SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to _________ to _________
Commission File No. 0-994
[GRAPHIC OMITTED][GRAPHIC OMITTED] NW NATURAL
NORTHWEST NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
OREGON 93-0256722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 N.W. SECOND AVENUE, PORTLAND, OREGON 97209
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (503) 226-4211
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
At May 8, 2002, 25,419,804 shares of the registrant's Common Stock, $3-1/6 par
value (the only class of Common Stock) were outstanding.
NORTHWEST NATURAL GAS COMPANY
March 31, 2002
Summary of Information Reported
The registrant submits herewith the following information:
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements Number
------
(1) Consolidated Statements of Income for the three-month periods
ended March 31, 2002 and 2001 3
(2) Consolidated Statements of Earnings Invested in the Business
for the three-month periods ended March 31, 2002 and 2001 4
(3) Consolidated Balance Sheets at March 31, 2002 and 2001
and Dec. 31, 2001 5
(4) Consolidated Statements of Cash Flows for the three-month
periods ended March 31, 2002 and 2001 7
(5) Consolidated Statements of Capitalization at March 31, 2002
and 2001 and Dec. 31, 2001 8
(6) Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signature 23
2
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(1) Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31,
------------------------------
Thousands, except per share amounts 2002 2001
- ---------------------------------------------------------------------------------------------
Operating revenues:
Gross operating revenues $ 278,563 $ 217,341
Cost of sales 167,897 125,688
--------------- ------------
Net operating revenues 110,666 91,653
Operating expenses:
Operations and maintenance 22,169 21,043
Taxes other than income taxes 12,002 9,694
Depreciation, depletion and amortization 12,814 12,128
--------------- ------------
Total operating expenses 46,985 42,865
--------------- ------------
Income from operations 63,681 48,788
Other income (expense) (870) 606
Interest charges - net 8,149 8,260
--------------- ------------
Income before income taxes 54,662 41,134
Income taxes 20,215 15,227
--------------- ------------
Net income 34,447 25,907
Redeemable preferred and preference stock dividend
requirements 595 608
--------------- ------------
Earnings applicable to common stock $ 33,852 $ 25,299
=============== ============
Average common shares outstanding 25,266 25,207
Basic earnings per share of common stock $ 1.34 $ 1.00
Diluted earnings per share of common stock $ 1.32 $ 0.99
Dividends per share of common stock $ 0.315 $ 0.31
--------------------------------------------------
See Notes to Consolidated Financial Statements
3
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Statements of Earnings Invested in the Business
(Unaudited)
Three Months Ended March 31,
-------------------------------------------------------------
Thousands 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Earnings invested in the business:
Balance at beginning of period $ 147,950 $ 134,189
Net income 34,447 $ 34,447 25,907 $ 25,907
Cash dividends paid:
Redeemable preferred and preference stock (594) (608)
Common stock (7,953) (7,812)
Common stock repurchased - (1,801)
---------------- -------------
Balance at end of period $ 173,850 $ 149,875
================ =============
Accumulated other comprehensive income (loss):
Balance at beginning of period $ (375) $ -
Other comprehensive income - net of tax:
Unrealized gain from price risk management activities 430 430 - -
------------------------------- ---------------------------
Comprehensive income $ 34,877 $ 25,907
=========== ===========
Balance at end of period $ 55 $ -
================ =============
--------------------------------------------------
See Notes to Consolidated Financial Statements
4
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Balance Sheets
March 31, March 31,
2002 2001 Dec. 31,
Thousands Unaudited) (Unaudited) 2001
----------------------------------------------------------------------------------------
Assets:
Plant and property:
Utility plant $ 1,478,725 $ 1,420,274 $ 1,465,079
Less accumulated depreciation 525,805 486,261 514,629
----------- ----------- -----------
Utility plant - net 952,920 934,013 950,450
----------- ----------- -----------
Non-utility property 18,494 8,648 18,203
Less accumulated depreciation and depletion 3,774 3,474 3,677
----------- ----------- -----------
Non-utility property - net 14,720 5,174 14,526
----------- ----------- -----------
Total plant and property 967,640 939,187 964,976
----------- ----------- -----------
Other investments 25,074 14,310 23,233
----------- ----------- -----------
Current assets:
Cash and cash equivalents 30,084 12,196 10,440
Accounts receivable 81,503 57,876 66,684
Allowance for uncollectible accounts (3,648) (2,708) (1,962)
Accrued unbilled revenue 39,860 26,591 57,749
Inventories of gas, materials and supplies 33,396 19,562 49,337
Prepayments and other current assets 24,100 20,554 28,086
----------- ----------- -----------
Total current assets 205,295 134,071 210,334
----------- ----------- -----------
Regulatory assets:
Income tax asset 48,469 49,515 48,469
Deferred gas costs receivable -- 16,491 --
Unrealized loss on non-trading derivatives 48,666 -- 111,641
Unamortized loss on debt redemption 6,855 7,317 6,970
Other 4,232 7,260 5,302
----------- ----------- -----------
Total regulatory assets 108,222 80,583 172,382
----------- ----------- -----------
Other assets:
Investment in life insurance 53,418 49,499 53,033
Other 11,168 10,225 11,064
----------- ----------- -----------
Total other assets 64,586 59,724 64,097
