-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A3+n/fjjB1rxNzPNTZE1tD/Cltc4wDK2wLLUwu+uNAsRVJGjmQSp66SEe/wiINQD qXf8rlfLcoir+bXGCJbcKw== 0000073020-98-000008.txt : 19980318 0000073020-98-000008.hdr.sgml : 19980318 ACCESSION NUMBER: 0000073020-98-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980317 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHWEST NATURAL GAS CO CENTRAL INDEX KEY: 0000073020 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 930256722 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-00994 FILM NUMBER: 98567167 BUSINESS ADDRESS: STREET 1: 220 NW SECOND AVE CITY: PORTLAND STATE: OR ZIP: 97209 BUSINESS PHONE: 5032264211 10-K 1 BODY 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, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to____________ Commission file number 0-994 NORTHWEST NATURAL GAS COMPANY (Exact name of registrant as specified in its charter) Oregon 93-0256722 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 220 N.W. Second Avenue, Portland, Oregon 97209 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (503) 226-4211 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Title of each class Shares outstanding on February 28, 1998 - ------------------- --------------------------------------- Common Stock, $3 1/6 par value, and Common Share Purchase Rights 22,922,546 Preference Stock, without par value 250,000 Preferred Stock, without par value 124,285 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 28, 1998 was: $640,982,000. DOCUMENTS INCORPORATED BY REFERENCE List documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated. Portions of the Proxy Statement of Company, dated April 17, 1998, are incorporated by reference in Part III. NORTHWEST NATURAL GAS COMPANY Annual Report to Securities and Exchange Commission on Form 10-K for the year 1997 TABLE OF CONTENTS PART I Page - ------ ---- Item 1. Business General............................................. 3 Gas Supply.......................................... 4 Regulation and Rates................................ 7 Competition and Marketing........................... 9 Environment......................................... 11 Employees........................................... 11 Item 2. Properties............................................... 11 Item 3. Legal Proceedings........................................ 12 Item 4. Submission of Matters to a Vote of Security Holders...... 12 Additional Item Executive Officers of the Registrant..................... 13 PART II - ------- Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................. 14 Item 6. Selected Financial Data.................................. 16 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition................... 18 Item 8. Financial Statements and Supplementary Data.............. 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................... 63 PART III - -------- Items 10. - 13. Incorporated by Reference to Proxy Statement............. 63 PART IV - ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................ 63 SIGNATURES ........................................................ 67 NORTHWEST NATURAL GAS COMPANY PART I ITEM 1. BUSINESS General - ------- 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 fertile 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, Oregon is the principal retail and manufacturing center in the Columbia River Basin. It is a major port and growing nucleus for trade with Pacific Rim nations such as Japan, Taiwan and Korea. At year-end 1997, NW Natural had about 407,100 residential customers, 50,300 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 has two active wholly-owned subsidiaries. NNG Financial Corporation (Financial Corporation) is incorporated in Oregon. Canor Energy Ltd. (Canor) is incorporated in Alberta, Canada. Financial Corporation arranges short-term financing for Canor and 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 is engaged in natural gas and oil exploration, development and production in Alberta and Saskatchewan, Canada. Since 1995, Canor has managed a joint venture with a wholly-owned subsidiary of NIPSCO Industries, Inc. (NIPSCO), to develop gas and oil properties in western Canada. Canor and NIPSCO plan to amalgamate their respective operations into a new company during 1998. 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-, medium- and long-term firm gas supply contracts. During periods of peak demand, supplies under these contracts are supplemented with gas from storage facilities either owned by or contractually committed to NW Natural. Natural gas for NW Natural's core market is transported by Northwest Pipeline Corporation (NPC), primarily under three firm transportation agreements. NPC's rates for service under these agreements are established by the Federal Energy Regulatory Commission (FERC) under NPC's primary firm transportation rate schedule, as amended or superseded from time to time. The largest of the contracts with NPC expires September 30, 2013 and provides for firm transportation capacity of up to 2,160,440 therms(1) per day. This agreement provides access to natural gas supplies in