SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 No. 0-994
[NORTHWEST NATURAL GAS COMPANY LOGO]
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 October 29, 1999, 25,048,521 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
September 30, 1999
Summary of Information Reported
The registrant submits herewith the following information:
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements Number
------
(1) Consolidated Statements of Income for three and
nine-month periods ended September 30, 1999 and 1998,
and Consolidated Statements of Earnings Invested in the
Business for the nine-month periods ended September 30,
1999 and 1998. 3
(2) Consolidated Balance Sheets at September 30, 1999 and
1998 and December 31, 1998 4
(3) Consolidated Statements of Cash Flows for the
nine-month periods ended September 30, 1999 and 1998. 5
(4) Consolidated Statements of Capitalization at
September 30, 1999 and 1998 and December 31, 1998. 6
(5) Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
2
<PAGE>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(1) Consolidated Statements of Income
(Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating Revenues:
Gross operating revenues ............... $ 59,863 $ 53,810 $328,897 $273,161
Cost of sales .......................... 22,132 19,350 143,111 110,391
-------- -------- -------- --------
Net operating revenues ............. 37,731 34,460 185,786 162,770
Operating Expenses:
Operations and maintenance ............. 20,036 20,941 60,817 61,082
Taxes other than income taxes .......... 4,971 4,361 18,986 16,372
Depreciation, depletion and amortization 13,346 13,496 40,121 38,137
-------- -------- -------- --------
Total operating expenses ........... 38,353 38,798 119,924 115,591
-------- -------- -------- --------
Income (Loss) from Operations ............... (622) (4,338) 65,862 47,179
Other Income ................................ 1,984 2,550 5,598 7,237
Interest Charges -- net ..................... 7,884 7,647 22,745 23,615
-------- -------- -------- --------
Income (Loss) Before Income Taxes ........... (6,522) (9,435) 48,715 30,801
Income Taxes ................................ (2,962) (3,515) 17,448 9,442
-------- -------- -------- --------
Net Income (Loss) ........................... (3,560) (5,920) 31,267 21,359
Redeemable Preferred and Preference Stock
Dividend Requirements .................. 623 638 1,893 1,939
-------- -------- -------- --------
Earnings (Loss) Applicable to Common Stock .. $ (4,183) $ (6,558) 29,374 $ 19,420
======== ======== ======== ========
Average Common Shares Outstanding ........... 25,007 24,763 24,946 24,037
Earnings (Loss) Per Share of Common Stock:
Basic .................................. $ (0.17) $ (0.26) $ 1.18 $ 0.81
Diluted ................................ $ (0.17) $ (0.26) $ 1.17 $ 0.80
Dividends Per Share of Common Stock ......... $ 0.305 $ 0.305 $ 0.915 $ 0.915
</TABLE>
See Notes to Consolidated Financial Statements
================================================================================
Consolidated Statements of Earnings Invested in the Business
(Thousands, Nine Months Ended September 30)
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------------------- ---------------------
<S> <C> <C> <C> <C>
Earnings Invested in the Business:
Balance at Beginning of Period $106,513 $113,098
Net Income 31,267 $31,267 21,359 $21,359
Dividends Declared or Paid:
Redeemable preferred and preference stock (1,904) (1,949)
Common stock (22,804) (22,050)
Common Stock Expense - (1,697)
-------- ---------
Balance at End of Period $113,072 $108,761
======== ========
Accumulated Other Comprehensive Income:
Balance at Beginning of Period $ (2,460) $ (2,235)
Other comprehensive income-
Foreign currency translation adjustment (621) (621) 167 167
--------- -------- -------- -------
Comprehensive Income $30,646 $21,526
======= =======
Balance at End of Period $ (3,081) $ (2,068)
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Balance Sheets
(Thousand of Dollars)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
September 30, September 30, December 31,
1999 1998 1998
------------ ------------- -------------
<S> <C> <C> <C>
Assets:
Plant and Property:
Utility plant ............................. $ 1,313,896 $ 1,218,380 $ 1,239,690
Less accumulated depreciation ............. 432,887 395,323 404,117
----------- ----------- -----------
Utility plant -- net ................. 881,009 823,057 835,573
----------- ----------- -----------
Non-utility property ...................... 85,563 90,901 89,050
Less accumulated depreciation and depletion 34,011 27,731 29,927
----------- ----------- -----------
Non-utility property -- net .......... 51,552 63,170 59,123
----------- ----------- -----------
Total plant and property ............. 932,561 886,227 894,696
----------- ----------- -----------
Investments and Other:
Investments ............................... 15,825 34,022 15,898
Long-term notes receivable ................ 527 794 816
----------- ----------- -----------
Total investments and other .......... 16,352 34,816 16,714
Current Assets:
Cash and cash equivalents ................. 17,961 6,469 7,383
Accounts receivable -- net ................ 21,842 21,791 47,476
Accrued unbilled revenue .................. 8,005 7,180 34,258
Inventories of gas, materials and supplies 37,121 23,310 21,258
Property held for sale .................... 15,690 -- --
Prepayments and other current assets ...... 21,647 10,126 16,105
----------- ----------- -----------
Total current assets ................. 122,266 68,876 126,480
Regulatory Tax Assets ......................... 56,860 56,860 56,860
Deferred Gas Costs Receivable ................. 19,902 28,499 27,795
Deferred Debits and Other ..................... 79,975 65,643 69,191
----------- ----------- -----------
Total Assets ......................... $ 1,227,916 $ 1,140,921 $ 1,191,736
=========== =========== ===========
Capitalization and Liabilities:
Capitalization:
Common stock .............................. $ 312,809 $ 306,802 $ 308,351
Earnings invested in the business ......... 113,072 108,761 106,513
Accumulated other comprehensive income .... (3,081) (2,068) (2,460)
----------- ----------- -----------
Total common stock equity ............ 422,800 413,495 412,404
Redeemable preference stock ............... 25,000 25,000 25,000
Redeemable preferred stock ................ 10,564 11,499 11,499
Long-term debt ............................ 386,482 346,953 366,738
----------- ----------- -----------
Total capitalization ................. 844,846 796,947 815,641
----------- ----------- -----------
Minority Interest ............................. 16,086 17,672 16,322
----------- ----------- -----------
Current Liabilities:
Notes payable ............................. 87,276 75,056 87,264
Accounts payable .......................... 53,066 37,788 56,039
Long-term debt due within one year ........ -- 10,000 10,000