----------- ----------- -----------
Total assets $ 1,370,817 $ 1,227,875 $ 1,435,022
=========== =========== ===========
--------------------------------------------------
See Notes To Consolidated Financial Statements
5
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Balance Sheets
March 31, March 31,
2002 2001 Dec. 31,
Thousands (Unaudited) (Unaudited) 2001
-------------------------------------------------------------------------------------------------------
Capitalization and liabilities:
Capitalization:
Common stock $ 80,130 $ 79,595 $ 79,889
Premium on common stock 242,245 237,970 240,697
Earnings invested in the business 173,850 149,875 147,950
Accumulated other comprehensive income (loss) 55 - (375)
----------- ---------- -----------
Total common stock equity 496,280 467,440 468,161
Redeemable preference stock 25,000 25,000 25,000
Redeemable preferred stock 9,000 9,750 9,000
Long-term debt 438,236 400,664 378,377
----------- ---------- -----------
Total capitalization 968,516 902,854 880,538
----------- ---------- -----------
Current liabilities:
Notes payable 163 22,470 108,291
Accounts payable 59,592 60,225 70,698
Long-term debt due within one year 40,000 20,000 40,000
Taxes accrued 30,280 17,818 22,539
Interest accrued 9,847 9,904 3,658
Other current and accrued liabilities 26,673 24,232 28,396
----------- ---------- -----------
Total current liabilities 166,555 154,649 273,582
----------- ---------- -----------
Regulatory liabilities:
Customer advances 1,824 1,709 1,985
Deferred gas costs payable 30,262 - 10,089
----------- ---------- -----------
Total regulatory liabilities 32,086 1,709 12,074
----------- ---------- -----------
Other liabilities:
Deferred income taxes 128,886 142,810 130,424
Fair value of non-trading derivatives 48,463 - 111,868
Deferred investment tax credits 8,138 9,063 8,682
Other 18,173 16,790 17,854
----------- ---------- -----------
Total other liabilities 203,660 168,663 268,828
----------- ---------- -----------
Total capitalization and liabilities $ 1,370,817 $1,227,875 $1,435,022
=========== ========== ===========
--------------------------------------------------
See Notes To Consolidated Financial Statements
6
(NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31,
-------------------------------
Thousands 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income from operations $ 34,447 $ 25,907
Adjustments to reconcile net income to cash provided by operations:
Depreciation, depletion and amortization 12,814 12,128
Gain on sale of assets (221) --
Unrealized gain from price risk management activities 430 --
Deferred income taxes and investment tax credits (2,082) 679
Equity in (earnings) losses of investments (138) 142
Allowance for funds used during construction (148) (191)
Deferred gas costs - net 20,173 482
Other 424 2,186
---------- ----------
Cash from operations before working capital changes 65,699 41,333
Changes in operating assets and liabilities:
Accounts receivable - net of uncollectible accounts (13,133) 5,585
Accrued unbilled revenue 17,889 19,028
Inventories of gas, materials and supplies 15,941 27,321
Accounts payable (11,106) (50,473)
Accrued interest and taxes 13,930 16,960
Other current assets and liabilities 2,097 2,782
---------- ----------
Cash provided by operating activities 91,317 62,536
---------- ----------
Investing activities:
Acquisition and construction of utility plant assets (15,039) (17,095)
Investment in non-utility property (291) --
Deferred costs for pending purchase of PGE (2,334) --
Proceeds from sale of assets 500 --
Other investments 518 167
---------- ----------
Cash used in investing activities (16,646) (16,928)
Financing activities:
Common stock issued 1,648 1,290
Common stock repurchased -- (3,772)
Long-term debt issued 60,000 --
Change in short-term debt (108,128) (33,793)
Cash dividend payments:
Redeemable preferred and preference stock (594) (608)
Common stock (7,953) (7,812)
---------- ----------
Cash used in financing activities (55,027) (44,695)
Increase in cash and cash equivalents 19,644 913
Cash and cash equivalents - beginning of period 10,440 11,283
---------- ----------
Cash and cash equivalents - end of period $ 30,084 $ 12,196
========== ==========
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,923 $ 1,041
Income taxes $ 14,111 $ 4,002
- ------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash financing activities:
Conversion to common stock:
7-1/4 % Series of Convertible Debentures $ 141 $ 126
--------------------------------------------------
See Notes to Consolidated Financial Statements
7
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(5) Consolidated Statements of Capitalization
March 31, 2002 March 31, 2001
Thousands, except share amounts (Unaudited) (Unaudited) Dec. 31, 2001
- --------------------------------------------------------------------------------------------------------------------
Common Stock Equity:
Common stock - par value $3-1/6 per share $ 80,130 $ 79,595 $ 79,889
Premium on common stock 242,245 237,970 240,697
Earnings invested in the business 173,850 149,875 147,950
Accumulated other comprehensive income (loss) 55 - (375)
--------- --------- ---------
Total common stock equity 496,280 51% 467,440 52% 468,161 53%
Redeemable Preference Stock:
$6.95 Series, stated value $100 per share 25,000 3% 25,000 3% 25,000 3%
Redeemable Preferred Stock:
$7.125 Series, stated value $100 per share 9,000 1% 9,750 1% 9,000 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 10,000
6.750% Series B due 2002 10,000 10,000 10,000
5.550% Series B due 2002 20,000 20,000 20,000
6.400% Series B due 2003 20,000 20,000 20,000
6.340% Series B due 2005 5,000 5,000 5,000
6.380% Series B due 2005 5,000 5,000 5,000
6.450% Series B due 2005 5,000 5,000 5,000
