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 March 31, 1998
-------------------------
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
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NORTHWEST NATURAL GAS COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 93-0256722
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 N. W. Second Avenue, Portland, Oregon 97209
------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (503) 226-4211
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
At May 11, 1998, 24,673,046 shares of the registrant's Common Stock, $3-1/6 par
value (the only class of Common Stock) were outstanding.
<PAGE>
NORTHWEST NATURAL GAS COMPANY
March 31, 1998
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-month
periods ended March 31, 1998 and 1997, and Consolidated
Statements of Earnings Invested in the Business for the
three-month periods ended March 31, 1998 and 1997. 3
(2) Consolidated Balance Sheets at March 31, 1998 4
and 1997 and December 31, 1997.
(3) Consolidated Statements of Cash Flows for the three-
month periods ended March 31, 1998 and 1997. 5
(4) Consolidated Statements of Capitalization at March 31,
1998 and 1997 and December 31, 1997. 6
(5) Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 9
PART II. OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signature 18
<PAGE>
<TABLE>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(1) Consolidated Statements of Income
(Thousands, Except Per Share Amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Operating Revenues:
Gross operating revenues $135,697 $134,347
Cost of sales 57,390 50,308
-------- --------
Net operating revenues 78,307 84,039
Operating Expenses:
Operations and maintenance 20,259 19,442
Taxes other than income taxes 7,025 6,879
Depreciation, depletion and amortization 11,945 10,242
-------- --------
Total operating expenses 39,229 36,563
-------- --------
Income from Operations 39,078 47,476
Other Income (Expense) 3,077 (652)
Interest Charges - net 8,409 6,722
-------- --------
Income Before Income Taxes 33,746 40,102
Income Taxes 10,560 15,349
-------- --------
Net Income 23,186 24,753
Redeemable preferred and preference stock dividend
requirements 653 673
-------- --------
Earnings Applicable to Common Stock $ 22,533 $ 24,080
======== ========
Average Common Shares Outstanding 22,903 22,590
Earnings per share of common stock:
Basic $0.98 $1.07
Diluted $0.97 $1.04
Dividends Paid Per Share of Common Stock $0.305 $0.30
</TABLE>
See Notes to Consolidated Financial Statements.
==============================================================================
<TABLE>
Consolidated Statements of Earnings Invested in the Business
(Thousands, Three-Month Periods Ended March 31)
(Unaudited)
<CAPTION>
1998 1997
------------------- ---------------------
<S> <C> <C> <C> <C>
Earnings invested in the business:
Balance at Beginning of Period $113,098 $100,026
Net Income 23,186 $23,186 24,753 $24,753
Dividends declared:
Redeemable preferred and preference stock (1,307) (673)
Common stock (13,970) (6,770)
-------- --------
Balance at End of Period $121,007 $117,336
======== ========
Accumulated other comprehensive income:
Balance at Beginning of Period $ (2,235) $ (1,650)
Other comprehensive income-
Foreign currency translation adjustment (40) (40) (97) (97)
-------- ------- -------- -------
Comprehensive income $23,146 $24,656
======= =======
Balance at End of Period $ (2,275) $ (1,747)
======== ========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Balance Sheets
(Thousands of Dollars)
<CAPTION>
(Unaudited) (Unaudited)
Mar. 31, Mar. 31, Dec. 31,
---------- ---------- --------
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Assets:
Plant and Property:
Utility plant $1,184,480 $1,072,615 $1,164,499
Less accumulated depreciation 376,767 344,042 366,607
---------- ---------- ----------
Utility plant - net 807,713 728,573 797,892
Non-utility property 77,211 47,567 52,422
Less accumulated depreciation and depletion 23,904 20,282 22,843
---------- ---------- ----------
Non-utility property - net 53,307 27,285 29,579
---------- ---------- ----------
Total plant and property 861,020 755,858 827,471
---------- ---------- ----------
Investments and Other:
Investments 32,361 32,785 34,148
Long-term notes receivable 750 1,157 978
---------- ---------- ----------
Total investments and other 33,111 33,942 35,126
Current Assets:
Cash and cash equivalents 28,525 9,121 6,731
Accounts receivable - net 48,305 39,191 39,420
Accrued unbilled revenue 12,470 12,075 23,911
Inventories of gas, materials and supplies 11,587 7,596 17,385
Prepayments and other current assets 12,784 9,532 17,226
---------- ---------- ----------
Total current assets 113,671 77,515 104,673
Regulatory Tax Assets 56,860 57,940 56,860
Deferred Gas Costs Receivable 34,201 8,511 28,628
Deferred Debits and Other 59,304 51,855 58,859
---------- ---------- ----------
Total Assets $1,158,167 $ 985,621 $1,111,617
========== ========== ==========
Capitalization and Liabilities:
Capitalization:
Common stock $ 257,210 $ 250,049 $ 255,402
Earnings invested in the business 121,007 117,336 113,098
Accumulated other comprehensive income (2,275) (1,747) (2,235)
---------- --------- ----------
Total common stock equity 375,942 365,638 366,265
Redeemable preference stock 25,000 25,000 25,000
Redeemable preferred stock 12,429 13,749 12,429
Long-term debt 347,146 270,724 344,303
---------- --------- ----------
Total capitalization 760,517 675,111 747,997
