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, 1996
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
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 Number)
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
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Shares outstanding on January 31, 1997
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Common Stock, $3 1/6 par value,
and Common Share Purchase Rights 22,565,734
Preference Stock, without par value 250,000
Preferred Stock, without par value 137,490
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 [ ].
The aggregate market value of the shares of voting stock (common stock)
held by non-affiliates of the registrant at January 31, 1997 was:
$560,406,800
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, dated April 11, 1997, 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 1996
Table of Contents
PART I Page
- ------ ----
Item 1. Business
General 1
Gas Supply 2
Regulation and Rates 7
Competition and Marketing 9
Environment 12
Employees 12
Item 2. Properties 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Additional Item
Executive Officers of the Registrant 14
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 18
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition 19
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 70
PART III
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Items
10. - 13. Incorporated by Reference to Proxy Statement 70
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 70
SIGNATURES 76
NORTHWEST NATURAL GAS COMPANY
PART I
ITEM 1. BUSINESS
General
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Northwest Natural Gas Company (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.
The Company is principally engaged in the distribution of natural gas.
The Oregon Public Utility Commission (OPUC) has allocated to the Company as
its exclusive service area a major portion of western Oregon, including the
Portland metropolitan area, most of the fertile Willamette Valley and the
coastal area from Astoria to Coos Bay. The Company 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 95 cities,
together with neighboring communities, in 16 Oregon counties, and in nine
cities, together with neighboring communities, in three Washington
counties. Based on U.S. Census Bureau statistics for 1995, the Company's
service areas had a population of about 2,735,000, including about 78
percent of the population of the State of Oregon and 6 percent of the
population of the State of Washington. The City of Portland, Oregon is the
principal retail and manufacturing center in the Columbia River Basin. It
is a major port for trade with Pacific Rim nations such as Japan, Taiwan
and Korea.
At year-end 1996, the Company had about 385,300 residential customers,
47,300 commercial customers, and 600 industrial customers. Industries
served include pulp, paper and other forest products; the processing of
farm and food products; the production of various mineral products; the
manufacture of electronic, electrochemical and electrometallurgical
products; metal fabrication and casting; and the production of machine
tools, machinery and textiles.
The Company has two active wholly-owned subsidiaries. NNG Financial
Corporation (Financial Corporation) is incorporated in the State of Oregon,
and Canor Energy, Ltd. (Canor) is an Alberta, Canada, corporation. During
1996, a third wholly-owned subsidiary, Oregon Natural Gas Development
Corporation (Oregon Natural), transferred its interests in certain gas-
producing properties in the western United States to Financial Corporation.
Oregon Natural was then merged with and into the Company, thus effecting
the transfer of Oregon Natural's other assets to the Company.
Financial Corporation provides short-term financing for Canor and
holds financial investments as a limited partner in four solar electric
generating plants, four windpower electric generation projects and a
hydroelectric project, all located in California, and in two low-income
housing projects in Portland. Financial Corporation now holds interests in
certain gas producing properties in the western United States formerly held
by Oregon Natural (see item 2, Properties, below).
Canor is engaged in natural gas and oil exploration, development and
production in Alberta and Saskatchewan, Canada. During 1995, Oregon
Natural and NIPSCO Energy Services Inc. (NESI), a wholly-owned subsidiary
of NIPSCO Industries Inc., formed a joint venture to develop gas and oil
properties in western Canada. The joint venture is managed by Canor. The
Company has assumed Oregon Natural's obligations under this joint venture.
Canor and NESI plan to combine their respective operations into a new
company by December 31, 1997.
Gas Supply -- General
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The Company meets the needs of its core market (residential,
commercial and firm industrial) customers through natural gas purchases
from a variety of suppliers. The Company has a diverse portfolio of short-
, medium- and long-term firm gas supply contracts. During periods of peak
demand, supplies under these contracts are supplemented with gas from
storage facilities either owned by or contractually committed to the
Company.
Natural gas for the Company's core market is transported by Northwest
Pipeline Corporation (NPC), primarily under three firm transportation
agreements. NPC's rates for service under these agreements are established
by the Federal Energy Regulatory Commission (FERC) under NPC's primary firm
transportation rate schedule, as amended or superseded from time to time.
The largest of the contracts with NPC expires September 30, 2013 and
provides for firm transportation capacity of up to 2,160,440 therms<F1> per
day. This agreement provides access to natural gas supplies in British
Columbia and the U.S. Rocky Mountains.
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<F1> For gas quantities expressed in therms, 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.
MMBtu means one million Btu's, or 10 therms. For gas quantities
expressed in cubic feet, unless otherwise indicated, all volumes
are stated at a pressure base of 14.73 pounds per square inch
absolute at 60 degrees Fahrenheit, and in some instances are
rounded to the nearest major multiple. Mcf means one thousand
cubic feet, MMcf means one million cubic feet and Bcf means one
billion cubic feet.
The Company also has a contract with NPC expiring April 1, 2008 for
340,000 therms per day of firm transportation capacity for the Company's
core market. This agreement also accesses gas supplies in the U. S. Rocky
Mountain region.
The third transportation contract with NPC, which expires November 30,
2011, provides 1,020,000 therms per day of firm transportation capacity
from the point of interconnection of the NPC and Pacific Gas Transmission
(PGT) systems in eastern Oregon to the Company's service territory. PGT's
line runs from the U.S./Canadian border through northern Idaho,
southeastern Washington and central Oregon to the California/Oregon border.
The Company's total capacity on PGT and two other upstream pipelines
(Alberta Natural Gas Company and NOVA Corporation of Alberta) substantially
matches this amount of NPC capacity northward into Alberta, Canada.
The cost to the Company 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 the Company's distribution system. While the rates
for pipeline transportation and peaking services are subject to federal
regulation, the purchase price of gas is not. Although pipeline rates have
increased significantly since 1992 due to system expansions and rate design
changes, the effect of such increases on core market customers has been
more than offset by lower gas commodity prices. In addition, the Company
has been able to offset firm transportation charges, in part, by making off-
system sales and releasing capacity in periods when core market customers
do not fully utilize firm pipeline capacity.
The Company 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 "Transportation".)
Gas Supply -- Core Market Basic Supply
- --------------------------------------
The Company purchases gas for its core market from a variety of
suppliers located in the western United States and Canada. At January 1,
1997, the Company had 20 firm contracts with 19 suppliers with remaining
terms of from four months to seven years which provided for a maximum of
2,705,850 therms of firm gas per day during the peak winter season and
1,388,300 therms per day during the remainder of the year. About
80 percent of the annual supply and 60 percent of a peak winter day's
supply comes from Canada.
The terms of the Company's principal purchase agreements are
summarized as follows:
An agreement expiring November 1, 2003, with CanWest Gas Supply, Inc.
(CanWest), an aggregator for gas producers in British Columbia, Canada,
entitles the Company to purchase up to 960,000 therms of firm gas per day.
This agreement 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 rate proceedings
similar to those conducted in the United States by the FERC. This contract
contains minimum purchase obligations.
An agreement also expiring November 1, 2003, with Amoco Canada
Petroleum Company, Ltd., on terms similar to the CanWest agreement,
entitles the Company 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.
An agreement with Poco Petroleums, Ltd. (Poco), a Canadian producer,
expiring September 30, 2003, entitles the Company to purchase up to 155,160
therms per day during the winter and up to 110,000 therms per day during
the summer of gas produced in Alberta.
Two agreements expiring September 30, 2003 with Westcoast Gas Services
entitle the Company 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.
An agreement expiring October 31, 2000, with Summit Resources Ltd.,
entitles the Company to purchase up to 77,580 therms per day during the
winter and up to 50,000 therms per day during the summer of gas produced in
Alberta. Pricing for supplies under this agreement can be renegotiated
annually. The current pricing arrangement includes demand charges for
upstream capacity on NOVA Corporation of Alberta's system and commodity
charges that are fixed in three volumetrically based tiers.
During 1996, new purchase agreements for firm gas were entered into
with 13 suppliers which provided for a total of 1,152,060 therms per day
during the heating season. These agreements were similarly structured, as
follows: each was for a four-month term, from November 1, 1996 through
February 28, 1997; nine of these agreements contain a base daily volume at
a fixed price plus a discretionary daily volume based on a reservation
charge and a monthly indexed commodity price; two have a daily base volume
at a fixed price; and two have a daily discretionary volume with a
reservation charge and a monthly indexed commodity price. The Company
intends to enter new purchase agreements for comparable volumes of gas with
these or other similar suppliers to be available during the winter season
extending from November 1, 1997 through February 28, 1998.
The Company continues to purchase gas under an agreement with Enerfin
Resources Northwest L.P. for gas produced from the Mist gas field, located
about 60 miles northwest of Portland, Oregon. The production areas are
situated near the Company's existing underground gas storage facility.
This agreement has a remaining term of nine years and prices that are tied
to the Company's weighted average cost of gas. Current production is
approximately 45,000 therms per day from about 17 wells, supplying about
2 percent of the Company's total annual requirements. Production from
these wells varies as existing wells are depleted and new wells are
drilled.
An agreement with Poco which entitled the Company to purchase up to
200,000 therms of firm gas per day expired on October 31, 1996. The
expiration of this agreement reduced the Company's daily supply commitment
by this amount.
During 1996, approximately 14 percent of the Company's purchases for
its core market was from the spot market (30 days or less), a significant
decrease from prior years due to generally higher spot market prices. The
Company's firm supply contracts permit the purchase of spot gas under
certain conditions and allow the Company to take advantage of spot market
gas availability in the western United States and Canada if prices for the
spot gas are lower than fixed contract prices.
The Company's goal in purchasing gas for its core market is to meet
customers' needs at reasonable prices. The Company 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
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The Company 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 the Company to meet its peak demand, these facilities
make it possible to lower the annual average cost of gas by allowing the
Company both to reduce its pipeline transportation contract demand and to
purchase gas for storage during the summer months when prices are generally
at their lowest.
The Company has contracts with NPC 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 a daily firm
deliverability of 923,470 therms and a total seasonal capacity of
13,082,647 therms. In addition, the Company has a contract with NPC which
expires in 1998 for an additional daily deliverability of 132,510 therms
and an additional seasonal capacity of 2,779,970 therms from the Jackson
Prairie storage field. Separate contracts with NPC provide for the
transportation of these storage supplies to the Company's service
territory.
The Company owns and operates two LNG plants which liquefy gas during
the summer months for use during the peak winter season. These two plants,
one located in Portland and the other near Newport, Oregon, together
provide a maximum daily deliverability of 1,800,000 therms and a total
seasonal capacity of 17,000,000 therms. The Company also owns and operates
an underground gas storage facility at Mist, Oregon. This facility has a
maximum daily deliverability of 1,000,000 therms and a total seasonal
working gas capacity of 70,000,000 therms. During 1996, the Company
acquired a 100 percent interest in four depleted reservoirs in the Mist
field which it is developing to provide additional gas storage capacity.
Current plans call for this expansion of the Mist underground gas storage
facility to be completed prior to the start of the 1998-99 winter heating
season.
The Company has a contract with Portland General Electric Company
(PGE) which expires in 2010 that provides the Company with additional
winter peaking supply. With certain limitations, the Company may interrupt
gas deliveries to PGE, use that gas for the Company's core customers, and
compensate PGE for its cost of replacement fuel oil. The daily
deliverability under this contract is 300,000 therms.
The Company also has contracts with three industrial customers and
another local gas distribution company on terms similar to those under the
contract with PGE which provide a total of 87,000 therms per day of year-
round capacity, plus 150,000 therms per day of recallable capacity and
supply. These contracts have remaining terms ranging from two to five
years.
Gas Supply -- Transportation
- ----------------------------
Between 1988 and early 1992, most of the Company's large industrial
interruptible customers switched from sales service to transportation
service, whereby they purchased gas directly from suppliers and shipped
the gas on the Company's system and those of its pipeline suppliers for a
fee. Since 1992, more than half of these customers have returned to sales
service, primarily because the Company's industrial sales rates were lower
than those customers' costs of purchasing and shipping their own gas. The
ability of industrial customers to switch between sales service and
transportation service has made it possible for the Company to retain most
of these customers. Because transportation charges typically have been
the same as the margin on an equivalent sale of gas, switching between
sales service and transportation service by industrial customers has not
had a material effect on the Company's results of operations. (See
"Competition and Marketing".)
Regulation and Rates
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The Company 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 1996, 94 percent of both the Company's gas deliveries and
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).
The Company's most recent general rate case in Oregon, which was
effective in 1989, authorized rates designed to produce a return on common
equity of 13.25 percent. The most recent general rate increase in
Washington, which was effective in 1986, authorized rates also designed to
produce a return on common equity of 13.25 percent. Actual revenues
resulting from the OPUC's and WUTC's general rate orders are dependent on
weather, economic conditions, customer growth, competition and other
factors affecting gas usage in the Company's service area. The Company's
returns on average common equity from utility operations were 11.4 percent
in 1995 and 13.7 percent in 1996. Its returns from consolidated
operations, including subsidiary results, were 11.8 percent in 1995 and
13.0 percent in 1996.
The Company has no plans to file a general rate case in Oregon in
1997. It intends to file a general rate case in Washington in the first
quarter of 1997, but has not yet determined the amount of revenue increase
to be requested.
In Oregon, the Company has a Purchased Gas Cost Adjustment (PGA)
tariff under which the Company's net income derived from Oregon operations
is affected only 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 the Company's gas requirements for the 12-month period ended
each June 30. Any resulting rate adjustments, derived from gas prices
negotiated for the gas supply contract year commencing on the following
November 1, are made effective on the following December 1.
The PGA tariff also provides that 80 percent of any difference between
actual purchased gas costs and estimated purchased gas costs incorporated
into rates will be deferred for potential amortization in subsequent
periods. If actual gas commodity costs are lower than those reflected in
rates, rates will be adjusted downward to give to core market customers the
benefit of 80 percent of such gas commodity cost savings. If actual gas
commodity costs exceed those incorporated in rates, the Company
subsequently will adjust its rates upward to recover 80 percent of the
excess from core market customers. The Company's ability to recover
amounts deferred due to excess gas costs is subject to an annual review by
the OPUC to determine whether the Company's weather-normalized earnings
during the PGA period were higher than a reasonable cost of equity capital,
so as to warrant an absorption of some or all of such excess costs.
In Washington, the Company is permitted to track increases and
decreases in gas commodity costs coincidental with their incurrence, with
the result that net income is not directly affected by changes in gas
commodity costs.
In both Oregon and Washington, the PGA permits the Company to recover
100 percent of FERC-approved pipeline transportation cost increases.
In October 1996, the Company filed under its Oregon PGA tariff to
reduce rates for Oregon customers by an average of 3.6 percent. In a
similar filing in Washington in November 1996, the Company filed to reduce
its rates by an average of 4.9 percent. The OPUC and WUTC approved the
respective filings effective December 1, 1996. The decreases pass through
reductions in gas costs and remove temporary adjustments to rates that were
put into effect on December 1, 1995 for the amortization of prior gas cost
savings.
The OPUC and WUTC have approved transportation tariffs under which the
Company may contract with customers to deliver customer-owned gas. Under
these tariffs, revenues from the transportation of customer-owned gas,
except that of large industrial customers having the capability of
bypassing the Company's system, generally are equivalent to the margins
that would have been realized from sales of Company-owned gas. (See "Gas
Supply -- Transportation" and "Competition and Marketing".)