6.050% Series B due 2006 8,000 - 8,000
6.310% Series B due 2007 20,000 - -
6.800% Series B due 2007 10,000 10,000 10,000
6.500% Series B due 2008 5,000 5,000 5,000
7.450% Series B due 2010 25,000 25,000 25,000
6.665% Series B due 2011 10,000 - 10,000
7.130% Series B due 2012 40,000 - -
8.260% Series B due 2014 10,000 10,000 10,000
7.000% Series B due 2017 40,000 40,000 40,000
6.600% Series B due 2018 22,000 22,000 22,000
8.310% Series B due 2019 10,000 10,000 10,000
7.630% Series B due 2019 20,000 20,000 20,000
9.050% Series A due 2021 10,000 10,000 10,000
7.250% Series B due 2023 20,000 20,000 20,000
7.500% Series B due 2023 4,000 4,000 4,000
7.520% Series B due 2023 11,000 11,000 11,000
7.720% Series B due 2025 20,000 20,000 20,000
6.520% Series B due 2025 10,000 10,000 10,000
7.050% Series B due 2026 20,000 20,000 20,000
7.000% Series B due 2027 20,000 20,000 20,000
6.650% Series B due 2027 20,000 20,000 20,000
6.650% Series B due 2028 10,000 10,000 10,000
7.740% Series B due 2030 20,000 20,000 20,000
7.850% Series B due 2030 10,000 10,000 10,000
Unsecured:
8.470% Series A due 2001 - 10,000 -
Convertible Debentures
----------------------
7-1/4% Series due 2012 8,236 8,664 8,377
--------- --------- ---------
478,236 420,664 418,377
Less long-term debt due within one year 40,000 20,000 40,000
--------- ---- --------- ---- --------- ----
Total long-term debt 438,236 45% 400,664 44% 378,377 43%
--------- ---- --------- ---- --------- ----
Total Capitalization $ 968,516 100% $ 902,854 100% $ 880,538 100%
========= ==== ========= ==== ========= ====
----------------------------------------------------
See Notes to Consolidated Financial Statements
8
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(6) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Financial Statements
The information presented in the consolidated financial statements is
unaudited, but includes all adjustments, consisting of only normal recurring
accruals, which the management of the Company considers necessary for a fair
presentation of the results of such periods. These consolidated financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's 2001 Annual Report on Form 10-K (2001
Form 10-K). A significant part of the business of the Company is of a seasonal
nature; therefore, results of operations for the interim periods are not
necessarily indicative of the results for a full year.
As referred to herein, the "Company" consists of Northwest Natural Gas
Company (NW Natural), a regulated utility, and non-regulated subsidiary
businesses, NNG Financial Corporation (Financial Corporation), a wholly-owned
subsidiary, and Northwest Energy Corporation (Northwest Energy or Holding
Company), which was formed in 2001 to serve as the holding company for NW
Natural and Portland General Electric Company (PGE) if the acquisition of PGE is
completed (see Note 6).
Certain amounts from prior periods have been reclassified to conform
with the 2002 presentation. These reclassifications had no impact on prior year
results of operations.
2. Use of Financial Derivatives
NW Natural utilizes derivative instruments to manage commodity price
risks related to natural gas purchases, foreign currency exchange rate risks
related to gas purchase commitments from Canada, oil or propane commodity price
risks related to gas sales and transportation services under rate schedules
pegged to these commodities, and interest rate risks related to long-term debt
maturing or expected to be issued in less than five years. NW Natural does not
enter into derivative instruments for trading purposes. See Part II, Item 7.,
"Accounting for Derivative Instruments and Hedging Activities," and Part II,
Item 8., Notes 1 and 11, "Notes to Consolidated Financial Statements," in the
2001 Form 10-K.
At March 31, 2002, NW Natural had the following derivatives outstanding
covering its exposures to commodity and foreign currency prices: a series of 18
natural gas price swap contracts and five 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, 2002 March 31, 2002
-------------------------- ------------------------
Fair value Notional Fair value Notional
Gain (loss) Amount Gain (loss) Amount
-------------------------- ------------------------
Thousands
Fixed-price natural gas commodity price swaps (110,935) $ 254,209 $ (48,428) $ 264,031
Fixed-price natural gas call options (832) 6,390 - -
Foreign currency forward purchase contracts (101) 10,223 (35) 8,353
-------------------------- ------------------------
Total $ (111,868) $ 270,822 $ (48,463) $ 272,384
========================== ========================
3. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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
9
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.
4. Adoption of New Accounting Standards
Effective Jan. 1, 2002, the Company adopted 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, of which the
Company had none as of March 31, 2002, and other intangibles with indefinite
lives to be tested for impairment at least annually rather than being amortized
as previously required. The adoption of SFAS No. 141 and SFAS No. 142 did not
have a material impact on the Company's financial position or results of
operations.
The Company also adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," effective Jan. 1, 2002. SFAS No. 144
establishes a single accounting model for recognition and measurement of the
impairment of long-lived assets to be held and used, the measurement of
long-lived assets to be disposed of by sale and for segments of a business to be
disposed of. 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. The adoption of SFAS No. 144 did not have a material
impact on the Company's financial position or results of operations.
