Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
------------------------
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 No.)
220 N. W. Second Avenue, Portland, Oregon 97209
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 226-4211
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
At August 6, 1997, 22,712,105 shares of the registrant's Common Stock, $3-1/6
par value (the only class of Common Stock) were outstanding.
NORTHWEST NATURAL GAS COMPANY
June 30, 1997
Summary of Information Reported
The registrant submits herewith the following information:
PART I. FINANCIAL INFORMATION
Page
Number
------
Item 1. Financial Statements
(1) Consolidated Statements of Income for the three and 3
six month periods ended June 30, 1997 and 1996, and
Consolidated Statements of Earnings Invested in the
Business for the six-month periods ended June 30, 1997
and 1996.
(2) Consolidated Balance Sheets at June 30, 1997 and 1996 4
and December 31, 1996.
(3) Consolidated Statements of Cash Flows for the six-month 5
periods ended June 30, 1997 and 1996.
(4) Consolidated Statements of Capitalization at June 30, 6
1997 and 1996 and December 31, 1996.
(5) Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of 8
Operations and Financial Condition
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature 18
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(1) Consolidated Statements of Incomec
(Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
Net Operating Revenues:
Operating revenues $65,855 $71,884 $200,202 $209,445
Cost of sales 22,129 25,701 72,437 79,758
------- ------- -------- --------
Net operating revenues 43,726 46,183 127,765 129,687
------ ------ ------- -------
Operating Expenses:
Operations and maintenance 19,690 18,114 39,132 38,114
Taxes other than income taxes 4,631 5,028 11,510 12,895
Depreciation, depletion and
amortization 10,680 10,730 20,922 23,434
------ ------ ------ ------
Total operating expenses 35,001 33,872 71,564 74,443
Income from Operations 8,725 12,311 56,201 55,244
Other Income 1,493 2,525 841 5,006
Interest Charges - net 6,723 6,276 13,445 12,772
------ ------ ------ ------
Income Before Income Taxes 3,495 8,560 43,597 47,478
Income Taxes 1,135 3,052 16,484 18,614
------ ------ ------ ------
Net Income 2,360 5,508 27,113 28,864
Redeemable preferred and preference
stock dividend requirements 666 685 1,339 1,376
------- ------- -------- --------
Earnings Applicable to Common Stock $ 1,694 $ 4,823 $ 25,774 $ 27,488
======= ======= ======== ========
Average Common Shares Outstanding 22,661 22,343 22,625 22,309
Earnings per share of common stock:
Primary $0.07 $0.22 $1.14 $1.23
Fully-Diluted * $0.22 $1.12 $1.21
Dividends Per Share of Common Stock $0.30 $0.30 $0.60 $0.60
See Notes to Consolidated Financial Statements.
* Anti-dilutive
================================================================================
Consolidated Statements of Earnings Invested in the Business
(Thousands) (Unaudited)
Six Months Ended
June 30,
------------------
1997 1996
---- ----
Balance at Beginning of Period $ 98,376 $105,651
Net Income 27,113 28,864
Cash dividends:
Redeemable preferred and preference stock (1,353) (1,388)
Common stock (13,560) (13,369)
Foreign currency translation and capital stock expense (169) (548)
-------- --------
Balance at End of Period $110,407 $119,210
======== ========
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Balance Sheets
(Thousands of Dollars)
(Unaudited) (Unaudited)
June 30, June 30, Dec. 31,
1997 1996 1996
---------- ---------- --------
Assets:
Plant and Property in Service:
Utility plant in service $1,094,450 $1,010,180 $1,055,112
Less accumulated depreciation 351,499 322,384 336,141
---------- ---------- ----------
Utility plant - net 742,951 687,796 718,971
Non-utility property 48,573 43,697 45,689
Less accumulated depreciation
and depletion 20,690 14,397 19,388
---------- ---------- ----------
Non-utility property - net 27,883 29,300 26,301
---------- ---------- ----------
Total plant and property
in service 770,834 717,096 745,272
Investments and Other:
Investments 34,008 31,258 33,008
Long-term notes receivable 1,184 3,404 1,715
---------- ---------- ----------
Total investments and other 35,192 34,662 34,723
Current Assets:
Cash and cash equivalents 7,429 3,355 8,219
Accounts receivable - net 21,305 25,909 40,833
Accrued unbilled revenue 5,248 5,058 22,340
Inventories of gas, materials
and supplies 13,487 14,531 14,439
Prepayments and other current
assets 7,492 8,747 12,483
---------- ---------- ----------
Total current assets 54,961 57,600 98,314
Regulatory Tax Assets 59,640 60,430 57,940
Deferred Debits and Other 66,449 47,205 52,620
---------- ---------- ----------
Total Assets $ 987,076 $ 916.993 $ 988,869
========== ========== ==========
Capitalization and Liabilities:
Capitalization:
Common stock $ 251,697 $ 221,117 $ 248,402
Earnings invested in the
business 110,407 119,210 98,376
---------- ---------- ----------
Total common stock equity 362,104 340,327 346,778
Redeemable preference stock 25,000 25,000 25,000
Redeemable preferred stock 12,429 13,749 13,749
Long-term debt 300,600 253,499 271,838
---------- ---------- ----------
