336
========== =========
NW Natural's total payments of fixed charges under capacity purchase
agreements in 2001, 2000 and 1999 were $86.5 million, $81.5 million and
$78.2 million, respectively. Included in the amounts for 2001, 2000 and
1999 were reductions for capacity release sales totaling $3.8 million in
each of these years. In addition, per-unit charges are required to be paid
based on the actual quantities shipped under the agreements. In certain
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.
Environmental Matters
---------------------
NW Natural owns property in Linnton, Oregon that is the site of a former
gas manufacturing plant that was closed in 1956 (the Linnton site). In
recent years, the Linnton site has been under voluntary investigation by NW
Natural for environmental contaminants under program oversight by the
Oregon Department of Environmental Quality (ODEQ). NW Natural has recorded
liabilities totaling $4.0 million for the estimated costs of investigation
and interim remediation at the Linnton site, including consultants' fees,
ODEQ oversight reimbursement and legal fees, of which $3.0 million had been
spent as of Dec. 31, 2001. In 2000, NW Natural recorded a $1.4 million
receivable representing an estimate of the costs for investigation and
interim remediation at the Linnton site that NW Natural expects to recover
from insurance.
62
NW Natural 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. NW Natural has recorded a liability of $0.3 million for its
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. NW Natural recorded a liability of $0.6 million in 2000
and, based on a revised estimate of NW Natural's share at the lower end of
a range of probable liability, recorded an additional $0.5 million in 2001
for its estimated share of the costs of the remedial investigation of the
Portland Harbor. Available information is insufficient to determine either
the total amount of liability for investigation and remediation of the
Portland Harbor or the higher end of a range for NW Natural's estimated
share of that liability.
NW Natural expects that its costs of further 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 1995, a jury returned verdicts against
NW Natural for $5.1 million on the customer's tort claim or, alternatively,
for $1.9 million on its contract claim, along with a verdict in favor of NW
Natural for $0.2 million on its own contract claim. In 1999, the Oregon
Supreme Court ruled in NW Natural's favor on the customer's tort claim and
the Oregon Court of Appeals ruled in NW Natural's favor on its contract
claim. The Oregon Supreme Court initially declined to review the Court of
Appeals' decision on the contract claim. On reconsideration, however, in
December 2000, the Supreme Court agreed to review the Court of Appeals'
decision on the contract claim.
In February 2002, the Supreme Court issued a decision adverse to NW Natural
on the customer's contract claim and remanded the case to the circuit court
for further proceedings. Based on the Supreme Court's February 2002
decision, NW Natural recorded charges to operating expense and interest
expense totaling $2.7 million for the year ended Dec. 31, 2001, equivalent
to 6 cents a diluted share, as a reserve against payment of the net
judgment, related costs and post-judgment interest.
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
expect disposition of these matters to have a materially adverse effect on
the Company's financial position, results of operations or cash flows.
63
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
- -----------------------------------------------------------------------------------------------------------
2001
Operating revenues 217,341 118,150 78,359 236,402 650,252
Net operating revenues 91,653 54,726 37,067 92,565 276,011
Net income (loss) 25,907 4,865 (4,976) 24,391 50,187
Basic earnings (loss) per share 1.00 0.17 (0.22) 0.94 1.90 *
Diluted earnings (loss) per share 0.99 0.17 (0.22) 0.93 1.88 *
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 *
* 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 changed 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.
64
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 (year ended December 31)
- ----------------------------------
2001
- ----
Reserves deducted in balance sheet
from assets to which they apply:
Allowance for uncollectible accounts $ 1,867 $ 3,359 $ - $ 3,264 $ 1,962
2000
- ----
Reserves deducted in balance sheet
from assets to which they apply:
Allowance for uncollectible accounts $ 1,669 $ 2,344 $ - $ 2,146 $ 1,867
1999
- ----
Reserves deducted in balance sheet
from assets to which they apply:
Allowance for uncollectible accounts $ 1,547 $ 2,380 $ - $ 2,258 $ 1,669
65
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
(Item 10. Directors and Executive Officers of the Registrant;
Item 11. Executive Compensation; Item 12. Security Ownership of
Certain Beneficial Owners and Management; and Item 13. Certain
Relationships and Related Transactions.)
