SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Check One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 number 0-994
NW NATURAL
NORTHWEST NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
OREGON 93-0256722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 N.W. SECOND AVENUE, PORTLAND, OREGON 97209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 226-4211
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Shares outstanding on February 29, 2000
- ------------------- ---------------------------------------
Common Stock, $3 1/6 par value,
and Common Share Purchase Rights 25,154,849
Preference Stock, without par value 250,000
Preferred Stock, without par value 105,643
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the shares of voting stock (common stock) held by
non-affiliates of the registrant at February 29, 2000 was: $479,149,100.
DOCUMENTS INCORPORATED BY REFERENCE
List documents incorporated by reference and the Part of the Form 10-K into
which the document is incorporated.
Portions of the Proxy Statement of Company, to be filed in connection with the
2000 Annual Meeting of Shareholders, are incorporated by reference in Part III.
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NORTHWEST NATURAL GAS COMPANY
Annual Report to Securities and Exchange Commission
on Form 10-K
for the year 1999
TABLE OF CONTENTS
PART I Page
- ------ ----
Item 1. Business
General..................................................... 3
Gas Supply.................................................. 3
Regulation and Rates........................................ 6
Competition and Marketing................................... 8
Environment................................................. 10
Employees................................................... 10
Item 2. Properties....................................................... 10
Item 3. Legal Proceedings................................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.............. 12
Additional Item
Executive Officers of the Registrant............................. 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data.......................................... 15
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition......................................... 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...... 27
Item 8. Financial Statements and Supplementary Data...................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................ 59
PART III
Items 10. - 13. Incorporated by Reference to Proxy Statement............... 59
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 59
SIGNATURES ............................................................ 65
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NORTHWEST NATURAL GAS COMPANY
PART I
ITEM 1. BUSINESS
General
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Northwest Natural Gas Company (NW Natural or the Company) was
incorporated under the laws of Oregon in 1910. The Company and its predecessors
have supplied gas service to the public since 1859. Since September 1997, it has
been doing business as NW Natural.
NW Natural is principally engaged in the distribution of natural gas.
The Oregon Public Utility Commission (OPUC) has allocated to NW Natural as its
exclusive service area a major portion of western Oregon, including the Portland
metropolitan area, most of the Willamette Valley and the coastal area from
Astoria to Coos Bay. NW Natural also holds certificates from the Washington
Utilities and Transportation Commission (WUTC) granting it exclusive rights to
serve portions of three Washington counties bordering the Columbia River. Gas
service is provided in 95 cities, together with neighboring communities, in 16
Oregon counties, and in nine cities, together with neighboring communities, in
three Washington counties. Based on U.S. Census Bureau statistics for 1995, NW
Natural's service areas had a population of about 2,735,000, including about 78
percent of the population of the State of Oregon and 6 percent of the population
of the State of Washington. The city of Portland is the principal retail and
manufacturing center in the Columbia River Basin, and is a major port and
growing nucleus for trade with Pacific Rim nations such as Japan, Taiwan and
Korea.
At year-end 1999, NW Natural had about 447,700 residential customers,
52,900 commercial customers and 600 industrial customers. Industries served
include pulp, paper and other forest products; the manufacture of electronic,
electrochemical and electrometallurgical products; the processing of farm and
food products; the production of various mineral products; metal fabrication and
casting; and the production of machine tools, machinery and textiles.
The Company operated two subsidiaries during 1999. NNG Financial
Corporation (Financial Corporation), a wholly-owned subsidiary, is incorporated
in Oregon. Financial Corporation holds financial investments as a limited
partner in three solar electric generating plants, four windpower electric
generation projects and a hydroelectric project, all located in California, and
in two low-income housing projects in Portland. Financial Corporation also holds
interests in certain gas producing properties in the western United States (See
Item 2, Properties, below). Canor Energy Ltd. (Canor) was a majority-owned
subsidiary incorporated in Alberta, Canada. In January 2000, the Company sold
its interest in Canor. For purposes of the accompanying consolidated financial
statements, Canor has been reclassified as a discontinued segment (see Part II,
Item 8, Notes 1 and 2 to the Consolidated Financial Statements). Prior to its
sale, Canor was engaged in natural gas and oil exploration in Alberta and
Saskatchewan, Canada.
Gas Supply - General
- --------------------
NW Natural meets the needs of its core market (residential, commercial
and firm industrial) customers through natural gas purchases from a variety of
suppliers. NW Natural has a diverse portfolio of short- and long-term firm gas
supply contracts. During periods of peak demand, supplies under these contracts
are supplemented with gas from storage facilities either owned by or
contractually committed to NW Natural.
Natural gas for NW Natural's core market is transported over the
interstate pipeline system of Williams Gas Pipeline - West (WGP), also known as
Northwest Pipeline Corporation. Most supplies also move over other pipelines
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upstream of WGP's system in the U.S. and Canada. Rates for service under
transportation agreements between NW Natural and the U. S. interstate pipelines
are established by the Federal Energy Regulatory Commission (FERC), and by
Canadian federal or provincial authorities for the Canadian pipelines over which
NW Natural transports gas.
The largest of the transportation agreements with WGP expires Sept. 30,
2013 and provides for firm transportation capacity of up to 2,160,440 therms1
per day. This agreement provides access to natural gas supplies in British
Columbia and the U.S. Rocky Mountains.
The Company's second largest transportation agreement with WGP expires
on Nov. 30, 2011. It provides 1,020,000 therms per day of firm transportation
capacity from the point of interconnection of the WGP and PG&E Gas Transmission
Northwest (PG&E GT-NW) systems in eastern Oregon to NW Natural's service
territory. PG&E GT-NW's pipeline runs from the U.S./Canadian border through
northern Idaho, southeastern Washington and central Oregon to the
California/Oregon border. NW Natural's total capacity on PG&E GT-NW and two
upstream pipelines (Alberta Natural Gas Company and NOVA Corporation of Alberta,
now both units of TransCanada PipeLines Limited) substantially matches this
amount of WGP capacity northward into Alberta, Canada.
NW Natural also has an agreement with WGP expiring Sept. 30, 2009, for
340,000 therms per day of firm transportation capacity for the Company's core
market. This agreement accesses gas supplies in the U.S. Rocky Mountain region.
The cost to NW Natural of gas to supply its core market consists of the
purchase price paid to suppliers plus charges paid to pipelines to transport
such gas to NW Natural's distribution system. While the rates for pipeline
transportation and peaking services are subject to federal regulation, the
purchase price of gas is not. Pipeline transportation rates have been relatively
stable in the past three years, helping to mitigate the effect on core market
customers of increases in gas commodity prices. Higher commodity prices also
have been offset in part by credits in the form of revenues from off-system
sales of commodity and released transportation capacity in periods when core
market customers do not fully utilize firm pipeline capacity.
NW Natural supplies many of its non-core customers (larger industrial
interruptible customers with full or partial dual fuel capabilities) through gas
transportation service, delivering gas purchased by these customers directly
from suppliers. (See "Transportation.")
Gas Supply -- Core Market Basic Supply
- --------------------------------------
NW Natural purchases gas for its core market from a variety of
suppliers located in the western United States and Canada. About 80 percent of
the annual supply comes from Canada, with most of the rest from the U.S. Rocky
Mountain region. At Jan. 1, 2000, NW Natural had 22 firm contracts with 15
suppliers with original terms of from four months to 15 years, which provided
for a maximum of 3,122,540 therms of firm gas per day during the peak winter
season and 1,343,300 therms per day during the remainder of the year. These
contracts have a variety of pricing structures and purchase obligations. NW
Natural intends to enter into new short-term purchase agreements in 2000 for
equivalent volumes of gas to replace similar agreements that expire after the
end of the 1999-2000 winter season.
- -----------------------------
1 One therm is equivalent to 100 cubic feet of natural gas at an
assumed heat content of 1,000 British Thermal Units (Btu's) per cubic
foot.
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NW Natural's largest core market gas supply contract is an agreement
expiring Nov. 1, 2003, with CanWest Gas Supply, Inc. (CanWest), an aggregator
for gas producers in British Columbia, Canada. This contract entitles NW Natural
to purchase up to 960,000 therms of firm gas per day. The contract contains a
demand and commodity pricing structure and a provision for annual renegotiations
of the commodity price to reflect then-prevailing market prices. The demand
charges reflect the reservation of firm transportation space on the Westcoast
Energy, Inc. pipeline system in British Columbia. These demand charges are
subject to change as approved by the Canadian National Energy Board (NEB) in
rate proceedings similar to those conducted in the United States by the FERC.
The CanWest contract contains minimum purchase obligations.
NW Natural also buys gas on the spot market (30 days or less) as needed
to meet demand. Some flexibility is provided under the terms of NW Natural's
firm supply contracts, permitting the purchase of spot gas in lieu of firm
contract volumes and allowing NW Natural to take advantage of favorable pricing
on the spot market from time to time.
NW Natural's goal in purchasing gas for its core market is to meet
customers' needs at reasonable prices. NW Natural believes that gas supplies
available from suppliers in the western United States and Canada are adequate to
serve its core market customers for the foreseeable future, and that the cost of
such gas generally will track market prices.
Gas Supply -- Core Market Peaking Supply
- ----------------------------------------
NW Natural supplements its firm gas supplies with gas from
Company-owned or contracted peaking facilities in which gas is stored during
periods of low demand for use during periods of peak demand. In addition to
enabling NW Natural to meet its peak demand, these facilities make it possible
to lower the annual average cost of gas by allowing NW Natural both to minimize
its pipeline transportation contract demand and to purchase gas for storage
during the summer months when prices are generally at their lowest.
NW Natural has contracts with WGP which expire in 2004 for firm storage
services from the underground gas storage field at Jackson Prairie near
Centralia, Washington, and the liquefied natural gas (LNG) facility at Plymouth,
Washington. Together, these facilities provide NW Natural with daily firm
deliverability of 1,061,300 therms and total seasonal capacity of 15,991,880
therms. Separate contracts with WGP provide for the transportation of these
storage supplies to NW Natural's service territory.
NW Natural owns and operates two LNG plants which liquefy gas during
the summer months for storage until the peak winter season. These two plants,
one located in Portland and the other near Newport, Oregon, provide a maximum
daily deliverability of 1.8 million therms and a total seasonal capacity of 17
million therms.
NW Natural also owns and operates an underground gas storage facility
at Mist, Oregon. This facility has a maximum daily deliverability of 1.9 million
therms and a total seasonal working gas capacity of 85 million therms. NW
Natural is engaged in a multi-year, major expansion of the Mist storage
facility. A new pipeline placed into service in November 1999 increased the Mist
facility's maximum daily deliverability by 0.45 million therms.
NW Natural also has contracts with one electric generator, three
industrial customers, two gas marketing companies and another local gas
distribution company that together provide a total of 137,000 therms per day of
year-round capacity, plus 660,000 therms per day of recallable capacity and
supply. These contracts have remaining terms ranging from one to 10 years.
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Gas Supply -- Transportation
- ----------------------------
Since WGP opened its system to the transportation of customer-owned gas
in the late 1980s, most of NW Natural's large industrial customers have switched
from sales service to transportation service whereby they purchase gas directly
from suppliers and ship the gas on the Company's system and those of its
pipeline suppliers for a fee. The ability of industrial customers to switch
between sales service and transportation service has made it possible for NW
Natural to retain most of these customers. Because transportation charges
typically have been the same as the margin on an equivalent sale of gas,
switching between sales service and transportation service by industrial
interruptible customers has not had a material effect on NW Natural's results of
operations. (See "Competition and Marketing.")
Regulation and Rates
- --------------------
NW Natural is subject to regulation with respect to, among other
matters, rates, systems of accounts and issuance of securities by the OPUC and
the WUTC. In 1999, 94 percent of NW Natural's gas deliveries and 93 percent of
its utility operating revenues were derived from Oregon customers and the
balance from Washington customers. The Company is exempt from the provisions of
the Natural Gas Act by order of the Federal Power Commission (now the FERC).
NW Natural's most recent general rate increase in Oregon, which was
effective Dec. 1, 1999, authorized rates designed to produce a return on common
shareholders' equity (ROE) of 10.25 percent. The OPUC approved a revenue
increase of $0.2 million per year, or 0.1 percent of Oregon revenues. The most
recent general rate increase in Washington, which was effective in 1997,
authorized rates designed to produce an ROE of 11.25 percent. Actual revenues
resulting from the OPUC's and the WUTC's general rate orders are dependent on
weather, economic conditions, customer growth, competition and other factors
affecting gas usage in NW Natural's service area. NW Natural's returns on
average common equity from utility operations were 9.9 percent in 1998 and 10.8
percent in 1999. The Company's returns from consolidated operations, including
subsidiary results, were 6.4 percent in 1998 and 10.2 percent in 1999.
In January 2000, NW Natural filed a general rate case in Washington
proposing a revenue increase of $6.2 million per year through rate increases
averaging 18.8 percent for Washington customers. The increase is designed to
cover utility plant investments in recent years and to implement the results of
a collaborative study to allocate costs of service between Oregon and
Washington. The WUTC suspended the filing for investigation and hearings. A
decision in the case is expected in late 2000.
In Oregon, NW Natural has a Purchased Gas Cost Adjustment (PGA) tariff
under which net income derived from Oregon operations is affected only within
defined limits by changes in purchased gas costs. The PGA tariff provides for
periodic revisions in rates due to changes in the Company's cost of purchased
gas. Costs included in the PGA adjustments are based on NW Natural's gas
requirements for the 12-month period ended each June 30. Any resulting rate
adjustments, derived from gas prices negotiated for the gas supply contract year
commencing on the following Nov. 1, are made effective on the following Dec. 1.
The PGA tariff provides that 67 percent of any difference between
actual purchased gas costs and estimated purchased gas costs incorporated into
rates will be deferred for amortization in subsequent periods. If actual gas
commodity costs exceed those incorporated in rates, NW Natural subsequently will
adjust its rates upward to recover 67 percent of the deficiency from core market
customers. Similarly, if actual gas commodity costs are lower than those
reflected in rates, rates will be adjusted downward to distribute to core market
customers 67 percent of such gas commodity cost savings.
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In Washington, NW Natural is permitted to track increases and decreases
in gas commodity costs coincidental with their occurrence, with the result that
net income is not directly affected by changes in commodity costs.
In both Oregon and Washington, the PGA permits NW Natural to recover
100 percent of FERC-approved pipeline transportation cost increases.
In October 1999, NW Natural filed under its Oregon PGA tariff to
increase rates for Oregon customers by an average of 10.6 percent. The OPUC
approved a substitute filing increasing rates by an average of 6.9 percent
effective Dec. 1, 1999, with the balance of gas cost deferrals to be recovered
in future filings. Also effective Dec. 1, 1999, the OPUC approved a $4.8 million
rate increase to reflect the cost of service of the Company's investment in
Phase III of its Mist underground gas storage facility.
Effective Dec. 1, 1999, the WUTC approved rate increases for Washington
customers averaging 11.1 percent under NW Natural's Washington PGA tariff.
In a regulatory proceeding relating to the PGA tariff in Oregon, the
OPUC issued an order in April 1999 formalizing a process that tests for
"excessive earnings" in connection with gas utilities' annual filings of rate
changes due to increases or decreases in gas commodity costs. Under the OPUC's
order, NW Natural will be able to retain all of its earnings up to a threshold
level equal to its authorized ROE plus 300 basis points. If earnings exceed the
threshold, NW Natural will share one-third of the "excess" amount with
customers. The OPUC confirmed NW Natural's ability to pass through 100 percent
of its prudently incurred gas costs into rates. The excess earnings threshold is
subject to adjustment up or down each year depending on movements in interest
rates.
The OPUC and WUTC have approved transportation tariffs under which NW
Natural may contract with customers to deliver customer-owned gas. Under these
tariffs, revenues from the transportation of customer-owned gas, except that of
large industrial customers having the capability of bypassing NW Natural's
system, generally are equivalent to the margins that would have been realized
from sales of Company-owned gas. (See "Gas Supply - Transportation" and
"Competition and Marketing.")
The OPUC and WUTC have implemented "integrated resource planning"
processes under which utilities develop plans defining alternative growth
scenarios and resource acquisition strategies. In 1996 and 1997, respectively,
the OPUC and the WUTC acknowledged and accepted NW Natural's submission of its
third Integrated Resource Plan. Elements of the Plan included an evaluation of
supply and demand resources; the consideration of uncertainties in the planning
process and the need for flexibility to respond to changes; a primary goal of
"least cost" service; and consistency with state energy policy. Although the
OPUC's order acknowledging the Integrated Resource Plan does not constitute
ratemaking approval of any specific resource acquisition or expenditure, the
OPUC indicated that it would give considerable weight in prudency reviews to
utility actions that are consistent with acknowledged plans. NW Natural's fourth
Integrated Resource Plan filing, originally scheduled for 1998 and deferred
until 1999, was further deferred until 2000.
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Competition and Marketing
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NW Natural has no direct competition in its service area from other
natural gas distributors. For residential customers' heating needs, however, NW
Natural competes with electricity, fuel oil, and, to a lesser extent, wood. It
also competes with electricity and fuel oil for commercial applications.
Competition among these forms of energy is based on price, reliability,
efficiency and performance. In 1999, NW Natural maintained its competitive price
advantage over electricity and approximate price parity with fuel oil in both
the residential and commercial markets. Throughout 1999, natural gas rates
continued to be substantially lower than rates for electricity provided by the
investor-owned utilities which serve approximately 75 percent of the homes in NW
Natural's Oregon service area. NW Natural believes that this rate advantage will
continue for the foreseeable future.
The relatively low saturation of natural gas in residential
single-family and attached dwellings in NW Natural's service territory,
estimated at 35 to 40 percent, together with the price advantage of natural gas
compared with electricity and its operating convenience over fuel oil, provides
the potential for continuing growth in the residential conversion market. In
1999, 22,053 net residential customers (after subtracting disconnected or
terminated services) were added, including 8,998 units of existing residential
housing which were reconnected to the system or were converted from oil or
electric appliances to natural gas. Of the new heating conversions from other
fuels, about 64 percent also converted to gas for water heating. In addition,
1,711 net commercial customers were connected in 1999. The net total of all new
customers added in 1999, including industrial sales and transportation
customers, was 23,756. This constituted a growth rate of 5.0 percent, about
three times the national average for local distribution companies as reported by
the American Gas Association.
Due to weather which was about 6 percent colder than in 1998, natural
gas sales volumes to residential and commercial customers in 1999 were up about
8 percent over 1998. Temperatures in NW Natural's service territory in 1999,
based on heating degree days, were 2 percent colder than the 20-year average.
The Pacific Northwest has historically enjoyed some of the lowest
electric rates in the nation, primarily due to the proximity of federal
hydropower facilities. With further deregulation in the energy business, the
region is unlikely to experience the large drop in electric rates expected in
other, high-cost areas of the country.
Electric deregulation holds the prospect of changing the competitive
landscape in the Northwest. Due to a number of environmental, economic and
political limitations on the future use of the hydroelectric infrastructure that
has dominated the Northwest energy supply for decades, several large gas-fired
generation projects are being planned to meet the region's future electricity
load growth. These projects could present opportunities for gas distributors to
serve the new loads as well as challenges from gas marketers. The developers of
generation projects often are affiliated with national multi-fuel marketers that
hold strong positions in a number of geographical areas in both gas and electric
markets. The availability of interstate pipeline capacity and gas storage
capacity will play significant roles in the future development of generation
projects.
While the natural gas industry, including producers, interstate
pipelines and local distribution companies (LDCs), has undergone many changes in
its history, perhaps no era has brought greater change than the past decade.