British Columbia and the U.S. Rocky Mountains. NW Natural also has a contract with NPC expiring September 30, 2009 for 340,000 therms per day of firm transportation capacity for the Company's core market. This agreement also accesses gas supplies in the U.S. Rocky Mountain region. The third transportation contract with NPC, under which service commenced on December 1, 1995 and expires November 30, 2011, provides 1,020,000 therms per day of firm transportation capacity from the point of interconnection of the NPC and PG&E Gas Transmission Northwest (PG&E GT-NW, formerly Pacific Gas Transmission) 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 other upstream pipelines (Alberta Natural Gas Company and NOVA Corporation of Alberta) substantially matches this amount of NPC capacity northward into Alberta, Canada. The cost to 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. Although pipeline rates increased significantly in 1993 due to system expansion and rate design changes, the effect of such increases on core market customers has been more than offset by lower gas commodity prices. In addition, NW Natural has been able to offset firm transportation charges, in part, by making off-system sales and releasing capacity in periods when core market customers do not fully utilize firm pipeline capacity. 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".) - ------------------------- (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. 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. At January 1, 1998, NW Natural had 21 firm contracts with 20 suppliers with original terms of from four months to 15 years which provided for a maximum of 2,757,090 therms of firm gas per day during the peak winter season and 1,418,300 therms per day during the remainder of the year. About 80 percent of the annual supply comes from Canada. The terms of NW Natural's principal purchase agreements are summarized as follows: An agreement expiring November 1, 2003, with CanWest Gas Supply, Inc. (CanWest), an aggregator for gas producers in British Columbia, Canada, entitles NW Natural to purchase up to 960,000 therms of firm gas per day. This agreement contains a demand and commodity pricing structure and a provision for annual renegotiations of the commodity price to reflect then-prevailing market prices. The demand charges reflect the reservation of firm transportation space on the Westcoast Energy, Inc. pipeline system in British Columbia. These demand charges are subject to change as approved by the Canadian National Energy Board (NEB) in rate proceedings similar to those conducted in the United States by the FERC. This contract contains minimum purchase obligations. An agreement also expiring November 1, 2003, with Amoco Canada Petroleum Company, Ltd., on terms similar to the CanWest agreement, entitles NW Natural to purchase up to 83,300 therms of firm gas per day. This gas is aggregated from production in the Canadian province of Alberta and the Yukon and Northwest Territories. This contract contains minimum purchase obligations. An agreement with Poco Petroleums, Ltd., a Canadian producer, expiring September 30, 2003, entitles NW Natural to purchase up to 155,160 therms per day during the winter and up to 110,000 therms per day during the summer of gas produced in Alberta. Two agreements expiring September 30, 2003 with Westcoast Gas Services entitle NW Natural to purchase up to 140,000 therms per day year-round, plus up to 92,750 therms per day as winter season supply, of gas produced in Alberta. Pricing for supplies under these agreements can be renegotiated annually. The current pricing arrangement includes demand charges for upstream capacity on the Canadian pipeline systems and a monthly reservation charge. The commodity pricing consists of a portion of the daily contract quantity at a fixed price and the remaining daily contract quantity tied to a monthly Canadian index. An agreement expiring October 31, 2000, with Summit Resources Ltd., entitles NW Natural to purchase up to 77,580 therms per day during the winter and up to 50,000 therms per day during the summer of gas produced in Alberta. Pricing for supplies under this agreement can be renegotiated annually. The current pricing arrangement includes demand charges for upstream capacity on NOVA Corporation of Alberta's system and commodity charges that are fixed in three volumetrically based tiers. During 1997, new short-term (4 or 5 month) purchase agreements for firm gas were entered into with 14 suppliers which provide for a total of 1,181,130 therms per day during the 1997-98 heating season. These contracts have a variety of pricing structures and purchase obligations. NW Natural intends to enter into new short-term purchase agreements in 1998 for equivalent volumes of gas with these or other similar suppliers to be available during the 1998-99 winter season. NW Natural continues to purchase gas under agreements with two producers (one of which is Financial Corporation), for gas produced from the Mist gas field, located about 60 miles northwest of Portland, Oregon. The production areas are situated near NW Natural's existing underground gas storage