---------- --------- ----------
Minority Interest 18,037 - -
---------- --------- ----------
Current Liabilities:
Notes payable 76,834 48,905 89,317
Accounts payable 49,457 37,494 58,775
Long-term debt due within one year 33,000 25,000 16,000
Taxes accrued 10,978 10,178 4,656
Interest accrued 10,355 8,517 6,058
Other current and accrued liabilities 29,679 19,961 21,390
---------- ---------- ----------
Total current liabilities 210,303 150,055 196,196
Deferred Investment Tax Credits 11,498 12,324 11,949
Deferred Income Taxes 141,747 133,375 139,953
Regulatory Accounts and Other 16,065 14,756 15,522
Commitments and Contingencies - - -
---------- ---------- ----------
Total Capitalization and Liabilities $1,158,167 $ 985,621 $1,111,617
========== ========== ==========
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Statements of Cash Flows
(Thousands of Dollars)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
---------------------
1998 1997
---- ----
<S> <C> <C>
Operating Activities:
Net income $ 23,186 $ 24,753
Adjustments to reconcile net income to cash provided by operations:
Depreciation, depletion and amortization 11,945 10,242
Gain on sale of assets (3,542) -
Deferred income taxes and investment tax credits 1,343 10,406
Equity in losses of investments 1,279 1,228
Allowance for funds used during construction (315) (472)
Deferred cost of gas receivable (5,573) (16,569)
Regulatory accounts and other - net (445) 765
-------- --------
Cash from operations before working capital changes 27,878 30,353
Changes in operating assets and liabilities:
Accounts receivable (8,885) 1,642
Accrued unbilled revenue 11,441 10,265
Inventories of gas, materials and supplies 5,798 6,843
Accounts payable (9,318) (27,301)
Accrued interest and taxes 10,619 10,103
Other current assets and liabilities 5,529 (933)
-------- --------
Cash Provided By Operating Activities 43,062 30,972
-------- --------
Investing Activities:
Acquisition and construction of utility plant assets (20,294) (18,476)
Investment in non-utility plant (3,306) (1,880)
Investments and other 836 (554)
-------- --------
Cash Used In Investing Activities (22,764) (20,910)
-------- --------
Financing Activities:
Common stock issued 1,651 1,533
Long-term debt issued 22,000 -
Long-term debt retired (2,000) (2,000)
Change in short-term debt (12,483) (1,153)
Cash dividend payments:
Redeemable preferred and preference stock (653) (673)
Common stock (6,979) (6,770)
Foreign currency translation and capital stock expense (40) (97)
-------- --------
Cash Provided By (Used For) Financing Activities 1,496 (9,160)
-------- --------
Increase In Cash and Cash Equivalents 21,794 902
Cash and Cash Equivalents - Beginning of Period 6,731 8,219
-------- --------
Cash and Cash Equivalents - End of Period $ 28,525 $ 9,121
======== ========
========================================================================================================
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest $4,255 $3,692
Income Taxes - -
========================================================================================================
========================================================================================================
Supplemental Disclosure of Noncash Financing Activities
Conversion to common stock:
7-1/4 percent Series of Convertible Debentures $157 $114
========================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Capitalization
(Thousands)
<CAPTION>
(Unaudited) (Unaudited)
Mar. 31, 1998 Mar. 31, 1997 Dec. 31, 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK EQUITY:
Common stock - par value $3-1/6 per share $ 72,636 $ 71,647 $ 72,404
Premium on common stock 184,574 178,402 182,998
Earnings invested in the business 121,007 117,336 113,098
Accumulated other comprehensive income (2,275) (1,747) (2,235)
-------- -------- --------
Total common stock equity $375,942 49% $365,638 54% $366,265 49%
-------- ---- -------- ---- -------- ----
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 3%
-------- ---- -------- ---- -------- ----
REDEEMABLE PREFERRED STOCK, stated value $100
per share:
$4.68 Series - 391 -
$4.75 Series 429 608 429
$7.125 Series 12,000 12,750 12,000
-------- ------- -------
Total redeemable preferred stock 12,429 2% 13,749 2% 12,429 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 18,000 20,000 20,000
Medium-Term Notes
-----------------
First Mortgage Bonds:
7.38% Series A due 1997 - 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 - 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
7.00% Series B due 2017 40,000 - 40,000
6.60% Series B due 2018 22,000 - -
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 20,000
7.00% Series B due 2027 20,000 - 20,000
6.65% Series B due 2027 20,000 - 20,000
Unsecured:
7.40% Series A due 1997 - 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 10,146 10,724 10,303
-------- -------- ---------
380,146 295,724 360,303
Less long-term debt due within one year 33,000 25,000 16,000
-------- -------- --------
Total long-term debt 347,146 46% 270,724 40% 344,303 46%
-------- ---- -------- ---- -------- ----
TOTAL CAPITALIZATION $760,517 100% $675,111 100% $747,997 100%
======== ==== ======== ==== ======== ====
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
NORTHWEST NATURAL GAS COMPANY
(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 1997 Annual Report on Form 10-K (1997
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 1998 presentation.