Information called for by Part III (Items 10., 11., 12. and 13.) is
incorporated herein by reference to portions of the Company's definitive proxy
statement. See the Additional Item included in Part I for information concerning
executive officers of the Company.
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:
1. A list of all Financial Statements and Supplemental Schedules is
incorporated by reference to Item 8.
2. List of Exhibits filed:
*(3a.) Restated Articles of Incorporation, as filed and
effective June 24, 1988 and amended December 8, 1992,
December 1, 1993 and May 27, 1994 (incorporated herein
by reference to Exhibit (3a.) to Form 10-K for 1994,
File No. 0-994).
(3b.) Bylaws as amended December 13, 2001.
*(4a.) Copy of Mortgage and Deed of Trust, dated as of July 1,
1946, to Bankers Trust and R. G. Page (to whom Stanley
Burg is now successor), Trustees (incorporated herein by
reference to Exhibit 7(j) in File No. 2-6494); and
copies of Supplemental Indentures Nos. 1 through 14 to
the Mortgage and Deed of Trust, dated respectively, as
of June 1, 1949, March 1, 1954, April 1, 1956, February
1, 1959, July 1, 1961, January 1, 1964, March 1, 1966,
December 1, 1969, April 1, 1971, January 1, 1975,
December 1, 1975, July 1, 1981, June 1, 1985 and
November 1, 1985 (incorporated herein by reference to
Exhibit 4(d) in File No. 33-1929); Supplemental
Indenture No. 15 to the Mortgage and Deed of Trust,
dated as of July 1, 1986 (filed as Exhibit (4)(c) in
File No. 33-24168); Supplemental Indentures Nos. 16, 17
and 18 to the Mortgage and Deed of Trust, dated,
respectively, as of November 1, 1988, October 1, 1989
and July 1, 1990 (incorporated herein by reference to
Exhibit (4)(c) in File No. 33-40482); Supplemental
Indenture No. 19 to the Mortgage and Deed of Trust,
dated as of June 1, 1991 (incorporated herein by
reference to Exhibit 4(c) in File No. 33-64014); and
Supplemental Indenture No. 20 to the Mortgage and Deed
66
of Trust, dated as of June 1, 1993 (incorporated herein
by reference to Exhibit 4(c) in File No. 33-53795).
*(4d.) Copy of Indenture, dated as of June 1, 1991, between the
Company and Bankers Trust Company, Trustee, relating to
the Company's Unsecured Medium-Term Notes (incorporated
herein by reference to Exhibit 4(e) in File No.
33-64014).
*(4e.) Officers' Certificate dated June 12, 1991 creating
Series A of the Company's Unsecured Medium-Term Notes
(incorporated herein by reference to Exhibit (4e.) to
Form 10-K for 1993, File No. 0-994).
*(4f.) Officers' Certificate dated June 18, 1993 creating
Series B of the Company's Unsecured Medium-Term Notes
(incorporated herein by reference to Exhibit (4f.) to
Form 10-K for 1993, File No. 0-994).
*(4f.(1)) Officers' Certificate dated January 15, 1999 relating to
Series B of the Company's Unsecured Medium-Term Notes
and supplementing the Officers' Certificate dated June
18, 1993 (incorporated herein by reference to Exhibit
(4f.(1)) to Form 10-K for 1998, File No. 0-994).
*(4f.(2)) Officers' Certificate dated February 28, 2001 relating
to Series B of the Company's Unsecured Medium-Term Notes
and supplementing the Officers' Certificate dated June
18, 1993 (incorporated herein by reference to Exhibit
(4f. (2)) to Form 10-K for 2000, File No. 0-994).
*(4g.) Rights Agreement, dated as of February 27, 1996, between
the Company and Boatmen's Trust Company (Mellon
Investor Services LLC, successor), which includes
as Exhibit A thereto the form of a Right Certificate
and as Exhibit B thereto the Summary of Rights to
Purchase Common Shares (incorporated herein by reference
to Exhibit 1 to Form 8-A, dated February 27, 1996,
File No. 0-994).