facility. These agreements have primary terms of 10 years and prices that are tied to NW Natural's weighted average cost of gas. Current production is approximately 25,000 therms per day from about 17 wells, supplying about 1 percent of NW Natural's total annual requirements. Production from these wells varies as existing wells are depleted and new wells are drilled. During 1997, approximately 23 percent of NW Natural's purchases for its core market was from the spot market (30 days or less), a significant increase from the prior year. This reflects the increased flexibility provided under the terms of NW Natural's firm supply contracts which permit the purchase of spot gas under certain conditions and allowed NW Natural to take advantage of generally depressed spot market prices in the western United States and Canada. 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 reduce 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 NPC which expire in 2004 for firm storage services from the underground gas storage field at Jackson Prairie near Centralia, Washington, and the liquefied natural gas (LNG) facility at Plymouth, Washington. Together, these facilities provide NW Natural with daily firm deliverability of 923,470 therms and total seasonal capacity of 13,082,647 therms. In addition, NW Natural has a contract with NPC which continues from year-to-year, at NW Natural's sole option, for additional daily deliverability of 132,510 therms and additional seasonal capacity of 2,779,970 therms from the Jackson Prairie storage field. Separate contracts with NPC provide for the transportation of these storage supplies to NW Natural's service territory. NW Natural owns and operates two LNG plants which liquefy gas during the summer months for use during the peak winter season. These two plants, one located in Portland and the other near Newport, Oregon, 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 million therms and a total seasonal working gas capacity of 70 million therms. NW Natural is engaged in a multi-year, major expansion of the Mist storage facility. NW Natural has a contract with Portland General Electric Company (PGE) which expires in 2010 that provides NW Natural with additional winter peaking supply. With certain limitations, NW Natural may interrupt gas deliveries to PGE, use that gas for its core customers, and compensate PGE for its cost of replacement fuel oil. The daily deliverability under this contract is 300,000 therms. NW Natural also has contracts with two industrial customers, one gas marketing company and another local gas distribution company on terms similar to those under the contract with PGE which provide a total of 137,000 therms per day of year-round capacity, plus 150,000 therms per day of recallable capacity and supply. These contracts have original terms ranging from five to ten years. Gas Supply -- Transportation - ---------------------------- Between 1988 and early 1992, most of NW Natural's large industrial interruptible customers switched from sales service to transportation service, whereby they purchased gas directly from suppliers and shipped the gas on the Company's system and those of its pipeline suppliers for a fee. Since 1992, many of these customers have returned to sales service, primarily because NW Natural's industrial sales rates were lower than those customers' costs of purchasing and shipping their own gas. The ability of industrial customers to switch between sales service and transportation service has made it possible for 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 1997, 94 percent of both NW Natural's gas deliveries and its utility operating revenues were derived from Oregon customers and the balance from Washington customers. The Company is exempt from the provisions of the Natural Gas Act by order of the Federal Power Commission (now the FERC). NW Natural's most recent general rate case in Oregon, which was effective in 1989, authorized rates designed to produce a return on common equity of 13.25 percent. The most recent general rate increase in Washington, which was effective in 1997, authorized rates designed to produce a return on common equity of 11.25 percent. Actual revenues resulting from the OPUC's and WUTC's general rate orders are dependent on weather, economic conditions, customer growth, competition and other factors affecting gas usage in NW Natural's service area. NW Natural's returns on average common equity from utility operations were 13.7 percent in 1996 and 12.0 percent in 1997. The Company's returns from consolidated operations, including subsidiary results, were 13.0 percent in 1996 and 11.3 percent in 1997. NW Natural tentatively plans to file for a general rate increase in Oregon in the fourth quarter of 1998. 