2. Recently Issued Accounting Standards
In the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for the reporting and display of elements of
comprehensive income, including foreign currency translation adjustments,
unrealized gains and losses on certain investments in debt and equity securities
and minimum pension liability adjustments.
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" which requires disclosure of segment data based on how management
makes decisions about allocating resources to segments and measuring
performance. The Company principally operates in a single line of business
consisting of the distribution of natural gas and therefore is not subject to
disclosure of segment reporting.
In February 1998, the FASB issued SFAS No. 132, "Employment
Disclosures About Pensions and Other Postretirement Benefits." This standard is
effective for financial statements issued for periods beginning after December
15, 1997. Adoption of this standard may result in additional financial
disclosures but the impact of SFAS No. 132 for the first quarter of 1998 is
immaterial.
3. Minority Interest
The Company reported a minority interest of $18.0 million in
the Consolidated Balance Sheet at March 31, 1998, resulting from a transaction
involving its Canadian energy exploration and production subsidiary, Canor
Energy Ltd. (Canor). In March 1998, Canor acquired all of the capital stock of
Southlake Energy, Inc. (Southlake), an indirect subsidiary of NIPSCO Industries,
Inc. (NI), in exchange for shares of common stock representing a 34 percent
interest in Canor. After the acquisition, Southlake was amalgamated with Canor.
The transaction resulted in a $3.5 million gain to the Company, equivalent to 15
cents a share, due to Canor's assets having represented a lower percentage of
the total assets of the amalgamated corporation than the Company's resulting
percentage interest in Canor's common stock. The minority interest in Canor is
held by NIPSCO Energy Services Canada Ltd. (NESCL), also an indirect subsidiary
of NI. For financial reporting purposes, the assets, liabilities and earnings of
Canor are consolidated in the Company's financial statements, and NESCL's common
stock interest has been recorded as "Minority Interest" in the Balance Sheet.
4. Income Taxes
No U.S. taxes have been provided for the gain in the first
quarter of 1998 from the combination of Canor and Southlake (see Note 3,
"Minority Interest"), since it is the Company's intention to indefinitely
reinvest Canor's earnings. Determination of the amount of unrecognized deferred
tax liability on Canor's unremitted earnings is not practicable. Canor's
undistributed net earnings amounted to $2.1 million at March 31, 1998 and the
amount of foreign withholding taxes that would be payable upon remittance of
those earnings is approximately $0.2 million.
5. Contingencies
See Part II, Item 7., "Contingent Liabilities" and
"Environmental Matters" in the 1997 Form 10-K.
<PAGE>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The consolidated financial statements include:
Regulated utility:
Northwest Natural Gas Company (NW Natural)
Non-regulated subsidiary businesses:
NNG Financial Corporation (Financial Corporation)
Canor Energy, Ltd. (Canor)
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 1997 Annual Report
on Form 10-K (1997 Form 10-K)).
The following is management's assessment of the Company's financial
condition, including the principal factors that affect results of operations.
The discussion refers to the consolidated activities of the Company for the
three months ended March 31, 1998 and 1997.
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 or foreign currency exchange rates or in rates of inflation;
(vii) unanticipated changes in operating expenses and capital expenditures;
(viii) capital market conditions; (ix) competition for new energy development
opportunities; and (x) legal and administrative proceedings and settlements. All
subsequent forward-looking statements, whether written or oral and whether made
by or on behalf of the Company, also are expressly qualified by these cautionary
statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date
on which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for the
Company to predict all such factors, nor can it assess the impact of each such
factor or the extent to which any factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking
statement.