Taxes accrued ............................. 6,280 371 7,486
Interest accrued .......................... 9,247 9,809 6,204
Other current and accrued liabilities ..... 40,922 21,889 23,477
----------- ----------- -----------
Total current liabilities ............ 196,791 154,913 190,470
Deferred Investment Tax Credits ............... 10,725 11,525 11,248
Deferred Income Taxes ......................... 140,817 142,629 140,310
Regulatory Accounts and Other ................. 18,651 17,235 17,745
Commitments and Contingencies ................. -- -- --
----------- ----------- -----------
Total Capitalization and
Liabilities ....................... $ 1,227,916 $ 1,140,921 $ 1,191,736
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Statements of Cash Flows
(Thousand of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------ --------------
<S> <C> <C>
Operating Activities:
Net income ........................................................ $ 31,267 $ 21,359
Adjustments to reconcile net income to cash provided by operations:
Depreciation, depletion and amortization ...................... 40,121 38,137
Gain on sale of assets ........................................ (1,691) (3,794)
Deferred income taxes and investment tax credits .............. (16) 2,252
Equity in (earnings) of investments ........................... (469) (399)
Allowance for funds used during construction .................. (567) (1,109)
Deferred gas costs receivable ................................. 7,893 129
Regulatory accounts and other -- net .......................... (9,878) (5,071)
--------- ---------
Cash from operations before working capital changes ...... 66,660 51,504
Changes in operating assets and liabilities:
Accounts receivable ...................................... 25,634 17,629
Accrued unbilled revenue ................................. 26,253 16,731
Inventories of gas, materials and supplies ............... (15,863) (5,925)
Accounts payable ......................................... (2,973) (20,987)
Accrued interest and taxes ............................... 1,837 (534)
Other current assets and liabilities ..................... 11,903 7,499
--------- ---------
Cash Provided by Operating Activities ......................... 113,451 65,917
--------- ---------
Investing Activities:
Acquisition and construction of utility plant assets .............. (78,685) (56,735)
Investments in non-utility property ............................... (16,595) (17,583)
Proceeds from sale of non-utility assets .......................... 3,862 --
Investments and other ............................................. 595 809
--------- ---------
Cash Used in Investing Activities ............................. (90,823) (73,509)
--------- ---------
Financing Activities:
Common stock issued ............................................... 4,202 51,050
Redeemable preferred stock retired ................................ (935) (930)
Long-term debt issued ............................................. 20,000 32,000
Long-term debt retired ............................................ (10,000) (35,000)
Change in short-term debt ......................................... 12 (14,261)
Cash dividend payments:
Redeemable preferred and preference stock ..................... (1,904) (1,949)
Common stock .................................................. (22,804) (22,050)
Foreign currency translation and capital stock expense ............ (621) (1,530)
--------- ---------
Cash Provided (Used) by Financing Activities .................. (12,050) 7,330
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents ....................... 10,578 (262)
Cash and Cash Equivalents - Beginning of Period ........................ 7,383 6,731
--------- ---------
Cash and Cash Equivalents - End of Period .............................. $ 17,961 $ 6,469
========= =========
=====================================================================================================
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest ...................................................... $ 19,748 $ 20,444
Income taxes .................................................. $ 27,300 $ 8,205
=====================================================================================================
Supplemental Disclosure of Noncash Financing Activities:
Conversion to common stock:
7-1/4 percent Series of Convertible Debentures ................ $ 256 $ 350
=====================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Capitalization
(Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
September 30, 1999 September 30, 1998 December 31, 1998
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK EQUITY:
Common stock - par value $3-1/6 per share $ 79,296 $ 78,512 $ 78,701
Premium on common stock 233,513 228,290 229,650
Earnings invested in the business 113,072 108,761 106,513
Accumulated other comprehensive income (3,081) (2,068) (2,460)
------------ ------------ ------------
Total common stock equity 422,800 50% 413,495 52% 412,404 51%
----------- ------- ----------- ------- ------------ -------
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 3% 25,000 3%
----------- ------- ----------- ------- ----------- -------
REDEEMABLE PREFERRED STOCK:
Stated value $100 per share:
$4.75 Series 64 249 249
$7.125 Series 10,500 11,250 11,250
----------- ----------- -----------
Total redeemable preferred stock 10,564 1% 11,499 1% 11,499 1%
----------- ------- ----------- ------- ----------- -------
LONG TERM DEBT:
First Mortgage Bonds
9-3/4% Series due 2015 50,000 50,000 50,000
Medium-Term Notes
First Mortgage Bonds:
7.69% Series A due 1999 - 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
6.62% Series B due 2001 10,000 - -
8.05% Series A due 2002 10,000 10,000 10,000
6.75% Series B due 2002 10,000 - -
5.55% Series B due 2002 20,000 - 20,000
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 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 40,000
6.60% Series B due 2018 22,000 22,000 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 20,000
6.65% Series B due 2027 20,000 20,000 20,000
6.65% Series B due 2028 10,000 10,000 10,000
Unsecured:
8.47% Series A due 2001 10,000 10,000 10,000
Convertible Debentures
7-1/4% Series due 2012 9,482 9,953 9,738
----------- ----------- -----------
386,482 356,953 376,738
Less long-term debt due within one year - 10,000 10,000
----------- ----------- -----------
Total long-term debt 386,482 46% 346,953 44% 366,738 45%
----------- ------- ----------- ------- ----------- -------
TOTAL CAPITALIZATION $ 844,846 100% $ 796,947 100% $ 815,641 100%
=========== ======= =========== ======= =========== =======
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
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 1998 Annual Report on Form 10-K (1998
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 1999 presentation.