These changes, brought about by the deregulation or restructuring of the energy
markets, are intended to promote competition where it is economically beneficial
to consumers. The changes are continuing, though at different rates among the
various regulatory jurisdictions throughout the country.
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Traditionally, LDCs have sold a "bundled" product which included the
natural gas itself as well as delivery to the meter. Since the late 1980s,
however, large customers have sought savings by procuring their own supplies of
natural gas from producers and contracting with pipelines and LDCs for
transportation. Since the cost of the gas commodity is passed through directly
to LDC customers without markup, the effect on net income when a customer
chooses transportation service has been negligible. While NW Natural's ability
to obtain competitively-priced gas commodity has enabled it to retain its
residential, commercial and many industrial customers as sales customers,
further deregulation of the industry may bring an unbundled product offering to
a greater number of customers, such that an increasing number of suppliers will
actively compete for customers' gas commodity business. However, since the final
delivery of customer-owned gas will continue to be through regulated
distribution systems, no material impact on NW Natural's profitability is
anticipated.
Competition to serve the industrial and large commercial market in the
Pacific Northwest has been relatively steady since the early 1990s in terms of
numbers and types of competitors. Competitors consist of gas marketers,
oil/propane sellers and electric utilities. Wood-based fuels continue to lose
market share primarily due to environmental concerns and restrictions.
Total industrial throughput, including both sales and transportation of
firm and interruptible gas, was 617 million therms in 1999, up 5.5 percent from
585 million therms in 1998. This increase was primarily related to a temporary
shift by an electric generation customer from a separate pipeline to
transportation service on NW Natural's system. Excluding this factor, throughput
for sales and transportation of industrial firm and interruptible gas was 584
million therms in 1999.
Industrial firm gas sales and transportation deliveries during 1999
totaled 219 million therms, up 1 percent from 1998. Industrial interruptible gas
sales and transportation deliveries during 1999 totaled 398 million therms, up 8
percent from 1998. In 1999, 4 percent of total utility operating revenues and 33
percent of total therms delivered were from sales and transportation deliveries
to industrial interruptible customers.
NW Natural and many of its largest industrial customers have entered
into negotiated transportation service agreements. These agreements are designed
to provide rates that are competitive with either the costs of alternative
fuels, such as heavy oil, or the customer's bypass alternatives. The agreements
generally prohibit bypass during their terms. Due to the cost pressures that
confront a number of the Company's largest customers which compete globally, the
risk of bypass continues to be a threat. Although NW Natural does not expect a
significant number of its large customers to bypass its system in the
foreseeable future, it may experience further deterioration of margin associated
with customers' transfers to contracts with pricing designed to be competitive
with the capital and operating costs of direct connections to WGP's system.
Since 1994, NW Natural has been authorized by the OPUC to make upstream
commodity sales and to release portions of its firm interstate pipeline capacity
at discounted rates when seasonal demand is low. This authorization allows NW
Natural to compete effectively with independent gas marketers. Sixty-seven
percent of all positive net revenues (gross revenues less the actual cost of gas
or pipeline capacity) generated from these sales and capacity releases ($1.7
million in 1999) have been credited to Oregon core market customer gas costs,
with the balance benefiting shareholders.
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Environment
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NW Natural is subject to air, water, hazardous waste and other
environmental regulation by state and federal authorities and has complied in
all material respects with applicable regulations. Compliance with these
regulations has not had a material effect on the Company's capital expenditures,
earnings or competitive position.
NW Natural owns property in Linnton, Oregon, that is the site of a
former gas manufacturing plant that was closed in 1956. In 1993, pursuant to
Oregon Department of Environmental Quality (ODEQ) procedures, NW Natural
submitted a notice of intent to participate in the ODEQ's Voluntary Cleanup
Program and, in 1994, the site was listed on ODEQ's Confirmed Release List and
Inventory. During 1995, initial tests revealed environmental contamination, but
the extent or the estimated cost of remediation cannot yet be determined. During
1998, the ODEQ and the U.S. Environmental Protection Agency (EPA) completed a
study of sediments in a 5.5-mile segment of the Willamette River that includes
the area adjacent to the site. Remediation of the site may be affected by the
sediments management plan now being developed in response to the ODEQ/EPA
sediments study.
Since 1993, NW Natural has recorded expenses of $2.6 million for the
estimated costs of consultants' fees, ODEQ oversight cost reimbursements, and
the voluntary investigation, plus an estimate for costs of the continuing
investigation. NW Natural expects that its costs of investigation and any
remediation for which it may be responsible should be recoverable, in large
part, from insurance. In the event these costs are not recovered from insurance,
NW Natural will seek recovery through future rates.
In 1996, the Eugene Water and Electric Board (EWEB) asked NW Natural to
participate in an investigation and potential remediation of a 1.5 acre site of
a former manufactured gas plant in Eugene, Oregon. NW Natural purchased the
property in 1958, after the plant had been converted to a liquid propane gas
plant. It used the propane plant until 1960, when the distribution system was
converted to natural gas, and continued to use the plant as a service center
until its sale in 1976. Although NW Natural never operated the manufactured gas
plant, EWEB has contended that NW Natural's activities on the site may have
exacerbated prior contamination. To date, NW Natural has not agreed to
participate in an investigation of the site and has not obtained sufficient
information to determine the extent of its responsibility, if any, for
remediation of the site.
Employees
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At year-end 1999, NW Natural had 1,275 employees, of which 929 were
members of the Office and Professional Employees International Union, Local No.
11. These union employees are working under a seven-year Joint Accord covering
wages, benefits and working conditions which will expire March 31, 2004.
ITEM 2. PROPERTIES
NW Natural's natural gas distribution system consists of 11,278 miles
of mains, as well as service pipes, meters and regulators, and gas regulating
and metering stations. The mains and feeder lines are located in municipal
streets or alleys pursuant to valid franchise or occupation ordinances, in
county roads or state highways pursuant to valid agreements or permits granted
pursuant to statute, or on lands of others pursuant to valid easements obtained
from the owners of such lands. NW Natural also holds all necessary permits for
the crossing of the Willamette River and a number of smaller rivers by its
mains.
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NW Natural owns service facilities in Portland, as well as various
satellite service centers, garages, warehouses and other buildings necessary and
useful in the conduct of its business. It leases office space in Portland for
its corporate headquarters. District offices are maintained on owned or leased
premises at convenient points in the distribution system. NW Natural owns LNG
facilities in Portland and near Newport, Oregon, and also owns underground
natural gas storage facilities located near Mist, Oregon.
NW Natural considers all of its properties currently used in its
operations, both owned and leased, to be well maintained, in good operating
condition, and adequate for its present and foreseeable future needs. In order
to reduce risks associated with gas leakage in older parts of its system, NW
Natural undertook an accelerated pipe replacement program in the 1980s under
which it has reduced the amount of low pressure gas main (including cast iron
and bare steel) in the system from 400 miles of main in 1985 to less than 25
miles at the end of 1999.
NW Natural's Mortgage and Deed of Trust constitutes a first mortgage
lien on substantially all of the real property constituting its utility plant.
NW Natural holds interests in 5,521 net acres of underground natural
gas storage and 1,824 net acres of oil and gas leases in Oregon. Financial
Corporation holds interests in oil and gas leases covering 4,500 net acres
located in California, Wyoming and Colorado. NW Natural owns depleted gas
reservoirs near Mist, Oregon, that are continuing to be developed as underground
gas storage facilities. It also holds an option to purchase future storage
rights in certain other areas of the Mist gas field. The Company also holds an
equity investment in a Boeing 737-300 aircraft.
ITEM 3. LEGAL PROCEEDINGS
NW Natural recorded a charge of $5.6 million in the fourth quarter of
1996, equivalent to 15 cents a share, as a reserve against possible payment of
the judgment, related costs and post-judgment interest in a case brought by a
commercial customer in July 1995, Northwest Natural Gas Company v. Chase
Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370). In the second
quarter of 1999, the Oregon Supreme Court ruled in the Company's favor on the
larger of the two claims in the suit, resulting in a credit to the litigation
reserve of $3.9 million, equivalent to 9 cents a share. The remaining issues in
the case were favorably resolved in a decision by the Oregon Court of Appeals,
resulting in an additional credit to the litigation reserve of $2.7 million,
equivalent to 8 cents a share, in the fourth quarter of 1999 (see Part II, Item
8, Note 12 to the Consolidated Financial Statements).
The Company is party to certain other legal actions in which claimants
seek material amounts. Although it is impossible to predict the outcome with
certainty, based upon the opinions of legal counsel, management does not expect
disposition of these matters to have a materially adverse effect on the
Company's financial position, results of operations or cash flows.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the year
ended Dec. 31, 1999.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Age at
Name December 31, 1999 Positions held during last five years
---- ----------------- -------------------------------------
<S> <C> <C>
Richard G. Reiten 60 President (1996- ); Chief Executive Officer (1997- );
Chief Operating Officer (1996); President and Chief
Operating Officer, Portland General Electric Company
(1992-95).
Michael S. McCoy 56 Executive Vice President, Customer and Utility Operations
(2000- ); Senior Vice President, Customer and Utility
Operations (1999-00); Senior Vice President, Customer
Services (1992-99).
Bruce R. DeBolt 52 Senior Vice President, Finance, and Chief Financial Officer
(1990- ).
Mark S. Dodson 54 Senior Vice President, Public Affairs and General Counsel
(1998- ); Senior Vice President (1997); Partner, Ater
Wynne Hewitt Dodson & Skerritt LLP (1981-97).
Stephen P. Feltz 44 Treasurer and Controller (1999- ); Assistant Treasurer
(1996-99); Manager, General Accounting (1996-99).
Dwayne L. Foley 54 Senior Vice President (1999- ); Senior Vice President,
Operations Support, and Chief Engineer (1997-99); Senior
Vice President, Operations and Information Services
(1992-97).
W. Richard Harper, Jr. 46 Vice President, Market Services (1999- ); Vice President,
Energy Marketing and Supply (1997-99);
Vice President, Industrial and District Operations
(1995-97).
Diana J. Johnston 55 Vice President, Human Resources and Administrative Services
(1996- ); Vice President, Human Resources (1992-96).
Gregg S. Kantor 42 Vice President, Public Affairs and Communications (1998- );
Director, Public Affairs and Communications (1996-97);
Principal, Kantor & Associates (1994-96).
C. J. Rue 54 Secretary (1982- ); Assistant Treasurer (1987- ).
</TABLE>
Each executive officer serves successive annual terms; present terms
end May 25, 2000.
There are no family relationships among the Company's executive
officers.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(A) NW Natural's common stock is traded on the Nasdaq National Market
tier of the Nasdaq Stock Market, which reports the daily high, low and closing
transaction prices, as well as volume data, under the symbol "NWNG."
NW Natural's common stock is included on the Federal Reserve Board's
list of over-the-counter securities determined to be subject to margin
requirements under the Board's regulations.
The quarterly high and low trades for NW Natural's common stock, as
quoted on the Nasdaq National Market and published in The Wall Street Journal
and on Nasdaq's World Wide Web site, were as follows:
1999 1998
-------------------------- -----------------------
Quarter Ended High Low High Low
- -------------------------------------------------------------------------------
March 31 $27.00 $21.00 $30.75 $25.75
June 30 27.00 19.50 28.25 26.38
September 30 27.88 23.31 28.00 24.25
December 31 27.00 21.13 30.25 25.75
The closing quotation for the common stock on Dec. 31, 1999, was
$21.9375. The closing quotation on Dec. 31, 1998, was $25.875.
(B) As of Dec. 31, 1999, there were 11,511 holders of record of the
Company's common stock.
(C) NW Natural has paid quarterly dividends on its common stock
in each year since the stock first was issued to the public in 1951. In December
1999, the Company also paid a special dividend on its common stock. Annual
common dividend payments have increased each year since 1956. Dividends per
share paid during the past two years were as follows:
Payment Date 1999 1998
------------ ---- ----
February 15 $0.305 $0.305
May 15 $0.305 $0.305
August 15 $0.305 $0.305
November 15 $0.305 $0.305
December 15 $0.005 -
------ ------
Total per share $1.225 $1.220
It is the intention of the Board of Directors to continue to pay cash
dividends on the Company's common stock on a quarterly basis. However, future
dividends will be dependent upon NW Natural's earnings, its financial condition
and other factors.
NW Natural's Dividend Reinvestment and Stock Purchase Plan permits
registered owners of common stock to reinvest all or a portion of their
quarterly dividends in additional shares of NW Natural's common stock at the
13
<PAGE>
current market price. Shareholders also may invest cash on a monthly basis, up
to $50,000 per calendar year, in additional shares at the current market price.
During 1999, dividend reinvestments and optional cash investments under the Plan
aggregated $4.6 million and resulted in the issuance of 188,821 shares of common
stock. During the 22 years the Plan has been available, the Company has issued
and sold 3,783,766 shares of common stock which produced $80 million in
additional capital.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data concerning the Company's
operations and financial condition.
<TABLE>
<CAPTION>
Operating revenues and cost of sales ($000): 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales revenues:
Residential $ 242,952 $ 205,388 $177,835 $183,802 $165,662
Commercial 139,425 117,889 100,677 104,582 99,079
Industrial - firm 35,857 34,303 27,025 30,672 31,268
Industrial - interruptible 17,182 15,337 13,944 17,097 24,113
Unbilled revenues (2,671) 8,314 1,647 1,627 1,173
----------- ----------- ----------- ----------- -----------
Total gas sales revenues 432,745 381,231 321,128 337,780 321,295
Transportation 21,351 19,958 22,029 22,533 16,650
Other 1,194 2,617 7,884 9,824 9,411
----------- ----------- ----------- ----------- -----------
Total utility operating revenues 455,290 403,806 351,041 370,137 347,356
Cost of gas 212,021 173,242 130,381 141,789 142,025
----------- ----------- ----------- ----------- -----------
Net utility operating revenues 243,269 230,564 220,660 228,348 205,331
Non-utility net operating revenues 368 402 450 636 8,271
----------- ----------- ----------- ----------- -----------
Net operating revenues $ 243,637 $ 230,966 $ 221,110 $228,984 $213,602
=========== =========== =========== =========== ===========
Net income $ 45,296 $ 27,301 $ 43,059 $46,793 $38,065
Preferred and preference stock
dividend requirements 2,515 2,577 2,646 2,723 2,806
----------- ----------- ----------- ----------- -----------
Earnings applicable to common stock $ 42,781 $ 24,724 $ 40,413 $44,070 $35,259
=========== =========== =========== =========== ===========
Average common shares outstanding (000)* 24,976 24,233 22,698 22,391 21,817
=========== =========== =========== =========== ===========
Basic earnings per share of common stock* $1.71 $1.02 $1.78 $1.97 $1.62
=========== =========== =========== =========== ===========
Diluted earnings per share of common stock* $1.70 $1.02 $1.76 $1.94 $1.60
=========== =========== =========== =========== ===========
Dividends per share of common stock* $1.225 $1.22 $1.205 $1.20 $1.18
=========== =========== =========== =========== ===========
Total assets - at end of period ($000) $1,244,423 $1,191,736 $1,111,617 $988,869 $929,277
=========== =========== =========== =========== ===========
Ratio of Earnings to Fixed Charges** 3.12 2.20 2.99 3.53 3.15
===== ===== ===== ===== =====
</TABLE>
* Data for 1995 have been restated to give effect to the three-for-two stock
split in September 1996.
** Computed using the Securities and Exchange Commission method. 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.
15
<PAGE>
SELECTED FINANCIAL DATA (continued)
<TABLE>
<CAPTION>
Capitalization - at end of period ($000): 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Common stock equity $429,596 $412,404 $366,265 $346,778 $323,552
Redeemable preference stock 25,000 25,000 25,000 25,000 25,000
Redeemable preferred stock 10,564 11,499 12,429 13,749 14,840
Long-term debt 396,379 366,738 344,303 271,838 279,945
---------- ---------- ---------- ---------- ----------
Total capitalization $861,539 $815,641 $747,997 $657,365 $643,337
========== ========== ========== ========== ==========
Gas sales and transportation deliveries (000 therms):
Residential 352,969 315,686 306,356 306,310 256,462
Commercial 252,382 229,124 225,249 225,115 196,723
Industrial - firm 84,630 87,275 84,523 91,122 82,958
Industrial - interruptible 52,938 51,521 53,929 63,261 84,173
Unbilled therms (9,343) 8,645 3,615 3,759 4,946
---------- ---------- ---------- ---------- ----------
Total gas sales 733,576 692,251 673,672 689,567 625,262
Transportation 480,570 446,165 440,452 410,062 379,116
---------- ---------- ---------- ---------- ----------
Total volumes delivered 1,214,146 1,138,416 1,114,124 1,099,629 1,004,378
========== ========== ========== ========== ==========
Customers (average for period):
Residential 435,959 413,714 394,415 374,558 355,427
Commercial 52,029 50,469 48,232 46,355 44,740
Industrial - firm 396 404 411 409 405
Industrial - interruptible 118 114 119 131 143
Transportation 127 122 120 106 79
---------- ---------- ---------- ---------- ----------
Total customers 488,629 464,823 443,297 421,559 400,794
========== ========== ========== ========== ==========
Customer statistics:
Heat requirements***
Actual degree days 4,256 4,011 4,092 4,427 3,779
20-year average degree days 4,193 4,234 4,264 4,273 4,306
Average annual use per customer in therms:
Residential 810 749 777 823 726
Commercial 4,851 4,540 4,670 4,874 4,420
Gas purchased cost per therm - net (cents) 27.85 25.09 24.05 22.25 20.67
===== ===== ===== ===== =====
</TABLE>
*** A degree day is the measure of the coldness of the weather experienced
based on the extent to which the average of the high and low temperatures
for a day falls below 65 degrees Fahrenheit.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The consolidated financial statements include:
Regulated utility:
Northwest Natural Gas Company (NW Natural)
Non-regulated subsidiary businesses:
NNG Financial Corporation (Financial Corporation), a
wholly-owned subsidiary
Canor Energy, Ltd. (Canor), a majority-owned
subsidiary reclassified as a discontinued segment in
1999
Together these businesses are referred to herein as the
"Company" (see "Subsidiary Operations" below and Note 2 to the Consolidated
Financial Statements).
At Dec. 31, 1999, the Company's investment in Canor was
reclassified to current assets and reported as a discontinued segment. In the
income statements for 1999, 1998 and 1997, Canor's operating revenues and
expenses are included in net income from discontinued segment. The balance
sheets and statements of cash flows and capitalization for prior years have not
been restated.
The following is management's assessment of the Company's
financial condition including the principal factors that affect results of
operations. The discussion refers to the consolidated activities of the Company
for the three years ended Dec. 31, 1999.
Highlights and Outlook
- ----------------------
Among its accomplishments in 1999, NW Natural:
o added 23,756 customers to the gas distribution system during
the year, including the Company's 500,000th customer in
December;
o completed a critical phase in the expansion of the Mist gas
storage system and placed it in service Dec. 1, 1999, on
time and on budget;
o wrapped up a major rate case in Oregon and secured fair
regulatory treatment for the Mist storage project and annual
gas cost changes; and
o increased productivity while raising customer satisfaction
ratings to record levels.
Among its corporate strategies for 2000, NW Natural will
focus on:
o supporting and strengthening its core gas distribution
business;
o sustaining profitable customer growth while providing
outstanding customer service;
o enhancing service and creating shareholder value
through gas storage development;
o improving efficiency through technological advancements
and a high performance culture; and
o reinvesting the proceeds from the sale of the Company's
investment in Canor.
Earnings and Dividends
- ----------------------
The Company's earnings applicable to common stock in 1999 were
$42.8 million, up from $24.7 million in 1998 and $40.4 million in 1997. Earnings
for 1999 and 1997 were the second and third highest on record for the Company,
17
<PAGE>
respectively. Earnings for 1998 were reduced by write-downs of subsidiary assets
and by warmer than normal weather.