Earnings and Dividends
- ----------------------
Basic earnings from consolidated operations were 98 cents a share for
the quarter ended March 31, 1998, compared to $1.07 a share in last year's first
quarter. The Company's earnings applicable to common stock were $22.5 million in
the quarter ended March 31, 1998, down 6 percent from $24.1 million in the first
quarter of 1997.
NW Natural earned 86 cents a share from utility operations in
the first quarter of 1998, compared to $1.08 a share in the same period in 1997.
Weather conditions in NW Natural's service territory were 8.5 percent warmer
than the 20-year average and 11 percent warmer than the first quarter of 1997.
The Company estimates that the weather-related reduction in net operating
revenues (margin) during the first quarter of 1998 was equivalent to about 22
cents a share compared to a similar period with average weather. Weather
conditions in the first quarter of 1997 were 2.5 percent colder than average
resulting in an estimated additional 7 cents a share in margin. These estimates
are derived from the Company's internal planning model (see Part II, Item 7.,
"Earnings and Dividends," in the 1997 Form 10-K). The model also estimates that
customer growth in the residential and commercial segments since March 31, 1997
contributed $4.3 million of margin during the first quarter of 1998.
NW Natural earned 15 cents a share from non-utility operations in the
first quarter of 1998 due to a transaction involving Canor, its Canadian gas and
oil exploration and production subsidiary. See "Subsidiary Operations" and
"Other Income (Expense)."
NW Natural's subsidiaries lost 3 cents a share during the first
quarter of 1998, compared to a loss of 1 cent in the first quarter of 1997.
See "Subsidiary Operations".
Dividends paid on common stock were 30.5 cents a share for the
three-month period ended March 31, 1998 and 30 cents for the three-month period
ended March 31, 1997. In February 1998, the Company's Board of Directors
declared a quarterly dividend of 30.5 cents a share on its common stock payable
May 15, 1998, to shareholders of record on April 30, 1998. The current indicated
annual dividend rate is $1.22 a share.
Results of Operations
- ---------------------
Comparison of Gas Operations
----------------------------
<TABLE>
The following table summarizes the composition of gas utility
volumes and revenues for the three months ended March 31:
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Gas Sales and Transportation Volumes - Therms (000's):
Residential and commercial sales 227,206 239,705
Unbilled volumes (26,495) (21,013)
------- --------
Weather-sensitive volumes 200,711 218,692
Industrial firm sales 25,989 24,661
Industrial interruptible sales 14,431 15,399
------- -------
Total gas sales 241,131 258,752
Transportation deliveries 122,148 110,470
------- -------
Total volumes delivered 363,279 369,222
======= =======
Utility Operating Revenues - Dollars (000's):
Residential and commercial revenues $125,411 $121,384
Unbilled revenues (12,543) (10,678)
-------- --------
Weather-sensitive revenues 112,868 110,706
Industrial firm sales revenues 9,648 7,875
Industrial interruptible sales revenues 4,515 4,046
-------- --------
Total gas sales revenues 127,031 122,627
Transportation revenues 5,331 5,950
Other revenues 1,271 3,278
-------- --------
Total utility operating revenues $133,633 $131,855
======== ========
Cost of gas - Dollars (000's) $ 57,338 $ 50,226
======== ========
Total number of customers (end of period) 461,485 439,897
======= =======
Actual degree days 1,697 1,908
===== =====
20-year average degree days 1,854 1,861
===== =====
</TABLE>
Residential and Commercial
--------------------------
Typically, 75 percent or more of NW Natural's annual operating
revenues are derived from gas sales to weather-sensitive residential and
commercial customers. Accordingly, variations in temperatures between periods
will affect volumes of gas sold to these customers. Average weather conditions
are calculated from the most recent 20 years of temperature data measured by
heating degree days. Weather conditions were 8.5 percent warmer than average in
the first quarter of 1998 and 11 percent warmer than in the first quarter of
1997.
NW Natural continues to experience a high level of customer
growth, with 21,588 customers added since March 31, 1997 for a growth rate of
4.9 percent. In the three years ended December 31, 1997, more than 66,000
customers were added to the system, representing an average annual growth rate
of 5.4 percent.