5. Segment Information
The Company principally operates in a segment of business, "Utility",
consisting of the distribution of natural gas. Another segment, "Gas Storage",
represents natural gas storage services provided to upstream customers using
storage capacity not required from time to time for service to core utility
customers. The remaining segment, "Other", primarily consists of non-regulated
investments in alternative energy projects in California, a Boeing 737-300
aircraft leased to Continental Airlines and deferred costs in the pending
purchase of PGE.
10
The following table presents information about the reportable segments
for the three months ended March 31, 2002 and 2001. Inter-segment transactions
are insignificant.
Three Months Ended March 31,
--------------------------------------------------------
Thousands Utility Gas Storage Other Total
- ---------------------------------------------------------------------------------------------------------------
2002
- ----
Net operating revenues $ 108,838 $ 1,774 $ 54 $ 110,666
Depreciation, depletion and amortization 12,723 91 -- 12,814
Other operating expenses 33,900 249 22 34,171
Income from operations 62,221 1,428 32 63,681
Income from financial investments -- -- 138 138
Net income 33,453 786 208 34,447
Assets 1,326,968 14,453 29,396 1,370,817
2001
- ----
Net operating revenues $ 90,384 $ 1,223 $ 46 $ 91,653
Depreciation, depletion and amortization 12,104 24 -- 12,128
Other operating expenses 30,795 31 (89) 30,737
Income from operations 47,485 1,168 135 48,788
Income (loss) from financial investments -- -- (142) (142)
Net income 25,059 693 155 25,907
Assets 1,201,355 4,895 21,625 1,227,875
6. Commitments and Contingencies
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. See
Part I, Item 1., "Acquisition of Portland General Electric Company," and Part
II, Item 8., Note 12, in the 2001 Form 10-K, and Part I, Item 2., "Acquisition
of Portland General Electric Company," in this Form 10-Q.
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.
Environmental Matters
---------------------
NW Natural has accrued all material loss contingencies relating to
environmental matters which it believes to be probable of assertion. See Part
II, Item 8., Note 12, "Notes to Consolidated Financial Statements," in the 2001
Form 10-K. However, due to the preliminary nature of these environmental
investigations, the range of any additional possible loss cannot be currently
estimated. 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.
11
Litigation
----------
The Company is party to certain 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.
12
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The consolidated financial statements include:
Regulated utility:
Northwest Natural Gas Company (NW Natural)
Non-regulated subsidiary businesses:
NNG Financial Corporation (Financial Corporation), a
wholly-owned subsidiary
Northwest Energy Corporation (Northwest Energy or
Holding Company), a wholly-owned subsidiary formed
in 2001
Together these businesses are referred to herein as the "Company" (see
"Non-utility Operations," below, and Part II, Item 8., Note 2, "Notes to
Consolidated Financial Statements," in the Company's 2001 Annual Report on Form
10-K (2001 Form 10-K)).
The following is management's assessment of the Company's financial
condition including the principal factors that affect results of operations. The
discussion refers to the consolidated activities of the Company for the three
months ended March 31, 2002 and 2001.
Earnings and Dividends
- ----------------------
The Company's earnings applicable to common stock were $33.9 million in
the quarter ended March 31, 2002, up from $25.3 million in the quarter ended
March 31, 2001.
Earnings per diluted share from consolidated operations were $1.32 a
share in the first quarter of 2002, compared to 99 cents a share in last year's
first quarter.
NW Natural earned $1.28 a diluted share from gas utility operations in
the first quarter of 2002, compared to 96 cents in the same period in 2001.
Weather conditions in NW Natural's service territory in the first quarter of
2002 were 5 percent colder than the 20-year average and 2 percent colder than
the first quarter of 2001. Residential and commercial customers' consumptions
per heating degree day were an estimated 8 percent and 12 percent lower,
respectively, during the first quarter of 2002 than average consumptions prior
to significant increases in gas commodity prices during 2000 and 2001. The
Company estimates that the lower consumptions per degree day reduced residential
and commercial sales in the first quarter of 2002 by about 21 million therms and
margin revenues (gross revenues minus cost of sales) by about $6.0 million,
equivalent to 14 cents a share.
Non-utility operating results for the first quarter of 2002 were
earnings of 4 cents a share, compared to earnings of 3 cents a share from these
operations in the first quarter of 2001. See "Non-utility Operations," below.
Dividends paid on common stock were 31.5 cents a share for the
three-month period ended March 31, 2002 and 31 cents a share for the three-month
period ended March 31, 2001. In April 2002, the Company's Board of Directors
declared a quarterly dividend of 31.5 cents a share on the common stock, payable
May 15, 2002, to shareholders of record of April 30, 2002. The current indicated
annual dividend rate is $1.26 a share.
13
Application of 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 its
critical accounting policies to be those which are most important to the
representation of the Company's financial condition and results of operations
and which require management's most difficult and subjective or complex
judgments, including those which could result in materially different amounts if
the Company reported under different conditions or using different assumptions.