*(4h.) Amendment No. 1, dated October 5, 2001, to Rights
Agreement, dated February 27, 1996, between the Company
and Boatmen's Trust Company (Mellon Investor Services
LLC, successor) (incorporated herein by reference to
Exhibit 4 to Form 10-Q for quarter ended September 30,
2001, File No. 0-994).
*(10a.) Stock Purchase Agreement by and among the Company, Enron
Corp., Northwest Energy Corporation and Enron Northwest
Assets, LLC dated October 5, 2001 (incorporated herein
by reference to Exhibit 10.1 to Form 8-K dated October
9, 2001, File No. 0-994).
*(10a.(1)) Agreement and Plan of Merger and Reorganization, dated
as of October 5, 2001, among the Company, Northwest
Energy Corporation and Northwest Energy Sub Corp.
(incorporated herein by reference to Exhibit 10.2 to
Form 8-K dated October 9, 2001, File No. 0-994).
*(10a.(2)) Form of Securityholders and Registration Rights
Agreement (incorporated herein by reference to Exhibit
10.3 to Form 8-K dated October 9, 2001, File No. 0-994).
67
*(10a.(3)) Terms of FELINE PRIDES (SM) (incorporated herein by
reference to Exhibit 10.4 to Form 8-K dated October 9,
2001, File No. 0-994).
*(10j.) Transportation Agreement, dated June 29, 1990, between
the Company and Northwest Pipeline Corporation
(incorporated herein by reference to Exhibit (10j.) to
Form 10-K for 1993, File No. 0-994).
*(10j.(1)) Replacement Firm Transportation Agreement, dated July
31, 1991, between the Company and Northwest Pipeline
Corporation (incorporated herein by reference to Exhibit
(10j.(2)) to Form 10-K for 1992, File No. 0-994).
*(10j.(2)) Firm Transportation Service Agreement, dated November
10, 1993, between the Company and Pacific Gas
Transmission Company (incorporated herein by reference
to Exhibit (10j.(2)) to Form 10-K for 1993, File No.
0-994).
*(10j.(3)) Service Agreement, dated June 17, 1993, between
Northwest Pipeline Corporation and the Company
(incorporated herein by reference to Exhibit (10j.(3))
to Form 10-K for 1994, File No. 0-994).
*(10j.(4)) Firm Transportation Service Agreement, dated October 22,
1993, between Pacific Gas Transmission Company and the
Company (incorporated herein by reference to Exhibit
(10j.(4)) to Form 10-K for 1994, File No. 0-994).
*(10j.(5)) Firm Transportation Service Agreement, dated June 22,
1994, between Pacific Gas Transmission Company and the
Company (incorporated herein by reference to Exhibit
(10j.(5)) to Form 10-K for 1995, File No. 0-994).
*(10j.(6)) Firm Transportation and Supply Agreement, dated May 9,
1997, between PanEnergy Trading and Market Services,
LLC, Inland Pacific Energy Services Corp., and the
Company (incorporated herein by reference to Exhibit
(10j.(6)) to Form 10-K for 1997, File No. 0-994).
(11) Statement re computation of per share earnings.
(12) Statement re computation of ratios of earnings to fixed
charges.
(23) Consent of PricewaterhouseCoopers LLP.
Executive Compensation Plans and Arrangements:
----------------------------------------------
*(10b.) Executive Supplemental Retirement Income Plan, 1995
Restatement (incorporated herein by reference to Exhibit
(10b.) to Form 10-K for 1994, File No. 0-994).
*(10b.-1) 1995 Amendment to Executive Supplemental Retirement
Income Plan (1995 Restatement) (incorporated herein by
reference to Exhibit (10b.-1) to Form 10-K for 1995,
File No. 0-994).
*(10b.-2) Amendment 1998-1 to the Executive Supplemental
Retirement Income Plan (1995 Restatement) (incorporated
herein by reference to Exhibit 10(a) to Form 10-Q for
68
the quarter ended September 30, 1998, File No. 0-994).
*(10b.-3) ESRIP Change in Control Amendment to the Executive
Supplemental Retirement Income Plan (1995 Restatement)
(incorporated herein by reference to Exhibit 10(b) to
Form 10-Q for the quarter ended September 30, 1998, File
No. 0-994).