Volumes of gas sold to residential and commercial customers
decreased 18 million therms, or 8 percent, in the first quarter of 1998 compared
to the first quarter of 1997. However, related revenues increased $2.2 million,
or 2 percent, due to rate increases in 1997 and 1998. In October 1997, the WUTC
approved a general rate increase averaging 3 percent for NW Natural's customers
in Washington. Effective December 1, 1997, the WUTC approved a rate increase
averaging 10.5 percent to pass through to Washington customers increases in
purchased gas costs and to remove temporary rate increments to amortize balances
in deferred accounts. Effective January 1, 1998, the OPUC approved a rate
increase under NW Natural's Purchased Gas Cost Adjustment (PGA) tariff averaging
11.4 percent for its customers in Oregon. The OPUC also approved a settlement
modifying the incentive formula for deferrals of variations in gas costs under
the PGA tariff from 80 percent to 67 percent, effective January 1, 1998.
In order to match revenues with related purchased gas costs,
NW Natural records unbilled revenues for gas delivered but not yet billed to
customers through the end of the period.
Industrial, Transportation and Other Revenues
---------------------------------------------
Total volumes delivered to industrial firm, industrial
interruptible, and transportation customers were 12.0 million therms, or 8
percent, higher in the first quarter of 1998 than in the same period of 1997.
Gross revenues from these customers were $1.6 million, or 9 percent, higher in
the first quarter of 1998. However, margin from these customers (gross revenues
minus cost of gas) decreased by 5 percent to $13.7 million in the first quarter
of 1998, from $14.3 million in the first quarter of 1997, due to transfers of
some of these customers from higher margin to lower margin rate schedules or
contract rates.
Other revenues, which relate primarily to deferrals to or
amortizations from regulatory accounts (see Part II, Item 8., Note 1, "Notes to
Consolidated Financial Statements," in the 1997 Form 10-K), decreased $2.0
million, or 61 percent, during the first quarter of 1998 compared to the first
quarter of 1997. The principal factors were a decrease in amortizations of
property tax savings ($1.0 million), and deferrals of revenue reductions
required under the settlement approved by the OPUC as part of the January 1,
1998 rate change ($0.8 million).
Cost of Gas
-----------
The cost per therm of gas sold was 23 percent higher during
the first quarter of 1998 than in the first quarter of 1997. The cost per therm
of gas sold includes current gas purchases, gas drawn from storage, demand cost
equalization, regulatory deferrals, and company use. NW Natural made off-system
gas sales of $0.8 million and $0.4 million for the first quarters of 1998 and
1997, respectively. Under an agreement with the OPUC, these sales are treated as
a reduction of gas costs.
The average cost per therm of gas purchased in the first quarter
of 1998 was 3 percent lower than in the first three months of 1997, due to the
higher prices NW Natural paid in January and February 1997 for the portion of
its gas supplies tied to monthly market price indexes. Under NW Natural's PGA
tariff in Oregon, its net income from Oregon operations is affected only within
defined limits by changes in purchased gas costs. In 1997, NW Natural absorbed
20 percent of the higher cost of gas purchased, as compared to projections,
under this tariff. The remaining 80 percent of higher gas costs was recorded as
deferred debits (regulatory assets). Effective January 1, 1998, the incentive
formula for deferred gas costs was modified so that NW Natural will absorb 33
percent of the difference between actual and projected gas costs and the
remaining 67 percent will be deferred for recovery or refund to customers in
future rates.
Subsidiary Operations
---------------------
<TABLE>
The following table summarizes financial information for the
Company's consolidated subsidiaries:
<CAPTION>
Three Months Ended
March 31,
----------------------
1998 1997
---- ----
<S> <C> <C>
Consolidated Subsidiaries (Thousands):
Net Operating Revenues $ 2,012 $ 2,411
Operating Expenses 2,360 1,878
------- -------
Income (Loss) from Operations ($ 348) $ 533
Loss from Financial Investments (1,279) (1,228)
Other Income and Interest Charges 281 39
-------- ------
Loss Before Income Taxes (1,346) (656)
Income Tax Benefit (626) (237)
------- ------
Net Loss ($ 720) ($ 419)
======= =======
</TABLE>
Results of operations for the individual subsidiaries for the
first quarter of 1998 consisted of a negligible net loss for Canor, compared to
net income of $0.2 million for the first quarter of 1997, and a net loss of $0.7
million for Financial Corporation, compared to a net loss of $0.6 million for
the first quarter of 1997. Financial Corporation normally incurs a loss in the
first quarter due to the seasonality of revenues from its investments in solar
and windpower electric generating plants in California.
On March 31, 1998, Canor purchased the stock of Southlake
Energy, Inc. (Southlake), an indirect subsidiary of NIPSCO Industries, Inc.