Diluted earnings per share from consolidated operations were
$1.70 a share in 1999, compared to $1.02 a share in 1998 and $1.76 a share in
1997.
NW Natural earned $1.66 a diluted share from gas utility
operations in 1999, compared to $1.43 in 1998 and $1.68 in 1997. Weather
conditions in its service territory in 1999 were 6 percent colder than in 1998
and 2 percent colder than the 20-year average. Weather in 1998 was 2 percent
warmer than in 1997 and 5 percent warmer than the 20-year average. The estimated
weather-related increase in net operating revenues (margin) during 1999 was
equivalent to about 16 cents a share compared to actual conditions during 1998.
The weather-related decrease in margin in 1998 was equivalent to about 9 cents a
share as compared to actual conditions in 1997.
Subsidiary results for 1999, excluding a discontinued segment,
were earnings of 3 cents a share compared to a loss of 42 cents a share in 1998
and earnings of 7 cents a share in 1997 (see Note 2). The loss in 1998 included
write-downs of subsidiary assets equivalent to 43 cents a share. 1997 results
included a gain equivalent to 5 cents a share from the sale of an interest in a
California solar electric partnership. Results from the discontinued segment for
each of the years ended Dec. 31, 1999, 1998 and 1997 were equivalent to earnings
of 1 cent a share (see Note 2). Results in 1998 included write-downs of assets
equivalent to 7 cents a share and a gain equivalent to 15 cents a share from a
transaction involving Canor (see "Discontinued Segment," below).
1999 was the 44th consecutive year in which the Company's
dividends paid have increased. Dividends paid on common stock were $1.225 a
share in 1999 compared to $1.22 a share in 1998 and $1.205 in 1997.
Results of Operations
- ---------------------
Regulatory Matters
------------------
NW Natural provides gas utility service in Oregon and
Washington, with Oregon representing approximately 93 percent of its revenues.
Future earnings and cash flows from utility operations will be determined
largely by the pace of continued growth in the residential and commercial
markets and by NW Natural's ability to remain price competitive in the large
industrial market, to control expenses, and to obtain reasonable and timely
regulatory ratemaking treatment for investments made in utility plant.
In October 1998, NW Natural filed a general rate case in
Oregon proposing a revenue increase of $14.7 million per year through rate
increases averaging 3.8 percent. In November 1999, the Oregon Public Utility
Commission (OPUC) issued an order authorizing a revenue increase of $0.2 million
per year effective Dec. 1, 1999, through rate increases averaging 1.3 percent
for residential customers, partially offset by rate decreases for certain
commercial and large industrial customers. The OPUC authorized and based rates
on a return on common equity (ROE) of 10.25 percent.
In an order issued in April 1999, the OPUC formalized a
process that tests for excessive earnings in connection with gas utilities'
annual filings of rate changes due to increases or decreases in gas costs. The
OPUC confirmed NW Natural's ability to pass through 100 percent of its prudently
18
<PAGE>
incurred gas costs into rates. Under this order, NW Natural is authorized to
retain all of its earnings up to a threshold level equal to its authorized ROE
plus 300 basis points. One-third of any earnings above that level will be
refunded to customers. In connection with the OPUC's order in the general rate
case, this means that NW Natural can earn up to 13.25 percent on equity before
sharing any additional earnings with customers. The excess earnings threshold is
subject to adjustment up or down each year depending on movements in interest
rates.
The OPUC approved rate increases averaging 9.1 percent
effective Dec. 1, 1999, and increases averaging 3.4 percent, 6.1 percent and
11.4 percent effective Dec. 1, April 1 and Jan. 1, 1998, respectively. These
rate changes 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 effective the previous
year.
The Washington Utilities and Transportation Commission (WUTC)
approved rate increases averaging 11.1 percent, 5.8 percent and 10.5 percent
effective Dec. 1, 1999, 1998 and 1997, respectively. These rate changes
primarily reflected changes in NW Natural's purchased gas costs. In October
1997, the WUTC approved a general rate increase averaging 3 percent for NW
Natural's customers in Washington and authorized an ROE of 11.25 percent.
19
<PAGE>
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility
volumes and revenues for the three years ended Dec. 31:
<TABLE>
<CAPTION>
Thousands 1999 1998 1997
(Except customers and degree days)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gas Sales and Transportation Volumes (Therms):
Residential and commercial sales 605,351 544,810 531,605
Unbilled volumes (9,343) 8,645 3,615
--------- ----------- ----------
Weather-sensitive volumes 596,008 49% 553,455 49% 535,220 48%
Industrial firm sales 84,630 7% 87,275 8% 84,523 7%
Industrial interruptible sales 52,938 4% 51,521 4% 53,929 5%
--------- ----------- ----------
Total gas sales 733,576 692,251 673,672
Transportation deliveries 480,570 40% 446,165 39% 440,452 40%
--------- ------- ------------- ------- ---------- --------
Total volumes sold and delivered 1,214,146 100% 1,138,416 100% 1,114,124 100%
========= ======= ============= ======== ========= ========
Utility Operating Revenues:
- ---------------------------
Residential and commercial
sales $382,377 $323,277 $278,512
Unbilled revenues (2,671) 8,314 1,647
--------- ----------- ----------
Weather-sensitive revenues 379,706 83% 331,591 82% 280,159 80%
Industrial firm sales 35,857 8% 34,303 8% 27,025 8%
Industrial interruptible sales
17,182 4% 15,337 4% 13,944 4%
--------- ----------- ----------
Total gas sales 432,745 381,231 321,128
Transportation revenues 21,351 5% 19,958 5% 22,029 6%
Other revenues 1,194 - 2,617 1% 7,884 2%
--------- ------- ----------- -------- ---------- --------
Total utility operating revenues $455,290 100% $403,806 100% $351,041 100%
========= ======= =========== ======== ========== ========
Cost of gas sold $212,021 $173,242 $130,381
========= =========== ==========
Total number of customers
(end of period) 501,163 477,407 458,021
========= =========== ==========
Actual degree days 4,256 4,011 4,092
========= =========== ==========
20-year average degree days 4,193 4,234 4,264
========= =========== ==========
</TABLE>
20
<PAGE>
Residential and Commercial
--------------------------
NW Natural continues to experience rapid customer growth, with
23,756 customers added since Dec. 31, 1998. This represents a growth rate of 5
percent, compared to a 4.2 percent growth rate in 1998 and a record growth rate
of 5.7 percent in 1997. In the three years ended Dec. 31, 1999, approximately
68,000 customers were added to the system, representing an average annual growth
rate of 5 percent.
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 and revenues derived from these customers.
Weather conditions were 2 percent colder than average in 1999,
5 percent warmer than average in 1998 and 4 percent warmer than average in 1997.
Average weather conditions are calculated from the most recent 20 years of
temperature data measured by heating degree days. Weather in 1999 was 6 percent
colder than in 1998 and 1998 was 2 percent warmer than 1997.
The volumes of gas sold to residential and commercial
customers during 1999 increased 8 percent compared to 1998, reflecting the
continued customer growth and colder weather. Related revenues increased 15
percent due to increased volumes and the rate increases effective in 1998 and
late 1999. Revenue from residential and commercial customers was up 18 percent
in 1998 due to increased volumes and rate increases effective in late 1997 and
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 Sales, Transportation and Other Revenues
---------------------------------------------------
Total volumes of gas delivered to industrial customers were 6
percent higher in 1999 than in 1998 and 1 percent higher in 1998 than in 1997.
The combined margin from industrial sales and transportation increased slightly
from 1998 and decreased by 7 percent in 1998 from 1997. The slight increase in
industrial margin in 1999 and the decrease in 1998, despite increased volumes in
both 1999 and 1998, primarily reflect the effect of low oil prices on an
industrial schedule in which rates vary with oil prices, and transfers of some
industrial customers to rate schedules or special contracts with lower margins.
Other revenues relate primarily to accumulations or
adjustments to regulatory accounts (see Note 1) and to miscellaneous fees
assessed to gas sales customers. In 1999, other revenues totaled $1.2 million,
including fees assessed to customers ($1.6 million) partially offset by other
regulatory account adjustments ($0.4 million).
In 1998, other revenues included the deferral of $2.0 million
in revenue reductions required under a settlement approved by the OPUC as part
of the Jan. 1, 1998 rate changes, offset by $3.1 million from the amortization
of property tax savings and $1.4 million from amortizations of other regulatory
accounts. In 1997, other revenues included $6.1 million from the amortization of
property tax savings and $1.2 million from the amortization of Oregon income tax
savings.
21
<PAGE>
Cost of Gas
-----------
NW Natural's cost per therm of gas sold was 15 percent higher
in 1999 than in 1998, primarily due to higher prevailing prices in the natural
gas commodity market. Its cost of gas sold was 29 percent higher in 1998 than in
1997. The cost per therm of gas sold includes current gas purchases, gas drawn
from storage, demand cost equalization, regulatory deferrals and company use.
The cost of gas sold was reduced by off-system gas sales of $1.7 million in 1999
compared to $4.6 million in 1998 and $2.3 million in 1997. Under an agreement
with the OPUC, revenues from these sales are treated as a reduction of gas
costs.
NW Natural has a Purchased Gas Cost Adjustment (PGA) tariff
under which its net income from Oregon operations is affected only within
defined limits by changes in purchased gas costs. NW Natural absorbs 33 percent
of the higher cost of gas sold, or retains 33 percent of the lower cost, in
either case as compared to projections. The remaining 67 percent of the higher
or lower gas costs are recorded as deferred debits or credits (regulatory assets
or liabilities) for recovery from or refund to customers in future rates.
Subsidiary Operations
---------------------
Results from continuing operations for Financial Corporation
in 1999 were earnings equivalent to 3 cents a share, compared to losses of 42
cents a share in 1998 and earnings of 7 cents a share in 1997 (see Note 2).
Financial Corporation's operating results in 1999 were net
income of $0.5 million, compared to $0.1 million in 1998 and $1.6 million in
1997. The increase in income from 1998 to 1999 was primarily due to stronger
operating results from its investments in limited partnerships in solar
electric, wind-power electric and hydroelectric generation projects in
California. The decline in income from 1997 to 1998 was primarily due to weaker
operating results from its investments in the limited partnerships. Its 1997
results included a $1.1 million gain from the sale of an interest in a solar
electric partnership.
Financial Corporation recorded asset impairment charges in
1998 totaling $16.6 million, equivalent to 43 cents a share. The charges
resulted from the application of Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," to Financial Corporation's limited
partnership investments. The determinations of impairments for Financial
Corporation's assets resulted from lower estimates of prices for future sales of
electricity from the partnerships' power projects.
The Company's investment in Financial Corporation at Dec. 31,
1999, was $7.1 million, compared to $6.6 million at Dec. 31, 1998.
Discontinued Segment
--------------------
In the fourth quarter of 1999 the Company decided to sell its
interests in Canor (see Note 2), with the effect that Canor has been
reclassified as a discontinued segment.
Net income from the discontinued segment for 1999 and 1998 was
$0.4 million in both years, compared to income of $0.2 million in 1997. Results
for 1998 included asset write-downs totaling $2.8 million, equivalent to 7 cents
a share, and a $3.5 million gain, equivalent to 15 cents a share, from a merger
involving Canor. Approximately half of the write-downs were asset impairment
22
<PAGE>
charges due to the application of SFAS No. 121, resulting from the impact of low
oil prices on Canor's oil properties in Alberta. The remaining write-downs were
due to determinations that some oil and gas wells were no longer productive
because of water encroachment. The gain from the merger was not subject to U.S.
income tax. In 1997, Canor's results included a $0.9 million write-down of
unproven properties under SFAS No. 121.
The Company's investment in Canor of $29.2 million at Dec. 31,
1999, is reported as an investment in discontinued segment in current assets.
The Company's investment in Canor for the years ended Dec. 31, 1998 and 1997 was
$31.9 million and $19.8 million, respectively. In 1998, the increase in the
Company's investment in Canor included $11.8 million converted to equity from
inter-company debt at the time of Canor's merger.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Consolidated operations and maintenance expenses were $5
million, or 6 percent, lower in 1999 than in 1998. NW Natural's operations and
maintenance expenses decreased $4.8 million, or 6 percent. The reduction was
primarily due to credits to a litigation reserve totaling $4.9 million resulting
from favorable decisions by the Oregon Supreme Court and the Oregon Court of
Appeals in a case involving claims by a commercial customer (see Note 12). Lower
expenses in 1999 for uncollectible accounts ($0.6 million), pensions ($0.4
million) and other miscellaneous operating costs ($2.0 million) were
approximately offset by higher expenses for bonus accruals ($2.5 million) and
early retirement and severance charges ($0.9 million).
Operations and maintenance expenses in 1998 were $4.4 million,
or 6 percent, higher than in 1997 primarily due to higher accruals for
uncollectible accounts ($1.4 million); maintenance expenses for a new customer
information system (CIS) ($1.1 million); amortizations of Year 2000 costs ($0.8
million); higher market development expense ($0.4 million); and employee
severance charges ($0.6 million).
Taxes Other Than Income
-----------------------
Taxes other than income, which are comprised of property,
franchise, payroll and other taxes, increased $2.7 million, or 12 percent, in
1999. Property tax expense was $0.9 million, or 10 percent, higher than in 1998
due to more plant in service. Franchise taxes, which are based on gross
revenues, increased $1.4 million, or 16 percent, reflecting higher revenues due
to an increase in the Company's customer base and rate increases effective Dec.
1, 1998 and 1999.
Taxes other than income increased $2.0 million, or 10 percent,
in 1998. NW Natural's property taxes increased $0.9 million, or 12 percent, due
to more plant in service. Franchise taxes increased $1.1 million, or 14 percent,
reflecting higher revenues due to rate increases effective Jan. 1, April 1 and
Dec. 1, 1998.
Depreciation, Depletion and Amortization
----------------------------------------
Depreciation, depletion and amortization expense increased
$7.1 million, or 16 percent, in 1999 compared to 1998, and $4.9 million, or 13
percent, in 1998 compared to 1997. NW Natural's depreciation expense increased
$7.1 million from 1998 to 1999, primarily due to an asset write-down of the CIS
($6.5 million) resulting from the OPUC's order in NW Natural's Oregon general
23
<PAGE>
rate case concluded in November (see "Results of Operations -- Regulatory
Matters," above). The $4.9 million, or 13 percent, increase from 1997 to 1998
was due to additional utility plant placed in service.
Other Income (Expense)
----------------------
The variations in other income (expense) during the past three
years resulted primarily from non-recurring items. Other income for 1999
consisted primarily of interest income ($3.9 million). In 1998, other income
(expense) reflected $16.6 million in asset write-downs recorded by Financial
Corporation under SFAS No. 121 (see "Subsidiary Operations," above).
Interest Charges - Net
----------------------
Interest charges decreased $1.5 million, or 5 percent, in 1999
compared to 1998 primarily due to the favorable decisions by the Oregon Supreme
Court and the Oregon Court of Appeals in a case involving claims by a commercial
customer (see Note 12).
Interest charges in 1998 increased $3.1 million, or 11
percent, compared to 1997. The 1998 increase resulted from increases in
long-term debt and commercial paper due to higher gas costs, construction
spending to fund customer growth and other spending for general corporate
purposes.
Allowance for Funds Used During Construction (AFUDC)
represents the cost of funds used during the construction of utility plant (see
Note 1). In 1999, AFUDC reduced interest expense by $1.2 million compared to
$1.4 million in 1998 and $1.7 million in 1997. The weighted average AFUDC rates
were 6.0 percent in 1999, 5.5 percent in 1998 and 5.8 percent in 1997 (see
"Financing Activities," below).
Income Taxes
------------
The effective corporate income tax rates for 1999, 1998 and
1997 were 35 percent, 35 percent and 33 percent, respectively. The effective tax
rate in 1997 was lower than the statutory rate due to permanent tax savings from
a change in book depreciation rates, an increase in tax credits and a reversal
of amounts previously recorded for the California solar energy investment sold
(see Note 8).
Redeemable Preferred and Preference Stock Dividend Requirements
---------------------------------------------------------------
Redeemable preferred and preference stock dividend
requirements for 1999 and 1998 were lower by $0.1 million, or 3 percent, due to
sinking fund redemptions.
Financial Condition
- -------------------
Capital Structure
-----------------
NW Natural's capital expenditures are primarily related to
utility construction resulting from customer growth, system improvements and the
development of underground gas storage. 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 gas
usage by NW Natural's residential and commercial customers influences the
Company's financing requirements. Short-term liquidity is satisfied primarily
24
<PAGE>
through the sale of commercial paper, which is supported by commercial bank
lines of credit (see Note 6).
The Company's long-term goal is to maintain a capital
structure comprised of 45 to 50 percent common stock equity, 5 to 10 percent
preferred and preference stock and 45 to 50 percent short-term and long-term
debt. When additional capital is required, the Company issues debt or equity
securities depending upon both the target capital structure and market
conditions. The Company also uses these sources to meet long-term debt and
preferred and preference stock redemption requirements (see Notes 3 and 5).
Cash Flows
----------
Operating Activities
--------------------
Operating activities provided net cash of $108.5 million in
1999 compared to $66.9 million in 1998. The 62 percent increase was due to
increased cash from operations ($6.8 million) and lower working capital
requirements ($34.8 million). The increase in cash from operations compared to
1998 was primarily due to higher net income from continuing operations ($18.0
million) and a greater reduction in deferred gas costs receivable ($6.0
million). The increase in cash from operations in 1999 ($16.1 million) was due
to non-cash investment losses in 1998 including the asset write-downs by
Financial Corporation. The decrease in working capital requirements in 1999 was
primarily due to an increase in accounts payable compared to a decrease in 1998
($19.6 million), and reductions in accrued unbilled revenue and accounts
receivable compared to increases in 1998 ($13.1 million and $8.8 million,
respectively). The decreases in working capital requirements were partially
offset by a larger increase in inventories of gas, materials and supplies ($8.8
million).
Cash provided by operating activities in 1998 was $66.9
million compared to $45.8 million in 1997. The 46 percent increase was due to
increased cash from operations ($26.6 million), offset in part by higher working
capital requirements ($5.5 million). The increase in cash from operations
compared to 1997 was primarily due to lower deferred gas costs receivable ($37.5
million), an increase in depreciation, depletion and amortization expense ($11.2
million) and non-cash investment losses in 1998 including the asset write-downs
by Financial Corporation ($16.0 million). The increase in cash from operations
was partially offset by lower net income from continuing operations ($15.9
million), a reduction in deferred taxes and investment tax credits ($17.0
million) and higher gains on sale of assets ($2.9 million). The increase in
working capital requirements was due to an increase in accounts receivable in
1998 compared to a reduction in 1997 ($9.5 million), partially offset by a
smaller reduction in accounts payable in 1998 ($3.3 million).
The Company has lease and purchase commitments relating to its
operating activities which are financed with cash flows from operations (see
Note 12).
Investing Activities
--------------------
Cash used in investing activities increased $20.6 million,
from $98.6 million in 1998 to $119.2 million in 1999. NW Natural's capital
expenditures in 1999 totaled $109 million, up $29 million, or 36 percent, from
1998. The increase in cash requirements for utility construction in 1999
resulted from higher expenditures for gas storage development due to completion
of a new phase of the Company's gas storage expansion project (Mist Storage
III)($23.9 million); higher expenditures for computer hardware and software
($2.3 million), communications technology ($0.8 million) and large system
25
<PAGE>
improvement projects ($1.3 million); and higher construction overhead ($2.0
million).