The OPUC and WUTC have implemented "integrated resource planning"
processes under which utilities develop plans defining alternative growth
scenarios and resource acquisition strategies. In 1996, the OPUC
acknowledged and accepted the Company's submission of its third Integrated
Resource Plan. The WUTC acknowledged and accepted the Company's third plan
in January 1997. Elements of these Plans included 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 the Integrated Resource Plan does
not constitute ratemaking approval of any specific resource acquisition or
expenditure, the OPUC indicated that it would give considerable weight in
prudency reviews to utility actions that are consistent with acknowledged
plans. The Company will file its fourth Integrated Resource Plan for
acknowledgment by the OPUC and WUTC in 1998.
Competition and Marketing
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The Company has no direct competition in the territory it serves from
other natural gas utility distributors. However, it competes with NPC to
serve large industrial customers; with oil and electricity for industrial
and commercial uses; and with oil, electricity and wood for residential
use. Competition among these forms of energy is based on price,
reliability, efficiency and performance. In 1996, the Company maintained
its competitive price advantage over electricity and approximate price
parity with fuel oil in both the residential and commercial markets.
Throughout 1996, natural gas rates continued to be substantially lower than
rates for electricity provided by the investor-owned utilities which serve
approximately 75 percent of the homes in the Company's Oregon service area.
The Company believes that this rate advantage will continue for the
foreseeable future.
The Pacific Northwest has historically enjoyed some of the lowest
electric rates in the nation, primarily due to the proximity of federal
hydropower facilities. With further deregulation anticipated in the
electric energy business, the Company believes that the region is unlikely
to experience the large drop in electric rates that other, high-cost areas
of the country are anticipating.
While the natural gas industry, including producers, interstate
pipelines and local distribution companies (LDCs) such as the Company, has
undergone many changes in its history, perhaps no era has brought greater
change than the past 10 years. These changes, brought about by the
deregulation or restructuring of the energy markets, are intended to
promote competition where it is economically beneficial to consumers.
Traditionally, LDCs have sold a "bundled" product which includes the
natural gas itself as well as delivery to a customer's meter. Since the
late 1980s, however, large customers have sought savings by procuring their
own supplies of natural gas from producers and contracting with pipelines
and LDCs for transportation. Since the cost of the gas commodity is
directly passed through to LDC customers without markup, the impact to net
income when a customer chooses transportation service has been negligible.
While the Company's expertise in obtaining competitively-priced gas
commodity has proven successful in retaining sales customers, further
deregulation of the industry is likely to bring an unbundled product
offering to a greater number of customers, potentially including commercial
and residential customers. An increasing number of suppliers will actively
compete for customers' gas commodity business in the open marketplace.
However, since the final distribution of customer-owned gas will continue
to be through distribution systems at regulated transportation rates, no
material impact to Company profitability is anticipated.
Merger and acquisition activity has increased in the utility industry.
Some companies have chosen to combine with others, rather than to remain
independent or seek joint ventures and alliances, in efforts to reduce
costs and offer more products and services. A proposed merger of Portland
General Corporation, the parent company of PGE, and Enron Corporation of
Houston, Texas, may affect the competitive environment in the Company's
service territory.
The relatively low market saturation of natural gas in residential
single-family and attached dwellings in the Company's service territory,
estimated at between 35 and 40 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
conversion market. In 1996, 21,310 net residential customers (after
subtracting disconnected or terminated services) were added, including
8,526 units of existing residential housing which were reconnected to the
system or were converted from oil or electric appliances to natural gas.
Of the new heating conversions from other fuels, at least 52 percent
converted to gas for water heating. In addition, 1,907 net commercial
customers were connected in 1996. The net total of all new customers added
in 1996, including industrial sales and transportation customers, was
23,220. This constituted a growth rate of 5.7 percent, more than three
times the national average for local distribution companies as reported by
the American Gas Association.
Natural gas sales volumes to residential and commercial customers
increased from 458 million therms in 1995 to 535 million therms in 1996,
largely due to new customer acquisitions and cooler weather. For the year
1996, temperatures in the Company's service territory, based on heating
degree days, were 17 percent colder than in 1995.
Natural gas sales and transportation deliveries to industrial firm
customers during 1996 totaled 138 million therms, up 34 percent from 1995.
This increase includes a mid-year transfer of one large customer that
previously was served on an interruptible rate (24 million therms) and the
effects of a continued strong local economy. In 1996, 9.1 percent of total
utility operating revenues and 12.5 percent of total therms delivered were
derived from deliveries to industrial firm customers.
Total natural gas sales and transportation deliveries to industrial
interruptible customers during 1996 totaled 427 million therms, down 3.7
percent from 1995. While economic expansion strengthened interruptible
deliveries, the closure of two forest products mills during 1996 (which
accounted for 34 million therms of deliveries in 1995), as well as the
aforementioned customer transfer to firm service, led to an overall
decrease in interruptible volume throughput. In 1996, 9.8 percent of total
utility operating revenues and 39 percent of total therms delivered were
derived from sales and transportation deliveries to industrial
interruptible customers. The Company and most of its largest industrial
interruptible customers have entered into high-volume transportation
service agreements. These agreements are designed to provide rates that
are competitive with the costs of alternative fuels, such as heavy oil, by
reducing the per-therm transportation rate. They also are designed to
provide rates competitive with "bypass" (direct connection to interstate
pipelines) by applying fixed charges that are equivalent to the capital and
operating costs of direct connections to NPC's system. These agreements
prohibit bypass during their terms. The Company does not expect a
significant number of its large customers to bypass its system in the
foreseeable future.
Since 1994, the Company has been authorized by the OPUC to make off-
system sales and to release portions of its firm pipeline capacity at
discounted rates when seasonal demand is low. This authorization is
intended to allow the Company to compete effectively with independent gas
marketers. Eighty percent of all positive net revenues (gross revenues
less the actual cost of gas or pipeline capacity) generated from these
agreements ($3.1 million in 1996) are credited to Oregon core market
customer gas costs.
Environment
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The Company is subject to air, water, hazardous waste and other
environmental regulation by state and federal authorities and has complied
in all material respects with applicable regulations. Compliance with
these regulations has had no material effect upon the capital expenditures,
earnings or the competitive position of the Company.
The Company owns property in Linnton, Oregon and previously owned
property in Salem and Eugene, Oregon that were sites of former gas
manufacturing plants. The Linnton site is currently under investigation
for potential remediation. The Company executed a settlement with the City
of Salem in 1996 and received a release from further liability with respect
to that site in return for a payment of $170,000. (See Part II, Item 7,
and Item 8, Note 13.)
Employees
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At year-end 1996, the Company had 1,304 employees, of which 940 were
members of the Office and Professional Employees International Union, Local
No. 11. These union employees have been working under a five-year Joint
Accord covering wages, benefits and working conditions which will expire
March 31, 1997. The Company and union representatives are currently
negotiating the terms of a contract to take effect April 1, 1997.
ITEM 2. PROPERTIES
The Company's natural gas distribution system consists of
approximately 10,000 miles of mains, as well as 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 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. The Company also holds all necessary permits for the crossing
of the Willamette River and a number of small rivers by its mains.
The Company 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. The Company owns LNG facilities in Portland and near
Newport, Oregon, and also owns two underground natural gas reservoirs at
Mist, Oregon.
The Company 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.
The Company's Mortgage and Deed of Trust constitutes a first mortgage
lien on substantially all of the real property constituting its utility
plant.
Financial Corporation holds interests in United States oil and gas
leases covering 37,315 net acres located in Oregon, California, Wyoming,
and Colorado, and 6,719 net acres of underground natural gas storage in
Oregon. Canor holds interests in Canadian gas and oil leases covering
142,024 net acres in Alberta and Saskatchewan. Most Canadian gas
production is sold under long-term contracts to markets in both Canada and
the United States. In late 1995, Oregon Natural acquired a 100 percent
interest in four depleted gas reservoirs near Mist, Oregon, together with
an option to purchase future storage rights in certain other areas of the
Mist gas field. Oregon Natural then sold its interest in these reservoirs
to the Company which is developing the reservoirs to provide additional gas
storage capacity in the Mist gas field.
The Company also holds an equity investment in a Boeing 737-300
aircraft which is under lease to Continental Airlines.
ITEM 3. LEGAL PROCEEDINGS
In July 1995, a jury in an Oregon state court returned a verdict
against Northwest Natural in the case of Northwest Natural Gas Company v.
Chase Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370).
Northwest Natural appealed to the Oregon Court of Appeals (Oregon Court of
Appeals Case No. CA A90481), which affirmed the trial court decision in
February 1997. Northwest Natural plans to petition for review of the Court
of Appeals decision by the Oregon Supreme Court, and believes there are
ample legal precedents to support a ruling by the latter court in favor of
Northwest Natural. However, due to the decreased probability that
Northwest Natural will succeed in overturning or reducing the damage award
on appeal, and to a decision in binding arbitration that Northwest
Natural's liability insurance policy does not provide coverage for the
judgment or defense costs, Northwest Natural recorded a charge of $5.6
million in the fourth quarter of 1996, equivalent to 15 cents a share, as a
reserve against payment of the judgment, costs and post-judgment interest
from the case.
The Company is party to certain other legal proceedings in which
claimants seek material amounts. Although it is not possible 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.
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 December 31, 1996.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Age at
December Positions held during
Name 31, 1996 last five years
- ----------------- -------- ----------------------------------
Robert L. Ridgley 62 Chairman of the Board (1996- );
Director (1984- );
Chief Executive Officer
(1985-96); President
(1985-96); Chairman of the
Executive Committee of the
Board (1985-95).
Richard G. Reiten 57 President (1996 - ); Chief
Executive Officer (1997- );
Chief Operating Officer(1996);
President and Chief Operating
Officer, Portland General
Electric Company (1992-95);
President, Portland General
Corporation (1989-92).
Bruce R. DeBolt 49 Senior Vice President, Finance,
and Chief Financial Officer
1990- ).
Dwayne L. Foley 51 Senior Vice President, Operations
and Information Services
(1992- );
Senior Vice President, Gas
Operations and Information
Services (1990-92).
Michael S. McCoy 53 Senior Vice President, Customer
Services (1992- );
Vice President, Operations
(1990-92).
Bruce B. Samson 61 Senior Vice President, Public
Affairs (1990- ); General
Counsel (1990- ).
W. Richard Harper, Jr.43 Vice President, Industrial and
District Operations (1995- );
General Manager, Industrial
and Business Development
(1992-95); Assistant to the
President, United Gas Pipeline
Company (1992).
Diana J. Johnston 52 Vice President, Human Resources
and Administrative Services
(1996- );
Vice President, Human
Resources (1992-96); Manager,
Customers Office Department
(1989-92).
C. J. Rue 51 Secretary (1982- ); Assistant
Treasurer (1987- ).
D. James Wilson 57 Treasurer and Controller
(1987- ).
Each executive officer serves successive annual terms;
present terms end May 22, 1997.
There are no family relationships among the Company's executive
officers.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(A) The Company's common stock is traded on the Nasdaq National Market
tier of the Nasdaq Stock Market, which reports the daily high, low and
closing transaction prices, as well as volume data, under the symbol
"NWNG".
The Company's common stock is included on the Federal Reserve Board's
list of over-the-counter securities determined to be subject to margin
requirements under the Board's regulations.
The Company's common stock was split three-for-two effective September
6, 1996, in the form of a 50 percent stock dividend, to shareholders of
record August 23, 1996. Data reported in this item, related to prices for
and dividends paid on shares of the Company's common stock, have been
adjusted for the stock split.
The quarterly high and low closing trades for the Company's common
stock, as quoted on the Nasdaq National Market and published in the Wall
Street Journal and on Nasdaq's Internet World Wide Web site, were as
follows:
1996 1995
------------------- --------------------
Quarter Ended High Low High Low
- ------------- ------ ------ ------ ------
March 31 $22.67 $20.83 $21.00 $18.67
June 30 23.58 21.17 21.00 19.33
September 30 24.25 22.54 21.50 19.75
December 31 25.75 23.25 22.67 20.50
The closing quotation for the common stock on December 31, 1996 was
$24.00. On December 29, 1995 the closing quotation (split-adjusted) was
$22.00.
(B) As of December 31, 1996 there were 10,859 holders of record of the
Company's common stock.
(C) The Company 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 1996 1995
------------- ----- ------
February 15 $0.30 $0.293
May 15 0.30 0.293
August 15 0.30 0.293
November 15 0.30 0.300
----- ------
Total per share $1.20 $1.179
===== ======
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 the Company's earnings, its
financial condition and other factors.
The Company'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 the Company'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 1996, dividend reinvestments and optional cash
investments under the Plan aggregated $5.4 million. During the 19 years
the Plan has been available the Company has issued and sold common stock
under the Plan which produced $64.9 million in additional capital.
Item 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data concerning the
Company's operations and financial condition.
Operating revenues and cost of sales ($000):
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Sales revenues:
Residential $183,802 $165,662 $176,510 $168,217 $124,834
Commercial 104,582 99,079 108,452 103,476 78,614
Industrial - firm 30,672 31,268 34,443 31,340 24,867
Industrial - interruptible 17,097 24,113 27,361 18,884 6,920
Unbilled revenues 1,627 1,173 (5,571) 5,153 2,603
-------- -------- -------- -------- --------
Total gas sales revenues 337,780 321,295 341,195 327,070 237,838
Transportation 22,533 16,650 14,702 17,892 25,564
Other 9,943 10,060 829 2,890 2,781
-------- -------- -------- -------- --------
Total utility operating
revenues 370,256 348,005 356,726 347,852 266,183
Cost of gas 142,752 144,051 163,026 138,833 101,733
-------- -------- -------- -------- --------
Net utility operating
revenues 227,504 203,954 193,700 209,019 164,450
Non-utility net operating
revenues 10,009 8,271 11,773 10,865 8,000
-------- -------- -------- -------- --------
Net operating revenues $237,513 $212,225 $205,473 $219,884 $172,450
======== ======== ======== ======== ========
Net income $ 46,793 $ 38,065 $ 35,461 $ 37,647 $ 15,775
Preferred and preference
stock dividend
requirements 2,723 2,806 2,983 3,488 2,560
Earnings applicable to
common stock $ 44,070 $ 35,259 $ 32,478 $ 34,159 $ 13,215
======== ======== ======== ======== ========
Average common shares
outstanding (000)* 22,391 21,817 19,943 19,612 17,864
====== ====== ====== ====== ======
Primary earnings per
share of common stock* $1.97 $1.62 $1.63 $1.74 $0.74**
===== ===== ===== ===== =====
Dividends per share of
common stock* $1.20 $1.18 $1.173 $1.167 $1.147
===== ===== ====== ====== ======
Total assets - at end
of period ($000) $988,869 $929,277 $889,304 $849,036 $731,834
======== ======== ======== ======== ========
Capitalization - at end
of period ($000):
Common stock equity $346,778 $323,552 $274,408 $258,565 $241,538
Redeemable preference stock 25,000 25,000 26,252 26,633 26,766
Redeemable preferred stock 13,749 14,840 15,950 17,041 28,218
Long-term debt 271,838 279,945 291,076 272,931 253,766
-------- -------- -------- -------- --------
Total capitalization $657,365 $643,337 $607,686 $575,170 $550,288
======== ======== ======== ======== ========
Gas sales and transportation
deliveries (000 therms):
Residential 306,310 256,462 260,218 267,818 206,131
Commercial 225,115 196,723 201,925 209,642 169,406
Industrial - firm 91,122 82,958 81,348 80,588 67,847
Industrial - interruptible 63,261 84,173 89,899 66,370 22,399
Unbilled therms 3,759 4,946 (7,519) 3,844 4,163
-------- -------- -------- -------- --------
Total gas sales 689,567 625,262 625,871 628,262 469,946
Transportation 410,062 379,116 364,461 415,367 595,397
--------- --------- --------- --------- ---------
Total volumes
delivered 1,099,629 1,004,378 990,332 1,043,629 1,065,343
========= ========= ========= ========= =========
Customers (average for period):
Residential 374,558 355,427 338,053 320,186 303,585
Commercial 46,355 44,740 43,367 41,906 40,481
Industrial - firm 409 405 398 388 374
Industrial - interruptible 131 143 148 122 75
Transportation 106 79 66 100 153
------- ------- ------- ------- -------
Total customers 421,559 400,794 382,032 362,702 344,668
======= ======= ======= ======= =======
Customer statistics:
Heat requirements***
Actual degree days 4,427 3,779 4,020 4,452 3,662
20-year average degree
days 4,273 4,306 4,324 4,313 4,354
Average annual use per
customer in therms:
Residential 823 726 776 844 685
Commercial 4,874 4,420 4,680 5,029 4,214
Gas purchased cost per
therm - net (cents) 22.25 20.67 23.44 23.11 23.76
===== ===== ===== ===== =====
* Restated to give effect to three-for-two stock split in September 1996.