(NI).Canor was then amalgamated with Southlake. The resulting company is owned
66 percent by NW Natural and 34 percent by NIPSCO Energy Services Canada Ltd.,
another indirect subsidiary of NI. The resulting gain is not subject to U.S.
income tax. (See Item 1, Note 3, "Notes to Consolidated Financial Statements,"
above.) Canor had managed Southlake's assets since 1995 under a previous
agreement.
The following discussion summarizes operating expenses, other
income (expense), interest charges - net, and income taxes.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Operations and maintenance expenses were $0.8 million, or 4
percent, higher in the first quarter of 1998 compared to the same period in
1997. NW Natural's expenses were $0.6 million higher in the first quarter of
1998, primarily due to increased market development and customer service expense
($1.0 million) which was offset in part by lower accruals for uncollectible
accounts ($0.2 million). Subsidiary operating expenses increased by $0.2 million
primarily due to Canor's increased lease operating and seismic and other
exploration costs.
Taxes Other than Income Taxes
-----------------------------
Taxes other than income taxes increased $0.1 million, or 2
percent. Increases of $0.1 million in both property tax and franchise tax
expense in the first quarter of 1998 were offset by a $0.1 million decrease in
local business taxes compared to 1997.
Depreciation, Depletion and Amortization
----------------------------------------
Depreciation expense increased $1.7 million, or 17 percent,
compared to the first quarter of 1997. NW Natural's depreciation expense
increased $1.4 million primarily due to the placement into service in November
1997 of the new Customer Information System (CIS) ($0.6 million), Mobile Data
Terminals ($0.1 million) and additional utility plant ($0.6 million). Canor's
depreciation expense increased $0.3 million in the first quarter of 1998
compared to 1997, primarily due to the recording of dry hole and abandonment
expense of $0.1 million as of March 31, 1998 and an increase of $0.1 million in
other depreciation expense compared to the first quarter of 1997.
Other Income (Expense)
----------------------
Other income was $3.7 million higher in the first quarter of
1998 compared with the same period in 1997. NW Natural recorded as other income
a $3.5 million gain, equivalent to 15 cents a share, from the amalgamation of
Canor with Southlake. The resulting gain is not subject to U.S. income tax. (See
Item 1, Notes 3 and 4, "Notes to Consolidated Financial Statements," and
"Subsidiary Operations," above.)
Interest Charges - net
----------------------
The Company's net interest expense increased $1.7 million, or
25 percent, in the first quarter of 1998 compared to the same period in 1997,
due in part to a net increase of $84.4 million in long-term debt outstanding at
March 31, 1998 compared to one year ago. In addition, average commercial paper
balances were higher than in the first quarter of 1997 primarily due to
increased purchased gas costs and construction expenditures.
Income Taxes
------------
The effective corporate income tax rates for the three months
ended March 31, 1998 and 1997 were 31 percent and 38 percent, respectively. The
lower 1998 rate was due in part to the non-taxable $3.5 million gain from
Canor's amalgamation with Southlake (see "Other Income (Expense)," above), and
in part to permanent tax savings resulting from a change in book depreciation
rates and increased tax credits.
Financial Condition
- -------------------
Capital Structure
-----------------
NW Natural's capital expenditures are primarily related to
utility construction resulting from customer growth and system improvements. NW
Natural finances these expenditures from cash provided by operations and from
short-term borrowings which are periodically refinanced through the sale of
long-term debt or equity securities. In addition to its capital expenditures,
the weather-sensitive nature of revenue derived from gas usage by NW Natural's
residential and commercial customers influences the Company's financing
requirements from one quarter to the next. Short-term liquidity requirements are
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 1997 Form 10-K).
The Company's long-term goal is to maintain a capital
structure comprised of 45 to 50 percent common stock equity, 5 to 10 percent
preferred and preference stock and 45 to 50 percent short-term and long-term
debt. When additional capital is required, the Company issues debt or equity
securities depending upon both the target capital structure and market
conditions. The Company also uses these sources to meet long-term debt and
preferred stock redemption requirements (see Part II, Item 8., Notes 3 and 5,
"Notes to Consolidated Financial Statements," in the 1997 Form 10-K). In March
1998, NW Natural issued and sold $22 million of its Medium-Term Notes, Series B.
In April 1998, NW Natural issued and sold through a negotiated public offering,
1,725,000 shares of its common stock. (See Part II, Item 5, "Other Information,"
below.)