Cash requirements for NW Natural's capital program in 1998
totaled $80 million, down $36 million, or 31 percent, from 1997. The decrease in
cash requirements for utility construction in 1998 resulted from lower
expenditures for completion of the new CIS ($14.0 million), an earlier phase of
the gas storage expansion project (Mist Storage II) ($5.2 million) and several
large system improvement projects ($5.9 million); reduced expenditures for
computer hardware and software ($1.1 million); and lower construction overhead
($2.0 million).
NW Natural's utility construction expenditures are estimated
at $82 million for 2000. Over the five-year period 2000 through 2004, these
expenditures are estimated at between $450 million and $500 million. The high
level of capital expenditures over the next five years reflects projected high
customer growth plus a major system reinforcement project and the development of
additional underground gas storage facilities. An estimated 60 percent of the
required funds is expected to be internally generated, with the remainder to be
funded through a combination of long-term debt and equity securities with
short-term debt providing liquidity and bridge financing.
NW Natural had non-utility capital expenditures of $10.7
million in 1999, primarily relating to a contract 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 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 first or second 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.
There were no new capital investments in either of the
Company's subsidiaries during 1999. Non-utility capital expenditures totaled
$19.8 million in 1998, including Canor's investments of $13.5 million in
Canadian exploration and production properties. NW Natural's non-utility
expenditures in 1998 totaling $6.3 million included expenditures relating to the
Port of Portland contract ($6.0 million) and additions to existing facilities
($0.3 million).
NW Natural invested $3.0 million in Canor's exploration and
production program in 1997 to supplement Canor's internally generated funds.
Financing Activities
--------------------
Cash provided by financing activities in 1999 totaled $13.3
million, down from $32.3 million in 1998. The decrease was due to lower proceeds
from sales of common stock, partially offset by higher net proceeds from the
issuance and retirement of long-term debt and an increase in short-term debt.
Proceeds from the sales of $20 million of Medium-Term Notes, Series B, in both
September and December 1999, and $12.7 million from the increase in short-term
debt, were used in part to reduce long-term debt ($10 million).
Cash provided by financing activities in 1998 was down $44.5
million from $76.8 million in 1997. This decrease was due to a $2 million
reduction in short-term debt in 1998 compared to a $39 million increase in 1997,
as the Company's higher proceeds from the sale of common stock in 1998 were
approximately offset by lower net proceeds from the issuance and retirement of
26
<PAGE>
long-term debt. Proceeds from the sales of $22 million, $10 million and $20
million of Medium-Term Notes, Series B, in March, June and November 1998,
respectively, and $44.7 million from the negotiated public offering and sale of
1,725,000 shares of NW Natural's common stock in April 1998, were used in part
to reduce long-term debt ($35 million) and short-term debt ($2 million).
Ratios of Earnings to Fixed Charges
-----------------------------------
For the years ended Dec. 31, 1999, 1998 and 1997, the
Company's ratios of earnings to fixed charges, computed using the Securities and
Exchange Commission method, were 3.12, 2.20 and 2.99, respectively. For this
purpose, earnings consist of net income before taxes plus fixed charges. 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.
Contingent Liabilities
- ----------------------
Year 2000 Readiness
-------------------
During 1999 NW Natural completed corrections to the
information technology (IT) and non-IT systems within its control that could be
affected by the Year 2000 (Y2K) issue. Y2K project work included maintaining and
managing the inventory of its date-sensitive IT and non-IT systems; renovating
and testing high-priority internal IT systems; researching and evaluating the
degree of Y2K readiness of IT and non-IT systems of suppliers and vendors; and
developing contingency plans for high-risk systems or vendor products where
products were known to be non-compliant or readiness levels could not be
independently verified. NW Natural did not experience significant Y2K-related
problems with its systems.
NW Natural's total cost for its Y2K readiness program was
about $7 million. The total estimated cost does not include the costs incurred
for IT systems that were replaced rather than renovated. In accordance with an
order of the OPUC, NW Natural's incremental operating costs for Year 2000
readiness were deferred and will be amortized over a five-year period.
Environmental Matters
---------------------
Since 1993, NW Natural has recorded expenses of $2.6 million
for the costs of a continuing investigation of property it owns in Linnton,
Oregon, that is the site of a former gas manufacturing plant that was closed in
1956 (see Note 12).
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures associated with
activities involving derivative financial instruments and other financial
instruments are natural gas commodity price risk, foreign currency risk and
interest rate risk. NW Natural uses derivative financial instruments as tools to
mitigate certain of these market risks (see Note 11). NW Natural enters into
such instruments for hedging purposes, not for trading purposes. Market risks
associated with the derivative financial instruments are monitored by management
personnel who do not directly enter into these contracts and by a committee of
the Board of Directors.
27
<PAGE>
Physical and Financial Commodity and Foreign Currency Transactions
------------------------------------------------------------------
NW Natural enters into short-term and long-term natural gas
purchase contracts with demand and commodity fixed-price and variable-price
components, along with associated short-term and long-term natural gas
transportation contracts. Many of the purchases made under these contracts are
in Canadian dollars and NW Natural uses foreign currency forward contracts to
hedge against foreign exchange rate fluctuations.
NW Natural historically has taken physical delivery of at
least the minimum quantities specified in its natural gas purchase contracts.
The contracts are subject to annual re-pricing, a process that is intended to
reflect anticipated market price trends during the next year. NW Natural's PGA
mechanism in Oregon provides for the recovery from customers of actual commodity
costs in comparison with established benchmark costs, except that NW Natural
absorbs 33 percent of the higher cost of gas sold, or retains 33 percent of the
lower cost, in either case as compared to projections.
At Dec. 31, 1999, differences between notional values and fair
values with respect to NW Natural's open positions in derivative financial
instruments were not material to the Company's financial position or results of
operations. However, to the degree that market risks exist due to potential
adverse changes in commodity prices and foreign exchange rates in relation to
these financial and physical contracts, the Company considers the risks to be:
Commodity Price Risk
--------------------
The prices of natural gas commodity are subject to
fluctuations due to unpredictable factors including weather, pipeline
transportation congestion and other factors that affect short-term supply and
demand. NW Natural uses natural gas commodity swap agreements to convert certain
long-term gas purchase contracts from floating prices to fixed prices. As of
Dec. 31, 1999, the Company had not entered into any natural gas commodity swaps
or other derivative commodity instruments extending beyond the end of 2000. If
all of the commodity swap agreements had been settled on Dec. 31, 1999, NW
Natural would have realized a loss of $7.7 million.
Foreign Currency Risk
---------------------
The costs of natural gas commodity and certain pipeline
services are subject to changes in the value of Canadian currency in relation to
U. S. currency. NW Natural uses foreign currency forward contracts to hedge
against fluctuations in currency values with respect to its purchases of at
least 80 percent of its estimated daily requirements for natural gas purchased
from suppliers in Canada. As of Dec. 31, 1999, the Company had not entered into
any derivative financial instruments relating to foreign currency exchange rates
extending beyond the end of 2000. If all of the contracts had been settled on
Dec. 31, 1999, NW Natural would have realized a gain of $0.2 million.
Interest Rate Risk
------------------
Interest rate risk relates to new debt financing needed to
fund capital requirements, including maturing debt securities, and to the
issuance of commercial paper. NW Natural manages interest rate risk through the
issuance of fixed-rate debt with varying maturities and the refunding of debt
through optional redemption when interest rates are favorable. NW Natural had no
derivative financial instruments to hedge interest rates in place at Dec. 31,
1999.
28
<PAGE>
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
OPUC and the WUTC, with respect to allowed rates of return, industry and rate
structure, purchased gas and investment recovery, acquisitions and dispositions
of assets and facilities, operation and construction of plant facilities,
present or prospective wholesale and retail competition, changes in tax laws and
policies and changes in and compliance with environmental and safety laws and
policies; (ii) 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.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
Page
----
1. Management's Responsibility for Financial Statements................ 31
2. Report of Independent Accountants................................... 32
3. Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended December 31,
1999, 1998 and 1997................................................. 33
Consolidated Statements of Earnings Invested in the Business for
the Years Ended December 31, 1999, 1998 and 1997.................... 34
Consolidated Balance Sheets, December 31, 1999 and 1998............. 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.................................... 37
Consolidated Statements of Capitalization, December 31, 1999
and 1998............................................................ 38
Notes to Consolidated Financial Statements.......................... 39
4. Quarterly Financial Information (unaudited)......................... 57
5. Supplementary Data:
Financial Statement Schedules for the Years Ended December 31,
1999, 1998 and 1997 Schedule II - Valuation and Qualifying
Accounts and Reserves............................................... 58
Supplemental Schedules Omitted
All other schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included
elsewhere in the financial statements.
30
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
----------------------------------------------------
The financial statements in this report were prepared by
management, which is responsible for their objectivity and integrity. The
statements have been prepared in conformity with generally accepted accounting
principles and, where appropriate, reflect informed estimates based on judgments
of management. The responsibility of the Company's independent accountants is to
render an independent report on the financial statements.
The Company's system of internal accounting controls is
designed to provide reasonable assurance that assets are safeguarded and
transactions are executed in accordance with management's authorizations, that
transactions are recorded to permit the preparation of financial statements in
conformity with orders of regulatory authorities and generally accepted
accounting principles and that accountability for assets is maintained. The
Company's system of internal controls has provided such reasonable assurances
during the periods reported herein. The system includes written policies,
procedures and guidelines, an organization structure that segregates duties and
an established program for monitoring the system by internal auditors. In
addition, the Company has prepared and annually distributes to its employees a
Code of Ethics covering its policies for conducting business affairs in a lawful
and ethical manner. Ongoing review programs are carried out to ensure compliance
with these policies.
The Board of Directors, through its Audit Committee, oversees
management's financial reporting responsibilities. The Committee meets regularly
with management, the internal auditors, and representatives of the Company's
independent accountants. Both internal auditors and external accountants have
free and independent access to the Committee and the Board of Directors. No
member of the Committee is an employee of the Company. The Committee reports the
results of its activities to the full Board of Directors. Annually, the
Committee recommends the nomination of independent accountants to the Board of
Directors for shareholder approval.
/s/ Richard G. Reiten
----------------------------------
Richard G. Reiten
President and
Chief Executive Officer
/s/ Bruce R. DeBolt
----------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of NW Natural
In our opinion, the accompanying consolidated financial statements listed in the
accompanying table of contents present fairly, in all material respects, the
financial position of Northwest Natural Gas Company (doing business as NW
Natural) and its subsidiaries (the Company) at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedules listed in the accompanying table of contents
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
February 18, 2000
32
<PAGE>
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES:
Gross operating revenues $455,834 $404,390 $351,709
Cost of sales 212,197 173,424 130,599
------- ------- -------
Net operating revenues 243,637 230,966 221,110
OPERATING EXPENSES:
Operations and maintenance 73,209 78,226 73,864
Taxes other than income taxes 24,652 21,939 19,952
Depreciation, depletion and amortization 51,008 43,937 39,051
------- ------- -------
Total operating expenses 148,869 144,102 132,867
------- ------- -------
INCOME FROM OPERATIONS 94,768 86,864 88,243
------- ------- -------
OTHER INCOME (EXPENSE) 4,816 (13,723) 4,138
INTEREST CHARGES - net 30,052 31,586 28,469
------- ------- -------
INCOME BEFORE INCOME TAXES 69,532 41,555 63,912
INCOME TAXES 24,591 14,604 21,034
------- ------- -------
NET INCOME FROM CONTINUING OPERATIONS 44,941 26,951 42,878
NET INCOME FROM DISCONTINUED SEGMENT 355 350 181
------- ------- -------
NET INCOME 45,296 27,301 43,059
Redeemable preferred and preference stock
dividend requirements 2,515 2,577 2,646
------- ------- -------
EARNINGS APPLICABLE TO COMMON STOCK $42,781 $24,724 $40,413
======= ======= =======
AVERAGE COMMON SHARES OUTSTANDING 24,976 24,233 22,698
======= ======= =======
BASIC EARNINGS PER SHARE OF COMMON STOCK:
From continuing operations $1.70 $1.01 $1.77
From discontinued segment 0.01 0.01 0.01
----- ----- -----
Total basic earnings per share $1.71 $1.02 $1.78
===== ===== =====
DILUTED EARNINGS PER SHARE OF COMMON STOCK:
From continuing operations $1.69 $1.01 $1.75
From discontinued segment 0.01 0.01 0.01
---- ---- ----
Total diluted earnings per share $1.70 $1.02 $1.76
===== ===== =====
DIVIDENDS PER SHARE OF COMMON STOCK $1.225 $1.22 $1.205
====== ===== ======
</TABLE>
------------------------------------
See Notes to Consolidated Financial Statements.
33
<PAGE>
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS INVESTED IN THE BUSINESS
(Thousands)
Year Ended December 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings invested in the business:
Balance at beginning of year $106,513 $113,098 $ 100,026
Net income 45,296 $45,296 27,301 $27,301 43,059 $43,059
Cash dividends paid:
Redeemable preferred and preference stock (2,525) (2,587) (2,660)
Common stock (30,569) (29,615) (27,321)
Common stock expense (4) (1,684) (6)
------------ ---------- -----------
Balance at end of year $ 118,711 $106,513 $ 113,098
============ ========== ===========
Accumulated other comprehensive income (loss):
Balance at beginning of year $ (2,460) $ (2,235) $ (1,650)
Other comprehensive income (loss)-
Foreign currency translation adjustment from
discontinued segment (721) (721) (225) (225) (585) (585)
------------ --------- ---------- --------- ----------- ---------
Comprehensive income $44,575 $27,076 $42,474
========= ========= =========
Balance at end of year $ (3,181) $ (2,460) $ (2,235)
============ ========== ===========
</TABLE>
------------------------------------
See Notes to Consolidated Financial Statements.
34
<PAGE>
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands)
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
PLANT AND PROPERTY:
Utility plant $1,331,415 $1,239,690
Less accumulated depreciation 436,386 404,117
------------ ------------
Utility plant - net 895,029 835,573
------------ ------------
Non-utility property 8,548 89,050
Less accumulated depreciation and depletion 7,654 29,927
-------------- ------------
Non-utility property - net 894 59,123
-------------- ------------
Total plant and property 895,923 894,696
INVESTMENTS AND OTHER 16,557 16,714
CURRENT ASSETS:
Cash and cash equivalents 10,013 7,383
Accounts receivable, less allowances for uncollectible accounts
of $1,669 in 1999 and $1,547 in 1998 43,349 47,476
Accrued unbilled revenue 31,550 34,258
Inventories of gas, materials and supplies 33,919 21,258
Investment in discontinued segment 29,163 -
Property held for sale 16,712 -
Prepayments and other current assets 18,349 16,105
-------------- ------------
Total current assets 183,055 126,480
-------------- ------------
REGULATORY TAX ASSETS 51,060 56,860
-------------- ------------
DEFERRED GAS COSTS RECEIVABLE 20,950 27,795
-------------- ------------
DEFERRED DEBITS AND OTHER 76,878 69,191
-------------- ------------
TOTAL ASSETS $1,244,423 $1,191,736
============== ============
</TABLE>
-----------------------------------
See Notes to Consolidated Financial Statements.
35
<PAGE>
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands)
<TABLE>
<CAPTION>
December 31 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CAPITALIZATION AND LIABILITIES:
CAPITALIZATION (See Consolidated Statements of Capitalization):
Common stock $ 79,458 $ 78,701
Premium on common stock 234,608 229,650
Earnings invested in the business 118,711 106,513
Accumulated other comprehensive income (loss) (3,181) (2,460)
------------- -------------
Total common stock equity 429,596 412,404
Redeemable preference stock 25,000 25,000
Redeemable preferred stock 10,564 11,499
Long-term debt 396,379 366,738
------------- -------------
Total capitalization 861,539 815,641
------------- -------------
MINORITY INTEREST - 16,322
------------- -------------
CURRENT LIABILITIES:
Notes payable 94,149 87,264
Accounts payable 68,163 56,039
Long-term debt due within one year 10,000 10,000
Taxes accrued 4,101 7,486
Interest accrued 4,673 6,204
Other current and accrued liabilities 39,153 23,477
------------- -------------
Total current liabilities 220,239 190,470
------------- -------------
DEFERRED INVESTMENT TAX CREDITS 10,393 11,248
------------- -------------
DEFERRED INCOME TAXES 136,150 140,310
------------- -------------
REGULATORY LIABILITIES AND OTHER 16,102 17,745
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 12) - -
------------- -------------
TOTAL CAPITALIZATION AND LIABILITIES $1,244,423 $1,191,736
============= =============
</TABLE>
-----------------------------------
See Notes to Consolidated Financial Statements.
36
<PAGE>
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income from continuing operations $ 44,941 $ 26,951 $ 42,878
Adjustments to reconcile net income to net cash provided by operations:
Depreciation, depletion and amortization 51,008 55,822 44,619
Gain on sale of assets - (3,782) (849)
Deferred income taxes and investment tax credits (5,015) (344) 16,609
Equity in (earnings) losses of investments (490) 15,572 (468)
Income from discontinued segment 355 350 181
Allowance for funds used during construction (1,153) (1,426) (1,868)
Deferred gas costs receivable 6,845 833 (36,686)
Regulatory accounts and other - net (3,795) (8,109) (5,159)
--------- --------- ---------
Cash from operations before working capital changes 92,696 85,867 59,257
Changes in operating assets and liabilities:
Accounts receivable, net 792 (8,056) 1,413
Accrued unbilled revenue 2,708 (10,347) (1,571)
Inventories of gas, materials and supplies (12,661) (3,873) (2,946)
Accounts payable 16,910 (2,736) (6,020)
Accrued interest and taxes (4,916) 2,976 2,122
Other current assets and liabilities 12,992 3,108 (6,439)
--------- --------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES 108,521 66,939 45,816
INVESTING ACTIVITIES:
Acquisition and construction of utility plant assets (109,144) (80,022) (115,886)
Investment in non-utility property (10,713) (19,780) (9,229)
Proceeds from sale of non-utility assets - - 1,014
Investments and other 647 1,226 (35)
--------- --------- ---------
CASH USED IN INVESTING ACTIVITIES (119,210) (98,576) (124,136)
FINANCING ACTIVITIES:
Common stock issued 5,356 52,384 6,465
Redeemable preferred stock retired (935) (930) (1,320)
Long-term debt:
Issued 40,000 52,000 90,000
Retired (10,000) (35,000) (27,000)
Change in short-term debt 12,717 (2,054) 39,259
Cash dividend payments:
Redeemable preferred and preference stock (2,525) (2,587) (2,660)
Common stock (30,569) (29,615) (27,321)
Foreign currency translation and capital stock expense (725) (1,909) (591)
--------- --------- ---------
CASH PROVIDED BY FINANCING ACTIVITIES 13,319 32,289 76,832
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,630 652 (1,488)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 7,383 6,731 8,219
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 10,013 $ 7,383 $ 6,731
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 30,506 $ 32,323 $ 28,756
Income taxes $ 27,302 $ 8,205 $ 7,288
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES:
Conversion to common stock:
7-1/4% Series of Convertible Debentures $ 359 $ 565 $ 535
</TABLE>
------------------------------------
See Notes to Consolidated Financial Statements
37
<PAGE>
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
December 31 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCK EQUITY:
Common stock - par value $3-1/6 per share; authorized 60,000,000 shares:
outstanding - 1999, 25,091,938 shares; 1998, 24,853,121 shares $ 79,458 $ 78,701
Premium on common stock 234,608 229,650
Earnings invested in the business 118,711 106,513
Accumulated other comprehensive income (loss) (3,181) (2,460)
---------- ---------
Total common stock equity 429,596 50% 412,404 51%
---------- ---- --------- ----
REDEEMABLE PREFERENCE STOCK, authorized
2,000,000 shares; $6.95 Series, stated value $100 per share; outstanding -
1999, 250,000 shares; 1998, 250,000 shares 25,000 25,000
---------- ---------
Total redeemable preference stock 25,000 3% 25,000 3%
---------- ---- --------- ----
REDEEMABLE PREFERRED STOCK, authorized 1,500,000 shares; all outstanding series
have a stated value of $100 per share:
$4.75 Series, outstanding-1999, 643 shares; 1998, 2,458 shares 64 249
$7.125 Series, outstanding -1999, 105,000 shares; 1998, 112,500 shares 10,500 11,250
---------- ---------
Total redeemable preferred stock 10,564 1% 11,499 1%
---------- ---- --------- ----
LONG-TERM DEBT:
First Mortgage Bonds
--------------------
9-3/4% Series due 2015 50,000 50,000
Medium-Term Notes
-----------------
First Mortgage Bonds:
7.69% Series A due 1999 - 10,000
5.96% Series B due 2000 5,000 5,000
5.98% Series B due 2000 5,000 5,000
6.62% Series B due 2001 10,000 -
6.75% Series B due 2002 10,000 -
8.05% Series A due 2002 10,000 10,000
5.55% Series B due 2002 20,000 20,000
6.40% Series B due 2003 20,000 20,000
6.34% Series B due 2005 5,000 5,000
6.38% Series B due 2005 5,000 5,000
6.45% Series B due 2005 5,000 5,000
6.80% Series B due 2007 10,000 10,000
6.50% Series B due 2008 5,000 5,000
8.26% Series B due 2014 10,000 10,000
7.00% Series B due 2017 40,000 40,000
6.60% Series B due 2018 22,000 22,000
8.31% Series B due 2019 10,000 10,000
7.63% Series B due 2019 20,000 -
9.05% Series A due 2021 10,000 10,000
7.25% Series B due 2023 20,000 20,000
7.50% Series B due 2023 4,000 4,000
7.52% Series B due 2023 11,000 11,000
6.52% Series B due 2025 10,000 10,000
7.05% Series B due 2026 20,000 20,000
7.00% Series B due 2027 20,000 20,000
6.65% Series B due 2027 20,000 20,000
6.65% Series B due 2028 10,000 10,000
Unsecured:
8.47% Series A due 2001 10,000 10,000
Convertible Debentures
----------------------
7-1/4% Series due 2012 9,379 9,738
---------- ---------
406,379 376,738
Less long-term debt due within one year 10,000 10,000
---------- ---------
Total long-term debt 396,379 46% 366,738 45%
---------- ---- --------- -----
TOTAL CAPITALIZATION $861,539 100% $ 815,641 100%
========== ==== ========= =====
</TABLE>
------------------------------------
See Notes to Consolidated Financial Statements.