** Includes loss of $0.16 per share in 1992 on Agrico Cogeneration
Corporation.
*** 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.
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 (Northwest Natural)
Non-regulated wholly-owned subsidiaries:
NNG Financial Corporation (Financial Corporation)
Canor Energy, Ltd. (Canor)
Oregon Natural Gas Development Corporation (Oregon Natural)-
merged with and into Northwest Natural during the
second quarter of 1996
Pacific Square Corporation (Pacific Square)-dissolved during 1995
NNG Energy Systems, Inc. (Energy Systems)-dissolved during 1995
Together these businesses are referred to herein as the "Company"
(see "Subsidiary 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 December 31, 1996.
Earnings and Dividends
- -----------------------
In 1996, the Company achieved record earnings applicable to
common stock of $44.1 million, up 25 percent from $35.3 million in 1995.
In 1995, earnings were up 9 percent from $32.5 million in 1994. Increased
1996 earnings reflect both colder weather and customer growth. Earnings
for both 1995 and 1994 were reduced by warmer weather, the effect of which
was partially offset by additional sales from customer growth and higher
subsidiary earnings.
Earnings from consolidated operations were $1.97 a share in
1996, up from $1.62 a share in 1995 and $1.63 a share in 1994. Northwest
Natural's common stock was split three-for-two on September 6, 1996. All
share and per share data for prior periods have been restated to reflect
the split.
Northwest Natural earned $1.87 a share from gas utility
operations in 1996, compared to $1.43 in 1995 and $1.39 in 1994. Weather
conditions in its service territory in 1996 were 17 percent colder than in
1995 and 4 percent colder than the 20-year average. Weather in 1995 was 6
percent warmer than 1994 and 12 percent warmer than the 20-year average.
The colder weather in 1996 resulted in increased gas deliveries to, and
related net operating revenues (margin) from, weather-sensitive customers.
The estimated weather-related increase in margin during 1996 was equivalent
to about 55 cents a share compared to actual conditions during 1995. The
weather-related reduction in 1995 due to warmer weather was equivalent to
about 15 cents a share compared to actual conditions in 1994.
In addition to colder weather, customer growth of 5.7 percent
during 1996 contributed an estimated $10.9 million to 1996 margin.
Customer growth of 4.7 percent during 1995 contributed an estimated $9.7
million to margin revenues.
The estimated impact of weather and customer growth are derived
from the Company's internal planning model. The model calculates expected
sales to, and revenues from, residential and commercial customers for "base
usage," representing gas use for water heaters, ranges, and other
appliances not sensitive to outside temperatures. The model also
calculates expected sales to, and revenues from, these customers for "heat
sensitive" usage, primarily furnaces, as a function of heating degree days
(the difference between 65 degrees Fahrenheit and the average of a day's
high and low temperatures). The model then estimates the earnings effect
of the difference between expected sales and revenues under actual
temperature conditions, and expected sales and revenues under average
temperature conditions.
Subsidiary results for 1996 were equivalent to earnings of 10
cents a share, compared to earnings of 19 cents in 1995 and 24 cents in
1994. The decrease in 1996 from 1995 was primarily due to a one-time gain
in 1995 of $3.8 million, equivalent to 11 cents a share, from Oregon
Natural's sale of production and related gathering system assets.
Subsidiary results in 1994 also included a one-time gain of $3.2 million,
equivalent to 10 cents a share, resulting from the sale of Pacific Square's
partnership interest in two commercial office buildings.
1996 was the 41st consecutive year in which the Company's
dividends paid have increased. Dividends paid on common stock were $1.20 a
share in 1996 compared with $1.18 in 1995 and $1.173 in 1994.
Results of Operations
- ---------------------
Regulatory Matters
------------------
Northwest Natural provides gas utility service in Oregon and
Washington, with Oregon representing approximately 94 percent of its
revenues. Future earnings and cash flows from utility operations will be
determined for the most part by continued growth in the residential and
commercial markets, by Northwest Natural's ability to remain price
competitive in the large industrial market, by the ability to control
expenses, and by obtaining timely regulatory approval for investments made
in utility plant.
Northwest Natural currently has no competition from other gas
utility distributors in the territory it serves. However, it competes with
Northwest Pipeline Corporation (NPC) to serve large industrial customers,
with oil and electricity for industrial and commercial uses, and with oil,
electricity, and wood for residential use. The Pacific Northwest has
historically enjoyed some of the lowest electric rates in the nation,
primarily due to the proximity of federal hydropower facilities. With
further deregulation in the energy business the market for energy will
become more competitive, but the Northwest is unlikely to experience the
large drop in electric rates that other, high cost areas of the country are
anticipating. In 1996, Northwest Natural maintained its competitive
advantage over electricity and approximate price parity with fuel oil in
the residential and commercial markets.
Effective December 1, 1996, the Oregon Public Utility Commission
(OPUC) and the Washington Utilities and Transportation Commission (WUTC)
approved rate decreases averaging 3.6 percent and 4.9 percent,
respectively, for Northwest Natural's residential, commercial and
industrial rate schedules. The OPUC and WUTC approved rate decreases
averaging 6.7 percent and 8.0 percent effective December 1, 1995 and 5.6
percent and 7.0 percent effective December 1, 1994, respectively. These
rate reductions passed through to customers changes in Northwest Natural's
purchased gas costs, applied temporary rate adjustments to amortize
regulatory balancing accounts and removed temporary rate adjustments
effective the previous year.
Northwest Natural also reduced rates by an average of 1.3 percent
in Oregon effective July 1, 1996, to pass through the ongoing impact of
property tax savings under an initiative measure approved by Oregon voters
in 1990.
None of the rate decreases discussed above had a material effect
on net income.
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility
volumes and revenues for the three years ended December 31:
Thousands 1996 1995 1994
(Except customers and degree days)
- ---------------------------------------------------------------------------
Gas Sales and Transportation Volumes (Therms):
- ----------------------------------------------
Residential and commercial
sales 531,425 453,185 462,143
Unbilled volumes 3,759 4,946 (7,519)
--------- --------- --------
Weather-sensitive volumes 535,184 49% 458,131 46% 454,624 46%
Industrial firm sales 91,122 8% 82,958 8% 81,348 8%
Industrial interruptible sales 63,261 6% 84,173 8% 89,899 9%
--------- --------- --------
Total gas sales 689,567 625,262 625,871
Transportation deliveries 410,062 37% 379,116 38% 364,461 37%
--------- ---- --------- ---- -------- ----
Total volumes sold
and delivered 1,099,629 100% 1,004,378 100% 990,332 100%
========= ==== ========= ==== ======== ====
Utility Operating Revenues:
- ---------------------------
Residential and commercial
revenues $288,384 $264,741 $284,962
Unbilled revenues 1,627 1,173 (5,571)
-------- -------- ---------
Weather-sensitive revenues 290,011 78% 265,914 76% 279,391 78%
Industrial firm sales revenues 30,672 8% 31,268 9% 34,443 10%
Industrial interruptible sales
revenues 17,097 5% 24,113 7% 27,361 8%
-------- -------- --------
Total gas sales revenues 337,780 321,295 341,195
Transportation revenues 22,533 6% 16,650 5% 14,702 4%
Other revenues 9,943 3% 10,060 3% 829 -%
-------- ---- -------- ---- -------- ----
Total utility operating
revenues $370,256 100% $348,005 100% $356,726 100%
======== ==== ======== ==== ======== ====
Cost of gas sold $142,752 $144,051 $163,026
======== ======== ========
Total number of customers
(end of period) 433,169 409,949 391,638
======= ======= =======
Actual degree days 4,427 3,779 4,020
===== ===== =====
20-year average degree days 4,273 4,306 4,324
===== ===== =====
Residential and Commercial
--------------------------
Customer growth continues at a rapid rate relative to others in
the industry. The 23,220 customers added since December 31, 1995 represent
a growth rate of 5.7 percent, the largest annual increase in customers in
Northwest Natural's history and the highest percentage increase since 1970.
In the three years ended December 31, 1996, almost 61,000 customers were
added to the system, representing an average annual growth rate of 5.2
percent.
Weather conditions were 4 percent colder than average in 1996, 12
percent warmer than average in 1995, and 7 percent warmer than average in
1994. Average weather conditions are calculated from the most recent 20
years of temperature data measured by heating degree days. Weather in 1996
was 17 percent colder than in 1995 and 1995 was 6 percent warmer than 1994.
Typically, 75 percent or more of Northwest Natural's annual
operating revenues are derived from gas sales to weather-sensitive
residential and commercial customers. Accordingly, variations in
temperatures between periods will affect volumes of gas sold to and
revenues derived from these customers.
The 17 percent increase in volumes of gas sold to residential and
commercial customers during 1996 compared to 1995 reflects both customer
growth and colder weather. Related revenues increased only 9 percent
primarily due to rate decreases effective December 1, 1995. The addition of
18,311 customers in 1995, offset by the effects of warmer weather and a
rate decrease in December 1994, combined to produce a 1 percent increase in
sales volumes and a 5 percent decrease in sales revenues from residential
and commercial customers as compared to 1994.
In order to match revenues with related purchased gas costs,
Northwest Natural records unbilled revenues for gas delivered to customers
through the end of the period but not yet billed.
Industrial Sales, Transportation and Other Revenues
---------------------------------------------------
The combined margin from industrial sales and transportation
increased to $53.9 million in 1996, compared to $49.6 million in 1995 and
$44.0 million in 1994, reflecting a 9 percent increase in 1996 and a 13
percent increase in 1995. Total volumes delivered to industrial customers
were 16.7 million therms, or 3 percent, higher in 1996 than in 1995, and
10.5 million therms, or 2 percent, higher in 1995 than in 1994. In
addition to higher volumes, margin revenues improved in 1996 due to higher
prices under industrial incentive rate schedules which are designed to
track changes in oil prices. In 1995 the increase in industrial margin was
primarily due to the termination of the Interruptible Sales Adjustment
(ISA) tariff schedule in Oregon effective December 1, 1994.
Northwest Natural did not experience losses of margin revenue
from new bypasses of its system in 1996, 1995, or 1994. Although Northwest
Natural does not expect a significant number of its large customers to
bypass its system in the foreseeable future, it may experience some
deterioration of margin associated with customers' transfers to contracts
with pricing designed to be competitive with the capital and operating
costs of direct connections to NPC's system.
Other revenues are primarily related to adjustments in regulatory
accounts (see Note 1 to the Consolidated Financial Statements). In 1996,
other revenues included $4.0 million from the amortization of property tax
savings, $1.6 million from regulatory amortizations, and two nonrecurring
gains. Specifically, Northwest Natural recorded a gain equivalent to 2
cents a share for the amount it will be able to recover through rates for
costs and lost revenues related to energy conservation programs approved by
the OPUC. Northwest Natural also recorded a gain equivalent to 2 cents a
share resulting from a settlement with the OPUC concerning amounts to be
refunded to Oregon customers from prior-year savings in property taxes and
Oregon income taxes.
Other revenues in 1995 included a one-time $3.0 million payment
under a contract with Portland General Electric Company (PGE), an electric
utility based in Portland. This contract gave PGE the option to request
gas transportation service for electric generation at one or more sites in
Northwest Natural's service territory. Additionally, other revenues in
1995 included $2.3 million relating to amortizations of the ISA account and
$3.1 million from other amortizations.
Cost of Gas
-----------
Northwest Natural has a Purchased Gas Cost Adjustment (PGA)
tariff under which its net income from Oregon operations is affected only
within defined limits by changes in purchased gas costs. The cost per
therm of gas sold during 1996 was 10 percent lower than in 1995 while the
cost per therm in 1995 was 12 percent lower than in 1994. The cost of gas
sold was reduced by non-regulated gas sales of $1.2 million in 1996
compared to $0.3 million in 1995. Under an agreement with the OPUC, these
sales are treated as a reduction of gas costs. The cost per therm of gas
sold includes purchased gas costs, related tariff adjustments (deferrals
and amortizations), net gas storage activity, and line loss.
During 1994, when the average cost per therm of gas sold was the
highest for the three years presented, increased gas costs resulted from
higher commodity prices and from an increase in demand charges placed into
effect in April 1993 by NPC.
Subsidiary Operations
---------------------
Consolidated subsidiary earnings for 1996 were $2.2 million,
equivalent to 10 cents a share, compared to $4.1 million or 19 cents a
share in 1995 and $4.7 million or 24 cents a share in 1994 (see Note 2 to
the Consolidated Financial Statements).
In 1996 Financial Corporation earned $1.0 million, compared to
$1.3 million in 1995 and $1.8 million in 1994. The decreases in Financial
Corporation's earnings from 1995 to 1996 and from 1994 to 1995 were due to
weaker operating results from its investments in windpower energy
facilities in California.
Oregon Natural was merged into Northwest Natural during 1996,
thereby transfering certain assets, including the stock of Canor, to
Northwest Natural. As a result of this merger, Canor became a wholly-owned
subsidiary of Northwest Natural. In 1996, Canor's earnings of $0.5 million
incorporated the effect of $1.3 million in impairment losses resulting from
the application of Statement of Financial Accounting Standards (SFAS) No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Earnings from Canor's operations in 1995 and
1994, prior to the merger, are included in Oregon Natural's results of
operations.
Oregon Natural earned $0.7 million in 1996 compared to $1.8 million in
1995 and $0.4 million in 1994. Oregon Natural's earnings in 1996 and 1995
were higher due to one-time gains from asset sales, including a $2.9
million gain from the sale of underground storage assets to Northwest
Natural in 1996, and a gain of $3.8 million from the sale of its gathering
system and gas producing properties in 1995. The 1996 gain was partially
offset by an impairment loss of $1.3 million on producing wells in
accordance with SFAS No. 121 and a $1.0 million writedown of unproven
properties in accordance with SFAS No. 19, "Financial Accounting and
Reporting by Oil and Gas Producing Companies."
Subsidiary results for 1994 reflected two additional factors.
First, Pacific Square sold its partnership interests in two office
buildings, including the Company's headquarters building, for a gain
equivalent to 9 cents a share. Second, Energy Systems realized a gain
equivalent to 2 cents a share on the sale of its subsidiary's assets
pursuant to a bankruptcy reorganization plan. Upon completion of these
transactions, both Pacific Square and Energy Systems were dissolved in
1995.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Consolidated operations and maintenance expenses were $8.2
million, or 11 percent, higher in 1996 than in 1995. Northwest Natural's
operation and maintenance expenses increased $9.3 million, or 14 percent,
compared to 1995 primarily due to a judgment of $4.9 million against
Northwest Natural from 1995 litigation (see "Chase Gardens Litigation",
below); work related to cold weather and flood conditions ($0.6 million);
higher employee bonus accruals ($1.9 million); environmental investigation
costs ($0.4 million); service costs tied to customer growth ($0.8 million);
and market development costs ($0.7 million). An offsetting favorable
variance resulted from a $1.1 million reduction in pension expense compared
to 1995. Subsidiary expenses decreased $1.1 million, or 17 percent, in
1996 compared to 1995 primarily due to a decline in Oregon Natural's
production costs.