Management considers its current critical accounting policies to be in the areas
of regulatory accounting, revenue recognition and derivative and hedging
activities (see "Part II, Item 7., "Critical Accounting Policies - Regulatory
Accounting, Revenue Recognition and Accounting for Derivative Instruments and
Hedging Activities," in the Company's 2001 Form 10-K). There have been no
material changes in the policies management considers its critical accounting
policies.
In addition to the accounting policies referred to above, management
believes that Statement of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets,"
and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," could become critical accounting policies in the event that NW Natural
completes its acquisition of Portland General Electric Company (PGE).
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. See
Part I, Item 1., "Acquisition of Portland General Electric Company," in the 2001
Form 10-K.
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 continues to be 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 that could expose PGE to liabilities. 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. 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.
On May 3, 2002, Enron publicly announced that it had presented a
process to its Unsecured Creditors' Committee which contemplated the
establishment of a new energy infrastructure company focused on the
transportation, distribution, generation and production of natural gas and
electricity. Enron disclosed that the new company, currently called OpCo Energy
Company, would be a holding company which may own PGE. Although Enron has stated
that it believes the OpCo Energy Company process is feasible whether or not PGE
is owned by such company, Enron has indicated its preference to retain PGE as
part of such company.
14
NW Natural understands that the Unsecured Creditors' Committee is
reviewing Enron's proposal and has not determined whether or not it will support
the OpCo Energy Company process.
NW Natural is in discussions with Enron to seek to determine whether
the parties should agree to mutually terminate the Stock Purchase Agreement or
should continue to pursue the transaction. NW Natural understands that Enron
will consult with its debtor-in-possession lenders and the Unsecured Creditors'
Committee in reaching such a determination. Any agreement by Enron and NW
Natural to terminate the Stock Purchase Agreement would be subject to approval
by the Bankruptcy Court.
Through March 31, 2002, NW Natural has recorded approximately $11.9
million of costs relating to the acquisition as deferred costs for the purchase
of PGE. If the acquisition is not completed, NW Natural would recognize these
costs incurred as current expense.
Results of Operations
- ---------------------
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility volumes
and revenues for the three months ended March 31:
(Thousands, except customers and degree days) 2002 2001
- ------------------------------------------------------------------------------------------------------
Gas Sales and Transportation Volumes - Therms:
- ----------------------------------------------
Residential and commercial sales 262,937 258,873
Unbilled volumes (18,622) (24,223)
--------- ---------
Weather-sensitive volumes 244,315 62% 234,650 61%
Industrial firm sales 23,755 6% 23,464 6%
Industrial interruptible sales 14,375 4% 13,798 4%
--------- ----- --------- ----
Total gas sales 282,445 72% 271,912 71%
Transportation deliveries 110,732 28% 112,473 29%
--------- ----- --------- ----
Total volumes sold and delivered 393,177 100% 384,385 100%
========= ===== ========= ====
Utility Operating Revenues - Dollars:
- -------------------------------------
Residential and commercial sales $ 259,491 $ 198,232
Unbilled revenues (17,895) (5,690)
--------- ---------
Weather-sensitive revenues 241,596 88% 192,542 89%
Industrial firm sales 17,865 6% 13,658 6%
Industrial interruptible sales 9,896 4% 7,225 3%
--------- ----- --------- ----
Total gas sales 269,357 98% 213,425 98%
Transportation revenues 6,452 2% 4,419 2%
Other revenues 173 -- (1,782) --
--------- ----- --------- ----
Total utility operating revenues $ 275,982 100% $ 216,062 100%
========= ===== ========= ====
Cost of gas sold $ 167,144 $ 125,678
========= =========
Total number of customers (end of period) 546,806 528,008
========= =========
Actual degree days 1,920 1,890
========= =========
20-year average degree days 1,836 1,827
========= =========
15
Residential and Commercial
--------------------------
NW Natural continues to experience rapid customer growth, with 18,798
customers added since March 31, 2001 for a growth rate of 3.6 percent. 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 operating revenues
are derived from gas sales to weather-sensitive residential and commercial
customers. Accordingly, variations in temperatures between periods will affect
volumes of gas sold to these customers. Average weather conditions are
calculated from the most recent 20 years of temperature data measured by heating
degree-days. Weather conditions were 5 percent colder than average in the first
quarter of 2002 and 2 percent colder than average in the first quarter of 2001.
Volumes of gas sold to residential and commercial customers were 9.7
million therms, or 4 percent, higher in the first quarter of 2002 than in the
first quarter of 2001. Related revenues increased $49.1 million, or 25 percent,
partially due to higher sales volumes but more significantly due to rate
increases effective Oct. 1, 2001. (See Part II, Item 7, "Results of Operations -
Regulatory Matters," in the 2001 Form 10-K.) Customer growth in the residential
and commercial segments since March 31, 2001, contributed an estimated 7 million
therms in sales volumes and $2.7 million in additional margin during the first
quarter of 2002.
NW Natural believes that reductions in recent years in its customers'
gas consumptions per degree day (see "Earnings and Dividends," above) were
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 Oregon Public Utility Commission (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 and early 2002 were to continue for
the full year 2002, but a margin stabilization mechanism were not approved, it
could reduce margin revenues for the last nine months of this year by the
equivalent of 13 to 18 cents a share compared to results with such a mechanism
in place.
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. End of period balances are affected by weather conditions, rate changes and
customer billing dates from one period to the next.