Total capitalization 700,133 632,575 657,365
---------- ---------- ----------
Current Liabilities:
Notes payable 52,943 21,301 50,058
Accounts payable 43,608 36,214 64,795
Long-term debt due within one year - 32,000 26,000
Taxes accrued 785 5,859 3,196
Interest accrued 5,448 4,536 5,396
Other current and accrued
liabilities 19,948 13,425 19,418
---------- ---------- ----------
Total current liabilities 122,732 113,335 168,863
Deferred Investment Tax Credits 12,263 11,952 11,668
Deferred Income Taxes 136,609 123,675 123,625
Regulatory Accounts and Other 15,339 35,456 27,348
Commitments and Contingencies - - -
---------- ---------- ----------
Total Capitalization and
Liabilities $ 987,076 $ 916,993 $ 988,869
========== ========== ==========
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Statements of Cash Flows
(Thousands of Dollars) (Unaudited)
Six Months Ended
June 30,
-----------------
1997 1996
---- ----
Operating Activities:
Net income $ 27,113 $ 28,864
Adjustments to reconcile net income to cash
provided by operations:
Depreciation, depletion and amortization 20,922 23,434
Gain on sale of assets - (2,897)
Deferred income taxes and investment tax credits 13,579 4,442
Equity in losses of investments 107 291
Allowance for funds used during construction (875) (653)
Regulatory accounts and other - net (15,529) (3,314)
-------- --------
Cash from operations before working
capital changes 45,317 50,167
Changes in operating assets and liabilities:
Accounts receivable 19,528 8,476
Accrued unbilled revenue 17,092 16,435
Inventories of gas, materials and supplies 952 (277)
Accounts payable (21,187) (5,570)
Accrued interest and taxes (2,359) (4,503)
Other current assets and liabilities (6,388) 3,870
-------- --------
Cash Provided By Operating Activities 52,955 68,598
-------- --------
Investing Activities:
Acquisition and construction of utility plant
assets (41,934) (36,411)
Investment in non-utility plant (3,675) (3,386)
Investments and other (676) 2,929
-------- --------
Cash Used In Investing Activities (46,285) (36,868)
-------- --------
Financing Activities:
Common stock issued 3,057 2,770
Redeemable preferred stock retired (1,320) (1,091)
Long-term debt issued 30,000 -
Long-term debt retired (27,000) (26,000)
Change in short-term debt 2,885 3,469
Cash dividend payments:
Redeemable preferred and preference stock (1,353) (1,388)
Common stock (13,560) (13,369)
Foreign currency translation and capital stock
expense (169) (548)
-------- --------
Cash Used For Financing Activities (7,460) (36,157)
-------- --------
Increase In Cash and Cash Equivalents (790) (4,427)
Cash and Cash Equivalents - Beginning of Period 8,219 7,782
Cash and Cash Equivalents - End of Period $ 7,429 $ 3,355
======== ========
================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $13,733 $12,723
Income Taxes $ 7,034 $16,700
================================================================================
Supplemental Disclosure of Noncash Financing Activities
Conversion to common stock:
7-1/4 percent Series of Convertible Debentures $238 $446
================================================================================
See Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Capitalization
(Thousands, Except Per Share Amounts)
(Unaudited) (Unaudited)
June 30, 1997 June 30, 1996 Dec. 31, 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK EQUITY:
Common stock - par value $3-1/6 per share $ 71,886 $ 47,273 $ 71,425
Premium on common stock 179,811 173,844 176,977
Earnings invested in the business 110,407 119,210 98,376
------- -------- ---------
Total common stock equity $362,104 52% $340,327 54% $ 346,778 53%
-------- ---- -------- ---- --------- ----
REDEEMABLE PREFERENCE STOCK:
$6.95 Series, stated value $100 per share 25,000 25,000 25,000
------- -------- ---------
Total redeemable preference stock 25,000 3% 25,000 4% 25,000 4%
-------- ---- -------- ---- --------- ----
REDEEMABLE PREFERRED STOCK, stated Value
$100 per share:
$4.68 Series - 391 391
$4.75 Series 429 608 608
$7.125 Series 12,000 12,750 12,750
------- -------- ---------
Total redeemable preferred stock 12,429 2% 13,749 2% 13,749 2%
-------- ---- -------- ---- --------- ----
LONG-TERM DEBT:
First Mortgage Bonds
--------------------
9-3/4% Series due 2015 50,000 50,000 50,000
9-1/8% Series due 2019 20,000 24,000 22,000
Medium-Term Notes
-----------------
First Mortgage Bonds:
7.38% Series A due 1997 - 20,000 20,000
7.69% Series A due 1999 10,000 10,000 10,000
5.96% Series B due 2000 5,000 5,000 5,000
5.98% Series B due 2000 5,000 5,000 5,000
8.05% Series A due 2002 10,000 10,000 10,000
6.40% Series B due 2003 20,000 20,000 20,000
6.34% Series B due 2005 5,000 5,000 5,000
6.38% Series B due 2005 5,000 5,000 5,000
6.45% Series B due 2005 5,000 5,000 5,000
6.80% Series B due 2007 10,000 - -
6.50% Series B due 2008 5,000 5,000 5,000
8.26% Series B due 2014 10,000 10,000 10,000
8.31% Series B due 2019 10,000 10,000 10,000
9.05% Series A due 2021 10,000 10,000 10,000
7.25% Series B due 2023 20,000 20,000 20,000
7.50% Series B due 2023 4,000 4,000 4,000
7.52% Series B due 2023 11,000 11,000 11,000
6.52% Series B due 2025 10,000 10,000 10,000