Northwest Natural's 1995 operations and maintenance expenses were
$2.2 million higher compared to 1994, while subsidiary expenses decreased
$1.1 million. The increase in utility operations and maintenance expenses
was primarily due to increases in outside services ($0.5 million); computer
network expenses ($0.4 million); operating claims ($0.4 million); bad debt
expenses ($0.3 million); and environmental management expenses ($0.2
million). Lower subsidiary operations and maintenance expenses were
primarily due to a decline in Oregon Natural's production expenses.
Chase Gardens Litigation
------------------------
In July 1995, a jury in an Oregon state court returned a verdict
against Northwest Natural in the case of Northwest Natural Gas Company v.
Chase Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370).
Northwest Natural appealed to the Oregon Court of Appeals (Oregon Court of
Appeals Case No. CA A90481), which affirmed the trial court decision in
February 1997. Northwest Natural plans to petition for review of the Court
of Appeals decision by the Oregon Supreme Court, and believes there are
ample legal precedents to support a ruling by the latter court in favor of
Northwest Natural. However, due to the decreased probability that
Northwest Natural will succeed in overturning or reducing the damage award
on appeal, and to a decision in binding arbitration that Northwest
Natural's liability insurance policy does not provide coverage for the
judgment or defense costs, Northwest Natural recorded a charge of $5.6
million in the fourth quarter of 1996, equivalent to 15 cents a share, as a
reserve against payment of the judgment, costs and post-judgment interest
from the case.
Taxes Other Than Income
-----------------------
Taxes other than income, which are comprised of property,
franchise, payroll and other taxes, declined $2.6 million, or 11 percent,
in 1996. Actual property tax expense was $2.9 million lower than in 1995,
due to refunds and lower tax accruals under the settlement of a property
valuation appeal in Oregon. The settlement reduced Northwest Natural's
assessed property values for the current and prior property tax years by an
average of about 9 percent. Accruals of other property tax savings and
associated interest for refund to customers, which had been charged to
other taxes, ceased at the end of the second quarter of 1996 when a
permanent rate reduction incorporating these savings became effective in
Oregon.
Northwest Natural's franchise taxes increased $0.6 million, or 8
percent, from $7.6 million in 1995 to $8.2 million in 1996. These taxes
are incurred as a percentage of revenue, and the increase paralleled the
percentage increase in gas sales revenues from 1995 to 1996. The increase
in franchise taxes, together with an increase in payroll and other taxes,
partially offset the decrease in property taxes during 1996.
Depreciation, Depletion and Amortization
----------------------------------------
Depreciation, depletion and amortization expense increased $2.5
million, or 6 percent, in 1996 compared to 1995, and $2.5 million, or 7
percent, in 1995 compared to 1994. Northwest Natural's depreciation
expense decreased $0.7 million from 1995 to 1996, reflecting lower
depreciation rates approved by the OPUC and WUTC effective January 1, 1996.
The impact of the lower depreciation rates was partially offset by
depreciation expense from additional utility plant placed in service.
Northwest Natural's depreciation expense increased $2.9 million, or 9
percent, in 1995 compared to 1994 primarily due to additional utility plant
in service.
Subsidiary depreciation, depletion and amortization expense
increased $3.2 million, or 79 percent, in 1996 compared to 1995, and
decreased $0.4 million, or 9 percent, in 1995 compared to 1994. Subsidiary
depreciation expense in 1996 included impairment ($1.3 million) and
abandonment ($1.0 million) expenses recorded by Oregon Natural, pursuant,
respectively, to the adoption of SFAS No. 121 and the write-down of
unproven properties. Canor also recorded a $1.3 million expense during
1996 pursuant to SFAS No. 121.
Other Income
------------
The variations in other income during the past three years
resulted primarily from non-recurring items including: Oregon Natural's
1995 gain on the sale of its gathering system and interests in production
assets in Oregon; Energy Systems' 1995 and 1994 gains resulting from the
reorganization plan of its California cogeneration subsidiary; and Pacific
Square's 1994 gain from the sale of its investments (see "Subsidiary
Operations").
Interest Charges
----------------
Interest charges increased $1.2 million, or 5 percent, in 1996
compared to 1995 partially due to the sale of $20 million and $10 million
of Northwest Natural's Medium-Term Notes in October 1996 and December 1995,
respectively. The 1996 increase also resulted from a higher average
balance of Northwest Natural's commercial paper outstanding which increased
from $7.4 million in 1995 to $14.0 million in 1996, plus post-judgment
interest charged due to the Chase Gardens litigation (see "Chase Gardens
Litigation," above).
Allowance for Funds Used During Construction (AFUDC) represents
the cost of funds used during the construction of utility plant (see Note 1
to the Consolidated Financial Statements). In 1996, AFUDC reduced interest
expense by $0.8 million compared to $0.6 million in 1995 and $0.3 million
in 1994. The weighted average AFUDC rates increased from 3.4 percent in
1994 to 5.3 percent in 1995 and 8.9 percent in 1996, reflecting higher
short-term interest rates and the use of long-term debt and equity to fund
construction work in progress. (See "Financing Activities" below).
Income Taxes
------------
The effective corporate income tax rate for each of the three
years ended December 31, 1996, 1995, 1994 was 37 percent which approximates
the Company's statutory tax rate for these periods (see Note 7 to the
Consolidated Financial Statements). The significant increase in income tax
expense during 1996 was directly related to the $14 million, or 23 percent,
increase in income before income taxes as compared to 1995.
In the fourth quarter of 1996, Northwest Natural recorded an
adjustment reducing tax expense for the year by $1.9 million, or 8 cents a
share, for reversal of deferred tax amounts provided in prior years.
Preferred and Preference Stock Dividend Requirements
----------------------------------------------------
Preferred and preference stock dividend requirements for 1996
were lower by $0.1 million, or 3 percent, compared to 1995, due to sinking
fund redemptions of preferred stock. 1995 requirements were $0.2 million,
or 6 percent, lower than 1994 due to sinking fund redemptions and the
conversion or redemption in 1995 of all remaining shares of the $2.375
Series of Convertible Preference Stock.
Financial Condition
- -------------------
Capital Structure
-----------------
Northwest Natural's capital expenditures are primarily related to
utility construction resulting from customer growth and system
improvements. Northwest Natural finances these expenditures from cash
provided by operations, and from short-term borrowings which are
periodically refinanced through the sale of long-term debt or equity
securities. In addition to its capital expenditures, the weather-sensitive
nature of gas usage by Northwest Natural's residential and commercial
customers influences the Company's financing requirements. Short-term
liquidity is satisfied primarily through the sale of commercial paper,
which is supported by commercial bank lines of credit (see Note 6 to the
Consolidated Financial Statements).
The Company's long-term goal is to maintain a capital structure
comprised of 45 to 50 percent common stock equity, 5 to 10 percent
preferred and preference stock and 45 to 50 percent short-term and long-
term debt. When additional capital is required, the Company issues debt or
equity securities depending upon both the target capital structure and
market conditions. The Company also uses these sources to meet long-term
debt and preferred and preference stock redemption requirements (see Notes
3 and 5 to the Consolidated Financial Statements).
Cash Flows
----------
Operating Activities
--------------------
Cash provided by operating activities in 1996 was $6.1 million,
or 7 percent, higher than in 1995. The increase was primarily due to
colder weather and customer growth and the resulting increases in gas
deliveries and related margin from weather-sensitive customers, partially
offset by the continuing effect of rate changes in December 1994 and
December 1995 to amortize credit balances in regulatory accounts. The
increased revenues also contributed to increases in accounts receivable and
accounts payable.
Cash provided by operating activities was $26.2 million, or 24
percent, lower in 1995 than in 1994. The reduction was primarily due to
the rate changes effective in December 1994 to amortize credit balances in
regulatory accounts and to the effects of weather, in combination with
customer growth, on accounts receivable, unbilled revenue, inventories of
gas, and accounts payable balances.
The Company has lease and purchase commitments related to its
operating activities which are financed with cash flows from operations
(see Note 13 to the Consolidated Financial Statements).
Investing Activities
--------------------
Cash requirements for Northwest Natural's capital expenditures
totaled $83.4 million, up $16.2 million, or 24 percent, from 1995. The
increase included higher amounts for the gas distribution system in order
to serve significant customer growth ($8.8 million); resumption of the
development of a new customer information system (CIS) which was delayed in
1995 ($3.7 million); and development of a remote data terminal system ($1.9
million).
In 1995, the decrease of $10.5 million in capital expenditures
from 1994 resulted largely from a $5.5 million reduction in expenditures
related to the CIS project and a $3.2 million reduction in costs to
construct new mains and services. In 1995, the CIS project was temporarily
delayed until a new software system could be selected to support Northwest
Natural's current and future requirements.
Northwest Natural's construction expenditures are estimated at
$110 million for 1997. Over the five year period 1997 through 2001, these
expenditures are estimated to be $500 to $550 million. The higher level of
capital expenditures over the next five years reflects projected high
customer growth, plus a major system reinforcement project and the
development of additional underground storage facilities. An estimated
50 percent of the required funds is expected to be internally generated,
with the remainder to be funded through a combination of long-term debt and
equity securities with short-term debt providing liquidity and bridge
financing.
In 1995 and 1994, $5.1 million and $4.8 million, respectively,
were invested in Canor's gas and oil properties. Additionally, in 1995,
Oregon Natural invested $6.5 million in underground natural gas storage
properties. Northwest Natural invested $3.0 million in 1996 and plans to
invest $3.0 million in 1997 in Canor's exploration and production program
to supplement Canor's internally generated funds.
Financing Activities
--------------------
Cash used for financing activities during 1996 totaled $6.5
million, down $0.7 million from 1995. The primary financing activities for
1996 which accounted for the change from 1995 were Northwest Natural's sale
of $20 million of its Medium-Term Notes in October 1996 and the net
issuance of $21.2 million of commercial paper, offset by the redemption of
$22 million of Medium-Term Notes and First Morgage Bonds.
Primary financing activity in 1995 consisted of the sale of $33.0
million of Northwest Natural's Common Stock in February 1995, the sale of
$10 million of its Medium-Term Notes, and the related net redemption of
$24.8 million of commercial paper. In 1994, financing activity principally
consisted of the sale of $20 million of Northwest Natural's Medium-Term
Notes and the related net redemption of $18.9 million of commercial paper.
The proceeds, after redemptions, from stock and Medium-Term Note offerings
were added to the general funds of the Company and were used for general
corporate purposes, primarily to fund, in part, Northwest Natural's
construction program.
In 1995, Northwest Natural redeemed the remaining shares of its
$2.375 Series of Convertible Preference Stock.
Ratios of Earnings to Fixed Charges
-----------------------------------
For the years ended December 31, 1996, 1995, and 1994, the
Company's ratios of earnings to fixed charges, computed by the Securities
and Exchange Commission method, were 3.53, 3.15, and 3.08, respectively.
Earnings consist of net income before taxes, plus fixed charges. Fixed
charges consist of interest on all indebtedness, amortization of debt
expense and discount or premium, and the estimated interest portion of
rentals charged to income.
Contingent Liabilities
- ----------------------
Like all companies with business application software programs,
the Company is affected by the "Year 2000" issue. Much of this software,
which includes its customer service, operations, and financial systems, was
written using two digits to define the year, rather than four. Any of the
Company's software that is time-sensitive may recognize a date using "00"
as the year 1900 rather than 2000. This could result in the computer
shutting down or performing incorrect calculations.
Northwest Natural is in the process of identifying the software
programs that could be affected by the Year 2000 issue and is developing an
implementation plan to resolve the issue. Northwest Natural believes that
with the appropriate modifications, it will be able to operate its time-
sensitive software programs beyond the turn of the century. The extent or
the estimated cost of such modifications cannot yet be determined.
Northwest Natural intends to seek recovery through future rates of its
costs of any remediation that may be required by this issue.
Environmental Matters
- ---------------------
Northwest Natural owns property in Linnton, Oregon, that is the
site of a former gas manufacturing plant that was closed in 1956. In 1993,
pursuant to Oregon Department of Environmental Quality (ODEQ) procedures,
Northwest Natural submitted a notice of intent to participate in the ODEQ's
Voluntary Cleanup Program and, in 1994, the site was listed on ODEQ's
Confirmed Release List and Inventory. During 1995, initial tests revealed
environmental contamination, but the extent or the estimated cost of
remediation cannot yet be determined.
In 1993, Northwest Natural recorded an expense of $0.5 million
for the estimated costs of consultants' fees, ODEQ oversight cost
reimbursements, and legal fees in connection with the voluntary
investigation at the Linnton site. It recorded an additional $0.4 million
of expense in 1996 for costs of the continuing investigation, and estimates
that ongoing costs will average about $0.1 million per calendar quarter
until the investigation is concluded, perhaps during 1997. Northwest
Natural expects that its costs of investigation and any remediation for
which it may be responsible should be recoverable, in large part, from
insurance or through future rates.
In 1996, the Eugene Water and Electric Board (EWEB) asked
Northwest Natural to participate in an investigation and potential
remediation of a 1.5 acre site of a former manufactured gas plant in
Eugene, Oregon. Northwest Natural purchased the property in 1958, after
the plant had been converted to a liquid propane gas plant. It used the
propane plant until 1960 when the system was converted to natural gas, and
continued to use the site as a service center until 1976 when it was sold.
Although Northwest Natural never operated the manufactured gas plant, EWEB
has contended that Northwest Natural's activities on the site may have
exacerbated prior contamination. To date, Northwest Natural has not agreed
to participate in an investigation of the site and has not obtained
sufficient information to determine the extent of its responsibility, if
any, for remediation of the site.
In 1992, the City of Salem, Oregon, requested Northwest Natural's
participation in its review of an environmental assessment of riverfront
property in Salem to be developed as a park, including a block previously
owned by Northwest Natural which was the site of a former manufactured gas
plant. The City had determined that there was environmental contamination
on the site, and that a remediation process involving Northwest Natural and
other prior owners of the block would be required. In 1996, Northwest
Natural agreed to a settlement of the City's claim under which Northwest
Natural paid $170,000 to the City as a contribution toward development of
the park, in return for a release from any further liability for costs
incurred by the City for remediation of the site.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
-----------------
Page
----
1. Management's Responsibility for Financial Statements 35
2. Independent Auditors' Report 36
3. Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1995 and 1994 37
Consolidated Statements of Earnings Invested in the Business
for the Years Ended December 31, 1996, 1995 and 1994 38
Consolidated Balance Sheets, December 31, 1996 and 1995 39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 41
Consolidated Statements of Capitalization, December 31,
1996 and 1995 42
Notes to Consolidated Financial Statements 43
4. Quarterly Financial Information (unaudited) 69
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.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
----------------------------------------------------
The financial statements in this report were prepared by
management, which is responsible for their objectivity and integrity. The
statements have been prepared in conformity with generally accepted
accounting principles and, where appropriate, reflect informed estimates
based on judgments of management. The responsibility of the Company's
independent auditors is to render an independent report on the financial
statements.
The Company's system of internal accounting controls is designed
to provide reasonable assurance that assets are safeguarded and
transactions are executed in accordance with management's authorizations,
that transactions are recorded to permit the preparation of financial
statements in conformity with orders of regulatory authorities and
generally accepted accounting principles and that accountability for assets
is maintained. The Company's system of internal controls has provided such
reasonable assurances during the periods reported herein. The system
includes written policies, procedures and guidelines, an organization
structure that segregates duties and an established program for monitoring
the system by internal auditors. In addition, Northwest Natural Gas
Company has prepared and annually distributes to its management employees a
Code of Ethics covering its policies for conducting business affairs in a
lawful and ethical manner. Ongoing review programs are carried out to
ensure compliance with these policies.