38
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- ----------------------------------------------------
Organization and Principles of Consolidation
- --------------------------------------------
The consolidated financial statements include:
Regulated utility:
-Northwest Natural Gas Company (doing business as NW Natural)
Non-regulated subsidiary businesses:
-NNG Financial Corporation (Financial Corporation), a
wholly-owned subsidiary
-Canor Energy Ltd. (Canor), a majority-owned subsidiary,
reclassified as a discontinued segment in 1999
Together these businesses are referred to herein as the "Company."
Intercompany accounts and transactions have been eliminated.
Investments in corporate joint ventures and partnerships in which the
Company's ownership is 50 percent or less are accounted for by the
equity method or the cost method (see Note 9).
Certain amounts from prior years have been reclassified to conform with
the 1999 presentation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts in the consolidated
financial statements and accompanying notes. Changes in such estimates
may affect amounts reported in future periods.
Industry Regulation
- -------------------
The Company's principal business is the distribution of natural gas
which is regulated by the Oregon Public Utility Commission (OPUC) and
the Washington Utilities and Transportation Commission (WUTC).
Accounting records and practices conform to the requirements and
uniform system of accounts prescribed by these regulatory authorities
in accordance with Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation."
Utility Plant
- -------------
Utility plant for NW Natural is stated at cost (see table in Note 9).
When a depreciable unit of property is retired, the cost is removed
from both utility plant and the accumulated provision for depreciation
together with the cost of removal, less any salvage. No gain or loss is
recognized upon normal retirement.
NW Natural's provision for depreciation of utility property, which is
computed under the straight-line, age-life method in accordance with
independent engineering studies and as approved by regulatory
authorities, approximated 4.0 percent of average depreciable plant in
1999, 3.9 percent in 1998 and 3.8 percent in 1997. The rate of
depreciation approximates the economic life of the utility property.
39
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Certain additions to utility plant include an allowance for funds used
during construction (AFUDC), a non-cash item. AFUDC represents the cost
of funds borrowed during construction and is calculated using actual
commercial paper interest rates. If commercial paper borrowings are
insufficient to finance the total work in progress, then a composite
rate of interest on all debt, shown as a reduction to interest charges,
and a return on equity funds, shown as other income, is used to compute
AFUDC. While cash is not realized currently from AFUDC, it is realized
in the ratemaking process over the service life of the related property
through increased revenues resulting from higher rate base and higher
depreciation expense. NW Natural's weighted average AFUDC rates were
6.0 percent for 1999, 5.5 percent for 1998 and 5.8 percent for 1997.
Regulatory Accounts
- -------------------
In applying SFAS No. 71, NW Natural has capitalized certain costs and
benefits as regulatory assets and liabilities pursuant to orders of the
state utility regulatory commissions, in general rate proceedings or
expense deferral proceedings, in order to provide for recovery of
revenues or expenses from, or refunds to, NW Natural's utility
customers in future periods. At Dec. 31, 1999 and 1998, regulatory tax
assets were $51.1 million and $56.9 million, respectively, while other
regulatory assets and liabilities (net) were $37.4 million and $40.4
million, respectively.
If NW Natural should determine in the future that all or a portion of
these regulatory assets and liabilities no longer meet the criteria for
continued application of SFAS No. 71, then NW Natural would be required
to write off that portion which it could not recover or refund.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and highly liquid temporary investments with expected
maturity dates of three months or less.
Unbilled Revenue
- ----------------
NW Natural accrues for gas deliveries not billed to customers from the
meter reading dates to month end.
Inventories
- -----------
NW Natural's inventories of gas in storage and materials and supplies
are stated at the lower of average cost or net realizable value.
Derivatives Policy
- ------------------
NW Natural's "Derivatives Policy" allows up to a 100 percent hedge
position in currency derivatives to match and lock in prices on
individual Canadian natural gas purchase transactions; interest rate
derivatives to match specific outstanding debt instruments maturing in
less than five years; and natural gas commodity derivatives to lock in
or cap prices on gas purchased for a future period under contracts with
market-indexed pricing. The policy requires derivatives to be used
within prescribed limitations and only in order to reduce price risk,
so as to qualify for hedge accounting treatment. Changes in market
values of foreign currency contracts, and gains or losses on commodity
derivative contracts, are deferred and recognized as adjustments to gas
purchase costs upon concurrent settlement of these contracts (see Note
11).
40
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In June 1999, the Financial Accounting Standards Board (FASB) issued
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 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 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 expects all of its derivative instruments and hedging
activities to be classified as cash flow hedges. Changes in the fair
market value of these cash flow hedges will be included in other
comprehensive income in accordance with SFAS No. 133. The Company has
not determined the impact that adoption of SFAS No. 133 will have on
other comprehensive income or on its financial position.
Segment Reporting
- -----------------
The Company principally operates in a single line of business
consisting of distribution of natural gas. Other segments are primarily
investments in alternative energy projects in California and a
discontinued oil and gas exploration business.
The following table presents information about reportable segments for
1999, 1998 and 1997. Inter-segment transactions are insignificant.
<TABLE>
<CAPTION>
Thousands Utility Other Total
--------- ------- ----- -----
<S> <C> <C> <C>
1999
Net operating revenues $ 243,269 $ 368 $ 243,637
Income from operations 94,744 24 94,768
Income (loss) from financial investments - (82) (82)
Net income from continuing operations 44,323 618 44,941
Net income from discontinued segment - 355 355
Assets 1,197,673 46,750 1,244,423
1998
Net operating revenues $ 230,564 $ 402 $ 230,966
Income (loss) from operations 86,981 (117) 86,864
Income (loss) from financial investments - (17,192) (17,192)
Net income (loss) from continuing operations 37,530 (10,579) 26,951
Net income from discontinued segment - 350 350
Assets 1,120,706 71,030 1,191,736
1997
Net operating income $ 220,660 $ 450 $ 221,110
Income from operations 88,127 116 88,243
Income from financial investments - 468 468
Net income from continuing operations 41,226 1,652 42,878
Net income from discontinued segment 181 181
Assets 1,049,289 62,328 1,111,617
</TABLE>
41
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Income Taxes
- ------------
NW Natural uses the balance sheet method of accounting for deferred
income taxes. Deferred tax liabilities and assets reflect the expected
future tax consequences, based on enacted tax law, of temporary
differences between the tax basis of assets and liabilities and their
financial reporting amounts (see Note 8).
Consistent with rate and accounting instructions of regulatory
authorities, deferred income taxes are not currently collected for
those temporary income tax differences where the prescribed regulatory
accounting methods do not provide for current recovery in rates. NW
Natural has recorded a regulatory tax asset for amounts pending
recovery from customers in future rates. These amounts are primarily
differences between the book and tax basis of net utility plant in
service. This asset balance was $51.1 million and $56.9 million at Dec.
31, 1999 and 1998, respectively.
Investment tax credits on utility property additions and leveraged
leases which reduce income taxes payable are deferred for financial
statement purposes and are amortized over the life of the related
property or lease. Investment and energy tax credits generated by
non-regulated subsidiaries are amortized over a period of one to five
years.
Other Income (Expense)
- ----------------------
Other income (expense) consists of interest income; gain on sale of
assets; investment income (loss) of Financial Corporation, including
write-downs due to asset impairments in 1998; and other miscellaneous
income from merchandise sales, rents, an aircraft lease and other
items.
Earnings Per Share
- ------------------
Basic earnings per share are computed based on the weighted average
number of common shares outstanding each year. Diluted earnings per
share reflect the potential effects of the conversion of any
outstanding convertible debentures and the exercise of outstanding
stock options. Diluted earnings are calculated as follows:
<TABLE>
<CAPTION>
Thousands, except per share amounts 1999 1998 1997
----------------------------------- ---- ---- ----
<S> <C> <C> <C>
Earnings applicable to common stock $42,781 $24,724 $40,413
Debenture interest less taxes 415 431 455
-------- -------- --------
Net income available for diluted common stock $43,196 $25,155 $40,868
======= ========== =======
Average common shares outstanding 24,976 24,233 22,698
Stock options 21 41 32
Convertible debentures 471 489 518
-------- -------- -------
Diluted average common shares outstanding 25,468 24,763 23,248
====== ====== ======
Diluted earnings per share of common stock $1.70 $1.02 $1.76
===== ===== =====
</TABLE>
2. CONSOLIDATED SUBSIDIARY OPERATIONS AND DISCONTINUED SEGMENT:
- --------------------------------------------------------------------
At Dec. 31, 1999, the Company had one active subsidiary, Financial
Corporation, a wholly-owned subsidiary, and one discontinued segment,
Canor, a majority-owned subsidiary.
42
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NNG Financial Corporation
- -------------------------
Financial Corporation provided short-term financing for Canor and has
several financial investments, including investments as a limited
partner in solar electric generating systems, windpower electric
generating projects, a hydroelectric facility and low-income housing
projects. It also holds interests in certain gas producing properties
in the western United States (see Note 9). During the fourth quarter of
1998, Financial Corporation recorded asset impairment charges resulting
from the application of an impairment model based on SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," to limited partnership investments in solar
electric, wind-power electric and hydroelectric generation projects in
California. The pre-tax write-down of $16.6 million is included in
other income (expense) in the consolidated statements of income.
Canor Energy, Ltd.
- ------------------
On Dec. 16, 1999, the Company decided to sell its interest in Canor, an
Alberta, Canada corporation engaged in natural gas and oil exploration,
development and production in Alberta and Saskatchewan, Canada. Canor
has been reclassified as a discontinued segment and its operating
revenues and expenses are included in net income from a discontinued
segment, net of tax of $0.3 million, $(2.4) million and $0.1 million
for 1999, 1998 and 1997, respectively. The balance sheets and
statements of cash flows and capitalization for prior years have not
been restated. At Dec. 31, 1999, the Company's investment in Canor was
$29.2 million and is shown as investment in discontinued segment (in
current assets). Net assets of Canor at Dec. 31, 1998 and 1997 were
$31.9 million and $19.8 million, respectively.
Canor began operations in 1990 as a wholly-owned indirect subsidiary.
In 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. Subsequent to year-end 1999, the Company acquired
NI's interest in Canor and then sold 100 percent of Canor's stock. The
sale of Canor in January 2000 will result in a estimated gain of $2.5
million, net of tax.
During 1998, Canor recorded asset write-downs of $4.2 million for its
oil and gas production properties. Approximately half of the
write-downs were due to impairment charges under SFAS No. 121 resulting
from the impact of low oil prices on Canor's oil properties in Canada.
The additional write-downs were due to determinations that some of
Canor's oil and gas wells were no longer productive due to water
encroachment.
3. CAPITAL STOCK:
- -----------------------
Common Stock
- ------------
At Dec. 31, 1999, NW Natural had reserved 36,925 shares of common stock
for issuance under the Employee Stock Purchase Plan, 353,497 shares
under its Dividend Reinvestment and Stock Purchase Plan, 787,337 shares
under its 1985 Stock Option Plan (see Note 4), 531,636 shares for
future conversions of its 7-1/4% Convertible Debentures and 3,000,000
shares under the Shareholder Rights Plan.
43
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Redeemable Preference Stock
- ---------------------------
The $6.95 Series of Preference Stock is not redeemable prior to Dec.
31, 2002, but is subject to mandatory redemption on that date.
Redeemable Preferred Stock
- --------------------------
The mandatory preferred stock redemption requirements aggregate $0.8
million in 2000, 2001, 2002, 2003 and 2004. These requirements are
non-cumulative. At any time NW Natural is in default on any of its
obligations to make the prescribed sinking fund payments, it may not
pay cash dividends on common stock or preference stock. Upon
involuntary liquidation, all series of redeemable preferred stock are
entitled to their stated value.
The remaining shares of the $4.68 Series of redeemable preferred stock
were redeemed on June 2, 1997.
The redeemable preferred stock is callable at stipulated prices, plus
accrued dividends. At Dec. 31, 1999, the redemption price for the $4.75
Series was $100 per share. Shares of the $7.125 Series are redeemable
on or after May 1, 2000 at a price of $103.80 per share decreasing each
year thereafter to $100 per share on or after May 1, 2008.
44
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The following table shows the changes in the number of shares of NW Natural's
capital stock and the premium on common stock for the years 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Premium
--------------------------- Shares ---------------- on
Redeemable Redeemable Common
Common Preference Preferred Stock
Stock Stock Stock (Thousands)
<S> <C> <C> <C> <C>
Balance, Dec. 31, 1996 22,555,184 250,000 137,490 $176,977
Sales to employees 27,525 - - 514
Sales to stockholders 211,532 - - 4,561
Exercise of stock options - net 43,216 - - 496
Conversion of convertible
debentures to common 26,871 - - 450
Sinking fund purchases - - (13,205) -
------------- ---------- ---------- ----------
Balance, Dec. 31, 1997 22,864,328 250,000 124,285 182,998
Sales to the public 1,725,000 - - 40,789
Sales to employees 17,637 - - 366
Sales to stockholders 194,835 - - 4,644
Exercise of stock options - net 22,946 - - 377
Conversion of convertible
debentures to common 28,375 - - 475
Sinking fund purchases - - (9,300) 1
------------- ---------- ---------- ----------
Balance, Dec. 31, 1998 24,853,121 250,000 114,985 229,650
Sales to employees 13,619 - - 295
Sales to stockholders 188,821 - - 4,028
Exercise of stock options - net 18,355 - - 334
Conversion of convertible
debentures to common 18,022 - - 301
Sinking fund purchases - - (9,342) -
------------- ---------- ---------- ----------
Balance, Dec. 31, 1999 25,091,938 250,000 105,643 $234,608
============= ========== ========== ==========
</TABLE>
4. STOCK OPTION AND PURCHASE PLANS:
- -----------------------------------------
NW Natural's 1985 Stock Option Plan (Plan) authorizes an aggregate of
1,200,000 shares of common stock for issuance as incentive or
non-statutory stock options. These options may be granted only to
officers and key employees designated by a committee of NW Natural's
Board of Directors.
All options are granted at an option price not less than the market
value at the date of grant and may be exercised for a period not
exceeding 10 years from the date of grant. Option holders may exchange
shares they have owned for at least one year, at the current market
price, to purchase shares at the option price.
Since the Plan's inception in 1985, options on 769,173 shares of common
stock have been granted at prices ranging from $11.75 to $27.875 per
share, and options on 66,296 shares have expired. NW Natural applies
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation cost has
been recognized for either the Plan or the Employee Stock Purchase
Plan. If compensation cost for awards under NW Natural's two
stock-based compensation plans had been determined based on the fair
45
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
value at the grant dates using the method prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997
---- ---- ----
Earnings applicable to common stock ($000):
- ------------------------------------------
As reported $42,781 $24,724 $40,413
Pro forma 42,525 24,518 40,302
Basic earnings per share
- ------------------------
As reported $1.71 $1.02 $1.78
Pro forma 1.70 1.01 1.78
Diluted earnings per share
- --------------------------
As reported $1.70 $1.02 $1.76
Pro forma 1.69 1.01 1.75
For purposes of determining the pro forma expense, the fair value of
each option is estimated on the grant date using the Black-Scholes
option pricing model with the following weighted-average assumptions
used for grants in 1998 and 1996, respectively: a dividend yield of 4.7
and 5.0 percent; expected volatility of 27 and 22 percent; risk-free
interest rates of 5 and 6 percent; and expected lives of seven years.
Information regarding the Plan is summarized as follows:
Options
-------------------------------------
1999 1998 1997
---- ---- ----
Outstanding, beginning of year 320,032 227,733 308,663
$16.59 Options:
Exchanged by holders - (2,608) (20,598)
Exercised - (2,264) (10,432)
$24.00 Options:
Exchanged by holders - - (7,184)
Exercised (7,500) (8,082) (12,243)
Expired - - (4,773)
$20.17 Options:
Exchanged by holders (1,465) - -
Exercised (5,755) (247) (500)
$20.92 Options:
Exchanged by holders - (1,147) (5,159)
Exercised (5,100) (12,353) (20,041)
46
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Options
-----------------------------------
1999 1998 1997
---- ---- ----
$27.875 Options:
Granted - 116,000 -
Expired (10,000) (1,000) -
$26.75 Options:
Granted - 4,000 -
------- ------- -------
Outstanding, end of year 290,212 320,032 227,733
======= ======= =======
Available for grant, end of year 497,125 487,125 606,125
======= ======= =======
- --------------------------------------------------------------------------------
NW Natural's Employee Stock Purchase Plan allows employees to purchase common
stock at 92 percent of the average bid and ask market price on the subscription
date which is set annually. Each eligible employee may purchase up to 900 shares
through payroll deduction over a six to 12 month period.
5. LONG-TERM DEBT:
- ------------------------
The issuance of first mortgage bonds, including secured medium-term
notes, under the Mortgage and Deed of Trust (Mortgage) is limited by
property, earnings and other provisions of the Mortgage. The Mortgage
constitutes a first mortgage lien on substantially all of NW Natural's
utility property.