7.05% Series B due 2026 20,000 - 20,000
7.00% Series B due 2027 20,000 - -
Unsecured:
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 5,000
8.95% Series A due 1998 10,000 10,000 10,000
8.47% Series A due 2001 10,000 10,000 10,000
Convertible Debentures
7-1/4% Series due 2012 10,600 11,499 10,838
300,600 285,499 297,838
Less long-term debt due within one year - 32,000 26,000
Total long-term debt 300,600 43% 253,499 40% 271,838 41%
-------- ---- -------- ---- -------- ----
TOTAL CAPITALIZATION $700,133 100% $632,575 100% $657,365 100%
======== ==== ======== ==== ======== ====
</TABLE>
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(5) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of financial statements
The information presented in the consolidated financial statements is
unaudited, but includes all adjustments, consisting of only normal recurring
accruals, which the management of the Company considers necessary for a fair
presentation of the results of such periods. These consolidated financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's 1996 Annual Report on Form 10-K (1996
Form 10-K). A significant part of the business of the Company is of a seasonal
nature; therefore, results of operations for the interim periods are not
necessarily indicative of the results for a full year.
Certain amounts from prior periods have been reclassified to conform
with the 1997 presentation.
2. Earnings Per Share
All share and per share data for the prior interim period have been
restated to reflect a three-for-two split of the Company's common stock, in the
form of a 50 percent stock dividend, which was effective September 6, 1996.
3. Recently Issued Accounting Standard
In March 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share
and Disclosure of Information About Capital Structure." SFAS No. 128 applies to
entities with publicly held common stock and is effective for financial
statements issued for periods ending after December 15, 1997. SFAS No. 128
replaces Accounting Principles Board Opinion No. 15, "Earnings Per Share", and
simplifies the computation of earnings per share by replacing the presentation
of primary earnings per share with a presentation of basic earnings per share.
The impact of the SFAS No. 128 calculation for the first six months of 1997 is
not material.
4. Contingencies
See Part II, Item 7, "Contingent Liabilities" and "Environmental
Matters" in the 1996 Form 10-K.
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The consolidated financial statements include:
Regulated utility:
Northwest Natural Gas Company (Northwest Natural)
Non-regulated wholly-owned businesses:
NNG Financial Corporation (Financial Corporation)
Canor Energy, Ltd. (Canor)
One other subsidiary, Oregon Natural Gas Development Corporation
(Oregon Natural), was dissolved during 1996.
Together these businesses are referred to herein as the "Company" (see
"Subsidiary Operations" below and Part II, Item 8., Note 2, "Notes to
Consolidated Financial Statements" in the Company's 1996 Annual Report on Form
10-K (1996 Form 10-K)).
The following is management's assessment of the Company's financial
condition including the principal factors that affect results of operations. The
discussion refers to the consolidated activities of the Company for the three
and six months ended June 30, 1997 and 1996.
Forward-Looking Statements
- --------------------------
This report and other presentations made by the Company from time to
time may contain forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and other statements which are other than statements of
historical facts. The Company's expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a reasonable
basis. However, each such forward-looking statement involves uncertainties and
is qualified in its entirety by reference to the following important factors
that could cause the actual results of the Company to differ materially from
those projected in such forward-looking statements: (i) prevailing governmental
policies and regulatory actions, including those of the Oregon Public Utility
Commission (OPUC) and the Washington Utilities and Transportation Commission
(WUTC), with respect to allowed rates of return, industry and rate structure,
purchased gas and investment recovery, acquisitions and dispositions of assets
and facilities, operation and construction of plant facilities, present or
prospective wholesale and retail competition, changes in tax laws and policies
and changes in and compliance with environmental and safety laws and policies;
(ii) weather conditions and other natural phenomena; (iii) unanticipated
population growth or decline, and changes in market demand and demographic
patterns; (iv) competition for retail and wholesale customers; (v) pricing of
natural gas relative to other energy sources; (vi) unanticipated changes in
interest rates, rates of inflation or foreign currency exchange rates; (vii)
unanticipated changes in operating expenses and capital expenditures; (viii)
capital market conditions; (ix) competition for new energy development
opportunities; and (x) legal and administrative proceedings and settlements.