The Board of Directors, through its Audit Committee, oversees
management's financial reporting responsibilities. The committee meets
regularly with management, the internal auditors, and representatives of
the Company's independent auditors. Both internal and external auditors
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 Audit Committee recommends the nomination of
independent auditors to the Board of Directors for shareholder approval.
/s/ Richard G. Reiten
-------------------------------
Richard G. Reiten
President and
Chief Executive Officer
/s/ Bruce R. DeBolt
-------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
DELOITTE & TOUCHE LLP
- ---------------------------------------------------------------
Suite 3900 Telephone: (503) 222-1341
111 SW Fifth Avenue Facsimile: (503) 224-2172
Portland, Oregon 97204-3698
INDEPENDENT AUDITORS' REPORT
To the Directors and Shareholders of
Northwest Natural Gas Company
We have audited the accompanying consolidated balance sheets and statements
of capitalization of Northwest Natural Gas Company and subsidiaries, as of
December 31, 1996 and 1995, and the related consolidated statements of
income, earnings invested in the business, and cash flows for each of the
three years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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 consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Northwest
Natural Gas Company and subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 12, 1997
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Thousands, Except Per Share Amounts)
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------
NET OPERATING REVENUES:
Operating revenues $380,318 $356,276 $368,261
Cost of sales 142,805 144,051 162,788
-------- -------- --------
Net operating revenues 237,513 212,225 205,473
-------- -------- --------
OPERATING EXPENSES:
Operations and maintenance 80,218 72,018 70,881
Taxes other than income taxes 21,597 24,181 24,263
Depreciation, depletion and
amortization 43,047 40,594 38,058
-------- -------- --------
Total operating expenses 144,862 136,793 133,202
-------- -------- --------
INCOME FROM OPERATIONS 92,651 75,432 72,271
-------- -------- --------
OTHER INCOME 8,196 10,432 8,582
-------- -------- --------
INTEREST CHARGES:
Interest on long-term debt 23,176 23,141 21,921
Other interest 3,448 2,252 2,473
Amortization of debt discount
and expense 865 882 850
------- ------- -------
Total interest charges 27,489 26,275 25,244
Allowance for funds used during
construction (782) (596) (325)
-------- -------- --------
Total interest charges-net 26,707 25,679 24,919
-------- -------- --------
INCOME BEFORE INCOME TAXES 74,140 60,185 55,934
INCOME TAXES 27,347 22,120 20,473
-------- -------- --------
NET INCOME 46,793 38,065 35,461
Redeemable preferred and preference
stock dividend requirements 2,723 2,806 2,983
-------- -------- --------
EARNINGS APPLICABLE TO COMMON STOCK $ 44,070 $ 35,259 $ 32,478
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING 22,391 21,817 19,943
====== ====== ======
EARNINGS PER SHARE OF COMMON STOCK $ 1.97 $ 1.62 $ 1.63
====== ====== ======
DIVIDENDS PER SHARE OF COMMON STOCK $ 1.20 $ 1.18 $1.173
====== ====== ======
-----------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS INVESTED IN THE BUSINESS
(Thousands)
1996 1995 1994
- ------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $105,651 $ 97,275 $ 88,497
Net Income 46,793 38,065 35,461
Cash dividends:
Redeemable preferred and
preference stock (2,735) (2,836) (3,041)
Common stock (26,836) (25,517) (23,365)
Stock Dividend:
Common stock (23,704) -- --
Foreign currency translation
and capital stock expense (793) (1,336) (277)
-------- -------- -------
BALANCE AT END OF YEAR $ 98,376 $105,651 $ 97,275
======== ======== ========
- -------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands)
December 31 1996 1995
- -----------------------------------------------------------------------
ASSETS:
PLANT AND PROPERTY IN SERVICE:
Utility plant in service $1,055,112 $969,075
Less accumulated depreciation 336,141 308,702
---------- --------
Utility plant - net 718,971 660,373
Non-utility property 45,689 53,807
Less accumulated depreciation and depletion 19,388 16,997
--------- --------
Non-utility property - net 26,301 36,810
--------- --------
Total plant and property in service 745,272 697,183
--------- --------
INVESTMENTS AND OTHER:
Investments 33,008 34,126
Long-term notes receivable 1,715 3,756
--------- --------
Total investments and other 34,723 37,882
--------- --------
CURRENT ASSETS:
Cash and cash equivalents 8,219 7,782
Accounts receivable - customers 41,890 35,175
Allowance for uncollectible accounts (1,057) (790)
Accrued unbilled revenue 22,340 21,493
Inventories of gas, materials and supplies 14,439 14,254
Prepayments and other current assets 12,483 12,396
---------- --------
Total current assets 98,314 90,310
---------- --------
REGULATORY TAX ASSETS 57,940 60,430
---------- --------
DEFERRED DEBITS AND OTHER 52,620 43,472
---------- --------
TOTAL ASSETS $ 988,869 $929,277
========== ========
- ---------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands)
December 31 1996 1995
- ----------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES:
CAPITALIZATION (See Consolidated Statements
of Capitalization):
Common stock $ 71,425 $ 46,958
Premium on common stock 176,977 170,943
Earnings invested in the business 98,376 105,651
-------- --------
Total common stock equity 346,778 323,552
Redeemable preference stock 25,000 25,000
Redeemable preferred stock 13,749 14,840
Long-term debt 271,838 279,945
-------- --------
Total capitalization 657,365 643,337
-------- --------
CURRENT LIABILITIES:
Notes payable 50,058 28,832
Accounts payable 64,795 41,784
Long-term debt due within one year 26,000 21,000
Taxes accrued 3,196 10,281
Interest accrued 5,396 4,617
Other current and accrued liabilities 19,418 13,204
-------- --------
Total current liabilities 168,863 119,718
-------- --------
DEFERRED INVESTMENT TAX CREDITS 11,668 12,493
-------- --------
DEFERRED INCOME TAXES 123,625 118,692
-------- --------
REGULATORY ACCOUNTS AND OTHER 27,348 35,037
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 13) -- --
-------- --------
TOTAL CAPITALIZATION AND LIABILITIES $988,869 $929,277
======== ========
- ------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
Year Ended December 31 1996 1995 1994
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 46,793 $ 38,065 $ 35,461
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation, depletion and amortization 43,047 40,594 38,058
Gain on sale of assets (2,897) (4,636) --
Deferred income taxes and investment
tax credits 4,108 5,222 8,796
Equity in (earnings)losses of investments (773) (2,141) (2,331)
Allowance for funds used during
construction (1,593) (620) (325)
Regulatory accounts and other - net (14,347) 3,974 8,989
-------- -------- --------
Cash from operations before working
capital changes 74,338 80,458 88,648
Changes in operating assets and liabilities:
Accounts receivable (6,448) 7,767 1,820
Accrued unbilled revenue (847) (1,173) 5,570
Inventories of gas, materials and
supplies (185) 704 1,880
Accounts payable 23,011 (6,733) 4,199
Accrued interest and taxes (6,306) 3,744 (41)
Other current assets and liabilities 6,377 (908) 7,948
-------- -------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 89,940 83,859 110,024
-------- -------- --------
INVESTING ACTIVITIES:
Acquisition and construction of
utility plant assets (83,400) (67,163) (77,668)
Investment in non-utility plant (3,246) (18,964) (7,455)
Proceeds from sale of non-utility assets -- 7,862 --
Investments and other 3,682 1,356 (192)
-------- -------- --------
CASH USED IN INVESTING ACTIVITIES (82,964) (76,909) (85,315)
-------- -------- --------
FINANCING ACTIVITIES:
Common stock issued 5,690 39,569 5,847
Redeemable preference stock retired -- (174) --
Redeemable preferred stock retired (1,091) (989) (1,091)
Long-term debt:
Issued 20,000 10,000 20,000
Retired (22,000) (1,131) (18)
Change in short-term debt 21,226 (24,822) (18,894)
Cash dividend payments:
Redeemable preferred and preference stock (2,735) (2,836) (3,041)
Common stock (26,836) (25,517) (23,365)
Foreign currency translation and capital
stock expense (793) (1,336) (277)
------- -------- --------
CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (6,539) (7,236) (20,839)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 437 (286) 3,870
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 7,782 8,068 4,198
-------- -------- --------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 8,219 $ 7,782 $ 8,068
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $25,846 $ 25,346 $ 24,262
Income taxes $27,266 $ 15,819 $ 12,054
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES:
Conversion to common stock:
$2.375 Series of Convertible
Preference Stock -- $ 1,078 $ 381
7-1/4 percent Series of Convertible
Debentures $1,107 $ 121 $ 837
- ---------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Thousands, Except Share Amounts)
December 31 1996 1995
- ---------------------------------------------------------------------------
COMMON STOCK EQUITY:
Common stock - par value $3-1/6 per
share; authorized 60,000,000 shares:
outstanding - 1996, 22,555,184
shares; 1995, 22,243,251 shares $ 71,425 $ 46,958
Premium on common stock 176,977 170,943
Earnings invested in the business 98,376 105,651
-------- --------
Total common stock equity 346,778 53% 323,552 50%
-------- ---- -------- ----
REDEEMABLE PREFERENCE STOCK, authorized
2,000,000 shares; $6.95 Series, stated
value $100 per share; outstanding -
1996, 250,000 shares; 1995, 250,000
shares 25,000 25,000
--------- ---------
Total redeemable preference stock 25,000 4% 25,000 4%
--------- ---- --------- -----
REDEEMABLE PREFERRED STOCK, authorized
1,500,000 shares; all outstanding series
have a stated value of $100 per share:
$4.68 Series, outstanding - 1996, 3,905
shares; 1995, 5,519 shares 391 552
$4.75 Series, outstanding - 1996, 6,085
shares; 1995, 7,885 shares 608 788
$7.125 Series, outstanding - 1996,
127,500 shares; 1995, 135,000 shares 12,750 13,500
-------- --------
Total redeemable preferred stock 13,749 2% 14,840 2%
-------- ---- -------- ----
LONG-TERM DEBT:
First Mortgage Bonds
9-3/4% Series due 2015 50,000 50,000
9-1/8% Series due 2019 22,000 24,000
Medium-Term Notes
First Mortgage Bonds:
4.80% Series A due 1996 -- 5,000
7.38% Series A due 1997 20,000 20,000
7.69% Series A due 1999 10,000 10,000
5.96% Series B due 2000 5,000 5,000
5.98% Series B due 2000 5,000 5,000
8.05% Series A due 2002 10,000 10,000
6.40% Series B due 2003 20,000 20,000
6.34% Series B due 2005 5,000 5,000
6.38% Series B due 2005 5,000 5,000
6.45% Series B due 2005 5,000 5,000
6.50% Series B due 2008 5,000 5,000
8.26% Series B due 2014 10,000 10,000
8.31% Series B due 2019 10,000 10,000
9.05% Series A due 2021 10,000 10,000
7.25% Series B due 2023 20,000 20,000
7.50% Series B due 2023 4,000 4,000
7.52% Series B due 2023 11,000 11,000
6.52% Series B due 2025 10,000 10,000
7.05% Series B due 2026 20,000 --
Unsecured:
4.90% Series A due 1996 -- 10,000
8.69% Series A due 1996 -- 5,000
7.40% Series A due 1997 5,000 5,000
8.93% Series A due 1998 5,000 5,000
8.95% Series A due 1998 10,000 10,000
8.47% Series A due 2001 10,000 10,000
Convertible Debentures
7-1/4% Series due 2012 10,838 11,945
-------- --------
297,838 300,945
Less long-term debt due within one-year 26,000 21,000
-------- --------
Total long-term debt 271,838 41% 279,945 44%
-------- ---- -------- -----
TOTAL CAPITALIZATION $657,365 100% $643,337 100%
======== ==== ======== ====
- ---------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
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 (Northwest Natural)
Non-regulated wholly-owned businesses:
--NNG Financial Corporation (Financial Corporation)
--Canor Energy, Ltd. (Canor)
--Oregon Natural Gas Development Corporation (Oregon
Natural)
Oregon Natural was merged with and into Northwest Natural during the
second quarter of 1996. Two other subsidiaries, Pacific Square
Corporation (Pacific Square) and NNG Energy Systems, Inc. (Energy
Systems), were dissolved during 1995.
Together these businesses are referred to herein as the "Company."
Intercompany accounts and transactions have been eliminated.
Investments in corporate joint ventures and partnerships in which the
Company's ownership is 50 percent or less are accounted for by the
equity method or the cost method (see Note 10).
Certain amounts from prior years have been reclassified to conform
with the 1996 presentation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts in the consolidated
financial statements and accompanying notes. Changes in such
estimates may affect amounts reported in future periods.
Industry Regulation
- -------------------
The Company's principal business is the distribution of natural gas
which is regulated by the Oregon Public Utility Commission (OPUC) and
the Washington Utilities and Transportation Commission (WUTC).
Accounting records and practices conform to the requirements and
uniform system of accounts prescribed by these regulatory authorities
in accordance with Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation."
Utility Plant
- -------------
Utility plant for Northwest Natural is stated at original cost (see
table in Note 10). When a depreciable unit of property is retired,
the original cost is removed from both utility plant and the
accumulated provision for depreciation together with the cost of
removal, less any salvage. No gain or loss is recognized upon normal
retirement.
Northwest 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 3.8 percent of average
depreciable plant in 1996, 4.2 percent in 1995 and 4.1 percent in
1994. The rate of depreciation 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 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. Northwest Natural's
weighted average AFUDC rates were 8.9 percent for 1996, 5.3 percent
for 1995, and 3.4 percent for 1994.
Regulatory Accounts
- -------------------
In applying SFAS No. 71, Northwest Natural has capitalized certain
costs and benefits as regulatory assets and liabilities pursuant to
orders of the state utility regulatory commissions, in general rate
proceedings or expense deferral proceedings, in order to provide for
recovery of revenues or expenses from, or refunds to, Northwest
Natural's utility customers in future periods. At December 31, 1996
and 1995, regulatory tax assets were $57.9 million and $60.4 million,
respectively, while regulatory assets and liabilities (net) were
$8.2 million and $28.2 million, respectively.
If the Company, at some point in the future, determines that all or a
portion of these regulatory assets and liabilities no longer meets the
criteria for continued application of SFAS No. 71, then the Company
would be required to write off that portion which it could not recover
or refund.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and highly liquid temporary investments with
original maturity dates of three months or less.
Unbilled Revenue
- ----------------
Northwest Natural accrues for gas deliveries not billed to customers
from the meter reading dates to month end.
Inventories
- -----------
Northwest Natural's inventories of gas in storage and materials and
supplies are stated at the lower of average cost or net realizable
value.
Derivatives Policy
- ------------------
Northwest Natural has a "Derivatives Policy" which allows up to a 100
percent hedge position in currency derivatives to match and lock-in
prices on individual Canadian natural gas purchase transactions;
interest rate derivatives to match specific outstanding debt
instruments maturing in less than five years; and natural gas
commodity derivatives to lock-in prices on gas purchased for a future
period under contracts with market-indexed pricing. The policy
requires derivatives to be used within prescribed limitations and only
in order to reduce price risk, so as to qualify for hedge accounting
treatment. Changes in market values of foreign currency contracts,
and gains or losses on commodity swap contracts, are deferred and
recognized as adjustments to gas purchase costs upon concurrent
settlement of these contracts (see Note 12).
Income Taxes
- ------------
Northwest Natural uses the liability 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.