The 7-1/4 % Series of Convertible Debentures may be converted at any
time into 50-1/4 shares of common stock for each $1,000 face value
($19.90 per share).
The maturities for the five years ending Dec. 31, 2004, on the
long-term debt outstanding at Dec. 31, 1999 amount to: $10.0 million in
2000, $20.0 million in 2001, $40.0 million in 2002, $20.0 million in
2003 and no maturity in 2004.
6. NOTES PAYABLE AND 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. Financial Corporation has available
through Sept. 30, 2000, committed lines of credit with two commercial
banks totaling $20 million. Financial Corporation's lines are supported
by the guaranty of NW Natural.
Under the terms of these lines of credit, 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 these lines of credit as of Dec.
31, 1999 or 1998.
During 1998, NW Natural entered into an additional $18 million line of
credit with a commercial bank for the purpose of constructing a new
headquarters building for the Port of Portland on property owned by NW
Natural. At Dec. 31, 1999, there was no outstanding balance. At Dec.
31, 1998, the outstanding balance was $6 million.
47
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
NW Natural and Financial Corporation issue domestic commercial paper,
which is supported by the committed bank lines, under agency agreements
with a commercial bank. Financial Corporation's commercial paper is
supported by the guaranty of NW Natural. The amounts and average
interest rates of commercial paper outstanding were as follows at Dec.
31:
1999 1998
------------------------ -----------------------
Thousands Amount Rate Amount Rate
--------------------------------- ----------- ----------- -------------
NW Natural $94,149 5.8% $75,400 5.2%
Financial Corporation - - - -
------- -------
Total $94,149 $75,400
======= =======
7. PENSION AND OTHER POSTRETIREMENT BENEFITS:
- ---------------------------------------------------
NW Natural has two qualified non-contributory defined benefit plans
covering all regular employees with more than one year of service, a
non-qualified supplemental pension plan for eligible executive officers
and other postretirement benefit plans for its employees. The following
tables provide a reconciliation of the changes in the plans' benefit
obligations and fair value of assets over the three-year period ended
Dec. 31, 1999 and a statement of the funded status as of Dec. 31, 1999,
1998 and 1997:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------------------------------- -----------------------------------------
Thousands 1999 1998 1997 1999 1998 1997
--------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at Jan. 1 $142,619 $127,879 $112,281 $15,717 $12,332 $10,863
Service cost 4,259 3,430 2,858 162 288 238
Interest cost 9,379 9,282 8,424 715 891 844
Expected benefits paid (6,911) (6,762) (6,041) (766) (578) (570)
Plan amendments 4,057 (2,948) 3,175 (1,583) - -
Net actuarial (gain) loss (17,205) 11,738 7,182 (2,343) 2,784 957
----------- --------- --------- --------- -------- --------
Benefit obligation at Dec. 31 136,198 142,619 127,879 11,902 15,717 12,332
----------- --------- --------- --------- -------- --------
Change in plan assets:
Fair value of plan assets at Jan. 1 175,554 158,118 134,375 - - -
Actual return on plan assets 24,104 23,532 29,298 - - -
Employer contributions 680 666 529 766 578 570
Benefits paid (6,911) (6,762) (6,084) (766) (578) (570)
----------- --------- --------- --------- -------- --------
Fair value of plan assets at Dec. 31 193,427 175,554 158,118 - - -
----------- --------- --------- --------- -------- --------
Funded status:
Funded status at Dec. 31 57,229 32,935 30,239 (11,902) (15,717) (12,332)
Unrecognized transition obligation 1,035 1,072 1,027 5,667 7,896 8,460
Unrecognized prior service cost 9,184 5,601 10,054 210 - -
Unrecognized net actuarial (gain)
loss (67,656) (40,936) (44,060) (755) 1,553 (1,230)
----------- --------- --------- --------- -------- --------
Net amount recognized $ (208) $ (1,328) $ (2,740) $(6,780) $ (6,268) $(5,102)
=========== ========= ========= ========= ======== ========
Amounts recognized in the
consolidated balance sheets:
Prepaid benefit cost $ 7,712 $ 5,900 $ 3,271 $ - $ - $ -
Accrued benefit liability (8,578) (8,902) (9,987) (6,780) (6,268) (5,102)
Intangible asset 658 1,674 3,976 - - -
----------- --------- --------- --------- -------- --------
Net amount recognized $ (208) $(1,328) $(2,740) $(6,780) $(6,268) $(5,102)
=========== ========= ========= ========= ======== ========
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The Company's non-qualified supplemental pension plan was the only
pension plan with an accumulated benefit obligation in excess of plan
assets. The plan's accumulated benefit obligation was $9.8 million,
$11.1 million and $13.5 million at Dec. 31, 1999, 1998 and 1997,
respectively. There were no plan assets in the non-qualified plan due
to the nature of the plan, but the Company funds its obligation with
trust-owned life insurance. The amount of the life insurance coverage
is designed to provide sufficient returns to recover all costs of the
plan. The Company's plans for postretirement benefits other than
pensions also have no plan assets. The aggregate benefit obligation for
those plans is $11.9 million, $15.7 million and $12.3 million at Dec.
31, 1999, 1998 and 1997, respectively.
The following tables provide the components of net periodic cost for
the plans for the years ended Dec. 31, 1999, 1998 and 1997 and the
assumptions used in the measurement of these costs and the Company's
benefit obligations:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
---------------- --------------
Thousands 1999 1998 1997 1999 1998 1997
--------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 4,259 $ 3,430 $ 2,858 $ 162 $ 288 $ 238
Interest cost 9,379 9,282 8,424 715 890 845
Expected return on plan assets (15,570) (13,926) (10,915) - - -
Amortization of transition (asset)
obligation 37 (45) (45) 436 564 564
Amortization of prior service cost 827 1,481 865 - - -
Recognized actuarial (gain) loss (781) (969) (676) (35) 2 (87)
Special termination benefits 1,410 - - - - -
---------- --------- -------- --------- -------- --------
Net periodic benefit cost $ (439) $ (747) $ 511 $1,278 $1,744 $1,560
========== ========= ======== ========= ======== =======
Weighted average assumptions as
of Dec. 31:
Discount rate 7.75% 6.75% 7.25% 7.75% 6.75% 7.25%
Expected return on plan assets 10.00% 10.00% 9.00% n/a n/a n/a
Rate of compensation increase 4.25%-5.0% 4.50% 4.50% n/a n/a n/a
</TABLE>
The assumed health care cost trend used in measuring the accumulated
postretirement benefit obligation was 9.0 percent during 1999. These
rates were assumed to decrease gradually each year to a rate of 4.5
percent for 2005 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A 1 percent change in
assumed health care cost trend rates would have the following effects:
1% Increase 1% Decrease
----------- -----------
Effect on the total service and interest cost
components of net periodic postretirement health
care benefit cost $ 52,923 $ (49,392)
Effect on the health care component of the
accumulated postretirement benefit obligation $446,471 $(407,863)
NW Natural also has a qualified defined benefit contribution plan under
Internal Revenue Code Section 401(k) and a non-qualified deferred
compensation plan for eligible employees. These plans are designed to
enhance the existing retirement program of employees and to assist them
in strengthening their financial security by providing an incentive to
save and invest regularly. NW Natural's contributions to these plans
were $1.0 million in 1999 and $1.1 million in both 1998 and 1997.
49
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. INCOME TAXES:
- ----------------------
A reconciliation between income taxes calculated at the statutory
federal tax rate and the tax provision reflected in the financial
statements is as follows:
<TABLE>
<CAPTION>
Thousands 1999 1998 1997
- ------------------------------------------------------------- ------------- --------------- -------------
<S> <C> <C> <C>
Computed income taxes based on statutory federal income
tax rate of 35%
$24,336 $14,544 $22,369
Increase (reduction) in taxes resulting from:
Differences between book and tax depreciation 222 310 221
Current state income tax, net of federal tax benefit 2,450 1,976 1,944
Federal income tax credits (357) (574) (360)
Restoration of investment and energy tax credits (855) (700) (844)
Removal costs (485) (424) (544)
Reversal of amounts provided in prior years (655) (361) (1,455)
Gains on Company-owned life insurance (703) (504) (470)
Other - net 638 337 173
-------- --------- ---------
Total provision for income taxes $24,591 $14,604 $21,034
======== ========= ========
</TABLE>
50
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
The provision for income taxes consists of the following:
Thousands 1999 1998 1997
- ------------------------------------------------ ---------------- --------------- ----------------
<S> <C> <C> <C>
Income taxes currently payable:
Federal $20,518 $13,004 $5,855
State 3,288 1,790 (1,644)
---------- --------- ---------
Total 23,806 14,794 4,211
---------- --------- ---------
Deferred taxes - net:
Federal 1,283 (876) 13,032
State 357 1,386 4,635
---------- --------- ---------
Total 1,640 510 17,667
---------- --------- ---------
Investment and energy tax credits restored:
From utility operations (800) (645) (800)
From subsidiary operations (55) (55) (44)
---------- --------- ---------
Total (855) (700) (844)
---------- --------- ---------
Total provision for income taxes $24,591 $14,604 $21,034
---------- --------- ---------
Percentage of pretax income 35% 35% 33%
========== ========= =========
- --------------------------------------------------------------------------------------------------
Deferred tax assets and liabilities are comprised of the following:
Thousands 1999 1998
- ------------------------------------------------ --------------- --------------- -----------------
Deferred tax liabilities:
Property, plant and equipment $114,664 $112,495
Regulatory asset 15,894 21,388
--------- ---------
Total 130,558 133,883
--------- ---------
Deferred tax assets:
Regulatory liability (10,784) (14,684)
Other deferred assets 5,192 8,257
--------- ---------
Total (5,592) (6,427)
--------- ---------
Net accumulated deferred income tax liability $136,150 $140,310
========= =========
- --------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
9. PROPERTY AND INVESTMENTS:
- ----------------------------------
The following table sets forth the major classifications of NW
Natural's utility plant and accumulated provision for depreciation at
Dec. 31:
<TABLE>
<CAPTION>
1999 1998
--------------------------------- -----------------------------------
Average Average
Depreciation Depreciation
Thousands Amount Rate Amount Rate
- ------------------------------------------------------- ------------------ ----- ---------------- ------------------
<S> <C> <C> <C> <C>
Transmission and distribution $1,086,891 3.3% $ 995,214 3.5%
Storage 98,750 2.6% 98,172 2.1%
General 80,509 4.7% 78,729 7.4%
Intangible and other 45,173 21.1% 49,628 8.6%
------------ -----------
Utility plant in service 1,311,323 4.0% 1,221,743 3.9%
Gas stored long-term 11,301 11,301
Work in progress 8,791 6,646
------------ -----------
Total utility plant 1,331,415 1,239,690
Less accumulated depreciation 436,386 404,117
------------ -----------
Utility plant-net $ 895,029 $ 835,573
============ ===========
</TABLE>
<TABLE>
<CAPTION>
The following table summarizes the Company's investments in
non-utility plant at Dec. 31:
Thousands 1999 1998
- ----------------------------------------- ------------------------------ ------------------------------
<S> <C> <C>
Canadian oil and gas properties and other $ - $74,503
Port of Portland building - 6,016
Dock, land and oil station 3,565 3,565
Other 4,983 4,966
----- -----
Total non-utility plant 8,548 89,050
Less accumulated depreciation 7,654 29,927
----- ------
Non-utility plant - net $ 894 $59,123
====== =======
- -------------------------------------------------------------------------------------------------------
</TABLE>
52
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Investments in Canadian oil and gas properties and the Port of Portland
building are included in current assets at Dec. 31, 1999. The Canadian
oil and gas properties are included in investment in a discontinued
segment and the Port of Portland building is classified as property
held for sale.
The following table summarizes the Company's investments in affiliated
entities accounted for under the equity and cost methods, and its
investment in a leveraged lease at Dec. 31:
Thousands 1999 1998
- ---------------------------------------- ------------- -------------
Electric generation $ 5,165 $ 5,509
Aircraft leveraged lease 7,925 8,439
Gas pipeline and other 2,919 1,950
Long-term notes receivable 548 816
-------- --------
Total investments and other $16,557 $16,714
======== ========
- --------------------------------------------------------------------
Financial Corporation has ownership interests ranging from 4.0 to 5.3
percent in solar electric generation plants located near Barstow,
California. Power generated by these plants is sold to Southern
California Edison Company under long-term contracts.
Financial Corporation also has ownership interests ranging from 8.5 to
41 percent in U. S. Windpower Partners electric generation projects
located near Livermore and Palm Springs, California. The wind-generated
power is sold to Pacific Gas and Electric Company and Southern
California Edison Company under long-term contracts.
In 1987, the Company invested in a Boeing 737-300 aircraft which was
leased to Continental Airlines for 20 years under a leveraged lease
agreement.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
- ---------------------------------------------
The estimated fair values of NW Natural's financial instruments have
been determined using available market information and appropriate
valuation methodologies. The following is a list of financial
instruments whose carrying values are sensitive to market conditions:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
-------------------------------- ----------------------------------
Carrying Estimated Carrying Estimated
Thousands Amount Fair Value Amount Fair Value
- ------------------------------------- ------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C>
Redeemable preference stock $ 25,000 $ 23,500 $ 25,000 $ 25,250
Redeemable preferred stock $ 10,564 $ 9,618 $ 11,499 $ 11,520
Long-term debt including amount due
within one year $406,379 $415,412 $376,738 $436,224
- ------------------------------------- ------------- ------------------ ------------------ ---------------
</TABLE>
Fair value of the redeemable preference stock and the redeemable
preferred stock was estimated using quoted market prices. Interest
rates that are currently available to the Company for issuance of debt
with similar terms and remaining maturities were used to estimate fair
value for debt issues.
The carrying amount of long-term notes receivable was stated at
estimated fair value at Dec. 31, 1999 and 1998.
53
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
11. USE OF FINANCIAL DERIVATIVES:
- --------------------------------------
In connection with its Canadian gas purchase commitments, NW Natural
uses foreign currency forward contracts to hedge against fluctuations
in currency values. The forward contracts have terms ranging up to 12
months. Such contracts are purchased in an amount up to 100 percent but
not less than 80 percent of estimated daily requirements for commodity
gas purchased in Canadian currency from gas suppliers in Canada. The
notional amount of these contracts at Dec. 31, 1999 and 1998, totaled
$8.6 million and $7.9 million, respectively, and, if settled on those
dates, NW Natural would have realized a negligible gain in 1998 and a
gain of $0.2 million in 1999.
As part of an overall strategy to maintain an acceptable level of
exposure to the risk of gas price fluctuation, NW Natural has developed
a targeted mix of fixed-rate and cap-protected natural gas commodity
contracts versus variable rate contracts. To efficiently manage this
mix, NW Natural utilizes natural gas commodity swap and cap agreements
to effectively convert the gas purchase commitments into an acceptable
fixed-rate and capped rate mix. NW Natural uses natural gas commodity
swap agreements to convert certain long-term gas purchase contracts
from floating prices to fixed prices. Under the commodity swap
agreements, NW Natural receives or makes payments based on the
differential between a specified price and the actual price of natural
gas as measured by price indices relating to the market area where it
purchases the gas. The swap agreements have terms ranging up to 12
months. At Dec. 31, 1999 and 1998, the Company had swap agreements with
broker-dealers to cover notional quantities of 100,000 and 136,741
MMBtu per day of gas, respectively. Under the swap agreements in effect
at Dec. 31, 1999 and 1998, the Company paid fixed prices averaging
$2.396 and $1.898 per MMBtu, respectively. In return, it received a
price that varied from month to month with market conditions. The
notional amounts of the swap agreements at Dec. 31, 1999 and 1998 were
$57.7 million and $48.7 million, respectively, and, if settled on those
dates, NW Natural would have realized a loss of $6.9 million and a gain
of $0.6 million, respectively. (See Note 1 for a summary of accounting
for gains and losses.)
Canor, a discontinued segment, also manages its commodity price risk
through the use of gas and oil commodity swaps and collars. At Dec. 31,
1999 and 1998, the notional amount of these contracts was $4.3 million
and $1.4 million respectively, and, if settled on those dates, Canor
would have realized a loss of $0.8 million in 1999 and a negligible
gain in 1998.
54
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. COMMITMENTS AND CONTINGENCIES:
- ---------------------------------------
Lease Commitments
-----------------
The Company leases land, buildings and equipment under agreements that
expire in various years through 2004. Rental expense under operating
leases was $5.2 million, $6.0 million and $6.4 million for the years
ended Dec. 31, 1999, 1998 and 1997, respectively. The table below
reflects the future minimum lease payments due under non-cancelable
leases at Dec. 31, 1999. Such payments total $23.0 million for
operating leases. The net present value of such payments on capital
leases was $1.1 million after deducting imputed interest of $0.1
million. These commitments principally relate to the lease of the
Company's office headquarters, underground gas storage facilities,
vehicles and computer systems.
Later
Millions 2000 2001 2002 2003 2004 years
---------------------- ------ -------- -------- ------- -------- ------
Operating leases $4.5 $4.3 $4.0 $2.6 $2.0 $5.6
Capital leases $0.4 $0.4 $0.4 - - -
Minimum lease
payments $4.9 $4.7 $4.4 $2.6 $2.0 $5.6
Purchase Commitments
--------------------
NW Natural has signed agreements providing for the availability of firm
pipeline capacity under which it must make fixed monthly payments for
contracted capacity. The pricing component of the monthly payment is
established, subject to change, by U.S. or Canadian regulatory bodies.
In addition, NW Natural has entered into long-term agreements to
release firm pipeline capacity. The aggregate amounts of these
agreements were as follows at Dec. 31, 1999:
Capacity Capacity
Purchase Release
Thousands Agreements Agreements
-------------------------------------------- ----------- ---------------
2000 $ 79,982 $ 3,870
2001 79,299 3,870
2002 76,359 3,870
2003 71,967 3,870
2004 49,664 3,870
2005 through 2028 358,488 22,575
------- ------
Total 715,759 41,925
Less: Amount representing interest 210,748 11,566
-------- -------
Total at present value $505,011 $30,359
======== =======
------------------------------------------------------------------------
NW Natural's total payments of fixed charges under capacity purchase
agreements in 1999, 1998 and 1997 were $78.2 million, $76.2 million and
$76.7 million, respectively. Included in the amounts for 1999, 1998 and
1997 were reductions for capacity release sales totaling $3.8 million,
$3.9 million and $4.2 million, respectively. In addition, NW Natural is
required to pay per-unit charges based on the actual quantities shipped
under the agreements. In certain of NW Natural's take-or-pay purchase
commitments, annual deficiencies may be offset by prepayments subject
55
<PAGE>
Northwest Natural Gas Company
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
to recovery over a longer term if future purchases exceed the minimum
annual requirements.
Environmental Matters
---------------------
NW Natural owns property in Linnton, Oregon, that is the site of a
former gas manufacturing plant that was closed in 1956. In 1993,
pursuant to Oregon Department of Environmental Quality (ODEQ)
procedures, NW Natural submitted a notice of intent to participate in
the ODEQ's Voluntary Cleanup Program and, in 1994, the site was listed
on ODEQ's Confirmed Release List and Inventory. During 1995, initial
tests revealed environmental contamination, but the extent or the
estimated cost of remediation cannot yet be determined.
During 1998, the ODEQ and the U.S. Environmental Protection Agency
(EPA) completed a study of sediments in a 5.5 mile segment of the
Willamette River that includes the area adjacent to the site.
Remediation of the site may be affected by the sediments management
plan now being developed in response to the ODEQ/EPA sediments study.