Cash Flows
----------
Operating Activities
--------------------
Cash provided by operating activities was $12.1 million, or 39
percent, higher in the first quarter of 1998 compared to the same period in
1997. The increase was largely due to a $9.3 million decrease in accounts
payable and a $5.6 million increase in deferred gas costs receivable during the
first quarter of 1998 compared to a $27.3 million decrease and a $16.6 million
increase, respectively, in the same period of 1997. Cash flow during the first
quarter of 1998 was reduced by an $8.9 million increase in accounts receivable
compared to a $1.6 million decrease in the first quarter of 1997. A non-cash
gain of $3.5 million was recognized in the first quarter of 1998 from Canor's
amalgamation with Southlake (see "Subsidiary Operations," above).
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
1997 Form 10-K).
Investing Activities
--------------------
Cash requirements for utility construction in the first quarter
of 1998 totaled $20.3 million, up $1.8 million, or 10 percent, from the
first quarter of 1997. The increase resulted largely from the development of
additional underground storage facilities ($3.7 million), offset by a reduction
in construction expenditures relating to the completion of the CIS ($1.2
million) and several other special projects ($0.7 million).
NW Natural's construction expenditures are estimated at $90
million for 1998. Over the five year period 1998 through 2002, these
expenditures are estimated at between $500 million and $550 million. The
projected level of capital expenditures during the next five years reflects
forecasted customer growth, a major system reinforcement project 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 quarter of 1998, non-utility expenditures totaled
$3.3 million. Canor invested $2.4 million in Canadian exploration and production
properties. NW Natural's non-utility expenditures totaling $0.9 million included
expenditures relating to a contract for the construction of a new headquarters
building for the Port of Portland on land currently owned by NW Natural ($0.6
million), and additions to existing facilities ($0.3 million). During the first
quarter of 1998, NW Natural converted $11.8 million of intercompany loans to
Canor to equity.
Financing Activities
--------------------
In the first quarter of 1998, a portion of the proceeds from
the issuance of the $22 million of Medium-Term Notes was used to reduce
short-term debt ($12.5 million) and long-term debt ($2.0 million). These notes
were sold primarily for the purpose of refunding the $18 million balance at
March 31, 1998, of the 9-1/8% Series of First Mortgage Bonds which NW Natural
redeemed as of April 1, 1998.
In the first quarter of 1997, internally generated cash was
used to reduce short-term debt by $1.2 million and long-term debt by $2.0
million.
Lines of Credit
---------------
NW Natural has available through September 30, 1998, 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 NW Natural's option, on a monthly basis. Financial
Corporation has available through September 30, 1998, 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 NW Natural.
Under the terms of these lines of credit, which are used as
backup lines for commercial paper programs, NW Natural and Financial Corporation
pay commitment fees but are not required to maintain compensating bank balances.
The interest rates on borrowings under these lines of credit are based on
current market rates as negotiated. There were no outstanding balances on either
the NW Natural or Financial Corporation lines of credit as of March 31, 1998 or
March 31, 1997.
Commercial Paper
----------------
The Company's primary source of short-term funds is commercial
paper. Both NW 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 NW Natural (see Part II, Item 8., Note 6, "Notes to Consolidated
Financial Statements," in the 1997 Form 10-K).
Ratios of Earnings to Fixed Charges
-----------------------------------
For the 12 months ended March 31, 1998 and December 31, 1997,
the Company's ratios of earnings to fixed charges, computed using the Securities
and Exchange Commission method, were 2.70 and 2.99, respectively. For this
purpose, earnings consist of net income before taxes plus fixed charges, and
fixed charges consist of interest on all indebtedness, the amortization of debt
expense and discount or premium, and the estimated interest portion of rentals
charged to income.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
Medium-Term Note Program
------------------------
Pursuant to its Medium-Term Note Program, in March 1998, NW
Natural issued and sold $22 million of its Secured Medium-Term Notes, Series B,
with a coupon rate of 6.60 percent. These notes mature in 2018; they have no
call or put options.
Capital Stock
-------------
In April 1998, NW Natural issued and sold through a negotiated
public offering 1,725,000 shares of its common stock at a net price to NW
Natural of $25.9275 per share. The Company used the net proceeds of $44.7
million from the offering primarily to repay short-term debt incurred to fund NW
Natural's utility construction program. The projected dilution of earnings per
share from this sale is estimated at 4 percent, based on a pro forma comparison
of a full year with the new shares outstanding with actual results for 1997.
Construction Line of Credit
---------------------------
In April 1998, NW Natural entered into an additional $18
million line of credit with a commercial bank for the purpose of constructing
the new headquarters building for the Port of Portland (see Part I, Item 2,
"Investing Activities," above). This line of credit is available through
November 30, 1999.