2. Recently Issued Accounting Standards
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," which postponed the effective date of SFAS No. 133,
"Accounting for Derivative Financial Instruments and Hedging Activities," to all
fiscal years beginning after June 15, 2000 (Jan. 1, 2001 for the Company). SFAS
No. 133 requires that all changes in the fair value of derivative instruments be
recorded each period either in current earnings or in other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if so designated, what type of hedge transaction it is. The
Company has not determined the impact that adoption of SFAS No. 133 will have on
its results of operation or financial position.
The Accounting Standards Executive Committee issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which are effective for years beginning after Dec. 31, 1998. The
Company's adoption of SOP 98-1 and SOP 98-5 had no material effect on its
results of operations or financial position.
3. Segment Reporting
The Company principally operates in a single line of business consisting of
the distribution of natural gas, which constitutes the "utility" segment. Other
lines of business are primarily investments in oil and gas exploration
properties in Canada and in alternative energy projects in California, which
constitute the "other" segment.
The following table presents information about reportable segments for the
three and nine months ended Sept. 30, 1999 and 1998. Inter-segment transactions
are insignificant.
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
----------------------------------------------- ----------------------------------------------
Thousands of Dollars Utility Other Total Utility Other Total
- ------------------------------- ---------------- ------------- ---------------- ------------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1999
Net operating revenues $ 33,523 $ 4,208 $ 37,731 $ 174,495 $ 11,291 $ 185,786
Income (loss) from 158 (622) 66,946 (1,084) 65,862
operations (780)
Depreciation expense 11,368 1,978 13,346 33,816 6,305 40,121
Net income (loss) (4,324) 764 (3,560) 30,242 1,025 31,267
Assets -- end of period 1,134,154 93,762 1,227,916 1,134,154 93,762 1,227,916
1998
Net operating revenues $ 30, 761 $ 3,699 $ 34,460 $ 153,610 $ 9,160 $ 162,770
Income (loss) from (3,160) (1,178) (4,338) 48,931 (1,752) 47,179
operations
Depreciation expense 11,014 2,482 13,496 32,679 5,458 38,137
Net income (loss) (6,282) 362 (5,920) 17,962 3,397 21,359
Assets -- end of period 1,032,752 108,169 1,140,921 1,032,752 108,169 1,140,921
</TABLE>
4. Property Held for Sale
Property held for sale is a new headquarters building being constructed for
the Port of Portland. This property has been classified as a current asset. See
Part I, Item 2., "Financial Condition -- Cash Flows -- Investing Activities,"
below.
5. Contingencies
See Part II, Item 7., "Contingent Liabilities" and "Environmental Matters"
in the 1998 Form 10-K and Part I, Item 2., "Financial Condition - Contingent
Liabilities - Chase Gardens Litigation," below.
9
<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), a wholly-owned
subsidiary
Canor Energy, Ltd. (Canor), a majority-owned subsidiary
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 1998 Annual Report on
Form 10-K (1998 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 nine months ended Sept. 30, 1999 and 1998.
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; (x) legal and administrative proceedings and settlements; and
(xi) estimates of future costs or the effect on future operations as a result of
10
<PAGE>
events that could result from the Year 2000 issue described further herein. 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 incurred a loss of 17 cents a diluted share for the
quarter ended Sept. 30, 1999, compared to a loss of 26 cents a diluted share in
last year's third quarter. The loss applicable to common stock was $4.2 million
in the third quarter of 1999 and $6.6 million in the third quarter of 1998. A
third quarter loss is customary for NW Natural, reflecting low summertime use of
natural gas.
NW Natural lost 20 cents a diluted share from utility operations in
the third quarter of 1999, compared to a loss of 28 cents a diluted share in the
same period of 1998. The smaller loss is primarily due to the colder weather
experienced during the third quarter of 1999 compared to the third quarter of
1998.
The Company earned $29.4 million, or $1.17 a diluted share, and
$19.4 million, or 80 cents a diluted share, for the nine months ended Sept. 30,
1999 and 1998, respectively. Year-to-date, NW Natural earned $1.12 a diluted
share from utility operations compared to 67 cents a diluted share in the same
period in 1998. Weather in the first nine months of the year was 17 percent
colder in 1999 than in 1998, resulting in an increase in margin from residential
and commercial customers equivalent to an estimated 39 cents a share.
NW Natural's subsidiaries earned 3 cents a share during the third
quarter of 1999 compared to 1 cent a share during the third quarter of 1998.
Year-to-date subsidiary results were income of 4 cents a share for 1999 compared
to a loss of 1 cent a share for 1998. See "Subsidiary Operations," below.
Dividends paid on common stock were 30.5 cents a share for the
three-month periods ended Sept. 30, 1999 and 1998. In October 1999, the
Company's Board of Directors declared a quarterly dividend of 30.5 cents a share
on the common stock, payable Nov. 15, 1999, to shareholders of record on
Oct. 29, 1999. The current indicated annual dividend rate is $1.22 a share.
Results of Operations
- ---------------------
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility volumes
and revenues:
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1999 1998 1999 1998
-------------------- ---------------------
<S> <C> <C> <C> <C>
Gas Sales and Transportation Volumes --
Therms (000's):
Residential and commercial sales ....... 54,335 48,337 456,868 388,468
Unbilled volumes ....................... 1,753 1,876 (45,246) (37,426)
-------- -------- --------- ---------
Weather-sensitive volumes .......... 56,088 50,213 411,622 351,042
Industrial firm sales .................. 16,695 17,353 65,362 64,906
Industrial interruptible sales ......... 11,602 11,643 39,303 38,608
-------- -------- --------- ---------
Total gas sales .................... 84,385 79,209 516,287 454,556
Transportation deliveries .............. 107,146 106,644 324,555 340,690
-------- -------- --------- ---------
Total volumes sold and delivered ....... 191,531 185,853 840,842 795,246
======== ======== ========= =========
Utility Operating Revenues -- Dollars (000's):
Residential and commercial revenues .... $ 38,028 $ 33,403 $ 286,916 $ 227,713
Unbilled revenues ...................... 1,021 1,102 (25,422) (17,769)
-------- -------- --------- ---------
Weather-sensitive revenues ......... 39,049 34,505 261,494 209,944
Industrial firm sales revenues ......... 7,071 7,056 27,489 25,233
Industrial interruptible sales
revenues ........................... 3,699 3,298 12,355 11,345
-------- -------- --------- ---------
Total gas sales revenues ........... 49,819 44,859 301,338 246,522
Transportation revenues ................ 5,277 4,914 14,960 15,050
Other revenues ......................... 505 292 1,174 2,295
-------- -------- --------- ---------
Total utility operating revenues ....... $ 55,601 $ 50,065 $ 317,472 $ 263,867
======== ======== ========= =========
Cost of Gas sold - Dollars (000's) .......... $ 22,078 $ 19,303 $ 142,977 $ 110,257
======== ======== ========= =========
Total number of customers (end of period) ... 487,806 463,743 487,806 463,743
======== ======== ========= =========
Actual degree days .......................... 127 48 2,869 2,460
======== ======== ========= =========
20-year average degree days ................. 92 100 2,598 2,617
======== ======== ========= =========
</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 38 percent colder than average in
the third quarter of 1999 and 52 percent warmer than average in the third
quarter of 1998.