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 November 1, are made effective on the following December 1. Effective January 1, 1998, 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. In Washington, NW Natural is permitted to track increases and decreases in gas commodity costs coincidental with their incurrence, with the result that net income is not directly affected by changes in gas commodity costs. In both Oregon and Washington, the PGA permits NW Natural to recover 100 percent of FERC-approved pipeline transportation cost increases. In October 1997, NW Natural filed under its Oregon PGA tariff to increase rates for Oregon customers by an average of 11.4 percent. The OPUC approved the filing effective January 1, 1998, along with a settlement between NW Natural and the OPUC Staff. The settlement modified the incentive formula for future deferrals of variations in gas costs, from 80 percent to 67 percent, and provided for a revenue reduction not relating to gas costs amounting to $2.5 million per year, effective on a deferred basis as of January 1, 1998. In February 1998, NW Natural filed a further rate increase averaging 6.1 percent under the PGA tariff, proposing as of April 1, 1998, to remove a temporary rate discount in effect since December 1996. In October 1997, NW Natural filed under its Washington PGA tariff to increase rates for Washington customers by 11.4 percent. The WUTC approved a substitute filing increasing rates by 10.5 percent effective December 1, 1997. 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, the OPUC acknowledged and accepted NW Natural's submission of its third Integrated Resource Plan. The WUTC acknowledged and accepted NW Natural's third plan in 1997. 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 will file its fourth Integrated Resource Plan for acknowledgment by the OPUC and WUTC in 1998. Competition and Marketing - ------------------------- 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 1997, NW Natural maintained its competitive price advantage over electricity and approximate price parity with fuel oil in both the residential and commercial markets. Throughout 1997, 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 between 33 and 40 percent, together with the price advantage of natural gas compared with electricity and its operating convenience over fuel oil, provides the potential for continuing growth in the residential conversion market. In 1997, 21,848 net residential customers (after subtracting disconnected or terminated services) were added, including 8,718 units of existing residential housing which were reconnected to the system or were converted from oil or electric appliances to natural gas. Of the new heating conversions from other fuels, at least 60 percent converted to gas for water heating. In addition, 3,006 net commercial customers were connected in 1997. The net total of all new customers added in 1997, including industrial sales and transportation customers, was 24,852. This constituted a growth rate of 5.7 percent, more than three times the national average for local distribution companies as reported by the American Gas Association. Despite warmer weather, natural gas sales volumes to residential and commercial customers in 1997 were about the same as in 1996, largely due to new customer acquisitions. For the year 1997, temperatures in NW Natural's service territory, based on heating degree days, were 8 percent warmer than in 1996 and 4 percent warmer 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. While the natural gas industry, including producers, interstate pipelines and local distribution companies (LDCs), has undergone many changes in its long history, perhaps no era has brought greater change than the past 10 years. These changes, brought about by the deregulation or restructuring of the energy markets, are intended to promote competition where it is economically beneficial to consumers. The changes are continuing, though at different rates among the various regulatory jurisdictions around the country. 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 impact to 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 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 to NW Natural's profitability is anticipated. Bypass of NW Natural's facilities by other potential providers of delivery service is not considered a widespread, significant threat because of the nature of NW Natural's customer base and proximity to interstate pipelines. Total industrial throughput, including both sales and transportation of firm and interruptible gas, was 579 million therms in 1997, up 2.7 percent from 564 million therms in 1996. This growth in industrial throughput is an indicator of the economic health of the region served by NW Natural. The basic industries such as forest products and metals continue to consolidate and experience only slow growth. But a new manufacturing base, notably high-technology, is emerging and has expanded and diversified the region's economic base. This economic growth has contributed to an increase in industrial gas volumes averaging 2 percent per year over the past four years. Industrial firm gas sales and transportation deliveries during 1997 totaled 194 million therms, up 41 percent from 1996. This increase reflects mid-year transfers of several large customers previously served under interruptible rates (52 million therms) and the effects of a strong local economy. In 1997, 9 percent of total utility operating revenues and 17 percent of total therms delivered were derived