All subsequent forward-looking statements, whether written or oral and whether
made by or on behalf of the Company, also are expressly qualified by these
cautionary statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for the
Company to predict all such factors, nor can it assess the impact of each such
factor or the extent to which any factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking
statement.
Earnings and Dividends
- ----------------------
The Company's earnings applicable to common stock were $1.7 million,
or 7 cents a share, in the quarter ended June 30, 1997, down from $4.8 million,
or 22 cents a share, in the second quarter of 1996.
Northwest Natural earned 3 cents a share from utility operations in
the second quarter of 1997, compared to 17 cents a share in the same period in
1996. Weather during the 3 months ended June 30, 1997 was 9 percent warmer than
average and 14 percent warmer than the second quarter of 1996. The Company
estimates that the weather-related reduction in net operating revenues (margin)
from sales to residential and commercial customers during the second quarter of
1997 was equivalent to about 8 cents a share of earnings compared to a similar
period with average weather and 7 cents a share compared to the same period in
1996. These estimates are derived from the Company's internal planning model
(see Part II, Item 7., "Earnings and Dividends" in the 1996 Form 10-K). The
model also estimates that customer growth in the residential and commercial
segments since June 30, 1996 contributed $2.2 million of margin during the
second quarter of 1997.
The Company earned $25.8 million, or $1.14 a share, and $27.5 million,
or $1.23 a share, for the six months ended June 30, 1997 and 1996, respectively.
Year-to-date, Northwest Natural earned $1.11 a share from utility operations
compared to $1.21 a share in the same period in 1996. Weather in the first half
of the year was 5 percent warmer in 1997 than in 1996, resulting in an estimated
5 cents a share decrease in margin from residential and commercial customers.
Northwest Natural's subsidiaries earned 4 cents a share during the
second quarter of 1997, compared to 5 cents in the second quarter of 1996.
Year to date subsidiary results were 3 cents a share for 1997 and 2 cents for
1996. See "Subsidiary Operations".
Dividends paid on common stock were 30 cents a share for the
three-month periods ended June 30, 1997 and 1996. In July 1997, the Company's
Board of Directors declared a quarterly dividend of 30 cents a share on its
common stock, payable August 15, 1997, to shareholders of record on July 31,
1997. The current indicated annual dividend rate is $1.20 a share.
Results of Operations
- ---------------------
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility
volumes and revenues:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
Gas Sales and Transportation Volumes
- - Therms (000's):
Residential and commercial sales 100,927 104,344 340,632 330,888
Unbilled volumes (14,665) (14,773) (35,678) (32,585)
------- ------- ------- -------
Weather-sensitive volumes 86,262 89,571 304,954 298,303
Industrial firm sales 19,563 22,568 44,224 49,669
Industrial interruptible sales 12,039 14,311 27,438 36,519
------- ------- ------- -------
Total gas sales 117,864 126,450 376,616 384,491
Transportation deliveries 103,408 97,133 213,878 201,910
------- ------- ------- -------
Total volumes sold and delivered 221,272 223,583 590,494 586,401
Utility Operating Revenues - Dollars (000's):
Residential and commercial
revenues $53,880 $57,885 $175,264 178,268
Unbilled revenues (7,118) (7,314) (17,796) (16,434)
------- ------- ------- -------
Weather-sensitive revenues 46,762 50,571 157,468 161,834
Industrial firm sales revenues 6,328 7,618 14,203 16,894
Industrial interruptible sales
revenues 2,977 3,827 7,023 9,860
------- ------- ------- -------
Total gas sales revenues 56,067 62,016 178,694 188,588
Transportation revenues 5,213 5,401 11,163 10,836
Other revenues 2,127 1,979 5,405 5,196
------- ------- -------- --------
Total utility operating revenues $63,407 $69,396 $195,262 $204,620
======= ======= ======== ========
Cost of gas sold - Dollars (000's) $22,111 $25,701 $ 72,337 $ 79,758
======= ======= ======== ========
Total number of customers (end of
period) 441,126 417,226 441,126 417,226
======= ======= ======= =======
Actual degree days 608 705 2,516 2,653
=== === ======= =======
20-year average degree days 671 679 2,532 2,543
=== === ======= =======
Residential and Commercial
--------------------------
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 these customers. Average weather
conditions are calculated from the most recent 20 years of temperature data
measured by heating degree days. Weather conditions were 9 percent warmer than
average in the second quarter of 1997 and 14 percent warmer than in the second
quarter of 1996.
Northwest Natural continues to experience rapid customer growth, with
23,900 customers added since June 30, 1996 for a growth rate of 5.7 percent. 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.