Since 1993, NW Natural has recorded an expense of $2.6 million for the
estimated costs of consultants' fees, ODEQ oversight cost
reimbursements, and the voluntary investigation, plus an estimate for
costs of the continuing investigation. NW Natural expects that its
costs of investigation and any remediation for which it may be
responsible should be recoverable, in large part, from insurance. In
the event these costs are not recovered from insurance, NW Natural will
seek recovery through future rates.
Litigation
----------
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).
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 equivalent to 15 cents per
share, as a reserve against payment of the judgment, related costs and
post-judgment interest. 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 the Supreme Court's
decision, NW Natural reduced the litigation reserve by a total of $3.9
million in the second quarter of 1999, reducing operating expense by
$3.0 million and interest expense by $0.9 million. The Court of Appeals
subsequently issued an opinion in favor of NW Natural on the remaining
issues in the case. Based on that decision, NW Natural reversed the
remaining reserve balance of $2.7 million at Dec. 31, 1999, reducing
operating expense for 1999 by $1.9 million and interest expense by $0.8
million.
The Company is party to certain other legal actions in which claimants
seek material amounts. Although it is impossible to predict the outcome
with certainty, based upon the opinions of legal counsel, management
does not expect disposition of these matters to have a materially
adverse effect on the Company's financial position, results of
operations or cash flows.
56
<PAGE>
NORTHWEST NATURAL GAS COMPANY
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Dollars Quarter Ended
------------------------------------------------------------------------------
(Thousands Except Per Share Amounts) Mar. 31 June 30 Sept. 30 Dec. 31 Total
- -------------------------------------------------- --------------- -------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
1999
Operating Revenues 167,873 94,252 55,737 137,972 455,834
Net operating revenues 85,905 55,241 33,605 68,886 243,637
Net income from continuing
operations 24,184 10,529 (3,608) 13,836 44,941
Net income from discontinued
segment (141) 255 48 193 355
Net income 24,043 10,784 (3,560) 14,029 45,296
Basic earnings (loss) per share 0.94 0.41 (0.17) 0.53 1.71*
Diluted earnings (loss) per share 0.93 0.40 (0.17) 0.53 1.70*
1998
Operating revenues 133,803 80,327 50,186 140,074 404,390
Net operating revenues 76,413 46,676 30,836 77,041 230,966
Net income from continuing
operations 19,693 4,248 (5,164) 8,174 26,951
Net income from discontinued
segment 3,493 (155) (756) (2,232) 350
Net income 23,186 4,093 (5,920) 5,942 27,301
Basic earnings (loss) per share .98 0.14 (0.26) 0.21** 1.02*
Diluted earnings (loss) per share .97 0.14 (0.26) 0.21** 1.02*
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Quarterly earnings per share are based upon the average number of common
shares outstanding during each quarter. Because the average number of shares
outstanding has increased in each quarter shown, the sum of quarterly earnings
does not equal earnings per share for the year. Variations in earnings between
quarterly periods are due primarily to the seasonal nature of the Company's
business.
** Results for the fourth quarter of 1998 include a charge equivalent to 43
cents per share resulting from asset write-down charges by subsidiaries.
57
<PAGE>
NORTHWEST NATURAL GAS COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ---------------------------------------------------------------------------------------------------------------
Additions
Balance at -------------------------- Deductions Balance
beginning Charged to Charged to ---------- at end
of costs other Net of
period and expenses accounts write-offs period
------ ------------ -------- --------- ------
<S> <C> <C> <C> <C> <C>
Thousands
- ---------
Years ended December 31:
1999
Reserves deducted in balance
sheet from assets to which they
apply:
Reserve for doubtful accounts: $1,547 $2,380 $ - $2,258 $1,669
1998
Reserves deducted in balance
sheet from assets to which they
apply:
Reserve for doubtful accounts: $1,253 $3,005 $ - $2,711 $1,547
1997
Reserves deducted in balance
sheet from assets to which they
apply:
Reserve for doubtful accounts: $1,057 $1,624 $ - $1,428 $1,253
</TABLE>
58
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
(Item 10. Directors and Executive Officers of the Registrant;
Item 11. Executive Compensation; Item 12. Security Ownership
of Certain Beneficial Owners and Management; and Item 13.
Certain Relationships and Related Transactions.)
Information called for by Part III (Items 10.,
11., 12. and 13.) is incorporated herein by reference to portions of the
Company's definitive proxy statement. See the Additional Item included in Part
I for information concerning executive officers of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
1. A list of all Financial Statements and Supplemental Schedules is
incorporated by reference to Item 8.
2. List of Exhibits filed:
*(3a.) Restated Articles of Incorporation, as filed and effective
June 24, 1988 and amended December 8, 1992, December 1, 1993
and May 27, 1994 (incorporated herein by reference to
Exhibit (3a.) to Form 10-K for 1994, File No. 0-994).
*(3b.) Bylaws as amended February 25, 1999 (incorporated herein by
reference to Exhibit 3 to Form 10-Q for the quarter ended
March 31, 1999, File No. 0-994).
*(4a.) Copy of Mortgage and Deed of Trust, dated as of July 1,
1946, to Bankers Trust and R. G. Page (to whom Stanley Burg
is now successor), Trustees (incorporated herein by
reference to Exhibit 7(j) in File No. 2-6494); and copies of
Supplemental Indentures Nos. 1 through 14 to the Mortgage
and Deed of Trust, dated respectively, as of June 1, 1949,
March 1, 1954, April 1, 1956, February 1, 1959, July 1,
1961, January 1, 1964, March 1, 1966, December 1, 1969,
April 1, 1971, January 1, 1975, December 1, 1975, July 1,
1981, June 1, 1985 and November 1, 1985 (incorporated herein
by reference to Exhibit 4(d) in File No. 33-1929);
Supplemental Indenture No. 15 to the Mortgage and Deed of
Trust, dated as of July 1, 1986 (filed as Exhibit (4)(c) in
File No. 33-24168); Supplemental Indentures Nos. 16, 17 and
59
<PAGE>
18 to the Mortgage and Deed of Trust, dated, respectively,
as of November 1, 1988, October 1, 1989 and July 1, 1990
(incorporated herein by reference to Exhibit (4)(c) in File
No. 33-40482); Supplemental Indenture No. 19 to the Mortgage
and Deed of Trust, dated as of June 1, 1991 (incorporated
herein by reference to Exhibit 4(c) in File No. 33-64014);
and Supplemental Indenture No. 20 to the Mortgage and Deed
of Trust, dated as of June 1, 1993 (incorporated herein by
reference to Exhibit 4(c) in File No. 33-53795).
*(4d.) Copy of Indenture, dated as of June 1, 1991, between the
Company and Bankers Trust Company, Trustee, relating to the
Company's Unsecured Medium-Term Notes (incorporated herein
by reference to Exhibit 4(e) in File No. 33-64014).
*(4e.) Officers' Certificate dated June 12, 1991 creating Series A
of the Company's Unsecured Medium-Term Notes (incorporated
herein by reference to Exhibit (4e.) to Form 10-K for 1993,
File No. 0-994).
*(4f.) Officers' Certificate dated June 18, 1993 creating Series B
of the Company's Unsecured Medium-Term Notes (incorporated
herein by reference to Exhibit (4f.) to Form 10-K for 1993,
File No. 0-994).
*(4f.(1)) Officers' Certificate dated January 15, 1999 relating to
Series B of the Company's Unsecured Medium-Term Notes and
supplementing the Officers' Certificate dated June 18, 1993
(incorporated herein by reference to Exhibit (4f.(1)) to
Form 10-K for 1998, File No. 0-994).
*(4g.) Rights Agreement, dated as of February 27, 1996, between the
Company and Boatmen's Trust Company (ChaseMellon Shareholder
Services, successor), which includes as Exhibit A thereto
the form of a Right Certificate and as Exhibit B thereto the
Summary of Rights to Purchase Common Shares (incorporated
herein by reference to Exhibit 1 to Form 8-A, dated February
27, 1996, File No. 0-994).
*(10j.) Transportation Agreement, dated June 29, 1990, between the
Company and Northwest Pipeline Corporation (incorporated
herein by reference to Exhibit (10j.) to Form 10-K for 1993,
File No. 0-994).
*(10j.(1)) Replacement Firm Transportation Agreement, dated July 31,
1991, between the Company and Northwest Pipeline Corporation
(incorporated herein by reference to Exhibit (10j.(2)) to
Form 10-K for 1992, File No. 0-994).
*(10j.(2)) Firm Transportation Service Agreement, dated November 10,
1993, between the Company and Pacific Gas Transmission
60
<PAGE>
Company (incorporated herein by reference to Exhibit
(10j.(2)) to Form 10-K for 1993, File No. 0-994).
*(10j.(3)) Service Agreement, dated June 17, 1993, between Northwest
Pipeline Corporation and the Company (incorporated herein by
reference to Exhibit (10j.(3)) to Form 10-K for 1994, File
No. 0-994).
*(10j.(4)) Firm Transportation Service Agreement, dated October 22,
1993, between Pacific Gas Transmission Company and the
Company (incorporated herein by reference to Exhibit
(10j.(4)) to Form 10-K for 1994, File No. 0-994).
*(10j.(5)) Firm Transportation Service Agreement, dated June 22, 1994,
between Pacific Gas Transmission Company and the Company
(incorporated herein by reference to Exhibit (10j.(5)) to
Form 10-K for 1995, File No. 0-994).
*(10j.(6)) Firm Transportation and Supply Agreement, dated May 9,
1997, between PanEnergy Trading and Market Services, LLC,
Inland Pacific Energy Services Corp., and the Company
(incorporated herein by reference to Exhibit (10j.(6)) to
Form 10-K for 1997, File No. 0-994).
(11) Statement re computation of per share earnings.
(12) Statement re computation of ratios.
(23) Consent of PricewaterhouseCoopers LLP.
(27) Financial Data Schedule.
Executive Compensation Plans and Arrangements:
---------------------------------------------
*(10b.) Executive Supplemental Retirement Income Plan, 1995
Restatement (incorporated herein by reference to Exhibit
(10b.) to Form 10-K for 1994, File No. 0-994).
*(10b.-1) 1995 Amendment to Executive Supplemental Retirement Income
Plan (1995 Restatement) (incorporated herein by reference to
Exhibit (10b.-1) to Form 10-K for 1995, File No. 0-994).
*(10b.-2) Amendment 1998-1 to the Executive Supplemental Retirement
Income Plan (1995 Restatement) (incorporated herein by
reference to Exhibit 10(a) to Form 10-Q for the quarter
ended September 30, 1998, File No. 0-994).
*(10b.-3) ESRIP Change in Control Amendment to the Executive
Supplemental Retirement Income Plan (1995 Restatement)
(incorporated herein by reference to Exhibit 10(b) to Form
10-Q for the quarter ended September 30, 1998, File No.
0-994).
61
<PAGE>
*(10c). 1985 Stock Option Plan, as amended effective May 25, 1995
(incorporated herein by reference to Exhibit (10c.) to Form
10-K for 1995, File No. 0-994).
*(10e.) Executive Deferred Compensation Plan, 1990 Restatement,
effective January 1, 1990 (incorporated herein by reference
to Exhibit (10e.) to Form 10-K for 1990, File No. 0-994).
*(10e.-1) Amendment No. 1 to Executive Deferred Compensation Plan
(incorporated herein by reference to Exhibit (10e.-1) to
Form 10-K for 1991, File No. 0-994).
*(10e.-2) Amendment No. 2 to Executive Deferred Compensation Plan
(incorporated herein by reference to Exhibit (10e.-2) to
Form 10-K for 1994, File No. 0-994).
*(10e.-3) Amendment No. 3 to Executive Deferred Compensation Plan
(incorporated herein by reference to Exhibit (10e.-3) to
Form 10-K for 1997, File No. 0-994).
*(10e.-4) Amendment No. 4 to Executive Deferred Compensation Plan,
effective September 24, 1998 (incorporated herein by
reference to Exhibit 10(c) to Form 10-Q for the quarter
ended September 30, 1998, File No. 0-994).
*(10f.) Directors Deferred Compensation Plan, effective June 1,
1981, restated as of December 1, 1997 (incorporated herein
by reference to Exhibit (10f.) to Form 10-K for 1997, File
No. 0-994).
*(10f.-1) Amendment No. 1 to Directors Deferred Compensation Plan
(December 1, 1997 Restatement) (incorporated herein by
reference to Exhibit 10(d) to Form 10-Q for the quarter
ended September 30, 1998, File No. 0-994).
(10f.-2) Amendment No. 2 to Directors Deferred Compensation Plan
(December 1, 1997 Restatement).
*(10g.) Form of Indemnity Agreement as entered into between the
Company and each director and executive officer
(incorporated herein by reference to Exhibit (10g.) to Form
10-K for 1988, File No. 0-994).
*(10i.) Non-Employee Directors Stock Compensation Plan, as amended
effective January 1, 1998 (incorporated herein by reference
to Exhibit (10i.) to Form 10-K for 1997, File No. 0-994).
(10k.) Executive Annual Incentive Plan, effective March 1, 1990, as
amended effective January 1, 1992, January 1, 1996 and
January 1, 2000.
*(10n.) Employment agreement dated November 2, 1995, as amended
February 27, 1996, between the Company and an executive
62
<PAGE>
officer (incorporated herein by reference to Exhibit (10n.)
to Form 10-K for 1995, File No. 0-994).
*(10n.-1) Amendment dated December 18, 1997 to employment agreement
dated November 2, 1995, as previously amended February 27,
1996, between the Company and an executive officer
(incorporated herein by reference to Exhibit (10n.-1) to
Form 10-K for 1997, File No. 0-994).
*(10n.-2) Amendment dated September 24, 1998 to employment agreement
dated November 2, 1995, as previously amended, between the
Company and an executive officer (incorporated herein by
reference to Exhibit 10(e) to Form 10-Q for the quarter
ended September 30, 1998, File No. 0-994).
*(10o.) Form of amended and restated executive change in control
severance agreement as entered into between the Company and
each executive officer (incorporated herein by reference to
Exhibit 10(f) to Form 10-Q for the quarter ended September
30, 1998, File No. 0-994).
*(10p.) Employment Agreement dated July 2, 1997, between the Company
and an executive officer (incorporated herein by reference
to Exhibit 10(a) for Form 10-Q for the quarter ended
September 30, 1997, File No. 0-994).
*(10p.-1) Amendment dated December 18, 1997 to employment agreement
dated July 2, 1997, between the Company and an executive
officer (incorporated herein by reference to Exhibit
(10p.-1) to Form 10-K for 1997, File No. 0-994).
*(10p.-2) Amendment dated September 24, 1998 to employment agreement
dated July 2, 1997, as previously amended, between the
Company and an executive officer (incorporated by reference
to Exhibit 10(g) to Form 10-Q for the quarter ended
September 30, 1998, File No. 0-994).
*(10q.) Employment agreement dated October 19, 1998, between the
Company and an executive officer (incorporated herein by
reference to Exhibit (10q.) to Form 10-K for 1998, File No.
0-994).
*(10r.) Employment agreement dated May 11, 1999 between the Company
and an executive officer (incorporated herein by reference
to Exhibit 10 to Form 10-Q for the quarter ended June 30,
1999, File No. 0-994).
The Company agrees to furnish the Commission, upon request, a copy of
certain instruments defining rights of holders of long-term debt of
the Company or its consolidated subsidiaries which authorize
securities thereunder in amounts which do not exceed 10% of the total
assets of the Company.
63
<PAGE>
(b) Report on Form 8-K.
On November 15, 1999, the Company filed a Current Report on Form 8-K
relating to the issuance of an order of the Oregon Public Utility
Commission in the Company's general rate case.
- --------------------------------------------
*Incorporated herein by reference as indicated
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
Date: March 27, 2000 By: /s/ Richard G. Reiten
--------------------------------
Richard G. Reiten, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
/s/ Richard G. Reiten Principal Executive Officer and Director March 27, 2000
- ----------------------------------
Richard G. Reiten, President
and Chief Executive Officer
/s/ Bruce R. DeBolt Principal Financial Officer March 27, 2000
- ----------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
/s/ Stephen P. Feltz Principal Accounting Officer March 27, 2000
- ----------------------------------
Stephen P. Feltz
Treasurer and Controller
/s/ Mary Arnstad Director )
- ---------------------------------- )
Mary Arnstad )
)
/s/ Thomas E. Dewey, Jr. Director )
- ---------------------------------- )
Thomas E. Dewey, Jr. )
)
/s/ Tod R. Hamachek Director )
- ---------------------------------- )
Tod R. Hamachek )
)
/s/ Richard B. Keller Director )
- ---------------------------------- )
Richard B. Keller )
)
/s/ Wayne D. Kuni Director )
- ---------------------------------- )
Wayne D. Kuni )
) March 27, 2000
/s/ Randall C. Pape Director )
- ---------------------------------- )
Randall C. Pape )
)
/s/ Robert L. Ridgley Director )
- ---------------------------------- )
Robert L. Ridgley )
)
/s/ Dwight A. Sangrey Director )
- ---------------------------------- )
Dwight A. Sangrey )
)
/s/ Melody C. Teppola Director )
- ---------------------------------- )
Melody C. Teppola )
)
/s/ Russell F. Tromley Director )
- ---------------------------------- )
Russell F. Tromley )
)
/s/ Benjamin R. Whiteley Director )
- ---------------------------------- )
Benjamin R. Whiteley )
</TABLE>
65
<PAGE>
NORTHWEST NATURAL GAS COMPANY
-----------------------------
EXHIBIT INDEX
-------------
To
Annual Report on Form 10-K
For Fiscal Year Ended
December 31, 1999
Exhibit
Document Number
-------- --------
* Restated Articles of Incorporation, as filed (3a.)
June 24, 1988 and amended December 8, 1992,
December 1, 1993 and May 27, 1994
* Bylaws as amended February 25, 1999 (3b.)
* Mortgage and Deed of Trust, dated as of July 1, (4a.)
1946, as supplemented by Supplemental Indenture
Nos. 1 through 20
* Indenture, dated as of June 1, 1991, between (4d.)
the Company and Bankers Trust Company
* Officers' Certificate, dated June 12, 1991, (4e.)
creating Unsecured Medium-Term Notes Series A
* Officers' Certificate, dated June 18, 1993, (4f.)
creating Unsecured Medium-Term Notes Series B
* Officers' Certificate, dated January 15, 1999, (4f.(1))
relating to Series B of the Company's Unsecured
Medium-Term Notes and supplementing the Officers'
Certificate dated June 18, 1993
* Rights Agreement, dated as of February 27, 1996, (4g.)
between the Company and Boatmen's Trust Company
(ChaseMellon Shareholder Services, successor)
* Transportation Agreement, dated June 29, 1990, (10j.)
between the Company and Northwest Pipeline
Corporation
* Replacement Firm Transportation Agreement, (10j.(1))
dated July 31, 1991, between the Company and
Northwest Pipeline Corporation
* Firm Transportation Service Agreement, dated (10j.(2))
November 10, 1993, between the Company and
Pacific Gas Transmission Company
<PAGE>
* Service Agreement, dated June 17, 1993, between (10j.(3))
Northwest Pipeline Corporation and the Company
* Firm Transportation Service Agreement, dated (10j.(4))
October 22, 1993, between Pacific Gas
Transmission Company and the Company
* Firm Transportation Service Agreement, dated (10j.(5))
June 22, 1994, between Pacific Gas Transmission
Company and the Company
* Firm Transportation and Supply Agreement, (10j.(6))
dated May 9, 1997, between PanEnergy Trading
and Market Services, Inland Pacific Energy Services
Corp., and the Company
Statement re computation of per share earnings (11)
Statement re computation of ratios (12)
Consent of PricewaterhouseCoopers LLP (23)
Financial Data Schedule (27)
Executive Compensation Plans and Arrangements
---------------------------------------------
* Executive Supplemental Retirement Income (10b.)