NW Natural continues to experience rapid customer growth, with 24,063
customers added since Sept. 30, 1998 for a growth rate of 5.2 percent. In the
three years ended Dec. 31, 1998, more than 67,000 customers were added to the
system, representing an average annual growth rate of 5.2 percent per year.
Residential and commercial revenues in the three months and nine
months ended Sept. 30, 1999 increased 13 percent and 25 percent, respectively,
over the corresponding 1998 periods. The higher residential and commercial
revenues in both 1999 periods over the comparable 1998 periods were due to
increased volumes and to rate increases. Effective Jan. 1, April 1 and Dec. 1,
1998, the OPUC approved rate increases averaging 11.4 percent, 6.1 percent and
3.4 percent, respectively, for NW Natural's Oregon customers. These rate
increases reflected changes in NW Natural's purchased gas costs, the application
of temporary rate adjustments to amortize regulatory balancing accounts and the
removal of temporary rate adjustments in effect during 1997. Effective Dec. 1,
12
<PAGE>
1998, the WUTC approved a rate increase averaging 5.8 percent primarily to pass
through to Washington customers increases in purchased gas costs.
Volumes of gas sold to residential and commercial customers were
5.9 million therms, or 12 percent, higher in the third quarter of 1999 than in
the third quarter of 1998. Margin from these customer categories was
$2.4 million, or 9 percent, higher primarily due to colder weather and customer
growth. Sales volumes to these customers were $60.6 million, or 17 percent,
higher in the first nine months of 1999 than in the first nine months of 1998;
related margin increased by 13 percent.
The Company previously reported that NW Natural filed a general rate
case in Oregon in October 1998, proposing a revenue increase of $14.7 million
per year from Oregon operations through rate increases averaging 3.8 percent.
(See Part I, Item 2., "Results of Operations - Residential and Commercial," in
the Company's Form 10-Q for the quarter ended March 31, 1999.) The OPUC is
expected to make its decision in the rate case in November 1999.
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 0.2 million therms, or less than 1 percent,
lower in the three months ended Sept. 30, 1999 than in the same period of 1998.
Transportation volumes increased 0.5 million therms while gas sales to
industrial firm and interruptible customers decreased 0.7 million therms as
compared to the third quarter of 1998. Margin from these customers increased
from $10.5 million in the third quarter of 1998 to $10.9 million in the third
quarter of 1999. The primary factor contributing to the increase in industrial
margin was a $0.8 million, or 59 percent, increase in margin from customers on
an industrial schedule in which rates vary with oil prices, due to both higher
oil prices and higher volumes delivered.
For the current nine-month period, total volumes delivered to
industrial and transportation customers decreased 15 million therms, or 3
percent, from 1998. Related margin from these customers decreased $0.7 million,
or 2 percent, as compared to the first nine months of 1998.
Other revenues, which relate primarily to accumulations or
amortizations of regulatory accounts (see Part II, Item 8., Note 1, "Notes to
Consolidated Financial Statement," in the 1998 Form 10-K), were $0.2 million, or
73 percent, higher during the third quarter of 1999 and $1.1 million, or
49 percent, lower year-to-date compared to 1998. The principal factors affecting
these results on a year-to-date basis were a decrease in amortization of
property tax savings ($3.2 million) offset in part by the completion of
amortizations of revenue reductions negotiated with the OPUC as part of the
Jan. 1, 1998 rate change ($1.8 million) and an increase in miscellaneous gas
revenues ($0.4 million).
Cost of Gas
-----------
The cost per therm of gas purchased was 14 percent higher in the third
quarter of 1999, and was 7 percent higher year-to-date, than in the same periods
last year.
13
<PAGE>
The cost per therm of gas sold was 7 percent higher during the third
quarter of 1999, and 14 percent higher year-to-date, than in the same periods of
1998. The cost of gas sold includes current gas purchases, gas drawn from
storage, demand cost equalization and regulatory deferrals less Company use. The
cost of gas sold was reduced by non-regulated sales of $1.1 million and
$1.7 million for the first nine months of 1999 and 1998, respectively. Under an
agreement with the OPUC, net proceeds from these sales are treated as a
reduction to cost of gas sold.
NW Natural has a Purchased Gas Adjustment (PGA) tariff in Oregon,
under which its net income from Oregon operations is affected only within
defined limits by changes in purchased gas costs. NW Natural recognizes
33 percent of the difference between actual and projected gas costs in current
operating results while the remaining 67 percent is deferred for recovery from
or refund to customers in future rates.