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 February 27, 1998, the Company filed a Current Report on
Form 8-K regarding the estimated impact on first quarter 1998 earnings of the
warm weather caused by El Nino climate conditions, and the declaration of
dividends payable on May 15, 1998.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
(Registrant)
Dated: May 14, 1998 /s/ D. James Wilson
-----------------------
D. James Wilson
Principal Accounting Officer,
Controller and Treasurer
<PAGE>
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Quarterly Report on Form 10-Q
For Quarter Ended
March 31, 1998
Exhibit
Document Number
- -------- -------
Statement re: Computation of Per Share Earnings 11
Computation of Ratios of Earnings to Fixed Charges 12
Financial Data Schedule 27
<TABLE>
EXHIBIT 11
<CAPTION>
NORTHWEST NATURAL GAS COMPANY
Statement re: Computation of Per Share Earnings
(Thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31,
-----------------------------
1998 1997
---- ----
<S> <C> <C>
Earnings Applicable to Common Stock $22,533 $24,080
Debenture Interest Less Taxes 112 119
------- -------
Net Income Available for Fully-Diluted
Common Stock $22,645 $24,199
======= =======
Average Common Shares Outstanding 22,903 22,590
Stock Options 46 40
Convertible Debentures 510 539
------- -------
Diluted Common Shares 23,459 23,169
Diluted Earnings per Share of Common Stock $0.97 $1.04
===== =====
</TABLE>
<TABLE>
EXHIBIT 12
NORTHWEST NATURAL GAS COMPANY
Computation of Ratio of Earnings to Fixed Charges
January 1, 1993 - March 31, 1998
<CAPTION>
Twelve
Months
Year Ended December 31, Ended
------------------------------------------------------------------- March 31,
1993 1994 1995 1996 1997 1998
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges, as Defined:
Interest on Long-Term Debt $22,578 $21,921 $23,141 $ 23,176 $24,918 $26,009
Other Interest 1,906 2,473 2,252 3,448 4,500 5,146
Amortization of Debt
Discount and Expense 775 850 882 865 730 689
Interest Portion of Rentals 1,701 1,697 1,764 1,798 2,111 2,111
------- ------- ------- -------- ------- -------
Total Fixed Charges,
as defined $26,960 $26,941 $28,039 $ 29,287 $32,259 $33,955
======= ======= ======= ======== ======= =======
Earnings, as defined:
Net Income $37,647 $35,461 $38,065 $46,793 $43,059 $41,492
Taxes on Income 22,096 20,473 22,120 27,347 21,106 16,317
Fixed Charges, as above 26,960 26,941 28,039 29,287 32,259 33,955
------- ------- ------- -------- ------- -------
Total Earnings, as defined $86,703 $82,875 $88,224 $103,427 $96,424 $91,764
======= ======= ======= ======== ======= =======
Ratio of Earnings to
Fixed Charges 3.22 3.08 3.15 3.53 2.99 2.70
==== ==== ==== ==== ==== ====
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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>
<CIK> 0000073020
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $ 807,713
<OTHER-PROPERTY-AND-INVEST> 86,418
<TOTAL-CURRENT-ASSETS> 113,671
<TOTAL-DEFERRED-CHARGES> 93,505
<OTHER-ASSETS> 56,860
<TOTAL-ASSETS> 1,158,167
<COMMON> 72,636
<CAPITAL-SURPLUS-PAID-IN> 184,574
<RETAINED-EARNINGS> 118,732
<TOTAL-COMMON-STOCKHOLDERS-EQ> 375,942
36,499
0
<LONG-TERM-DEBT-NET> 347,146
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 76,834
<LONG-TERM-DEBT-CURRENT-PORT> 33,000
930
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 287,816
<TOT-CAPITALIZATION-AND-LIAB> 1,158,167
<GROSS-OPERATING-REVENUE> 135,697
<INCOME-TAX-EXPENSE> 10,560
<OTHER-OPERATING-EXPENSES> 39,229
<TOTAL-OPERATING-EXPENSES> 49,789
<OPERATING-INCOME-LOSS> 28,518
<OTHER-INCOME-NET> 3,077
<INCOME-BEFORE-INTEREST-EXPEN> 31,595
<TOTAL-INTEREST-EXPENSE> 8,409
<NET-INCOME> 23,186
653
<EARNINGS-AVAILABLE-FOR-COMM> 22,533
<COMMON-STOCK-DIVIDENDS> 13,970
<TOTAL-INTEREST-ON-BONDS> 6,250
<CASH-FLOW-OPERATIONS> 43,062
<EPS-PRIMARY> $0.98
<EPS-DILUTED> $0.97
</TABLE>