Industrial, Transportation and Other Revenues
---------------------------------------------
Total volumes delivered to industrial and electric generation customers
in the first quarter of 2002 were 148.1 million therms, down 1 percent from the
same period of 2001. Combined margin from these customers increased, however,
from $11.7 million in the first quarter of 2001 to $14.7 million in the first
quarter of 2002.
In the industrial market, volumes delivered to industrial sales and
transportation customers in the first quarter of 2002 were 144.9 million therms.
This was 30.6 million therms, or 27 percent, higher than in the first quarter of
2001. Several large customers switched back to gas after having used oil during
the same period last year. Related margins in the industrial market increased
from $11.3 million to $12.4 million.
16
In the electric generation market, volumes delivered in the first
quarter of 2002 were 3.2 million therms. This was 31.3 million therms, or 91
percent, lower than in the first quarter of 2001. Margin in this market
increased, however, from $0.4 million in the first quarter of 2001 to $2.3
million in the first quarter of 2002. A customer served on a contract with low
fixed charges and relatively high volumetric charges used 34.5 million therms
during the first quarter of 2001 but only about 3 million therms during the
first quarter of 2002. On the other hand, two new electric generation customers
added in mid-2001 used only about 0.3 million therms in the first quarter of
2002, but generated $2.3 million in margin because they are served on contracts
with high fixed charges and low volumetric charges. The contracts with these two
customers will continue in place at least through the end of the second quarter
of 2002.
Other revenues include amortizations from regulatory accounts and
miscellaneous fee income (see Part II, Item 8., Note 1, "Notes to Consolidated
Financial Statements," in the 2001 Form 10-K). Other revenues amounted to a net
increase to utility operating revenues of $0.2 million during the first quarter
of 2002, inluding increased revenues from customer late payment and collection
fees ($1.1 million) and miscellaneous revenues ($0.4 million), partially offset
by amortizations from regulatory accounts covering conservation programs ($0.8
million) and Year 2000 costs ($0.5 million). Amortizations of regulatory
accounts for conservation programs amounted to $2.4 million for the three months
ended March 31, 2002, which accounted for the $2.0 million increase in other
revenues from the three months ended March 31, 2001.
Cost of Gas
-----------
The cost per therm of gas sold was 28 percent higher during the first
quarter of 2002 than in the first quarter of 2001, primarily due to higher
natural gas commodity prices. The cost per therm of gas sold includes current
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 Part II, Item 7., "Critical Accounting
Policies -- Accounting for Derivative Instruments and Hedging Activities," in
the Company's 2001 Form 10-K) to help manage its gas commodity costs. NW Natural
recorded net losses from commodity swap and call option contracts of $28 million
in the first quarter of 2002, compared to net gains of $74 million in the first
quarter of 2001. 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
projected costs built into rates. 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 commodity purchases in the first quarter of 2002
contributed $8.7 million of margin, equivalent to 21 cents a share of earnings.
The Company credited the remaining portion of its first quarter 2002 purchased
gas costs savings, about $17.4 million, plus interest, to a deferred account for
future refund to Oregon customers. In the first quarter of 2001, NW Natural
absorbed $1.4 million of excess gas costs, generating a loss of 3 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 $0.7 million and $0.6 million for the first quarters of 2002 and 2001,
respectively.
Non-utility Operations
----------------------
At March 31, 2002 and 2001, 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, has had no active operations since its inception in 2001.
17
Financial Corporation
---------------------
Financial Corporation's operating results for the three months ended
March 31, 2002 were net income of $0.2 million, compared to income of $0.1
million for the first quarter of 2001. Earnings were equivalent to 1 cent a
share for each of the three-month periods ended March 31, 2002 and 2001.
Financial Corporation's net assets at March 31, 2002 and 2001 were $8.1 million
and $7.4 million, respectively.
Gas Storage Services
--------------------
NW Natural realized net income, after regulatory sharing and income
tax, from gas storage services of $0.8 million, or 3 cents a share, in the three
months ended March 31, 2002, up from $0.7 million, or 2 cents a share, in the
three months ended March 31, 2001. Gas storage services are provided to
customers using storage capacity not required from time to time for utility
services. NW Natural retains 80 percent of the income before tax from storage
services and credits the remaining 20 percent to a deferred regulatory account
for refund to its core utility customers.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Consolidated operations and maintenance expenses were $1.1
million, or 5 percent, higher in the first quarter of 2002 compared to the same
period in 2001. The increase was caused primarily by higher net pension costs
($0.7 million) due to reduced earnings on pension assets; higher uncollectible
expense ($0.5 million) due to economic conditions in the Northwest and the
impact of higher customer gas bills resulting from recent rate increases; and
higher payroll costs ($0.3 million) due to wage and salary increases.
Taxes Other than Income Taxes
-----------------------------
Taxes other than income, which are comprised of property,
franchise, payroll and other taxes, were $2.3 million, or 24 percent, higher in
the first quarter of 2002 compared to the same period in 2001. Franchise taxes,
which are based on gross revenues, increased $1.7 million, or 35 percent,
reflecting higher revenues due to an increase in NW Natural's customer base and
rate increases effective in late 2001. Property tax expense increased $0.6
million, or 22 percent, due to higher property tax rates and an increase in
utility plant.