(10c.) Restated Stock Option Plan, as amended effective
February 28, 2002.
*(10e.) Executive Deferred Compensation Plan, 2001 Restatement
(incorporated herein by reference to Exhibit 10(b) to
Form 10-Q for quarter ended September 30, 2001, File No.
0-994).
(10f.) Directors Deferred Compensation Plan, effective June 1,
1981, restated as of December 1, 2001.
*(10g.) Form of Indemnity Agreement as entered into between the
Company and each director and executive officer
(incorporated herein by reference to Exhibit (10g.) to
Form 10-K for 1988, File No. 0-994).
*(10i.) Non-Employee Directors Stock Compensation Plan, as
amended effective January 1, 1998 (incorporated herein
by reference to Exhibit (10i.) to Form 10-K for 1997,
File No. 0-994).
*(10k.) Executive Annual Incentive Plan, effective March 1,
1990, as amended effective January 1, 1992, January 1,
1996 and January 1, 2000 (incorporated herein by
reference to Exhibit (10k.) to Form 10-K for 1999, File
No. 0-994).
*(10n.) Employment agreement dated November 2, 1995, as amended
February 27, 1996, between the Company and an executive
officer (incorporated herein by reference to Exhibit
(10n.) to Form 10-K for 1995, File No. 0-994).
*(10n.-1) Amendment dated December 18, 1997 to employment
agreement dated November 2, 1995, as previously amended
February 27, 1996, between the Company and an executive
officer (incorporated herein by reference to Exhibit
(10n.-1) to Form 10-K for 1997, File No. 0-994).
*(10n.-2) Amendment dated September 24, 1998 to employment
agreement dated November 2, 1995, as previously amended,
between the Company and an executive officer
(incorporated herein by reference to Exhibit 10(e) to
Form 10-Q for the quarter ended September 30, 1998, File
No. 0-994).
*(10o.) Form of amended and restated executive change in control
severance agreement as entered into between the Company
and each executive officer (incorporated herein by
reference to Exhibit 10(a) to Form 10-Q for the quarter
ended June 30, 2001, File No. 0-994).
*(10o.(1)) Form of change in control letter agreement as entered
into between the Company and each executive officer
(incorporated herein by reference to Exhibit 10(a) to
Form 10-Q for the quarter ended September 30, 2001, File
No. 0-994).
69
*(10p.) Employment Agreement dated July 2, 1997, between the
Company and an executive officer (incorporated herein by
reference to Exhibit 10(a) for Form 10-Q for the quarter
ended September 30, 1997, File No. 0-994).
*(10p.-1) Amendment dated December 18, 1997 to employment
agreement dated July 2, 1997, between the Company and an
executive officer (incorporated herein by reference to
Exhibit (10p.-1) to Form 10-K for 1997, File No. 0-994).
*(10p.-2) Amendment dated September 24, 1998 to employment
agreement dated July 2, 1997, as previously amended,
between the Company and an executive officer
(incorporated herein by reference to Exhibit 10(g) to
Form 10-Q for the quarter ended September 30, 1998, File
No. 0-994).
*(10q.) Employment agreement dated October 19, 1998, between the
Company and an executive officer (incorporated herein by
reference to Exhibit (10q.) to Form 10-K for 1998, File
No. 0-994).
*(10r.) Employment agreement dated May 11, 1999, between the
Company and an executive officer (incorporated herein by
reference to Exhibit 10 to Form 10-Q for the quarter
ended June 30, 1999, File No. 0-994).
*(10s.) Employment agreement dated September 20, 2000, between
the Company and an executive officer (incorporated
herein by reference to Exhibit 10(a) to Form 10-Q for
the quarter ended September 30, 2000, File No. 0-994).
*(10t.) Employment agreement dated October 20, 2000, between the
Company and an executive officer (incorporated herein by
reference to Exhibit 10(d) to Form 10-Q for the quarter
ended September 30, 2000, File No. 0-994).