Subsidiary Operations
---------------------
The following table summarizes financial information for the Company's
consolidated subsidiaries:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ----------------------
1999 1998 1999 1998
------------------------ ----------------------
<S> <C> <C> <C> <C>
Consolidated Subsidiaries (Thousands):
Net Operating Revenues ................. $ 4,208 $ 3,699 $ 11,291 $ 9,160
Operations and Maintenance Expense ..... 2,072 2,398 6,070 5,456
Depreciation, Depletion and
Amortization......................... 1,978 2,481 6,305 5,458
-------- -------- -------- --------
Income (Loss) from Operations .......... 158 (1,180) (1,084) (1,754)
Income from Financial Investments ...... 826 1,228 552 399
Other Income and Interest Charges --
net................................... (24) 42 1,727 415
Minority Interest ...................... (25) 389 (83) 470
-------- -------- -------- --------
Income (Loss) Before Income Taxes ...... 935 479 1,112 (470)
Income Tax Expense (Benefit) ........... 193 138 153 (258)
-------- -------- -------- --------
Net Income (Loss) ...................... $ 742 $ 341 $ 959 $ (212)
======== ======== ======== ========
</TABLE>
Results of operations for the individual subsidiaries for the third
quarter of 1999 were negligible net income for Canor compared to a loss of
$0.8 million in the third quarter of 1998, and net income of $0.7 million for
Financial Corporation compared to net income of $1.1 million in the third
quarter of 1998. These combined results are equivalent to net income of 3 cents
a share in 1999 and 1 cent a share in 1998.
For the nine months ended Sept. 30, 1999, the subsidiaries' net
results were income of $0.2 million for Canor and $0.8 million for Financial
Corporation, compared to a net loss of $0.9 million for Canor and net income of
$0.7 million for Financial Corporation in the first nine months of 1998. These
combined results are equivalent to net income of 4 cents a share in 1999
compared to a loss of 1 cent a share in 1998.
In the first quarter of 1998, NW Natural recorded a $3.5 million gain,
equivalent to 15 cents a share, from the combination of Canor with Southlake
Energy, Inc. (Southlake), an indirect subsidiary of NIPSCO Industries, Inc. (now
NiSource Inc.). Canor purchased Southlake's stock in exchange for shares of
Canor, with the resulting company owned 66 percent by NW Natural and 34 percent
by an indirect subsidiary of NiSource Inc. The resulting gain was not subject to
U.S. income tax. Canor had managed Southlake's assets since 1995 under a
previous agreement.
14
<PAGE>
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Operations and maintenance expenses were $0.3 million, or less than
1 percent, lower in the nine months ended Sept. 30, 1999, compared to the same
period in 1998. NW Natural's operations and maintenance expenses decreased
$0.9 million reflecting reductions to the litigation reserve for the Chase
Gardens case ($3.0 million) (see Part II, Item 1, "Legal Proceedings," below)
offset by higher accruals for bonuses ($1.0 million), bad debt expense
($0.8 million) and costs of employee severance and special voluntary early
retirement programs ($0.9 million). Subsidiary operations and maintenance
expenses increased by $0.6 million primarily due to increased operating costs
for Canor subsequent to the Canor/Southlake combination.
Taxes Other than Income Taxes
-----------------------------
Taxes other than income taxes for the nine months ended Sept. 30, 1999
increased $2.6 million, or 16 percent, from the nine months ended Sept. 30,
1998. Franchise tax expense increased $1.5 million compared to the first nine
months of 1998 as a result of higher revenues reflecting rate increases and
colder weather. Property taxes increased $0.7 million due to higher utility
plant balances while regulatory fees and other local business taxes increased a
total of $0.4 million.
Depreciation, Depletion and Amortization
----------------------------------------
The Company's depreciation, depletion and amortization expense for the
nine months ended Sept. 30, 1999, increased $2.0 million, or 5 percent, compared
to the first nine months of 1998. NW Natural's depreciation expense increased by
$1.1 million primarily due to the placement into service in November 1998 of an
expansion of its underground gas storage facility (Mist Phase II) and other
utility plant investments. Subsidiary depreciation expense increased
$0.9 million in the first nine months of 1999 due to an increase in Canor's
total assets following its combination with Southlake.
Other Income
------------
The Company's other income for the year to date was $1.6 million lower
than in 1998. Results from 1998 included a $3.5 million gain from the
combination of Canor with Southlake (see "Subsidiary Operations," above). The
first nine months of 1999 included a gain on the sale of assets by Canor
($1.7 million) (see "Financial Condition -- Cash Flows -- Investing Activities,"
below) and an increase in income from Financial Corporation's alternative energy
investments ($0.2 million).
Interest Charges -- net
-----------------------
The Company's net interest expense was $0.9 million, or 4 percent,
lower in the first nine months of 1999 than in the same period in 1998,
reflecting reductions to interest expense of $1.1 million due to a decision in
the Chase Gardens case (see Part II, Item 1, "Legal Proceedings," below).
Increases in interest charges reflecting higher balances of long-term debt
outstanding during the first nine months of 1999 were partially offset by a
reduction in the average interest rate on long-term debt due to the redemption
or maturity of higher-cost notes, and lower balances of short-term debt
outstanding.
15
<PAGE>
Income Taxes
------------
The effective corporate income tax rates for the nine months ended
Sept. 30, 1999 and 1998 were 35.8 percent and 30.7 percent, respectively. The
lower 1998 rate was due in part to the non-taxability of the $3.5 million gain
from the Canor combination with Southlake. (See Part II, Item 8., Note 7, "Notes
to Consolidated Financial Statements," in the 1998 Form 10-K.)
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 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 1998 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 1998 Form 10-K).
Cash Flows
----------
Operating Activities
--------------------
Operating activities provided net cash of $113.5 million in the nine
months ended Sept. 30, 1999 compared to $65.9 million in the first nine months
of 1998. The $47.5 million, or 72 percent increase, was due to increased cash
from operations ($15.2 million) and decreased working capital requirements
($32.3 million). The increase in cash from operations compared to 1998 was
primarily due to an increase in net income ($9.9 million), lower deferred gas
costs receivable ($7.8 million), a decrease in non-cash gains on the sale of
assets ($2.1 million), an increase in depreciation, depletion and amortization
($2.0 million) and a decrease in the allowance for funds used during
construction ($0.5 million), offset by a reduction in deferred income taxes and
investment tax credits ($2.3 million) and an increase in regulatory accounts
($4.8 million). The decrease in working capital requirements was due to larger
decreases in accounts receivable ($8.0 million) and accrued unbilled revenue
($9.5 million); accrued taxes and interest ($2.4 million); and a smaller
decrease in accounts payable ($18.0 million); changes in other current assets
and liabilities ($4.4 million), including the excess of progress payments
received minus construction costs incurred for the construction of a building
for the Port of Portland ($3.1 million), less an increase in inventory balances
16
<PAGE>
($9.9 million). A non-cash gain of $3.5 million was recognized in the first
quarter of 1998 from Canor's combination with Southlake.