Depreciation, Depletion and Amortization
----------------------------------------
Depreciation, depletion and amortization expense increased $0.7
million, or 6 percent, compared to the first quarter of 2001. The increase was
primarily due to a 5 percent increase in plant in service. As a percentage of
average plant and property, depreciation, depletion and amortization expense was
approximately 1 percent for each of the three months ended March 31, 2002 and
2001.
Other Income (Expense)
----------------------
Other income (expense) decreased $1.5 million in the first quarter of
2002 compared to the first quarter of 2001. The decrease was primarily due to a
change in interest income on deferred regulatory account balances. The first
quarter of 2002 included interest expense of $0.9 million on deferred gas cost
liability balances totaling $30.3 million as of March 31, 2002, compared to
interest income of $0.2 million on receivable balances of $16.5 million as of
March 31, 2001. The change in deferred gas cost balances, from an asset as of
March 31, 2001 to a liability at March 31, 2002, resulted in a combined decrease
of $1.2 million in interest on deferred regulatory accounts. The first quarter
of 2001 also included interest income on short-term investments of $0.4 million.
18
Interest Charges - net
----------------------
The Company's net interest expense decreased $0.1 million, or 1
percent, in the first quarter of 2002 compared to the first quarter of 2001.
Interest expense on commercial paper was $0.2 million lower due to a lower
average balance of commercial paper outstanding during the period.
Income Taxes
------------
The effective corporate income tax rate from continuing operations was
37.0 percent for both three-month periods ended March 31, 2002 and 2001.
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 Part II, Item 8., Notes 3 and 5, "Notes to Consolidated
Financial Statements," in the 2001 Form 10-K).
Liquidity and Capital Resources
-------------------------------
At March 31, 2002, the Company had $30.1 million in cash and cash
equivalents compared to $12.2 million at March 31, 2001. 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 Part
II, Item 8., Note 6, "Notes to Consolidated Financial Statements," in the
Company's 2001 Form 10-K). The Company has available through Sept. 30, 2002,
committed lines of credit totaling $170 million (see "Cash Flows - Lines of
Credit," below). 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 March 31, 2002, NW Natural was in
compliance with this covenant.
19
The following table shows NW Natural's contractual obligations by
maturity and type of obligation:
Commercial Preferred Long-term Total
Thousands Paper and Capital Gas Supply Contractual
Payments Due in Years Supported by Preference Long-term Lease Operating Purchase Cash
Ending March 31, Lines of Credit Stock Debt Obligations Leases Obligations Obligations
- --------------------------------------------------------------------------------------------------------------------------------
2002 $ 163 $ 25,750 $ 40,000 $ 569 $ 2,966 $ 82,104 $ 151,552
2003 - 750 20,000 132 2,753 67,391 91,026
2004 - 750 - 5 2,641 46,467 49,863
2005 - 750 15,000 - 2,585 43,926 62,261
2006 - 750 28,000 - 365 41,912 71,027
-------------------------------------------------------------------------------------------------------
Total 2002 - 2006 163 28,750 103,000 706 11,310 281,800 425,729
Thereafter - 5,250 375,236 - 3,423 239,940 623,849
Less: imputed interest - - - (32) - (111,540) (111,572)
-------------------------------------------------------------------------------------------------------
Total $ 163 $ 34,000 $ 478,236 $ 674 $ 14,733 $ 410,200 $ 938,006
=======================================================================================================
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 (see "Cash
Flows - Investing Activities," below). In addition, NW Natural has certain
long-term contractual obligations such as capital lease obligations, operating
leases and long-term gas supply purchase 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.
Cash Flows
----------
Operating Activities
--------------------
Operations provided net cash of $91.3 million in the three months ended
March 31, 2002, compared to $62.5 million in the first three months of 2001. The
$28.8 million, or 46 percent, increase was due to increased cash from operations
before working capital changes ($24.4 million) and lower working capital
requirements ($4.4 million). The increase in cash from operations before working
capital changes was due to an increase in deferred gas costs payable in the
first quarter of 2002 ($19.7 million), an increase in income from operations
($8.5 million) and an increase in depreciation, depletion and amortization ($0.7
million), partially offset by a decrease in deferred investment tax credits and
income taxes ($2.8 million) and a decrease in other adjustments ($1.8 million).
The decrease in working capital requirements was primarily due to a smaller
decrease in accounts payable ($39.4 million), partially offset by an increase in
accounts receivable ($18.7 million), a smaller increase in accrued interest and
taxes ($3.0 million), and a smaller decrease in inventories ($11.4 million).
The Company has lease and purchase commitments relating to its
operating activities which are financed with cash flows from operations (see
Part II, Item 8., Note 12, "Notes to Consolidated Financial Statements," in the
2001 Form 10-K).
20
Investing Activities
--------------------
Cash requirements for investing activities in the first quarter of 2002
totaled $16.6 million, down from $16.9 million in the same period of 2001. Cash
requirements for utility construction totaled $15.0 million, down $2.1 million
from the first quarter of 2001. The decrease in cash requirements for utility
construction in 2002 was primarily the result of the completion of another phase
in the expansion of NW Natural's Mist gas storage system in December 2001.
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 during the first quarter of 2002
totaled $0.3 million and were negligible during the first quarter of 2001.
Investing activities during the first three months of 2002 also
included $2.3 million in cash used for 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 not completed, the Company
would recognize costs accumulated to date of $11.9 million as current expenses.