Plan, 1995 Restatement
* 1995 Amendment to Executive Supplemental (10b.-1)
Retirement Income Plan (1995 Restatement)
* Amendment 1998-1 to the Executive (10b.-2)
Supplemental Retirement Income Plan
(1995 Restatement)
* ESRIP Change in Control Amendment to the (10b.-3)
Executive Supplemental Retirement Income
Plan (1995 Restatement)
* 1985 Stock Option Plan, as amended effective (10c.)
May 25, 1995
* Executive Deferred Compensation Plan, 1990 (10e.)
Restatement, effective January 1, 1990
* Amendment No. 1 to Executive Deferred (10e.-1)
Compensation Plan
<PAGE>
* Amendment No. 2 to Executive Deferred (10e.-2)
Compensation Plan
* Amendment No. 3 to Executive Deferred (10e.-3)
Compensation Plan
* Amendment No. 4 to Executive Deferred (10e.-4)
Compensation Plan
* Directors Deferred Compensation Plan, (10f.)
effective June 1, 1981, restated as of
December 1, 1997
* Amendment No. 1 to Directors Deferred (10f.-1)
Compensation Plan (December 1, 1997
Restatement)
Amendment No. 2 to Directors Deferred (10f.-2)
Compensation Plan (December 1, 1997
Restatement)
* Form of Indemnity Agreement entered into (10g.)
between the Company and each director and
executive officer
* Non-Employee Directors Stock Compensation (10i.)
Plan, as amended effective January 1, 1998
Executive Annual Incentive Plan, effective (10k.)
March 1, 1990, as amended effective
January 1, 1992, January 1, 1996 and
January 1, 2000
* Employment agreement dated November 2, 1995, (10n.)
as amended February 27, 1996, between the
Company and an executive officer
* Amendment dated December 18, 1997 to (10n.-1)
employment agreement dated November 2, 1995,
between the Company and an executive officer
* Amendment dated September 24, 1998 to (10n.-2)
employment agreement dated November 2, 1995,
as previously amended, between the Company
and an executive officer
* Form of amended and restated executive change (10o.)
in control severance agreement as entered into
between the Company and each executive officer
* Employment agreement dated July 2, 1997 (10p.)
between the Company and an executive officer
<PAGE>
* Amendment dated December 18, 1997 to (10p.-1)
employment agreement dated July 2, 1997,
between the Company and an executive officer
* Amendment dated September 24, 1998 to (10p.-2)
employment agreement dated July 2, 1997, as
previously amended, between the Company and an
executive officer
* Employment agreement dated October 19, 1998, (10q.)
between the Company and an executive officer
* Employment agreement dated May 11, 1999, (10r.)
between the Company and an executive officer
- ----------------------------------
* Incorporated by reference
EXHIBIT (10f.-2)
NORTHWEST NATURAL GAS COMPANY
DIRECTORS DEFERRED COMPENSATION PLAN
AMENDMENT NO. 2
This Amendment No. 2 to the Northwest Natural Gas Company Directors
Deferred Compensation Plan, effective June 1, 1981 and restated as of December
1, 1997 (the "Plan"), is effective as of February 24, 2000 and has been executed
as of this 24th day of February, 2000.
The Plan is hereby amended as follows:
FIRST: Section 3(d) is amended to read as follows:
(d) Retirement Benefit Account. A Director's Retirement
--------------------------
Benefit Account shall be denominated in shares of Common Stock, including
fractional shares. Effective as of January 1, 1998, Section 5 of Article III of
the Company's Bylaws has been amended to eliminate with respect to all persons
who are Directors as of January 1, 1998 a provision for a retirement benefit
payable to Directors who retire from the Board at age 72 with at least 10 years
of service. Effective as of January 1, 1998, the Retirement Benefit Account of
each person who is a Director on that date shall be credited with a number a
shares of Common Stock determined by the Company as a replacement for the prior
retirement benefit. As of each date for payment of dividends on the Common
Stock, the Retirement Benefit Accounts shall be credited with an additional
number of shares (including fractional shares) equal to the amount of dividends
that would be paid on the number of shares recorded as the balance of the
Retirement Benefit Account as of the record date for such dividend divided by
the purchase price for shares of Common Stock under the DRSPP for dividends
reinvested on such payment date. The Retirement Benefit Account of a Director
shall be canceled, and all amounts credited to such account shall be forfeited,
if the Director ceases to be a Director before reaching age 72 or before serving
as a Director for 10 years; provided, however, that each Director's Retirement
Benefit Account will be fully vested and noncancellable upon the death of the
Director, the disability (within the meaning of Section 22(e)(3) of the Internal
Revenue Code) of the Director, or a Change in Control as defined in Paragraph 8.
SECOND: Except as provided herein, all other Plan provisions shall
remain in full force and effect.
IN WITNESS WHEREOF, Northwest Natural Gas Company has caused this
Amendment No. 2 to be executed as of the date first written above.
NORTHWEST NATURAL GAS COMPANY
By: /s/ R. G. Reiten
------------------------------------
President and CEO
================================================================================
EXHIBIT (10k.)
NORTHWEST NATURAL GAS COMPANY
EXECUTIVE ANNUAL INCENTIVE PLAN
As amended
effective January 1, 2000
================================================================================
<PAGE>
EXECUTIVE ANNUAL INCENTIVE PLAN
This amended Executive Annual Incentive Plan (the "Plan") is
executed by Northwest Natural Gas Company, an Oregon corporation (NNG),
effective January 1, 1996.
I. PURPOSE OF PLAN
1.0 The success of NNG is dependent upon its ability to
attract and retain the services of key executives of the highest competence and
to provide incentives for superior performance. The purpose of the plan is to
advance the interests of NNG and its shareholders through an incentive
compensation program that will attract and retain key executives and motivate
them to achieve performance goals.
II. TYPE OF PLAN
2.0 This Plan is intended to be and shall be administered by
NNG as an income tax nonqualified plan primarily for the purpose of providing
compensation for a "select group of management or highly compensated employees"
within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of the Employee
Retirement Income Security Act of 1974, as amended.
III. PARTICIPATION
3.0 All executive officers of the company and any other highly
compensated employees as designated by the Board of Directors are eligible to
participate in the Executive Annual Incentive Plan.
3.1 Each calendar year, NNG's Organization and Executive
Compensation Committee (the "Committee") shall determine whether NNG's chief
executive officer and other eligible officers shall participate in the Plan.
Such participating employees shall be referred to as "Participants."
<PAGE>
EXECUTIVE ANNUAL INCENTIVE PLAN As amended effective January 1, 2000
Page 2
IV. INCENTIVE COMPENSATION
4.0 Each Participant's potential total incentive compensation
consists of two components, a corporate performance award and an individual
performance award.
4.1 The total incentive compensation award ("Award")
consists of:
(a) Base salary
x Corporate performance rating
x Corporate allocation percentage
x Target percentage;
plus,
(b) Base salary x Individual performance rating x
Individual allocation percentage x Target percentage.
4.2 There shall be no incentive compensation award under the
Plan for any Plan Year in which net income shall be less than dividends payable
on the preferred, preference and common stock.
V. DEFINITIONS
Corporate Allocation Percentage
- -------------------------------
5.0 The corporate allocation percentage reflects the
Participant's contribution to corporate performance. The difference between this
percentage and 100% is the individual allocation percentage. The ratio will be
determined annually by the Committee.
<PAGE>
EXECUTIVE ANNUAL INCENTIVE PLAN As amended effective January 1, 2000
Page 3
Corporate Performance Matrix
- ----------------------------
5.1 At the beginning of each fiscal year ("Plan Year"), a
corporate performance matrix shall be submitted to the Committee for approval.
The vertical axis represents the average of the corporate performance goals. The
horizontal axis represents the percentage attainment of the earnings plan.
5.1.1 Should unexpected deviations in corporate goals occur in
the course of the Plan Year that produce distortions in the application of the
matrix, the Committee may adjust the matrix to correct the distortions.
Individual Performance Rating
- -----------------------------
5.2 The Participant's individual performance rating is
determined by the executive's performance evaluation by his superior officer as
approved by the C.E.O. If the Participant's individual rating is less than .5 on
a scale of 0 to 1.5, he shall receive no Award.
Target Percentage
5.3 The target percentage is the percentage of Base salary
determined by the Committee to be appropriate for each Participant.
Calculation of the Award
- ------------------------
5.4 The Committee shall calculate the Award for each
Participant for a Plan Year no later than two months after the end of the
Plan Year. In the event of a change in job position during the year, the
Committee may, in its discretion, increase or decrease the amount of a
Participant's Award to reflect such change.
Right to Receive Award
- ----------------------
5.5 A Participant must continue employment with NNG until the
end of the Plan Year in order to be entitled to receive the Participant's Award
in accordance with the terms of the Plan. This shall not be a guarantee of
employment and such employment may be terminated by either party to the
employment relationship at any time and for any reason which does not violate
any preexisting law or other agreement, if any, between the parties. If a
Participant's employment with NNG or its subsidiaries is terminated prior to the
<PAGE>
EXECUTIVE ANNUAL INCENTIVE PLAN As amended effective January 1, 2000
Page 4
end of the Plan Year for a reason other than death, disability, or retirement,
the Participant shall not be entitled to any payment of an Award for that Plan
Year. If a Participant's employment with NNG is terminated prior to the end of
the Plan Year due to death, disability, or retirement, the Committee, in its
sole discretion, shall determine whether the Participant or the Participant's
beneficiary or estate shall be entitled to receive payment of a portion of the
Participant's Award for the Plan Year.
VI. ADMINISTRATION
6.0 The Plan shall be administered by the Committee. The
Committee shall have the exclusive authority and responsibility for all matters
in connection with the operation and administration of the Plan. The Committee's
powers and duties shall include, but shall not be limited to, the following:
(a) Responsibility for the compilation and maintenance of
all records necessary in connection with the Plan;
(b) Subject to the Board of Directors approval authorizing the
payment of all benefits and expenses of the Plan as they become payable
under the Plan; and
(c) Authority to engage such legal, accounting, and other
professional services as it may deem proper.
6.1 Decisions by the Committee shall be final and binding upon
all parties affected by the Plan, including the beneficiaries of Participants.
6.2 The Committee may rely on information and recommendations
provided by management. The Committee may delegate to management the
responsibility for decisions that it may make or actions that it may take under
the terms of the Plan, subject to the Committee's reserved right to review such
decisions or actions and modify them when necessary or appropriate under the
circumstances. The Committee shall not allow any employee to obtain control over
decisions or actions that affect that employee's Plan benefits.
<PAGE>
EXECUTIVE ANNUAL INCENTIVE PLAN As amended effective January 1, 2000
Page 5
VII. MISCELLANEOUS
Nonassignability of Benefits
- -----------------------------
7.0 A Participant's benefits under the Plan cannot be sold,
transferred, anticipated, assigned, hypothecated, seized by legal process,
subjected to claims of creditors in any way, or otherwise disposed of.
Governing Law
7.1 This Plan and any amendments shall be construed,
administered, and governed in all respects in accordance with applicable
federal law and the laws of the State of Oregon.
No Right of Continued Employment
- --------------------------------
7.2 Nothing in the Plan shall confer upon any person the
right to continue in the employ of NNG or interfere in any way with the right
of NNG to terminate the person's employment at any time.
Withholding Taxes
- -----------------
7.3 NNG shall withhold any taxes required by law to be
withheld in connection with payment of an Award under this Plan.
VIII. CLAIMS PROCEDURE
Initial Claim
- -------------
8.0 Any person claiming an Award under this Plan ("Claimant")
shall present a claim in writing to the C.E.O.
Decision on Initial Claim
- -------------------------
8.1 (a) Time Period for Denial Notice. A decision shall be
-----------------------------
made on the claim as soon as practicable and shall be communicated in writing by
the C.E.O. to the Claimant within a reasonable period after receipt of the claim
by the C.E.O. In no event shall the decision on an initial claim be given more
than 90 days after the date the claim was filed, unless special circumstances
require an extension of time for processing. If there is an extension, the
Claimant shall be notified of such within 90 days of the date the claim was
<PAGE>
EXECUTIVE ANNUAL INCENTIVE PLAN As amended effective January 1, 2000
Page 6
filed. The extension notice shall indicate the special circumstances and the
date by which a decision is expected. The extension shall not exceed 90 days
from the end of the initial response period.
8.1 (b) Contents of Notice. If the claim is wholly or
--------------------
partially denied the notice of denial shall indicate:
(1) The specific reasons for the denial;
(2) The specific references to pertinent Plan provisions on
which the denial is based;
(3) A description of additional material or information
necessary for the Claimant to perfect the claim and an explanation of
why such material or information is necessary; and
(4) An explanation of the Plan's claim review procedure.
8.1 (c) Deemed Denied. If written notice of the decision
-------------
wholly or partially denying the claim has not been furnished within 90 days
after the claim is filed or there has been an extension and no notice of a
decision is furnished by the end of the extension period, and if the claim
has not been granted within such period, the claim shall be deemed denied for
purposes of proceeding to the review stage.
Review of Denied Claim
- ----------------------
8.2 If a Claimant receives a notice of denial, or if his or
her claim is deemed denied pursuant to paragraph 8.1, the Claimant may request a
review of the claim. The request for review is made by personally delivering or
mailing a written request for review, prepared by either the Claimant or his or
her authorized representative, to the Committee. The Claimant's request for
review must be made within 60 days after receipt of the notice of denial or the
date on which the claim is deemed denied if no notice is received. If the
written request for review is not made on a timely basis, the Claimant shall be
deemed to have waived his or her right to review. The Claimant or his or her
duly authorized representative may, at or after the time of making the request,
review all pertinent documents and submit issues and comments in writing.
<PAGE>
EXECUTIVE ANNUAL INCENTIVE PLAN As amended effective January 1, 2000
Page 7
Decision on Review
- ------------------
8.3 A decision on review shall be made and furnished by the
Committee in writing to the Claimant within 60 days of receipt of the request
for review. If special circumstances require an extension of time for processing
(such a decision by the Committee, within its sole discretion to conduct a
hearing), a decision shall be made and furnished to the Claimant not later than
120 days after such receipt. If an extension is required, the Claimant shall be
notified of such within 60 days after the request for review was filed. The
written decision shall include the reasons for such decision with reference to
the provisions of the Plan upon which the decision is based. The decision shall
be final and binding upon the Claimant and NNG and its subsidiaries and all
other persons involved.
8.3.1 The scope of any subsequent review of the benefit claim,
judicial or otherwise, shall be limited to a determination as to whether the
Committee acted arbitrarily or capriciously in the exercise of its discretion.
In no event shall any such further review be on a de novo basis as the Committee
has discretionary authority to determine eligibility for benefits and to
construe the terms of this Plan.
IX. AMENDMENTS AND TERMINATION
9.0 The Board has the power to terminate this Plan at any time
or to amend this Plan at any time and in any manner that it may deem advisable.
IN WITNESS WHEREOF this Plan was duly amended on the 24th day
of February 2000, effective January 1, 2000.
NORTHWEST NATURAL GAS COMPANY
By: /s/ Richard G. Reiten
------------------------------------
Richard G. Reiten
President & C.E.O.
EXHIBIT (11)
NORTHWEST NATURAL GAS COMPANY
Statement Re: Computation of Per Share Earnings
(Thousands, except per share amounts)
(Unaudited)
12 Months Ended December 31
----------------------------------
1999 1998 1997
---- ---- ----
Earnings Applicable to Common Stock $42,781 $24,724 $40,413
Debenture Interest Less Taxes 415 431 455
--------- --------- ---------
Earnings Applicable to Diluted Common Stock $43,196 $25,155 $40,868
========= ========= =========
Average Common Shares Outstanding 24,976 24,233 22,698
Stock Options 21 41 32
Convertible Debentures 471 489 518
--------- --------- ---------
Diluted Average Common Shares Outstanding 25,468 24,763 23,248
========= ========= =========
Diluted Earnings Per Share of Common Stock $ 1.70 $ 1.02 $ 1.76
========= ========= =========
EXHIBIT (12)
NORTHWEST NATURAL GAS COMPANY
Computation of Ratio of Earnings to Fixed Charges
January 1, 1995 - December 31, 1999
($000)
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Fixed Charges, as defined:
Interest on Long-Term Debt $23,141 $23,176 $24,904 $27,389 $27,728
Other Interest 2,252 3,448 4,500 4,909 2,778
Amortization of Debt Discount
and Expense 882 865 730 714 699
Interest Portion of Rentals 1,764 1,798 2,111 1,986 1,707
-------- --------- -------- -------- -----
Total Fixed Charges, as defined $28,039 $29,287 $32,245 $34,998 $32,912
======== ========= ======== ======== =========
Earnings, as defined:
Net Income $38,065 $46,793 $43,059 $27,301 $45,296
Taxes on Income 22,120 27,347 21,034 14,604 24,591
Fixed Charges, as above 28,039 29,287 32,245 34,998 32,912
-------- --------- -------- -------- ---------
Total Earnings, as defined $88,224 $103,427 $96,338 $76,903 $102,799
======== ========= ======== ======== =========
Ratio of Earnings to Fixed Charges 3.15 3.53 2.99 2.20 3.12
======== ========= ======== ======== =========
</TABLE>
EXHIBIT (23)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Registration Statement
Nos. 33-63017 and 333-48919, Post-Effective Amendment No. 1 to Registration
Statement No. 2-76276, and Post-Effective Amendment No. 2 to Registration
Statement No. 2-77195 on Form S-8 of Northwest Natural Gas Company, and in the
Prospectus constituting part of Registration Statement Nos. 33-53795 and
333-64777, and Post-Effective Amendment No. 1 to Registration Statement Nos.
33-1304, 33-20384, and 333-32989 on Form S-3 of Northwest Natural Gas Company of
our report dated February 18, 2000 relating to the consolidated financial
statements and financial statement schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
March 23, 2000
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This 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
<NAME> NORTHWEST NATURAL GAS COMPANY
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 895,029
<OTHER-PROPERTY-AND-INVEST> 17,451
<TOTAL-CURRENT-ASSETS> 183,055
<TOTAL-DEFERRED-CHARGES> 97,828
<OTHER-ASSETS> 51,060
<TOTAL-ASSETS> 1,244,423
<COMMON> 79,458
<CAPITAL-SURPLUS-PAID-IN> 234,608
<RETAINED-EARNINGS> 115,530
<TOTAL-COMMON-STOCKHOLDERS-EQ> 429,596
34,750
0
<LONG-TERM-DEBT-NET> 396,379
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 94,149
<LONG-TERM-DEBT-CURRENT-PORT> 10,000
814
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 278,735
<TOT-CAPITALIZATION-AND-LIAB> 1,244,423
<GROSS-OPERATING-REVENUE> 455,834
<INCOME-TAX-EXPENSE> 24,591
<OTHER-OPERATING-EXPENSES> 361,066
<TOTAL-OPERATING-EXPENSES> 385,657
<OPERATING-INCOME-LOSS> 70,177
<OTHER-INCOME-NET> 5,171
<INCOME-BEFORE-INTEREST-EXPEN> 75,348
<TOTAL-INTEREST-EXPENSE> 30,052
<NET-INCOME> 45,296
2,515
<EARNINGS-AVAILABLE-FOR-COMM> 42,781
<COMMON-STOCK-DIVIDENDS> 30,569
<TOTAL-INTEREST-ON-BONDS> 26,192
<CASH-FLOW-OPERATIONS> 108,521
<EPS-BASIC> 1.71
<EPS-DILUTED> 1.70
</TABLE>