Consistent with rate and accounting instructions of regulatory
authorities, deferred income taxes are not currently collected for
those income tax temporary differences where the prescribed regulatory
accounting methods do not provide for current recovery in rates.
Northwest Natural has recorded a regulatory tax asset for amounts
pending recovery from customers in future rates. These amounts are
primarily differences between the book and tax basis of net utility
plant in service. This asset balance was $57.9 million at December
31, 1996, and $60.4 million at December 31, 1995 (see Note 7).
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.
Earnings Per Share
- ------------------
All share and per share data for prior periods have been restated to
reflect the three-for-two split of the Company's common stock,
effected in the form of a 50 percent stock dividend, effective
September 6, 1996.
Primary earnings per share are computed based on the weighted average
number of common shares outstanding each year. Outstanding stock
options are common stock equivalents but are excluded from primary
earnings per share computations due to immateriality. The Company
reports fully-diluted earnings per share when dilution is three
percent or greater. This calculation reflects the potential effects
of the conversion of any outstanding convertible stock and convertible
debentures and the exercise of outstanding stock options.
2. CONSOLIDATED SUBSIDIARY OPERATIONS:
- ----------------------------------------
At December 31, 1996, the Company had two active wholly-owned
subsidiaries, Financial Corporation and Canor. Another wholly-owned
subsidiary, Oregon Natural, was merged into Northwest Natural during
1996, while two other subsidiaries, Pacific Square and Energy Systems,
were dissolved during 1995.
NNG Financial Corporation
- -------------------------
Financial Corporation provides short-term financing for Canor and has
several financial investments, including investments as a limited
partner in four solar electric generating systems, four windpower
electric generating projects, a hydroelectric facility and two low-
income housing projects. It also holds interests in certain gas
producing properties in the western United States (see Note 10).
Oregon Natural Gas Development Corporation
- ------------------------------------------
Prior to its merger with Northwest Natural, Oregon Natural's primary
activities included oil and gas exploration and production and
underground gas storage development. Oregon Natural recognized a $2.9
million gain from the sale of underground gas storage assets to
Northwest Natural. In accordance with SFAS No. 71, the profit from
this sale, although intercompany in nature, was not eliminated during
consolidation since the sales price was approved by the OPUC and the
approximate sales price which resulted in the intercompany gain is
expected to be recovered through rates as an allowable cost. In mid-
1996, Oregon Natural transferred its interests in certain gas-
producing properties in the western United States to Financial
Corporation. Ownership of Oregon Natural's remaining assets,
including stock in Canor and its equity interest in a Boeing 737
aircraft, was transferred to Northwest Natural through the merger.
Canor Energy, Ltd.
- ------------------
Canor, an Alberta, Canada corporation, is engaged in natural gas and
oil exploration, development and production in Alberta and
Saskatchewan, Canada. Canor began operations in 1990 as a wholly-
owned subsidiary of Oregon Natural. When Oregon Natural was merged
into Northwest Natural during 1996, Canor became a wholly-owned
subsidiary of Northwest Natural.
Summarized financial information for the consolidated subsidiaries follows:
Thousands 1996 1995 1994
- ------------------------------------------------------------------------
Statements of Income for the year ended
December 31:
Net Operating Revenues $10,009 $ 8,271 $11,773
Operating Expenses 11,671 9,727 11,253
------- ------- -------
Income (Loss) from Operations (1,662) (1,456) 520
Income from Financial
Investments 773 2,063 2,115
Other Income and Interest Charges 4,197 5,991 4,092
------- ------- -------
Income Before Income Taxes 3,308 6,598 6,727
Income Tax Expense 1,076 2,497 1,986
------- ------- -------
Net Income $ 2,232 $ 4,101 $ 4,741
======= ======= =======
Balance Sheets as of December 31:
Assets:
Non-utility property - net $25,704 $36,053 $24,212
Investments and other 26,081 37,364 41,419
Current assets 20,898 20,750 27,541
------- ------- -------
Total Assets $72,683 $94,167 $93,172
======= ======= =======
Capitalization and Liabilities:
Equity $30,706 $ 30,392 $ 26,562
Current liabilities 13,590 37,459 42,164
Other liabilities 28,387 26,316 24,446
------- -------- --------
Total Capitalization and
Liabilities $72,683 $ 94,167 $ 93,172
======= ======== ========
- ----------------------------------------------------------------------
3. CAPITAL STOCK:
- ---------------------
Common Stock
- ------------
On September 6, 1996, additional shares of common stock were
distributed to shareholders of record on August 23, 1996 in connection
with a three-for-two stock split. All share disclosures and per share
data related to the common stock included in these financial
statements are presented on a post-split basis. Amounts associated
with common stock for prior years have been adjusted to reflect the
stock split.
During 1996, the Board of Directors adopted a Shareholder Rights Plan
and declared a dividend of one Right for each outstanding share of
common stock. Each Right entitles the shareholder to purchase one
tenth of a share of common stock for $6.67. In the event that any
person acquired more than 15 percent of the outstanding common stock,
or should the Company be acquired in a merger or other business
combination transaction, subject to the terms of the Rights Plan, the
Right would become exercisable, entitling each holder (other than the
acquiring person or group), for a purchase price equal to 10 times the
current purchase price of the Right, to purchase that number of shares
of common stock having a market value equal to 20 times the purchase
price of the Right. The Rights will expire on March 15, 2006.
At December 31, 1996, Northwest Natural had reserved 95,706 shares of
common stock for issuance under the Employee Stock Purchase Plan,
198,685 shares under its Dividend Reinvestment and Stock Purchase
Plan, 910,015 shares under its 1985 Stock Option Plan (see Note 4),
604,904 shares for future conversions of its 7-1/4 percent Convertible
Debentures and 3,000,000 shares under the Shareholder Rights Plan.
In the first quarter of 1995, Northwest Natural sold 1.72 million
shares of its Common Stock. The net proceeds of $33.0 million were
used for corporate purposes, primarily to fund, in part, Northwest
Natural's construction program, and to repay short-term debt incurred
for that purpose.
Redeemable Preference Stock
- ---------------------------
The remaining shares of the $2.375 Series of Convertible Preference
Stock were redeemed on May 15, 1995. The $6.95 Series of Preference
Stock is not redeemable prior to December 31, 2002, but is subject to
mandatory redemption on that date.
Redeemable Preferred Stock
- --------------------------
The mandatory preferred stock redemption requirements aggregate $1.1
million in 1997 and 1998, $1.0 million in 1999 and $0.8 million in 2000
and 2001. These requirements are noncumulative. At any time Northwest
Natural is in default on any of its obligations to make the prescribed
sinking fund payments, it may not pay cash dividends on common stock or
preference stock. Upon involuntary liquidation, all series of
redeemable preferred stock are entitled to their stated value.
The redeemable preferred stock is callable at stipulated prices, plus
accrued dividends. At December 31, 1996, redemption prices were $100
per share for the $4.68 and $4.75 Series. Shares of the $7.125 Series
are redeemable on or after May 1, 1998 at a price of $104.75 per share
decreasing each year thereafter to $100 per share on or after May 1,
2008.
The following table shows the changes in the number of shares of Northwest
Natural's capital stock and the premium on common stock for the years 1996,
1995, and 1994:
Premium
--------------Shares------------ on
Redeemable Redeemable Common
Common Preference Preferred Stock
Stock Stock Stock (Thousands)
- -------------------------------------------------------------------------------
Balance, December 31, 1993 19,765,884 315,323 170,406 $128,340
Sales to employees 16,284 -- -- 290
Sales to stockholders 260,991 -- -- 4,958
Exercise of stock options
- net 5,101 -- -- 2
Conversion of preference
stock to common 37,721 (15,244) -- 301
Conversion of convertible
debentures to common 42,047 -- -- 748
Sinking fund purchases -- -- (10,902) --
Other -- -- -- 2
---------- -------- -------- --------
Balance, December 31, 1994 20,128,028 300,079 159,504 134,641
Sales to the public 1,725,000 -- -- 30,571
Sales to employees 21,046 -- -- 346
Sales to stockholders 237,985 -- -- 4,376
Exercise of stock options
- net 18,359 -- -- 45
Conversion of preference
stock to common 106,755 (43,137) -- 853
Conversion of convertible
debentures to common 6,078 -- -- 108
Sinking fund purchases -- -- (11,100) --
Redemptions -- (6,942) -- --
Other -- -- -- 3
---------- ------- ------- --------
Balance, December 31, 1995 22,243,251 250,000 148,404 170,943
Sales to employees 15,043 -- -- 255
Sales to stockholders 235,878 -- -- 4,834
Exercise of stock options
- net 5,400 -- -- (11)
Conversion of convertible
debentures to common 55,612 -- -- 956
Sinking fund purchases -- -- (10,914) --
---------- ------- ------- --------
Balance December 31, 1996 22,555,184 250,000 137,490 $176,977
========== ======= ======= ========
- --------------------------------------------------------------------------------
4. STOCK OPTION AND PURCHASE PLANS:
- ---------------------------------------
Northwest Natural's 1985 Stock Option Plan (Plan) authorizes an
aggregate of 1,200,000 shares of common stock for issuance as
incentive or non-statutory stock options. These options may be
granted only to officers and key employees designated by a committee
of Northwest 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.
During 1985, 1990, 1994, 1995 and 1996, 225,000, 129,750, 112,773,
11,250, and 170,400 options were granted under the Plan at option
prices of $11.75, $16.59, $24.00, $20.17, and $20.92, respectively.
Since inception of the Plan, 50,523 options have expired. Northwest
Natural applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock-based compensation plans.
Accordingly, no compensation cost has been recognized for either the
Plan or the employee stock purchase plan. Had compensation cost for
Northwest Natural's two stock-based compensation plans been
determined based on the fair value at the grant dates for awards
under those plans in a manner consistent with the method determined
under 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:
1996 1995
---- ----
Earnings applicable to common stock ($000):
- -------------------------------------------
As reported $44,070 $35,259
Pro forma 43,480 35,185
Primary earnings per share
- --------------------------
As reported $1.97 $1.62
Pro forma 1.94 1.61
Fully diluted earnings per share
- --------------------------------
As reported $1.94 $1.60
Pro forma 1.89 1.57
For purposes of the pro forma expense, the fair value of each option
is estimated on the grant date using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants
in 1996 and 1995, respectively: a dividend yield of 5 and 5.4
percent; expected volatility of 22 and 21 percent; risk-free interest
rates of 6 and 7 percent; and expected lives of seven years.
Information regarding the Plan is summarized as follows:
Options
-----------------------------
1996 1995 1994
---- ---- ----
Outstanding, beginning of year 167,846 208,506 106,955
$11.75 Options:
Exchanged by holders -- (10,284) (4,620)
Exercised -- (14,310) (5,102)
$16.59 Options:
Exchanged by holders (12,933) (14,268) --
Exercised (5,400) (4,048) --
$24.00 Options:
Granted -- -- 112,773
Expired (8,250) (9,000) (1,500)
$20.17 Options:
Granted -- 11,250 --
$20.92 Options:
Granted 170,400 -- --
Expired (3,000) -- --
------- ------- -------
Outstanding, end of year 308,663 167,846 208,506
======= ======= =======
Available for grant, end
of year 601,352 760,500 12,750
======= ======= =======
--------------------------------------------------------------
Northwest Natural has an employee stock purchase plan whereby
employees may purchase common stock at 92 percent of the average bid
and ask market price on the subscription date. The subscription date
is set annually, and each employee may purchase up to 900 shares
payable through payroll deduction over a six to 12 month period.
5. LONG-TERM DEBT:
- --------------------
The issuance of first mortgage bonds under the Mortgage and Deed of
Trust is limited by property, earnings and other provisions of the
mortgage. Northwest Natural's Mortgage and Deed of Trust constitutes
a first mortgage lien on substantially all of its utility property.
The 7-1/4 percent 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 sinking fund requirements and maturities for the five years ending
December 31, 2001, on the long-term debt outstanding at December 31,
1996 amount to: $26.0 million in 1997; $16.0 million in 1998; and
$11.0 million in 1999, 2000, and 2001.
6. NOTES PAYABLE AND LINES OF CREDIT:
- ---------------------------------------
Northwest Natural has available through September 30, 1997, committed
lines of credit with five commercial banks totaling $100 million,
consisting of a primary fixed amount of $50 million plus an excess
amount of up to $50 million available as needed, at Northwest
Natural's option, on a monthly basis. Financial Corporation has
available through September 30, 1997, committed lines of credit with
two commercial banks totaling $20 million, consisting of a primary
fixed amount of $15 million plus an excess amount of up to $5 million
available as needed, at Financial Corporation's option, on a monthly
basis. Financial Corporation's lines are supported by the guaranty of
Northwest Natural.
Under the terms of these lines of credit, which are used as backup
lines for commercial paper programs, Northwest 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 Northwest Natural or
the Financial Corporation line of credit as of December 31, 1996 or
December 31, 1995.
Northwest Natural and Financial Corporation issue domestic commercial
paper, which is supported by the committed bank lines, under agency
agreements with a commercial bank. Additionally, Financial
Corporation's commercial paper is supported by the guaranty of
Northwest Natural. The amounts and average interest rates of
commercial paper outstanding were as follows at December 31:
1996 1995
----------------- ----------------
Thousands Amount Rate Amount Rate
-----------------------------------------------------------
Northwest Natural $43,532 5.4% $13,041 5.9%
Financial Corporation 6,526 5.4% 15,791 6.0%
------- -------
Total $50,058 $28,832
======= =======
-----------------------------------------------------------
7. 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 1996 1995 1994
- -------------------------------------------------------------------
Computed income taxes based on
statutory federal income tax
rate of 35% $25,949 $21,065 $19,577
Increase (reduction) in taxes
resulting from:
Differences between book and tax
depreciation 1,313 1,575 1,575
Current state income tax, net
of federal tax benefit 3,235 2,051 2,189
Federal income tax credits (228) (384) (338)
Restoration of investment tax
credit (849) (1,088) (1,077)
Removal costs (538) (552) (556)
Reversal of amounts provided in
prior years (1,900) -- --
Unconsolidated foreign subsidiary
income 113 266 (172)
Other - net 252 (812) (725)
------- ------- -------
Total provision for income taxes $27,347 $22,121 $20,473
======= ======= =======
- ---------------------------------------------------------------------
The provision for income taxes consists of the following:
Thousands 1996 1995 1994
- ---------------------------------------------------------------------
Income taxes currently payable:
Federal $17,634 $16,104 $10,441
State 2,912 1,052 2,375
Foreign 126 284 21
------- ------- -------
Total 20,672 17,440 12,837
------- ------- -------
Deferred taxes - net:
Federal 5,451 4,086 7,720
State 1,889 1,683 993
Foreign 184 -- --
------- ------- -------
Total 7,524 5,769 8,713
------- ------- -------
Investment and energy tax credits
restored:
From utility operations (800) (800) (800)
From subsidiary operations (49) (288) (277)
-------- ------- -------
Total (849) (1,088) (1,077)
Total provision for income taxes $27,347 $22,121 $20,473
------- ------- -------
Percentage of pretax income 36.9% 36.8% 36.6%
======= ======= =======
- --------------------------------------------------------------------
Deferred tax assets and liabilities are comprised of the following:
Thousands 1996 1995
- --------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $112,210 $110,544
Regulatory asset 22,597 23,568
-------- --------
Total 134,807 134,112
-------- --------
Deferred tax assets:
Regulatory liability $ 3,609 $ 9,099
Other deferred assets 7,554 5,842
Alternative minimum tax credits 19 479
-------- --------
Total 11,182 15,420
-------- --------
Net accumulated deferred income tax liability $123,625 $118,692
======== ========
- --------------------------------------------------------------------
8. EMPLOYEE RETIREMENT PLANS:
- -------------------------------
Northwest Natural has two non-contributory defined benefit retirement
plans covering all regular, full-time employees with more than one
year of service. The benefits under the plans are based upon years of
service and the employee's average compensation during the final years
of service. Northwest Natural's funding policy is to make the annual
contribution required by applicable regulations and recommended by its
actuary. Plan assets consist primarily of marketable foreign and
domestic equity securities, corporate obligations, U.S. government
obligations and cash equivalents.