Financing Activities
--------------------
Cash used in financing activities in the first quarter of 2002 totaled
$55.0 million, compared to $44.7 million in the first quarter of 2001.
NW Natural sold $60 million of its secured Medium-Term Notes, Series B
(MTNs) in March 2002 and used the proceeds, together with internally generated
cash to reduce short-term debt by $108.1 million in the first quarter of 2002.
Internally generated cash was used to reduce short-term debt by $33.8 million in
the first quarter of 2001.
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 2003. 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, or
the three months ended March 31, 2002. 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.
Commercial Paper
----------------
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 (see Part II, Item 8., Note 6, "Notes to
Consolidated Financial Statements," in the 2001 Form 10-K). NW Natural had $0.2
million of commercial paper notes outstanding at March 31, 2002, compared to
$22.5 million and $108.3 million at March 31 and Dec. 31, 2001, respectively.
Financial Corporation had no commercial paper notes outstanding at March 31,
2002.
21
Lines of Credit
---------------
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 March
31, 2002 or 2001.
Ratios of Earnings to Fixed Charges
-----------------------------------
For the 12 months ended March 31, 2002, and Dec. 31, 2001, the
Company's ratios of earnings to fixed charges, computed using the Securities and
Exchange Commission method, were 3.52 and 3.14, respectively. For this purpose,
earnings consist of net income before taxes plus fixed charges, and fixed
charges consist of interest on all indebtedness, the amortization of debt
expense and discount or premium and the estimated interest portion of rentals
charged to income.
Forward-Looking Statements
- --------------------------
This report and other presentations made by the Company from time to
time may contain forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and other statements 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, if completed; (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, if completed; (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.
22
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for the
Company to predict all such factors, nor can it assess the impact of each such
factor or the extent to which any factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking
statement.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the information provided in Part
II, Item 7A., "Quantitative and Qualitative Disclosures About Market Risk," in
the 2001 Form 10-K.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Statement re: Computation of Per Share Earnings
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
On March 1, 2002, the Company filed its Current Report on Form 8-K
relating to: 1) a litigation decision adverse to the Company; 2) the Company's
2001 earnings; 3) a regulatory development; and 4) the status of the Company's
proposed acquisition of Portland General Electric Company.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
(Registrant)
Dated: May 14, 2002 /s/ Stephen P. Feltz
------------------------------------
Stephen P. Feltz
Principal Accounting Officer
Treasurer and Controller
23
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Quarterly Report on Form 10-Q
For Quarter Ended
March 31, 2002
Exhibit Number
Document
Statement re: Computation of Per Share Earnings 11
Computation of Ratios of Earnings to Fixed Charges 12
EXHIBIT 11
NORTHWEST NATURAL GAS COMPANY
Statement re: Computation of Per Share Earnings
(Unaudited)
Thousands, except per share amounts Three Months Ended March 31,
- --------------------------------------------------------------------------------
2002 2001
----------------------------
Earning Applicable to Common Stock $ 33,852 $ 25,299
Debenture Interest Less Taxes 91 96
---------- ----------
Net Income Available for Diluted Common
Stock $ 33,943 $ 25,395
========== ==========
Average Common Shares Outstanding 25,266 25,207
Stock Options 54 41
Convertible Debentures 414 435
---------- ----------
Diluted Common Shares 25,734 25,683
========== ==========
Diluted Earnings per Share of Common Stock $ 1.32 $ 0.99
========== ==========
EXHIBIT 12
NORTHWEST NATURAL GAS COMPANY
Computation of Ratio of Earnings to Fixed Charges
January 1, 1997 - March 31, 2002
(Thousands, except ratio of earnings to fixed charges)
(Unaudited)
12 Months Three Months
Year Ended December 31, Ended Ended
------------------------------------------------------------ March 31, March 31,
1997 1998 1999 2000 2001 2002 2002
------------------------------------------------------------ ---------- ------------
Fixed Charges, as Defined:
Interest on Long-Term Debt $ 24,904 $ 27,389 $ 27,728 $ 29,987 $ 30,224 $ 30,047 $ 7,343
Other Interest 4,500 4,909 2,778 3,628 3,772 3,812 769
Amortization of Debt
Discount and Expense 730 714 699 735 768 751 185
Interest Portion of
Rentals 2,111 1,986 1,707 1,628 1,572 1,558 393
-------- -------- --------- --------- --------- --------- --------
Total Fixed Charges, as
defined $ 32,245 $ 34,998 $ 32,912 $ 35,978 $ 36,336 36,168 $ 8,690
======== ======== ========= ========= ========= ========= ========
Earnings, as Defined:
Net Income $ 43,059 $ 27,301 $ 45,296 $ 50,224 $ 50,187 58,727 $ 34,447
Taxes on Income 21,034 14,604 24,591 26,829 27,553 32,541 20,215
Fixed Charges, as above 32,245 34,998 32,912 35,978 36,336 36,168 8,690
-------- -------- --------- --------- --------- --------- --------
Total Earnings, as defined $ 96,338 $ 76,903 $ 102,799 $ 113,031 $ 114,076 $ 127,436 $ 63,352
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Ratio of Earnings to Fixed
Charges 2.99 2.20 3.12 3.14 3.14 3.52 7.29
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