Although the volumes of gas sold to residential and commercial
customers were 2 percent higher in the first six months of 1997 than in the
first six months of 1996, related margin increased by less than 1 percent. The
impact of higher sales volumes relating to customer growth was partially offset
by rate reductions effective December 1, 1996, averaging 3.6 percent in Oregon
and 4.9 percent in Washington.
Volumes of gas sold to residential and commercial customers were lower
by 3.3 million therms, or 4 percent, in the second quarter of 1997 compared to
the second quarter of 1996. Margin was $1.6 million, or 4 percent, lower
reflecting both the warmer weather and the rate reductions referred to above.
Industrial, Transportation and Other Revenues
---------------------------------------------
Total volumes delivered to industrial firm, industrial interruptible,
and transportation customers were 1.0 million therms, or 1 percent, higher in
the second quarter of 1997 than in the same period of 1996. Transportation
volumes increased 6.3 million therms while gas sales to industrial firm and
interruptible customers decreased 5.3 million therms as compared to the second
quarter of 1996. Margin from these customers was $11.9 million in the second
quarter of 1997, down 6 percent from $12.6 million in the second quarter of
1996, due to transfers of some of these customers from higher margin to lower
margin schedules or special contract rates.
For the current six-month period, total volumes delivered to
industrial customers were 2.6 million therms lower than in 1996; margin from
these customers was 5 percent lower than in the first six months of 1996.
Other revenues, which primarily consist of amortizations of
regulatory account balances (see Part II, Item 8., Note 1, "Notes to
Consolidated Financial Statements" in the 1996 Form 10-K), increased $148,000,
or 7 percent, during the second quarter of 1997 compared to the second quarter
of 1996.
Cost of Gas
-----------
Total cost per therm of gas sold was 8 percent lower during the second
quarter of 1997, and 7 percent lower year to date, than in the same periods of
1996. The cost of gas sold includes current gas purchases, gas drawn from
storage, demand cost equalization, regulatory deferrals, and company use.
However, the average cost per therm of gas purchased was 13 percent higher in
the second quarter of 1997 and 23 percent higher year-to-date than in the same
periods last year, due to high prices Northwest Natural paid for the portion of
its gas supplies tied to monthly market price indexes.
Northwest Natural absorbed 20 percent of the higher cost of gas
purchased, as compared to projections, under its Purchased Gas Adjustment
(PGA) tariff in Oregon. The remaining 80 percent of such higher gas costs was
recorded as deferred debits (regulatory assets) to be recovered under the Oregon
PGA tariff through temporary rate surcharges commencing in December 1997.
Northwest Natural's ability to recover these amounts is subject to a review by
the OPUC to determine whether its weather-normalized earnings during the 12
months ended June 30, 1997, were higher than a reasonable cost of equity capital
during that period so as to warrant the absorption of some or all of such excess
costs.
Subsidiary Operations
---------------------
The following table summarizes financial information for the Company's
consolidated wholly-owned subsidiaries:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
Consolidated Subsidiaries (Thousands):
Net Operating Revenues $2,429 $2,488 $4,840 $4,825
Operating Expenses 2,109 2,273 3,987 6,868
------ ------ ------ ------
Income (Loss) from Operations 320 215 853 (2,043)
Income (Loss) from Financial Investments 1,121 893 (107) (328)
Other Income and Interest 86 374 125 3,512
------ ------ ------ ------
Income Before Income Taxes 1,527 1,482 871 1,141
Income Tax Expense 490 464 253 541
------ ------ ------ ------
Net Income $1,037 $1,018 $ 618 $ 600
====== ====== ====== ======
Results of operations for the subsidiaries for the second quarter of
1997 were about the same as in the second quarter of 1996. Financial Corporation
earned $0.8 million, an increase of $0.2 million over the second quarter of
1996, while Canor earned $0.2 million, down $0.1 million from 1996. Oregon
Natural reported net income of $0.1 million in the second quarter of 1996. At
the end of the second quarter of 1996, Oregon Natural transferred to Financial
Corporation all of its assets other than cash, intercompany receivables, the
stock of Canor, and its ownership in a Boeing 737 jet leased to Continental
Airlines. The transferred assets were primarily interests in gas-producing
properties in the western United States. Oregon Natural then was merged with and
into Northwest Natural, with the result that Canor became a wholly-owned
subsidiary of Northwest Natural.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Operations and maintenance expenses were $1.0 million, or 3 percent,
higher in the first six months of 1997 compared to the same period in 1996.
Northwest Natural's operations and maintenance expenses increased $1.6 million
due to higher payroll costs resulting from a new labor agreement effective April
1, 1997; increased marketing costs relating to commercial and industrial
customers; information system costs for network and communication system
upgrades; and costs relating to customer growth. Subsidiary operations and
maintenance expenses decreased by $0.6 million primarily due to lower gas and
oil exploration and production costs.