The Company has lease and purchase commitments relating to its
operating activities which are financed with cash flows from operations (see
Part II, Item 8., Note 12, "Notes to Consolidated Financial Statements," in the
1998 Form 10-K).
Investing Activities
--------------------
Cash requirements for utility construction in the first nine months of
1999 totaled $78.7 million, up $22 million, or 39 percent, from the first nine
months of 1998. The increase resulted largely from higher expenditures for the
development of underground storage facilities ($20.9 million) and an increase in
computer software related to the development of a new industrial billing system.
NW Natural's construction expenditures are estimated to total
$110 million for 1999. Over the five-year period 1999 through 2003, these
expenditures are estimated at between $450 million and $500 million. The
projected level of capital expenditures during the next five years reflects
projected 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 nine months of 1999, non-utility capital expenditures
totaled $16.6 million, down from $17.6 million in the first nine months of 1998.
Canor invested $6.9 million in Canadian exploration and production properties.
Canor also realized proceeds of $3.9 million from the sale of interests in other
exploration and production properties.
NW Natural's non-utility expenditures totaled $9.7 million for the
construction of a new headquarters building for the Port of Portland. The
purchase and sale agreement between NW Natural and the Port of Portland provides
for the Port to pay at closing, following completion of construction, an
established purchase price for construction of the core and shell of the
building plus NW Natural's costs for construction of tenant improvements. NW
Natural anticipates that closing will occur during the fourth quarter of 1999 or
the first quarter of 2000. In June and August 1999, the Port made construction
progress payments in advance of closing totaling $18.8 million, which were used
to pay off the balance outstanding under a line of credit used for construction
of the building. See Part I, Item 1., Note 4, "Notes to Consolidated Financial
Statements," above, and Part I, Item 2., "Financial Condition -- Lines of
Credit," below.
Financing Activities
--------------------
NW Natural had $12.1 million net cash used in financing activities in
the first nine months of 1999, compared to $7.3 million net cash provided by
financing activities in the first nine months of 1998. The primary factor
contributing to the $19.4 million turnaround was that cash provided from common
stock issued during the nine-month periods was $46.8 million lower in 1999 than
in 1998, when NW Natural realized $44.7 million from the negotiated public
offering of 1,725,000 shares of common stock. Offsetting this factor was that NW
Natural's long-term debt program provided $10 million in cash in 1999 (debt
17
<PAGE>
issued net of debt retired), compared to $3 million cash used in 1998, and its
short-term debt balances stayed about the same in 1999 compared to $14 million
of cash used to pay down short-term balances in 1998.
Lines of Credit
---------------
NW Natural has available through Sept. 30, 2000, committed lines of
credit with five commercial banks totaling $120 million, consisting of a primary
fixed amount of $60 million plus an excess amount of up to $60 million available
as needed, at NW Natural's option, on a monthly basis. Financial Corporation has
available through Sept. 30, 2000, 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 Sept. 30, 1999 or 1998.
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, and Part I, Item 1., Note 4, "Notes to Consolidated
Financial Statements," above). This line of credit is available through Nov. 30,
1999. There was no outstanding balance as of Sept. 30, 1999.
Canor has a $24 million (Canadian) revolving credit facility available
for its normal business operations through a Canadian commercial bank. The
amount of the facility is subject to a re-setting annually either upward or
downward, based upon an analysis of Canor's gas and oil reserves as of
December 31 each year. Canor had $5.5 million (U.S.) outstanding on this line of
credit at Sept. 30, 1999.
Commercial Paper
----------------
The Company's primary source of short-term funds is commercial paper.
Both NW Natural and Financial Corporation issue commercial paper under agency
agreements with a commercial bank. The commercial paper is supported by lines of
credit with commercial banks (see "Lines of Credit," above). Financial
Corporation's commercial paper also is supported by the guaranty of NW Natural
(see Part II, Item 8., Note 6, "Notes to Consolidated Financial Statements," in
the 1998 Form 10-K). NW Natural had $81.7 million of commercial paper notes
outstanding at Sept. 30, 1999. Financial Corporation had no commercial paper
notes outstanding at that date.
Ratios of Earnings to Fixed Charges
-----------------------------------
For the 12 months ended Sept. 30, 1999 and Dec. 31, 1998, the
Company's ratios of earnings to fixed charges, computed using the Securities and
Exchange Commission method, were 2.70 and 2.12, respectively. For this purpose,
earnings consist of net income before taxes plus fixed charges, and fixed
18
<PAGE>
charges consist of interest on all indebtedness, the amortization of debt
expense and discount or premium and the estimated interest portion of rentals
charged to income.
Contingent Liabilities
- ----------------------
Chase Gardens Litigation
------------------------
In 1996, NW Natural recorded charges to operating expense and interest
totaling $5.6 million as a reserve against payment of a judgment against it in
the Chase Gardens litigation (see Part II, Item 1, "Legal Proceedings," below).
Following a favorable decision by the Supreme Court of Oregon in May 1999, NW
Natural reduced the litigation reserve by a total of $3.9 million, reducing
operating expense for the second quarter of 1999 by $3.0 million and interest
expense by $0.9 million. The balance in the reserve account as of Sept. 30,
1999, was $2.7 million, an amount the Company believes is adequate to cover any
remaining liability it may have in the case.
Year 2000 Readiness
-------------------
Overview
--------
The Company has identified and is in the process of completing
corrections to the information technology (IT) and non-IT systems within its
control that could be affected by the Year 2000 issue. In early 1997, NW Natural
established a Year 2000 Project Office with technical specialists experienced in
the Year 2000 issue, sponsored by two senior executives.