*(10u.) Separation Agreement and Mutual Release of All Claims
between the Company and an executive officer, dated
February 28, 2001 (incorporated herein by reference to
Exhibit (10u.) to Form 10-K for 2000, File No. 0-994).
*(10v.) Northwest Natural Gas Company Long-Term Incentive Plan,
as amended and restated effective July 26, 2001
(incorporated herein by reference to Exhibit 10(c) to
Form 10-Q for the quarter ended June 30, 2001, File No.
0-994).
*(10w.) Restricted stock retention agreement, dated August 1,
2001, as entered into between the Company and an
executive officer (incorporated herein by reference to
Exhibit 10(b) to Form 10-Q for the quarter ended June
30, 2001, File No. 0-994).
The Company agrees to furnish the Commission, upon request, a copy
of certain instruments defining rights of holders of long-term debt
of the Company or its consolidated subsidiaries which authorize
securities thereunder in amounts which do not exceed 10% of the
total assets of the Company.
70
(b) Reports on Form 8-K.
On October 9 and December 4, 2001, the Company filed its
Current Reports on Form 8-K relating, respectively, to
its proposed acquisition of Portland General Electric
Company from Enron Corp. and the implications on the
proposed acquisition of Enron Corp.'s filing for
reorganization under Chapter 11 of the United States
Bankruptcy Code.
On March 1, 2002, the Company filed its Current Report
on Form 10-K relating to: 1) a litigation decision
adverse to the Company; 2) the Company's 2001 earnings
(unaudited); 3) a regulatory development; and 4) the
status of the Company's proposed acquisition of Portland
General Electric Company.
- --------------------------------------------
*Incorporated herein by reference as indicated
71
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: March 27, 2002 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 and Director March 27, 2002
- ---------------------------------------------------------
Richard G. Reiten, Chairman
and Chief Executive Officer
/s/ Bruce R. DeBolt Principal Financial Officer March 27, 2002
- ---------------------------------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
/s/ Stephen P. Feltz Principal Accounting Officer March 27, 2002
- ---------------------------------------------------------
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/ Wayne D. Kuni Director )
- ---------------------------------------------------------
Wayne D. Kuni )
)
/s/ Randall C. Pape Director ) March 27, 2002
- ---------------------------------------------------------
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 )
72
NORTHWEST NATURAL GAS COMPANY
-----------------------------
EXHIBIT INDEX
-------------
To
Annual Report on Form 10-K
For Fiscal Year Ended
December 31, 2001
Exhibit
Document Number
-------- -------------
* Restated Articles of Incorporation, as filed (3a.)
June 24, 1988 and amended December 8, 1992, December 1, 1993 and
May 27, 1994
Bylaws as amended December 13, 2001 (3b.)
* Mortgage and Deed of Trust, dated as of July 1, (4a.)
1946, as supplemented by Supplemental Indenture
Nos. 1 through 20
* Indenture, dated as of June 1, 1991, between (4d.)
the Company and Bankers Trust Company
* Officers' Certificate, dated June 12, 1991, (4e.)
creating Unsecured Medium-Term Notes Series A
* Officers' Certificate, dated June 18, 1993, (4f.)
creating Unsecured Medium-Term Notes Series B
* Officers' Certificate, dated January 15, 1999, (4f.(1))
relating to Series B of the Company's Unsecured
Medium-Term Notes and supplementing the
Officers' Certificate dated June 18, 1993
* Officers' Certificate, dated February 28, 2001, (4f.(2))
relating to Series B of the Company's Unsecured
Medium-Term Notes and supplementing the
Officers' Certificate dated June 18, 1993
* Rights Agreement, dated as of February 27, 1996, (4g.)
between the Company and Boatmen's Trust Company
(Mellon Investor Services LLC, successor)
* Amendment No. 1, dated October 5, 2001, to (4h.)
Rights Agreement, dated February 27, 1996,
between the Company and Boatmen's Trust
Company (Mellon Investor Services LLC, successor)
* Stock Purchase Agreement by and among the (10a.)