Taxes Other than Income
-----------------------
Taxes other than income for the six months ended June 30, 1997
decreased $1.4 million, or 11 percent. Property tax expense was lower than last
year because of settlements reached in 1996 relating to property valuations and
regulatory treatment of reduced property taxes ($1.8 million). This reduction
was partially offset by increased payroll taxes due to higher payroll costs
($0.3 million).
Depreciation, Depletion and Amortization
----------------------------------------
The Company's depreciation, depletion and amortization expense was
lower by $2.5 million, or 11 percent, as compared to the first six months of
1996. The reduction was primarily due to non-recurring charges for impairment
($1.3 million) and abandonment ($1.0 million) recorded by Oregon Natural in 1996
pursuant, respectively, to the adoption of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and the write-down of unproven properties. Despite an increase of more than $55
million in net utility plant in service, depreciation expense for Northwest
Natural decreased by $0.2 million due to lower depreciation rates approved in
1996.
Other Income
------------
Other income was $4.2 million lower in the first six months of 1997
compared with the same period in 1996, primarily due to two non-recurring
events in 1996. A $2.9 million gain was recorded in the first quarter of 1996
from the sale of Oregon Natural's underground gas storage assets to Northwest
Natural. In addition, a $1.0 million refund of property taxes was recorded in
the second quarter of 1996 due to the settlement of a property valuation appeal
in Oregon.
Interest Charges - net
----------------------
The Company's net interest expense increased $0.7 million, or
5 percent, in the first six months of 1997 compared to the same period in 1996.
Average commercial paper balances were higher than in the first six months of
1996 primarily due to increased gas purchase costs and utility construction
expenditures. Allowance for Funds Used During Construction (AFUDC) also
increased due to higher construction work in progress balances principally
relating to the development of Northwest Natural's new customer information
system.
Income Taxes
------------
The effective corporate income tax rates for the six months ended
June 30, 1997 and 1996 were 37.8 percent and 39.2 percent, respectively. Last
year's effective rate was higher due to flow-through treatment of property tax
refunds.
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 revenue derived from gas usage by
Northwest Natural's residential and commercial customers influences the
Company's financing requirements from one quarter to the next. Short-term
liquidity is satisfied primarily through the sale of commercial paper, which is
supported by commercial bank lines of credit (see Part II, Item 8., Note 6,
"Notes to Consolidated Financial Statements" in the 1996 Form 10-K).
Cash Flows
----------
Operating Activities
--------------------
Cash provided by operating activities was $15.6 million, or 23
percent, lower in the first six months of 1997 compared to the same period in
1996. The reduction was primarily due to a decrease in accounts payable ($21.2
million) relating to year-end accruals for gas costs and employee bonuses paid
in the first quarter of 1997, and rate changes effective in December 1996 to
amortize credit balances in regulatory accounts ($15.5 million). Offsetting the
reduction in accounts payable were decreases in accounts receivable ($19.5
million).
The Company has lease and purchase commitments relating to its
operating activities which are financed with cash flows from operations (see
Part II, Item 8., Note 13, "Notes to Consolidated Financial Statements" in the
1996 Form 10-K).
Investing Activities
--------------------
Cash requirements for utility construction in the first six months of
1997 totaled $41.9 million, up $5.5 million, or 15 percent, from the first six
months of 1996. The increase resulted largely from construction of new mains and
services ($1.8 million); replacement and reinforcement of existing mains and
services ($0.6 million); computer software and hardware ($1.0 million);
expansion of the Mist underground gas storage field ($1.8 million); and the
development of a new customer information system ($0.4 million) (see Part II,
Item 7, Financial Condition, "Investing Activities," in the 1996 Form 10-K).
Northwest Natural's construction expenditures are estimated to
be $110 million in 1997. Over the five-year period 1997 through 2001, these
expenditures are estimated at between $500 and $550 million. The high capital
expenditures during the next five years reflect projected customer growth, a
higher level of system reinforcement and the development of additional
underground storage facilities. It is anticipated that approximately 50 percent
of the funds required for these expenditures will be internally generated, and
that the remainder will be funded through the sale of long-term debt and equity
securities with short-term debt providing liquidity and bridge financing.
In the first six months of 1997, non-utility capital expenditures
totaling $3.7 million were incurred by Canor to invest in Canadian exploration
and production properties. Canor expects to use internally generated funds, in
addition to $3.0 million invested by Northwest Natural during the first quarter
of 1997, for development of its Canadian gas exploration and production
properties during the current year. (See Part II, Item 7. Financial Condition,
"Investing Activities," in the 1996 Form 10-K.)
Financing Activities
--------------------
Cash used for financing activities in the first six months of 1997
totaled $7.5 million, down $28.7 million from the first six months of 1996.
Proceeds from the sale of $30 million of medium-term notes in the second quarter
of 1997 (see Part II, Item 5, "Medium-Term Note Program") were used to retire
$27.0 million in maturing long-term debt and for other corporate purposes. In
the first six months of 1996, $26.0 million of debt was retired.