The Company's objective in its Year 2000 project is to reduce the risk
of business disruption or serious financial loss due to IT and non-IT systems
failures relating to the Year 2000 issue. In November 1997, NW Natural replaced
its largest application, its customer information system for residential and
small commercial customers incorporating billing, customer order, credit and
other programs, with a fully Year 2000-ready system. Additional project work
includes maintaining and managing the inventory of its date-sensitive IT and
non-IT systems; researching and evaluating the degree of Year 2000 readiness of
IT and non-IT systems of suppliers and vendors; identifying and assessing the
cost of renovating or replacing non-IT systems within its control that could be
affected by the Year 2000 issue; assigning risk ratings to its IT and non-IT
systems in order to prioritize renovation and replacement efforts; and
developing contingency plans for high-risk systems or vendor products where
products are known to be non-compliant or readiness levels cannot be
independently verified.
Readiness of Systems
--------------------
The Year 2000 project office has achieved various stages of correction
for impacted IT systems and non-IT equipment and, overall, NW Natural has
maintained and expects to continue its planned schedule for correction. For
example, besides installing the new residential and commercial customer
information system, NW Natural has completed renovations or Year 2000-ready
upgrades of its gas supply and gas management systems, general ledger accounting
system, distribution construction system, stockholder system and distributed
facilities system. The Company also has completed replacements of several
systems including its accounts payable, purchasing and inventory applications.
19
<PAGE>
As of Sept. 30, 1999, renovations of all high priority internal
applications had been completed except for NW Natural's industrial billing
system which is scheduled for replacement in November 1999. Upgrades of NW
Natural's internal network (Unix) infrastructure also are scheduled to be
completed in November 1999. NW Natural is developing appropriate plans to
renovate or address risks of failure in its remaining lower-risk systems by the
end of 1999.
Suppliers and Vendors
---------------------
NW Natural has evaluated the status of Year 2000 compliance efforts of
critical suppliers and vendors. These contacts include written communication or
face-to-face meetings with providers of interstate pipeline capacity and gas
storage, natural gas suppliers, financial institutions and electric and
telephone companies. In addition, the project office has investigated 563
vendor-supplied products. Of these products, as of Sept. 30, 1999, 501 products
either have been determined to be compliant or have been represented by the
vendors to be compliant if used in connection with other compliant systems.
Another 61 products have been deemed non-compliant of which 36 have been
determined to pose no significant risk to operations. One other product is still
under active investigation. If warranted, the Company will identify alternative
vendor sources for the non-compliant products to the extent alternatives are
available, and develop contingency plans for any critical vendor products
considered to pose a significant risk where alternatives are not available.
Risks and Contingency Planning
------------------------------
The Company has not quantified its worst-case exposure from the Year
2000 issue. With respect to its internal operations, NW Natural believes its
most significant risks are its ability to render timely bills to its industrial
and large commercial customers, its ability to use electronic devices to control
and operate its distribution system and its ability to maintain continuous
operation of its internal network and other computer systems. In the event that
any Year 2000-related problems may occur, the Company intends to implement
contingency plans to mitigate the impact of such failures to the extent
possible. These plans will include options for manual control and operation of
the gas distribution system.
With respect to external factors, NW Natural relies on the suppliers
of natural gas and interstate pipeline transportation to deliver natural gas to
the Company's distribution system. External infrastructure such as electric and
telephone service is necessary for the Company's basic operation as well as the
operations of many of its customers. A failure by any of these critical vendors
could challenge the Company's ability to meet the demands of its customers. As
part of its normal business practice, NW Natural maintains plans to follow
during emergencies. These plans have been incorporated into its contingency plan
for potential Year 2000-related problems.
Financial Impact
----------------
NW Natural's total estimated cost for its Year 2000 readiness program
is $7.6 million. This amount includes its costs of assessment, planning, vendor
management, project management and other project costs as well as the costs of
renovating and testing internal applications. NW Natural's costs for Year 2000
activities from 1997 through Sept. 30, 1999, totaled $6.6 million. Neither the
total estimated cost nor the costs to date include the costs incurred in
20
<PAGE>
replacing NW Natural's customer information system or costs for other IT systems
that are being replaced rather than renovated. In accordance with an order of
the OPUC, NW Natural's incremental operating costs for Year 2000 readiness are
being deferred and will be amortized over a five-year period.
Disclaimer
----------
As a result of its Year 2000 program and the replacement of the
residential and small commercial customer information system, the Company does
not believe that, in the aggregate, Year 2000 issues will be material to its
business, operations or financial condition. However, despite the Company's
efforts, there can be no assurance that all material Year 2000 risks relating to
systems within its control will have been adequately identified and corrected
before the end of 1999. In addition, while the Company is in the process of
researching and evaluating the Year 2000 readiness of its suppliers and vendors,
the Company can make no assurances regarding the Year 2000 compliance status of
systems or parties outside its control, and currently cannot assess the effect
on it of any non-compliance by such systems or parties.
The Year 2000 statements in this report are Year 2000 Readiness
Disclosures under the Year 2000 Information and Readiness Disclosure Act and are
made to the best knowledge and belief of the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the information provided in
Part II, Item 7A., "Quantitative and Qualitative Disclosures About Market Risk,"
in the 1998 Form 10-K.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
In July 1995, a jury in an Oregon state court returned a verdict
against NW Natural in the case of Northwest Natural Gas Company v. Chase
Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370). (See Part II,
Item 8., Note 12, "Notes to Consolidated Financial Statements," in the 1998
Form 10-K.) In the fourth quarter of 1996, after the Oregon Court of Appeals
affirmed the trial court decision, NW Natural recorded charges to operating
expense and interest expense totaling $5.6 million as a reserve against payment
of the judgment. NW Natural petitioned for review by the Oregon Supreme Court,
which issued its opinion in May 1999 reversing the Court of Appeals' decision,
overturning the trial court verdict on the larger of the two claims in the case
and remanding the case to the Court of Appeals for further proceedings on NW
Natural's appeal of the judgment on the smaller of the two claims. Reflecting
that decision, NW Natural reduced the litigation reserve by a total of
$3.9 million, reducing operating expense for the second quarter of 1999 by
$3.0 million and interest expense by $0.9 million. The balance in the reserve
account as of Sept. 30, 1999 was $2.7 million, an amount the Company believes is
adequate to cover any remaining liability it may have in the case.