The following table sets forth the amounts recognized in the financial
statements and the combined funded status of the retirement plans:
Thousands 1996 1995 1994
------------------------------------------------------------------
Service cost $ 3,082 $ 2,819 $ 2,952
Interest cost 6,980 6,843 6,264
Return on assets (14,935) (29,291) 4,056
Net amortization and deferral 4,110 19,927 (12,804)
-------- -------- -------
Annual pension cost $ (763) $ 298 $ 468
======== ======== =======
------------------------------------------------------------------
Vested benefit obligation $ 84,502 $ 79,805 $ 68,628
Total accumulated benefit
obligation $ 84,915 $ 80,079 $ 70,186
------------------------------------------------------------------
Funded status as of December 31:
Plan assets at fair value $134,376 $124,748 $100,077
Projected benefit obligation
for service rendered to date 100,481 96,999 85,206
-------- -------- --------
Funded status 33,895 27,749 14,871
Unrecognized net gain (35,326) (30,185) (15,992)
Unrecognized net asset at
transition (1,123) (1,518) (1,914)
Unrecognized prior service costs 5,012 5,650 5,028
------- -------- --------
Prepaid pension cost $ 2,458 $ 1,696 $ 1,993
======= ======== ========
Total cash contribution $ 0 $ 0 $ 10
======= ======== ========
------------------------------------------------------------------
Discount rate:
Funded status 7.50% 7.50% 8.00%
===== ===== =====
Pension cost 7.50% 8.00% 7.50%
===== ===== =====
Expected long-term rate of return on
plan assets 9.00% 9.00% 9.00%
===== ===== =====
Rate for compensation increases 5.00% 5.00% 5.00%
===== ===== =====
------------------------------------------------------------------
Effective December 31, 1995, Northwest Natural changed the assumed
discount rate used in determining the funded status of the plans from
8.00 percent to 7.50 percent. The 7.50 percent discount rate was used
in determining the funded status of the plans at year-end 1995 and
1996 and was used to determine annual pension cost in 1996. This
discount rate also will be used to determine 1997 pension cost.
Northwest Natural has a qualified "Retirement K Savings Plan" under
Internal Revenue Code Section 401(k) and a non-qualified "Executive
Deferred Compensation Plan," for eligible employees. These plans are
designed to enhance the existing retirement program of employees and
to assist them in strengthening their financial security by providing
an incentive to save and invest regularly. Northwest Natural's
contributions to these plans in 1996, 1995, and 1994 were $1.0
million, $0.8 million, and $0.7 million, respectively.
Northwest Natural has a non-qualified supplemental retirement plan
for eligible executive officers which it is funding with trust-owned
life insurance. The amount of coverage is designed to provide
sufficient returns to recover all costs of the plan if assumptions
made as to mortality experience, policy earnings, and other factors
are realized. Expenses related to the plan were $1.3 million in 1996
and $1.0 million in 1995 and 1994.
9. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS:
- ------------------------------------------------------------
The Company provides continued health care and life insurance coverage
after retirement for exempt employees. These benefits and similar
benefits for active employees are provided by insurance companies and
related premiums are based on the amount of benefits paid during the
year.
The accrued costs in excess of benefits paid of approximately $1.0
million per year (pre-tax) relating to SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions," are not
included in Northwest Natural's rates. The staff of the OPUC has
recommended that Northwest Natural's portion of these costs allocated
to Oregon be authorized for recovery in rates only pursuant to a
general rate case filing, and has recommended against the use of
deferred accounting treatment for their recovery. Northwest Natural
is charging the Oregon portion of these costs to expense. The WUTC
has approved deferred accounting treatment for the portion of these
costs allocated to Washington pending final approval for recovery in a
general rate case. Northwest Natural monitors its need for general
rate cases covering these and other expenses and plans to file a
general rate case in Washington in 1997.
The following table sets forth the postretirement health care and life
insurance plan's status at December 31:
Thousands
------------------------------------------------------------
1996 1995 1994
---- ---- ----
Retirees $ 5,753 $ 5,983 $ 5,768
Fully eligible active
plan participants 1,232 1,254 834
Other active plan participants 3,878 4,236 3,792
------- ------ --------
Total accumulated post-
retirement benefit
obligation 10,863 11,473 10,394
Fair value of plan assets - - -
------- ------- -------
Accumulated postretirement
benefit obligation in
excess of plan assets 10,863 11,473 10,394
Unrecognized transition
obligation (9,024) (9,588) (10,152)
Unrecognized gain 2,273 1,262 1,942
------- ------- --------
Accrued postretirement
benefit cost $ 4,112 $ 3,147 $ 2,184
======= ======= ========
Service cost - benefits
earned during the period $ 262 $ 239 $ 314
Interest cost on accumulated
postretirement benefit
obligation 838 859 859
Amortization of transition
obligation 556 503 564
------- ------- -------
Net postretirement
benefit cost $ 1,656 $ 1,601 $ 1,737
======= ======= =======
------------------------------------------------------------
The unrecognized transition obligation is being amortized over a
period of 20 years beginning January 1, 1993. The assumed health care
cost trend rate used in measuring the accumulated postretirement
benefit obligation for pre-Medicare eligibility is 6.5 percent for
1997; 8.5 percent for 1998; 8 percent for 1999; 7.5 percent for 2000;
7.0 percent for 2001; then decreasing over the next six years to 4
percent. The assumed rate for the HMO plan is 4 percent for 1997; 5
percent for 1998; 4.5 percent for 1999; and 4 percent for the next
eight years. The assumed rate for post-Medicare eligibility is 6
percent for 1997; 8 percent for 1998; 7.5 percent for 1999; 7 percent
for 2000; 6.5 percent for 2001; then decreasing over the next six
years to 4 percent. A one-percentage-point change in the assumed
health care cost trend rate for each year would adjust the accumulated
postretirement benefit obligation and net postretirement health care
cost as of December 31, 1996 by approximately 13 percent and
17 percent, respectively. The assumed discount rate used in
determining the accumulated postretirement benefit obligation was
8.0 percent at December 31, 1996, 7.5 percent at December 31, 1995 and
8.5 percent at December 31, 1994.
10. PROPERTY AND INVESTMENTS:
- ------------------------------
The following table sets forth the major classifications of Northwest
Natural's utility plant and accumulated provision for depreciation at
December 31. The lower average depreciation rates in 1996 compared to 1995
reflect reductions in these rates approved by the OPUC and WUTC effective
January 1, 1996.
1996 1995
------------------ -----------------
Average Average
Depreciation Depreciation
Thousands Amount Rate Amount Rate
- ----------------------------------------------------------------------
Transmission and
distribution $ 873,862 3.6% $ 811,559 3.8%
Storage 66,624 2.7% 59,700 3.9%
General 66,483 6.8% 64,856 7.6%
Intangible and other 11,287 12.5% 11,725 13.2%
---------- ---------
Utility plant in
service 1,018,256 3.8% 947,840 4.2%
Gas stored long-term 10,708 6,738
Work in progress 26,148 14,497
---------- ---------
Total utility
plant 1,055,112 969,075
Less accumulated
provision for
depreciation 336,141 308,702
---------- ----------
Utility plant-net $ 718,971 $ 660,373
========== ==========
- -------------------------------------------------------------------
The following table summarizes the Company's investments in affiliated
entities accounted for under the equity and cost methods, and its
investment in a leveraged lease at December 31:
Thousands 1996 1995
-------------------------------------------------------
Electric generation $22,035 $22,405
Aircraft leveraged lease 8,265 8,734
Gas pipeline and other 2,708 2,987
------- -------
Total investments and other $33,008 $34,126
======= =======
-------------------------------------------------------
Financial Corporation has invested in four solar electric generation
plants located near Barstow, California. Power generated by these
stations is sold to Southern California Edison Company under long-
term contracts. Financial Corporation's ownership interests in these
projects range from 4.0 percent to 5.3 percent.
Financial Corporation also has invested in four U. S. Windpower
Partners electric generating projects, with facilities 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. Financial Corporation's
ownership interests in these projects range from 8.5 percent to 41
percent.
In 1987, Oregon Natural purchased a Boeing 737-300 aircraft which was
leased to Continental Airlines for 20 years under a leveraged lease
agreement. As part of the merger with Northwest Natural, the aircraft
was transferred from Oregon Natural to Northwest Natural.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
- -----------------------------------------
The estimated fair values of Northwest Natural's financial instruments
have been determined using available market information and
appropriate valuation methodologies. The following is a list of
financial instruments whose carrying values are sensitive to market
conditions:
December 31, 1996 December 31, 1995
-------------------- --------------------
Carrying Estimated Carrying Estimated
Thousands Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------
Redeemable preference
stock $ 25,000 $ 22,750 $ 25,000 $ 22,500
Redeemable preferred
stock $ 13,749 $ 12,956 $ 14,840 $ 14,092
Long-term debt
including amount due
within one year $297,838 $316,205 $300,945 $333,052
- -----------------------------------------------------------------
Fair value of the redeemable preference stock and the redeemable
preferred stock was estimated using quoted market prices. Interest
rates that are currently available to the Company for issuance of debt
with similar terms and remaining maturities were used to estimate fair
value for debt issues.
The carrying amount of long-term notes receivable was stated at
estimated fair value at December 31, 1996 and December 31, 1995.
12. USE OF FINANCIAL DERIVATIVES:
- ----------------------------------
In connection with its Canadian gas purchase commitments, Northwest
Natural uses foreign currency forward contracts to hedge against
fluctuations in currency values. The forward contracts have terms
ranging up to 12 months. Such contracts are purchased in an amount up
to 100 percent but not less than 80 percent of estimated daily
requirements for commodity gas purchased in Canadian currency from gas
suppliers in Canada. The notional amount of these contracts at
December 31, 1996, totaled $10.3 million, and, if settled on that
date, Northwest Natural would have realized a loss on these contracts
of $0.1 million.
Northwest Natural uses natural gas commodity swap agreements to
convert certain long-term gas purchase contracts from floating prices
to fixed prices. Under the commodity swap agreements, Northwest
Natural receives or makes payments based on the differential between a
specified price and the actual price of natural gas as measured by
price indices relating to the market area where it purchases the gas.
The swap agreements have terms ranging up to 12 months. They may
cover up to 100 percent of Northwest Natural's daily baseload
supplies, although in 1996 and 1995 the limited market for gas
commodity swaps in the supply areas where Northwest Natural purchases
baseload gas restricted their use to 30 percent or less of baseload
supplies. At December 31, 1996 and 1995, the Company had swap
agreements with broker-dealers to exchange monthly payments on
notional quantities amounting to 30,000 and 15,000 MMBtu per day of
gas, respectively. Under the swap agreements in effect at
December 31, 1996, the Company pays fixed prices averaging $1.285 per
MMBtu. In return, it receives a price that varies from month to month
with market conditions; this price was $3.55 per MMBtu at December 31,
1996. The notional amount of the swap agreements at December 31,
1996, was $11.7 million, and, if settled on that date, Northwest
Natural would have realized a gain on these swaps of $3.6 million.
13. COMMITMENTS AND CONTINGENCIES:
- -----------------------------------
Lease Commitments
-----------------
Future lease commitments are: $4.9 million in 1997; $2.5 million in
1998 and 1999; $2.4 million in 2000 and $2.3 million in 2001.
Thereafter, total commitments amount to $7.1 million. These
commitments principally relate to the lease of the Company's office
headquarters, vehicles and computer systems.
Total rental expense for 1996, 1995 and 1994 was $5.4 million, $5.3
million and $5.1 million, respectively.
Purchase Commitments
--------------------
Northwest 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, Northwest Natural has entered into
long-term agreements to release firm pipeline capacity. The aggregate
amounts of these agreements were as follows at December 31, 1996:
Capacity Capacity
Purchase Release
Thousands Agreements Agreements
------------------------------------------------------------
1997 $ 77,641 $ 4,142
1998 77,417 4,142
1999 77,417 4,142
2000 77,416 4,142
2001 76,692 4,142
2001 through 2023 573,346 36,589
-------- -------
Total 959,929 57,299
Less: Amount representing
interest 326,068 19,118
-------- -------
Total at present value $633,861 $38,181
======== =======
-----------------------------------------------------------
Northwest Natural's total payments of fixed charges under capacity
purchase agreements in 1996, 1995 and 1994 were $73.4 million,
$62.2 million, and $50.0 million, respectively. Included in the
amounts for 1996, 1995 and 1994 were reductions for capacity release
sales totaling $4.2 million, $4.8 million and $3.7 million,
respectively. In addition, Northwest Natural is required to pay per-
unit charges based on the actual quantities shipped under the
agreements. In certain of Northwest Natural's take-or-pay purchase
commitments, annual deficiencies may be offset by prepayments subject
to recovery over a longer term if future purchases exceed the minimum
annual requirements.
Environmental Matters
---------------------
Northwest Natural owns property in Linnton, Oregon, that is the site
of a former gas manufacturing plant that was closed in 1956. In 1993,
pursuant to Oregon Department of Environmental Quality (ODEQ)
procedures, Northwest Natural submitted a notice of intent to
participate in the ODEQ's Voluntary Cleanup Program and, in 1994, the
site was listed on ODEQ's Confirmed Release List and Inventory.
During 1995, initial tests revealed environmental contamination, but
the extent or the estimated cost of remediation cannot yet be
determined.
In 1993, Northwest Natural recorded an expense of $0.5 million for the
estimated costs of consultants' fees, ODEQ oversight cost
reimbursements, and legal fees in connection with the voluntary
investigation at the Linnton site. It recorded an additional
$0.4 million of expense in 1996 for costs of the continuing
investigation, and estimates that ongoing costs will average about
$0.1 million per calendar quarter until the investigation is
concluded, perhaps during 1997. Northwest Natural expects that its
costs of investigation and any remediation for which it may be
responsible should be recoverable, in large part, from insurance or
through future rates.
In 1996, the Eugene Water and Electric Board (EWEB) asked Northwest
Natural to participate in an investigation and potential remediation
of a 1.5 acre site of a former manufactured gas plant in Eugene,
Oregon. Northwest Natural purchased the property in 1958, after the
plant had been converted to a liquid propane gas plant. It used the
propane plant until 1960 when the system was converted to natural gas,
and continued to use the site as a service center until 1976 when it
was sold. Although Northwest Natural never operated the manufactured
gas plant, EWEB has contended that Northwest Natural's activities on
the site may have exacerbated prior contamination. To date, Northwest
Natural has not agreed to participate in an investigation of the site
and has not obtained sufficient information to determine the extent of
its responsibility, if any, for remediation of the site.
Litigation
----------
In July 1995, a jury in an Oregon state court returned a verdict
against Northwest Natural in the case of Northwest Natural Gas Company
v. Chase Gardens, Inc. (Lane County Circuit Court Case No. 16-91-
01370). Northwest Natural appealed to the Oregon Court of Appeals
(Oregon Court of Appeals Case No. CA A90481), which affirmed the trial
court decision in February 1997. Northwest Natural plans to petition
for review of the Court of Appeals decision by the Oregon Supreme
Court, and believes there are ample legal precedents to support a
ruling by the latter court in favor of Northwest Natural. However,
due to the decreased probability that Northwest Natural will succeed
in overturning or reducing the damage award on appeal, and to a
decision in binding arbitration that Northwest Natural's liability
insurance policy does not provide coverage for the judgment or defense
costs, Northwest Natural recorded a charge of $5.6 million in the
fourth quarter of 1996, equivalent to 15 cents a share, as a reserve
against payment of the judgment, costs and post-judgment interest from
the case.