Company, Enron Corp., Northwest Energy
Corporation and Enron Northwest Assets, LLC
dated October 5, 2001
* Agreement and Plan of Merger and Reorganization, (10a.(1)) dated (10a.(1))
as of October 5, 2001, among the Company, Northwest Energy
Corporation and Northwest Energy Sub Corporation
* Form of Securityholders and Registration (10a.(2))
Rights Agreement
* Terms of FELINE PRIDES (SM) (10a.(3))
* Transportation Agreement, dated June 29, 1990, (10j.)
between the Company and Northwest Pipeline
Corporation
* Replacement Firm Transportation Agreement, (10j.(1))
dated July 31, 1991, between the Company and
Northwest Pipeline Corporation
* Firm Transportation Service Agreement, dated (10j.(2))
November 10, 1993, between the Company and
Pacific Gas Transmission Company
* Service Agreement, dated June 17, 1993, between (10j.(3))
Northwest Pipeline Corporation and the Company
* Firm Transportation Service Agreement, dated (10j.(4))
October 22, 1993, between Pacific Gas
Transmission Company and the Company
* Firm Transportation Service Agreement, dated (10j.(5))
June 22, 1994, between Pacific Gas Transmission
Company and the Company
* Firm Transportation and Supply Agreement, (10j.(6))
dated May 9, 1997, between PanEnergy Trading
and Market Services, Inland Pacific Energy Services
Corp., and the Company
Statement re computation of per share earnings (11)
Statement re computation of ratios of earnings to fixed charges (12)
Consent of PricewaterhouseCoopers LLP (23)
Executive Compensation Plans and Arrangements
---------------------------------------------
* Executive Supplemental Retirement Income (10b.)
Plan, 1995 Restatement
* 1995 Amendment to Executive Supplemental (10b.-1)
Retirement Income Plan (1995 Restatement)
* Amendment 1998-1 to the Executive (10b.-2)
Supplemental Retirement Income Plan
(1995 Restatement)
* ESRIP Change in Control Amendment to the (10b.-3)
Executive Supplemental Retirement Income
Plan (1995 Restatement)
Restated Stock Option Plan, as amended effective (10c.)
February 28, 2002
* Executive Deferred Compensation Plan, 2001 (10e.)
Restatement
Directors Deferred Compensation Plan, (10f.)
effective June 1, 1981, restated as of
December 1, 2001
* Form of Indemnity Agreement entered into (10g.)
between the Company and each director and
executive officer
* Non-Employee Directors Stock Compensation (10i.)
Plan, as amended effective January 1, 1998
* Executive Annual Incentive Plan, effective (10k.)
March 1, 1990, as amended effective
January 1, 1992, January 1, 1996 and
January 1, 2000
* Employment agreement dated November 2, 1995, (10n.)
as amended February 27, 1996, between the
Company and an executive officer
* Amendment dated December 18, 1997 to (10n.-1)
employment agreement dated November 2, 1995,
between the Company and an executive officer
* Amendment dated September 24, 1998 to employment (10n.-2)
agreement dated November 2, 1995, as previously amended, between
the Company and an executive officer
* Form of amended and restated executive change (10o.)
in control severance agreement as entered into
between the Company and each executive officer
* Form of change in control letter agreement as (10o.(1))
entered into between the Company and each
executive officer
* Employment agreement dated July 2, 1997 (10p.)
between the Company and an executive officer
* Amendment dated December 18, 1997 to (10p.-1)
employment agreement dated July 2, 1997,
between the Company and an executive officer
* Amendment dated September 24, 1998 to employment (10p.-2)
agreement dated July 2, 1997, as previously amended, between the
Company and an executive officer
* Employment agreement dated October 19, 1998, (10q.)
between the Company and an executive officer
* Employment agreement dated May 11, 1999, (10r.)
between the Company and an executive officer
* Employment agreement dated September 20, 2000, (10s.)
between the Company and an executive officer
* Employment agreement dated October 20, 2000, (10t.)
between the Company and an executive officer
* Separation Agreement and Mutual Release of All (10u.)
Claims between the Company and an executive officer
* Northwest Natural Gas Company Long-Term (10v.)
Incentive Plan, as amended and restated,
effective July 26, 2001
* Restricted stock retention agreement dated (10w.)
August 1, 2001, as entered into between the
Company and an executive officer
- ------------------------------------
* Incorporated by reference