21
<PAGE>
Item 5. OTHER INFORMATION
Rate Increase Filings
---------------------
In October 1999, NW Natural filed its annual rate adjustments under
its PGA tariffs in Oregon and Washington. These filings propose rate increases
averaging 10.6 percent in Oregon and 11.1 percent in Washington. The increases
are due to higher costs of natural gas to be purchased under contracts with gas
producers during the coming year; increases in temporary rate surcharges for
recovery of balances in deferred gas cost and other regulatory accounts; and the
removal of temporary rate reductions for refunds of deferred account balances
from prior years.
NW Natural also filed for a rate increase in Oregon to recover its
incremental cost of service relating to an expansion of the pipeline from its
Mist Storage facility. The proposed rate increases, which are supported by a
stipulation between NW Natural and the OPUC Staff, are 1.5 percent for
residential customers, 2.0 percent for commercial customers and 1.0 percent for
industrial firm customers.
The filings in both states propose that rate increases go into effect
on Dec. 1, 1999. NW Natural expects the OPUC and the WUTC to approve the PGA
filings, and the OPUC to approve the filing relating to the expansion of the
Mist Storage pipeline, on approximately the terms proposed.
Even assuming the rates proposed to be effective as of Dec. 1, 1999,
NW Natural would continue to enjoy a significant price advantage over competing
fuels, including electricity provided by the investor-owned electric utilities
in its service territory.
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
No Current Reports on Form 8-K were filed during the quarter ended
Sept. 30, 1999.
22
<PAGE>
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: November 4, 1999 /s/ Stephen P. Feltz
--------------------------------------
Stephen P. Feltz
Principal Accounting Officer
Treasurer and Controller
23
<PAGE>
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Quarterly Report on Form 10-Q
For Quarter Ended
September 30, 1999
Exhibit
Document Number
-------
Statement re: Computation of Per Share Earnings 11
Computation of Ratios of Earnings to Fixed Charges 12
Financial Data Schedule 27
<PAGE>
EXHIBIT 11
NORTHWEST NATURAL GAS COMPANY
Statement re: Computation of Per Share Earnings
(Thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 1998 1999 1998
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Earnings Applicable to Common Stock ...... $ (4,183) $ (6,558) $ 29,374 $ 19,420
Debenture Interest Less Taxes ....... 105 110 315 330
-------- -------- -------- --------
Net Income Available for Diluted Common
Stock .................................. $ (4,078) $ (6,448) $ 29,689 $ 19,750
======== ======== ======== ========
Average Common Shares Outstanding ........ 25,007 24,763 24,946 24,037
-------- -------- -------- --------
Stock Options ....................... 31 36 15 40
Convertible Debentures .............. 476 500 476 500
-------- -------- -------- --------
Diluted Common Shares .................... 25,514 25,299 25,437 24,577
======== ======== ======== ========
Diluted Earnings per Share of
Common Stock ........................ $ (0.17) $ (0.26) $ 1.17 $ 0.80
======== ======== ======== ========
</TABLE>
EXHIBIT 12
NORTHWEST NATURAL GAS COMPANY
Computation of Ratio of Earnings to Fixed
Charges January 1, 1994 - September 30, 1999
<TABLE>
<CAPTION>
Twelve
Months
Year Ended December 31, Ended
------------------------------------------------------ Sept. 30,
1994 1995 1996 1997 1998 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges, as Defined:
Interest on Long-Term
Debt ................... $ 21,921 $ 23,141 $ 23,176 $ 24,918 $ 27,567 $ 27,758
Other Interest ........... 2,473 2,252 3,448 4,500 4,902 3,307
Amortization of Debt
Discount and Expense ... 850 882 865 730 714 706
Interest Portion of
Rentals ................ 1,697 1,764 1,798 2,111 1,986 1,986
-------- -------- -------- -------- -------- --------
Total Fixed Charges, as
defined ................ $ 26,941 $ 28,039 $ 29,287 $ 32,259 $ 35,169 $ 33,757
======== ======== ======== ======== ======== ========
Earnings, as defined:
Net Income ............... $ 35,461 $ 38,065 $ 46,793 $ 43,059 $ 27,301 $ 37,209
Taxes on Income .......... 20,473 22,120 27,347 21,106 12,254 20,260
Fixed Charges, as above .. 26,941 28,039 29,287 32,259 35,169 33,757
-------- -------- -------- -------- -------- --------
Total Earnings, as defined $ 82,875 $ 88,224 $103,427 $ 96,424 $ 74,724 $ 91,226
======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed
Charges ..................... 3.08 3.15 3.53 2.99 2.12 2.70
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and is qualifed in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 881,009
<OTHER-PROPERTY-AND-INVEST> 67,904
<TOTAL-CURRENT-ASSETS> 122,266
<TOTAL-DEFERRED-CHARGES> 99,877
<OTHER-ASSETS> 56,860
<TOTAL-ASSETS> 1,227,916
<COMMON> 79,296
<CAPITAL-SURPLUS-PAID-IN> 233,513
<RETAINED-EARNINGS> 109,991
<TOTAL-COMMON-STOCKHOLDERS-EQ> 422,800
34,750
0
<LONG-TERM-DEBT-NET> 386,482
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 87,276
<LONG-TERM-DEBT-CURRENT-PORT> 0
814
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 295,794
<TOT-CAPITALIZATION-AND-LIAB> 1,227,916
<GROSS-OPERATING-REVENUE> 328,897
<INCOME-TAX-EXPENSE> 17,448
<OTHER-OPERATING-EXPENSES> 263,035
<TOTAL-OPERATING-EXPENSES> 280,483
<OPERATING-INCOME-LOSS> 48,414
<OTHER-INCOME-NET> 5,598
<INCOME-BEFORE-INTEREST-EXPEN> 54,012
<TOTAL-INTEREST-EXPENSE> 22,745
<NET-INCOME> 31,267
1,893
<EARNINGS-AVAILABLE-FOR-COMM> 29,374
<COMMON-STOCK-DIVIDENDS> 22,804
<TOTAL-INTEREST-ON-BONDS> 19,387
<CASH-FLOW-OPERATIONS> 113,451
<EPS-BASIC> $1.18
<EPS-DILUTED> $1.17
</TABLE>