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.
Technology Risk
----------------
Like all companies with business application software programs,
Northwest Natural is affected by the "Year 2000" issue. Much of this
software, which includes its customer service, operations, and
financial systems, was written using two digits to define the year,
rather than four. Any of the Company's software that is time-
sensitive may recognize a date using "00" as the year 1900 rather than
2000. This could result in the computer shutting down or performing
incorrect calculations.
Northwest Natural is in the process of identifying the software
programs that could be affected by the Year 2000 issue and is
developing an implementation plan to resolve the issue. Northwest
Natural believes that with the appropriate modifications, it will
be able to operate its time-sensitive software programs beyond
the turn of the century. The extent or the estimated cost
of such modifications cannot yet be determined.
Northwest Natural intends to seek recovery through
future rates of its costs of any remediation that may
be required by this issue.
NORTHWEST NATURAL GAS COMPANY
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- -------------------------------------------
--------------Quarter Ended-------------
Dollars (Thousands
Except Per Share Amounts) Mar. 31 June 30 Sept. 30 Dec. 31 Total
- ------------------------------------------------------------------------------
1996
Operating revenues 137,561 71,884 50,585 120,288 380,318
Net operating revenues 83,504 46,183 34,578 73,248 237,513
Net income 23,356 5,508 255 17,674** 46,793
Earnings (loss) per share 1.02 0.22 (0.02) 0.76** 1.97*
1995
Operating revenues 125,389 71,029 48,644 111,214 356,276
Net operating revenues 73,845 41,805 28,031 68,544 212,225
Net income (loss) 19,052 3,508 (4,348) 19,853 38,065
Earnings (loss) per share 0.88 0.13 (0.23) 0.86 1.62*
- -----------------------------------------------------------------------------
* Quarterly earnings per share are based upon the average number of common
shares outstanding during each quarter. Because the average number of
shares outstanding has increased in each quarter shown, the sum of quarterly
earnings does 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.
** Results for the fourth quarter of 1996 include a charge equivalent to
15 cents per share resulting from a judgment against Northwest Natural in
litigation dating from 1995 and an adjustment reducing tax expense by
$1.9 million, or 8 cents a share, for reversal of deferred tax amounts
provided in prior years.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Audit Committee of the Board of Directors has recommended
that Price Waterhouse LLP, independent certified public accountants, be
retained as independent auditors of the Company for the year 1997, and that
this firm be elected by the shareholders at the Annual Meeting. On
February 20, 1997, the Board approved Price Waterhouse LLP as its
independent auditors for the year ending December 31, 1997. The Company
plans to engage Price Waterhouse LLP as its independent auditors, subject
to approval by the shareholders. In case Price Waterhouse LLP is not
elected, the Board of Directors will select another certified public
accounting firm to serve as independent auditors of the Company.
On February 21, 1997, management informed the former accountant,
Deloitte & Touche LLP, that it had been dismissed. There have been no
adverse opinions, disclaimers of opinion or qualifications or modifications
as to uncertainty, audit scope or accounting principles regarding the
reports of Deloitte & Touche LLP on the Company's financial statements
within the two most recent fiscal years prior to their dismissal. There
were no reportable disagreements with the former accountants on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure.
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 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 effective July 25, 1996
(incorporated herein by reference to Exhibit 3
to Form 10-Q for quarter ended June 30, 1996,
File No. 0-994).
*(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 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).
*(4g.) Rights Agreement, dated as of February 27,
1996, between the Company and Boatmen's Trust
Company, 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).
*(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).
(11) Statement re computation of per share earnings.
(12) Statement re computation of ratios.
(23) Independent Auditors' Consent.
(27) Financial Data Schedule.
Executive Compensation Plans and Arrangements:
----------------------------------------------
*(10a.) Employment agreement, dated October 27, 1983,
between the Company and an executive officer
(incorporated herein by reference to Exhibit
(10a.) to Form 10-K for 1989, File No. 0-994).
*(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).
*(10c.) 1985 Stock Option Plan, as amended effective
May 25, 1995 (incorporated herein by reference
to Exhibit (10c.) to Form 10-K for 1995, File
No. 0-994).
*(10e.) Executive Deferred Compensation Plan, 1990
Restatement, effective January 1, 1990
(incorporated herein by reference to Exhibit
(10e.) to Form 10-K for 1990, File No. 0-994).
*(10e.-1) Amendment No. 1 to Executive Deferred
Compensation Plan (incorporated herein by
reference to Exhibit (10e.-1) to Form 10-K for
1991, File No. 0-994).
*(10e.-2) Amendment No. 2 to Executive Deferred
Compensation Plan (incorporated herein by
reference to Exhibit
(10e.-2) to Form 10-K for 1994, File No. 0-
994).
*(10f.) Directors Deferred Compensation Plan, 1988
Restatement, effective January 1, 1988
(incorporated herein by reference to Exhibit
(10g.) to Form 10-K for 1987, File No. 0-994).
*(10f.-1) Amendment No. 1 to Directors Deferred
Compensation Plan (incorporated herein by
reference to Exhibit
(10f.-1) to Form 10-K for 1994, File No. 0-
994).
*(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 July 1, 1991 (incorporated
herein by reference to Exhibit (10i.) to Form 10-K
for 1991, File No. 0-994).
*(10k.) Executive Annual Incentive Plan, effective March
1, 1990, as amended effective January 1, 1992 and
January 1, 1996 (incorporated by reference to
Exhibit (10k.) to Form 10-K for 1995, File No. 0-
994).
*(10l.) Employment agreement dated November 27, 1989,
between the Company and an executive officer
(incorporated herein by reference to Exhibit
(10l.) to Form 10-K for 1991, File No. 0-994).
*(10m.) Agreement dated September 22, 1994, between the
Company and an executive officer (incorporated
herein by reference to Exhibit (10m.) to Form 10-K
for 1994, 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).
*(10o.) Form of Severance Agreement as entered into
between the Company and designated executive
officers (incorporated herein by reference to
Exhibit (10o.) to Form 10-K for 1995, 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.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the quarter ended
December 31, 1996.
___________________________
*Incorporated herein by reference as indicated.
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: February 21, 1997 By: /s/ Richard G. Reiten
----------------- --------------------------------
Richard G. Reiten, President
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 February 21, 1997
- ------------------------------ and Director
Richard G. Reiten, President
and Chief Executive Officer
/s/ Bruce R. DeBolt Principal Financial Officer February 21, 1997
- -------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
/s/ D. James Wilson Principal Accounting Officer February 21, 1997
- -------------------------------
D. James Wilson
Treasurer and Controller
/s/ Mary Arnstad Director )
- ------------------------------- )
Mary Arnstad )
)
/s/ Thomas E. Dewey, Jr. Director )
- ------------------------------- )
Thomas E. Dewey, Jr. )
)
/s/ Tod R. Hamachek Director )
- ------------------------------ )
Tod R. Hamachek )
)
/s/ Richard B. Keller Director )
- ------------------------------- )
Richard B. Keller )
)
/s/ Wayne D. Kuni Director )
- ------------------------------- )
Wayne D. Kuni )
) February 21, 1997
/s/ Randall C. Pape )
- ------------------------------- Director )
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 )
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Annual Report on Form 10-K
For Fiscal Year Ended
December 31, 1996
Exhibit
Document Number
-------- -------
* Restated Articles of Incorporation, as filed
June 24, 1988 and amended December 8, 1992,
December 1, 1993 and May 27, 1994 (3a.)
* Bylaws as amended effective July 25, 1996 (3b.)
* Mortgage and Deed of Trust, dated as of July 1,
1946, as supplemented by Supplemental Indenture
Nos. 1 through 20 (4a.)
* Indenture, dated as of June 1, 1991, between
the Company and Bankers Trust Company (4d.)
* Officers' Certificate dated June 12, 1991
creating Unsecured Medium-Term Notes Series A (4e.)
* Officers' Certificate dated June 18, 1993
creating Unsecured Medium-Term Notes Series B (4f.)
* Rights Agreement, dated as of February 27, 1996,
between the Company and Boatmen's Trust Company (4g.)
* Transportation Agreement, dated June 29, 1990,
between the Company and Northwest Pipeline
Corporation (10j.)
* Replacement Firm Transportation Agreement,
dated July 31, 1991, between the Company and
Northwest Pipeline Corporation (10j.(1))
* Firm Transportation Service Agreement, dated
November 10, 1993, between the Company and
Pacific Gas Transmission Company (10j.(2))
* Service Agreement, dated June 17, 1993, between
Northwest Pipeline Corporation and the Company (10j.(3))
* Firm Transportation Service Agreement, dated
October 22, 1993, between Pacific Gas
Transmission Company and the Company (10j.(4))
* Firm Transportation Service Agreement, dated
June 22, 1994, between Pacific Gas Transmission
Company and the Company (10j.(5))
Statement re computation of per share earnings (11)
Statement re computation of ratios (12)
Independent Auditors' Consent (23)
Financial Data Schedule (27)
Executive Compensation Plans and Arrangements
---------------------------------------------
* Employment Agreement, dated October 27, 1983,
between the Company and an executive officer (10a.)
* Executive Supplemental Retirement Income Plan,
1995 Restatement (10b.)
* 1995 Amendment to Executive Supplemental
Retirement Income Plan (1995 Restatement) (10b.-1)
* 1985 Stock Option Plan as amended effective
May 25, 1995 (10c.)
* Executive Deferred Compensation Plan, 1990
Restatement, effective January 1, 1990 (10e.)
* Amendment No. 1 to Executive Deferred
Compensation Plan (10e.-1)
* Amendment No. 2 to Executive Deferred
Compensation Plan (10e.-2)
* Directors Deferred Compensation Plan, 1988
Restatement, effective January 1, 1988 (10f.)
* Amendment No. 1 to Directors Deferred
Compensation Plan (10f.-1)
* Form of Indemnity Agreement entered into
between the Company and each director and
executive officer (10g.)
* Non-Employee Directors Stock Compensation Plan,
as amended effective July 1, 1991 (10i.)
* Executive Annual Incentive Plan, effective
March 1, 1990, as amended effective
January 1, 1992 and January 1, 1996 (10k.)
* Employment agreement dated November 27, 1989
between the Company and an executive officer (10l.)
* Employment agreement dated September 22, 1994
between the Company and an executive officer (10m.)
* Agreement dated November 2, 1995, as amended
February 27, 1996, between the Company and an
executive officer (10n.)
* Form of Severance Agreement as entered into
between the Company and designated executive
officers. (10o.)
- --------------------------
* Incorporated by reference
EXHIBIT 11
NORTHWEST NATURAL GAS COMPANY
Statement Re: Computation of Per Share Earnings
(Thousands, except per share amounts)
(Unaudited)
12 Months Ended December 31
-------------------------------
1996 1995 1994
---- ---- ----
Earnings Applicable to Common Stock $44,070 $35,259 $32,478
Preference Stock Dividends - - 119
Debenture Interest Less Taxes 479 528 534
------- ------- -------
Net Income Available for
Fully-Diluted Common Stock $44,549 $35,787 $33,131
======= ======= =======
Average Common Shares Outstanding 22,391 21,817 19,943
Stock Options 34 14 27
Convertible Preference Stock - - 124
Convertible Debentures 545 600 607
------- ------- -------
Fully-Diluted Common Stock 22,970 22,431 20,701
======= ======= =======
Fully-Diluted Earnings Per Share
of Common Stock $1.94 $1.60 $1.60
===== ===== =====
Note: Primary earnings per share are computed on the weighted daily
average number of common shares outstanding each year. Outstanding
stock options are common stock equivalents but are excluded from
primary earnings per share computations due to immateriality.
EXHIBIT 12
NORTHWEST NATURAL GAS COMPANY
Computation of Ratio of Earnings to Fixed Charges
January 1, 1992 - December 31, 1996
($000)
Year Ended December 31
-------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- --------
Fixed Charges,
as defined:
Interest on
Long-Term Debt $23,001 $22,578 $21,921 $23,141 $ 23,176
Other Interest 3,223 1,906 2,473 2,252 3,448
Amortization of
Debt Discount
and Expense 511 775 850 882 865
Interest Portion
of Rentals 1,439 1,701 1,697 1,764 1,798
------- ------- ------- ------- --------
Total Fixed
Charges, as
defined $28,174 $26,960 $26,941 $28,039 $ 29,287
======= ======= ======= ======= ========
Earnings, as defined:
Net Income $15,775 $37,647 $35,461 $38,065 $ 46,793
Taxes on Income 6,951 22,096 20,473 22,120 27,347
Fixed Charges,
as above 28,174 26,960 26,941 28,039 29,287
------- ------- ------- ------- --------
Total Earnings,
as defined $50,900 $86,703 $82,875 $88,224 $103,427
======= ======= ======= ======= ========
Ratio of Earnings
to Fixed Charges 1.81 3.22 3.08 3.15 3.53
==== ==== ==== ==== ====
EXHIBIT 23
DELOITTE & TOUCHE LLP
- ---------------------------------------------------------------
Suite 3900 Telephone: (503) 222-1341
111 SW Fifth Avenue Facsimile: (503) 224-2172
Portland, Oregon 97204-3698
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement Nos. 33-63017 and 33-63585, Post-Effective Amendment
No. 1 to Registration Statement No. 2-76276, and Post-Effective
Amendments No. 2 to Registration Statement No. 2-77195 on Form
S-8 and in Registration Statement Nos. 33-64014, 33-51271, and
33-53795, and Post-Effective Amendments No. 1 to Registration
Statements Nos. 33-1304 and 33-20384 on Form S-3 of our report
dated February 12, 1997 appearing in this Annual Report on
Form 10-K of Northwest Natural Gas Company for the year ended
December 31, 1996.
DELOITTE & TOUCHE LLP
February 21, 1997
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This section of the schedule contains summary financial information extracted
from the consolidated financial statements and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 718,971
<OTHER-PROPERTY-AND-INVEST> 61,024
<TOTAL-CURRENT-ASSETS> 98,314
<TOTAL-DEFERRED-CHARGES> 52,620
<OTHER-ASSETS> 57,940
<TOTAL-ASSETS> 988,869
<COMMON> 71,425
<CAPITAL-SURPLUS-PAID-IN> 176,977
<RETAINED-EARNINGS> 98,376
<TOTAL-COMMON-STOCKHOLDERS-EQ> 346,778
37,668
0
<LONG-TERM-DEBT-NET> 271,838
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 50,058
<LONG-TERM-DEBT-CURRENT-PORT> 26,000
1,081
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 255,446
<TOT-CAPITALIZATION-AND-LIAB> 988,869
<GROSS-OPERATING-REVENUE> 380,318
<INCOME-TAX-EXPENSE> 27,347
<OTHER-OPERATING-EXPENSES> 287,667
<TOTAL-OPERATING-EXPENSES> 315,014
<OPERATING-INCOME-LOSS> 65,304
<OTHER-INCOME-NET> 8,196
<INCOME-BEFORE-INTEREST-EXPEN> 73,500
<TOTAL-INTEREST-EXPENSE> 26,707
<NET-INCOME> 46,793
2,723
<EARNINGS-AVAILABLE-FOR-COMM> 44,070
<COMMON-STOCK-DIVIDENDS> 26,836
<TOTAL-INTEREST-ON-BONDS> 19,374
<CASH-FLOW-OPERATIONS> 89,940
<EPS-PRIMARY> $1.97
<EPS-DILUTED> $1.94
</TABLE>