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 Financial Corporation lines of credit as of June 30,
1997 or June 30, 1996.
Commercial Paper
----------------
The Company's primary source of short-term funds is commercial paper.
Both Northwest Natural and Financial Corporation issue commercial paper,
which is supported by the bank lines discussed above, under agency agreements
with a commercial bank. Financial Corporation's commercial paper is supported by
the guaranty of Northwest Natural (see Part II, Item 8., Note 6, "Notes to
Consolidated Financial Statements" in the 1996 Form 10-K).
Ratios of Earnings to Fixed Charges
-----------------------------------
For the 12 months ended June 30, 1997 and December 31, 1996, the
Company's ratios of earnings to fixed charges, computed by the Securities
and Exchange Commission method, were 3.32 and 3.53, respectively. Earnings
consist of net income to which has been added taxes on income and 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. (See Part II, Item 7, "Contingent
Liabilities" in the 1996 Form 10-K.)
In July 1997, a consultant completed and presented a report on its
assessment of Northwest Natural's application software. The assessment included
surveying and interviewing personnel; off-loading application source code from
various computer platforms and scanning it for date occurrences; and modeling
the results to determine estimates of costs to convert date-related fields to
four-digit years. The consultant estimated that the cost of making Northwest
Natural's application source code Year 2000-compliant would be about $4.0
million. Northwest Natural intends to proceed into a planning phase of its Year
2000 project, including choices as to which software will be modified and which
software will be replaced.
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. Northwest Natural intends to seek recovery through future rates
of its costs of any system modifications or replacements that may be required by
this issue.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently not applicable.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
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). The Oregon Court
of Appeals (Oregon Court of Appeals Case No. CA A90481) affirmed the trial court
decision in February 1997. (See Part I, Item 3, "Legal Proceedings" and Part II,
Item 8., Note 13, "Commitments and Contingencies" in the 1996 Form 10-K and Part
II, Item 1, "Legal Proceedings" in the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1997). In June 1997, Northwest Natural filed a
petition for review of the Court of Appeals' decision with the Oregon Supreme
Court.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Northwest Natural's Annual Meeting of Shareholders was held in
Portland, Oregon on May 22, 1997. At the meeting, four director-nominees were
elected to three year terms, as follows:
Term Share Votes Share Votes
Director-nominee Expiring For Withheld
- ----------------- -------- ----------- -----------
Richard B. Keller 2000 18,941,744 381,846
Randall C. Pape 2000 18,940,154 383,436
Robert L. Ridgley 2000 18,922,855 400,735
Dwight A. Sangrey 2000 18,932,542 391,048
There were no broker non-votes with respect to the election of the
director-nominees.
The other eight directors whose terms of office as directors
continued after the annual meeting are: Mary Arnstad, Thomas E. Dewey, Jr., Tod
R. Hamachek, Wayne D. Kuni, Richard G. Reiten, Melody C. Teppola, Russell F.
Tromley and Benjamin R. Whiteley.
The shareholders also elected Price Waterhouse LLP, certified
public accountants, as Northwest Natural's auditors for the year 1997 by the
following vote: 19,075,101 shares for; 76,396 against; and 172,093 abstained.
There were no broker non-votes on this item.
Item 5. OTHER INFORMATION
Washington General Rate Case
----------------------------
In May 1997, Northwest Natural filed for rate increases averaging
about 6 percent for its customers in Washington. The rates in the filing were
designed to increase Washington revenues by a total of $1.2 million per year.
The WUTC has suspended the rate increases for investigation and hearings.
Medium-Term Note Program
------------------------
In May 1997, Northwest Natural entered into a Distribution Agreement
relating to an additional $165 million of its Medium-Term Notes, Series B, of
which $95 million remains unsold and which Northwest Natural intends to sell
from time to time over the next several years.
Pursuant to its Medium-Term Note Program, in May 1997, Northwest
Natural issued and sold $20 million of its Secured Medium-Term Notes,
Series B, with a coupon rate of 7.00 percent. These notes mature in 2027 and
have a one-time put option in 2007.
Also in May 1997, Northwest Natural issued and sold $10 million of its
Secured Medium-Term Notes, Series B, with a coupon rate of 6.80 percent. These
notes mature in 2007 and have a one-time put option in 2002.
In August 1997, Northwest Natural issued and sold $40 million of its
Secured Medium-Term Notes, Series B, with a coupon rate of 7.00 percent. These
notes mature in 2017; they have no call or put options.
Marketing Alliance with PacifiCorp
----------------------------------
Northwest Natural and PacifiCorp have formed an alliance to jointly
market gas and energy services, and, as the market opens, electric commodity to
commercial and industrial customers in Oregon and Washington. The alliance is
aimed at meeting the multiple fuel needs of commercial and industrial customers.
Through the alliance, PacifiCorp and Northwest Natural intend to market gas,
electricity and energy services within as well as outside of their franchised
service areas (see the Company's Current Report on Form 8-K, filed July 17,
1997).
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 - Statement re: Computation of Per Share Earnings.
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K
On July 17, 1997, the Company filed a Current Report on Form 8-K
regarding the formation of an alliance with PacifiCorp to jointly market gas and
electric commodity and energy services.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
(Registrant)
Dated: August 8, 1997 /s/ D. James Wilson
-----------------------
D. James Wilson
Principal Accounting Officer,
Controller and Treasurer
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Quarterly Report on Form 10-Q
For Quarter Ended
June 30, 1997
Exhibit
Document Number
- -------- -------
Statement re: Computation of Per Share Earnings 11
Computation of Ratios of Earnings to Fixed Charges 12
Financial Data Schedule 27
EXHIBIT 11
NORTHWEST NATURAL GAS COMPANY
Statement re: Computation of Per Share Earnings
(Thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1997 1996 1997 1996
---- ---- ---- ----
Earnings Applicable to Common Stock $1,694 $4,823 $25,774 $27,488
Debenture Interest Less Taxes 117 127 234 254
------ ------ ------- -------
Net Income Available for Fully-Diluted
Common Stock $1,811 $4,950 $26,008 $27,742
====== ====== ======= =======
Average Common Shares Outstanding 22,661 22,343 22,625 22,309
Stock Options 49 33 49 33
Convertible Debentures 533 578 533 578
------ ------ ------- -------
Fully-Diluted Common Shares 23,243 22,954 23,207 22,920
====== ====== ======= =======
Fully-Diluted Earnings per Share
of Common Stock $0.08* $0.22 $1.12 $1.21
====== ====== ======= =======
* Anti-dilutive
EXHIBIT 12
NORTHWEST NATURAL GAS COMPANY
Computation of Ratio of Earnings to Fixed Charges
January 1, 1992 - June 30, 1997
Twelve
Months
Year Ended December 31, Ended
--------------------------------------- June 30,
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- --------
Fixed Charges, as Defined:
Interest on Long-
Term Debt $23,001 $22,578 $21,921 $23,141 $ 23,176 $ 23,148
Other Interest 3,223 1,906 2,473 2,252 3,448 4,565
Amortization of Debt
Discount and Expense 511 775 850 882 865 796
Interest Portion of
Rentals 1,439 1,701 1,697 1,764 1,798 1,798
------- ------- ------- ------- -------- --------
Total Fixed Charges,
as defined $28,174 $26,960 $26,941 $28,039 $ 29,287 $ 30,307
======= ======= ======= ======= ======== ========
Earnings, as defined:
Net Income $15,775 $37,647 $35,461 $38,065 $ 46,793 $ 45,042
Taxes on Income 6,951 22,096 20,473 22,120 27,347 25,217
Fixed Charges,
as above 28,174 26,960 26,941 28,039 29,287 30,307
------- ------- ------- ------- -------- --------
Total Earnings,
as defined $50,900 $86,703 $82,875 $88,224 $103,427 $100,566
======= ======= ======= ======= ======== ========
Ratio of Earnings to
Fixed Charges 1.81 3.22 3.08 3.15 3.53 3.32
==== ==== ==== ==== ==== ====
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 742,951
<OTHER-PROPERTY-AND-INVEST> 63,075
<TOTAL-CURRENT-ASSETS> 54,961
<TOTAL-DEFERRED-CHARGES> 66,449
<OTHER-ASSETS> 59,640
<TOTAL-ASSETS> 987,076
<COMMON> 71,886
<CAPITAL-SURPLUS-PAID-IN> 179,811
<RETAINED-EARNINGS> 110,407
<TOTAL-COMMON-STOCKHOLDERS-EQ> 362,104
36,499
0
<LONG-TERM-DEBT-NET> 300,600
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 52,943
<LONG-TERM-DEBT-CURRENT-PORT> 0
930
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 234,000
<TOT-CAPITALIZATION-AND-LIAB> 987,076
<GROSS-OPERATING-REVENUE> 127,765
<INCOME-TAX-EXPENSE> 16,484
<OTHER-OPERATING-EXPENSES> 71,564
<TOTAL-OPERATING-EXPENSES> 88,048
<OPERATING-INCOME-LOSS> 39,717
<OTHER-INCOME-NET> 841
<INCOME-BEFORE-INTEREST-EXPEN> 40,558
<TOTAL-INTEREST-EXPENSE> 13,445
<NET-INCOME> 27,113
1,339
<EARNINGS-AVAILABLE-FOR-COMM> 25,774
<COMMON-STOCK-DIVIDENDS> 13,560
<TOTAL-INTEREST-ON-BONDS> 10,141
<CASH-FLOW-OPERATIONS> 52,955
<EPS-PRIMARY> $1.14
<EPS-DILUTED> $1.12
</TABLE>