from sales and transportation deliveries to industrial firm customers. Industrial interruptible gas sales and transportation deliveries during 1997 totaled 385 million therms, down 10 percent from 1996. While economic expansion strengthened interruptible deliveries, a number of larger customers migrated from tariff-based interruptible transportation or sales rates to individually negotiated transportation agreements based upon bypass economics (the customers' costs of a direct connection to an interstate pipeline). In 1997, 9 percent of total utility operating revenues and 35 percent of total therms delivered were derived from sales and transportation deliveries to industrial interruptible customers. As described above, 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 either: 1) competitive with the costs of alternative fuels, such as heavy oil, or 2) competitive with the customer's bypass alternatives. These agreements generally prohibit bypass during their terms. NW Natural currently has a proposed contract before the OPUC which, if not approved, may expose NW Natural to a bypass risk of up to 6 million therms of deliveries per year to a single customer. Other than this possibility, NW Natural does not expect significant bypass to occur in the foreseeable future. Since 1994, NW Natural has been authorized by the OPUC to make off-system 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. Eighty percent of all positive net revenues (gross revenues less the actual cost of gas or pipeline capacity) generated from these sales and capacity releases ($3.5 million in 1997) have been credited to Oregon core market customer gas costs. Effective March 2, 1998, the crediting factor for off-system commodity sales changed from 80 percent to 67 percent. During 1997, NW Natural entered into a marketing alliance with PacifiCorp, the purpose of which is to provide electric and gas commodity services to industrial and commercial customers in the states of Oregon and Washington. In addition, the alliance will provide other energy-related services and products. NW Natural does not expect the alliance to have a material impact on its earnings. The primary value of the alliance is to provide convenience and extra value to end-use customers, creating a more loyal customer base for both NW Natural and PacifiCorp. PacifiCorp provides wholesale power throughout the U.S. and electricity and energy-related services to over 1.4 million retail customers in seven western states through its divisions, Pacific Power and Utah Power. Environment - ----------- 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 and previously owned property in Salem and Eugene, Oregon that were sites of former gas manufacturing plants. The Linnton site is currently under investigation for potential remediation. The Company received a release from further liability for the Salem property in 1996. (See Part II, Item 7., "Environmental Matters.") Employees - --------- At year-end 1997, NW Natural had 1,337 employees, of which 900 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 approximately 10,500 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. 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 two underground natural gas reservoirs at 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. 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 8,915 net acres of underground natural gas storage in Oregon. Financial Corporation holds interests in United States oil and gas leases covering 8,558 net acres located in Oregon, California, Wyoming, and Colorado. Canor holds interests in Canadian gas and oil leases covering 149,211 net acres in Alberta and Saskatchewan. Most Canadian gas production is sold under long-term contracts to markets in both Canada and the United States. NW Natural owns four depleted gas reservoirs near Mist, Oregon, that will 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 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). The Oregon - ------------- Court of Appeals (Oregon Court of Appeals Case No. CA A90481) affirmed the trial court decision in February 1997. The Oregon Supreme Court agreed to hear the case on appeal and is expected to render a final ruling during 1998. 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 payment of the judgment, costs and post-judgment interest from the case. The Company is party to certain other legal proceedings in which claimants seek material amounts. Although it is not possible to predict the outcome with certainty, based upon the opinions of legal counsel, management does not expect disposition of these matters to have a materially adverse effect on the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the year ended December 31, 1997. ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT Age at Name December 31, 1997 Positions held during last five years ---- ----------------- ------------------------------------- Richard G. Reiten 58 President (1996 - ); Chief Executive Officer (1997- ); Chief Operating Officer (1996); President and Chief Operating Officer, Portland General Electric Company (1992-95); President, Portland General Corporation (1989-92). Bruce R. DeBolt 50 Senior Vice President, Finance, and Chief Financial Officer (1990- ). Mark S. Dodson 52 Senior Vice President, Public Affairs and General Counsel (1998 - ); Senior Vice President (1997); Partner, Ater Wynne Hewitt Dodson & Skerritt LLP (1981 - 97). Dwayne L. Foley 52 Senior Vice President, Operations Support, and Chief Engineer (1997 - ); Senior Vice President, Operations and Information Services (1992-97); Senior Vice President, Gas Operations and Information Services (1990-92). Michael S. McCoy 54 Senior Vice President, Customer Services (1992- ). Bruce B. Samson 62 Senior Vice President (1998); (retired March 1, 1998) Senior Vice President, Public Affairs and General Counsel (1990-97). W. Richard Harper, Jr. 44 Vice President, Energy Marketing and Supply 1997- ); Vice President, Industrial and District Operations (1995-97); General Manager, Industrial and Business Development (1992-95). Diana J. Johnston 53 Vice President, Human Resources and Administrative Services (1996- ); Vice President, Human Resources (1992-96). Gregg S. Kantor 40 Vice President, Public Affairs and Communications (1998- ); Director, Public Affairs and Communications (1996-97); Principal, Kantor & Associates (1994-96); Manager, Economic Development, Portland General Electric Company (1991-94). C. J. Rue 52 Secretary (1982- ); Assistant Treasurer (1987- ). D. James Wilson 58 Treasurer and Controller (1987- ). Each executive officer serves successive annual terms; present terms end May 28, 1998. There are no family relationships among the Company's executive officers. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (A) 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. NW Natural's common stock was split three-for-two effective September 6, 1996, in the form of a 50% stock dividend, to shareholders of record August 23, 1996. Share prices and dividends paid on shares of NW Natural's common stock for periods prior to the effective date of the stock split, have been adjusted for the stock split. The quarterly high and low closing 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: 1997 1996 ------------------ ------------------- Quarter Ended High Low High Low March 31 ........ $25.38 $23.25 $22.67 $20.83 June 30 ......... 26.88 23.13 23.58 21.17 September 30 .... 27.75 24.25 24.25 22.54 December 31 ..... 31.25 24.38 25.75 23.25 The closing quotation for the common stock on December 31, 1997 was $31.00. On December 31, 1996 the closing quotation was $24.00. (B) As of December 31, 1997 there were 10,097 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. Annual common dividend payments have increased each year since 1956. Dividends per share paid during the past two years were as follows: Payment Date: 1997 1996 ------------- ---- ---- February 15 $0.30 $0.30 May 15 $0.30 $0.30 August 15 $0.30 $0.30 November 15 $0.305 $0.30 ------ ----- Total per share $1.205 $1.20 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 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 1997, dividend reinvestments and optional cash investments under the Plan aggregated $5.2 million and resulted in the issuance of 211,532 shares of common stock. During the 20 years the Plan has been available the Company has issued and sold 3,400,110 shares of common stock which produced $70.1 million in additional capital.
ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data concerning the Company's operations and financial condition. Operating revenues and cost of sales ($000): 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Sales revenues: Residential $ 177,835 $183,802 $165,662 $176,510 $168,217 Commercial 100,677 104,582 99,079 108,452 103,476 Industrial - firm 27,025 30,672 31,268 34,443 31,340 Industrial - interruptible 13,944 17,097 24,113 27,361 18,884 Unbilled revenues 1,647 1,627 1,173 (5,571) 5,153 ------------------------------------------------------- Total gas sales revenues 321,128 337,780 321,295 341,195 327,070 Transportation 22,029 22,533 16,650 14,702 17,892 Other 8,513 9,943 10,060 829 2,890 ------------------------------------------------------- Total utility operating revenues 351,670 370,256 348,005 356,726 347,852 Cost of gas 129,094 142,752 144,051 163,026 138,833 -------------------------------------------------------- Net utility operating revenues 222,576 227,504 203,954 193,700 209,019 Non-utility net operating revenues 9,868 10,009 8,271 11,773 10,865 -------------------------------------------------------- Net operating revenues $ 232,444 $237,513 $212,225 $205,473 $219,884 ======================================================== Net income $ 43,059 $ 46,793 $ 38,065 $ 35,461 $ 37,647 ======================================================== Preferred and preference stock dividend requirements 2,646 2,723 2,806 2,983 3,488 -------------------------------------------------------- Earnings applicable to common stock $ 40,413 $ 44,070 $ 35,259 $ 32,478 $ 34,159 ======================================================== Average common shares outstanding (000)* 22,698 22,391 21,817 19,943 19,612 ======================================================== Basic earnings per share of common stock* $1.78 $1.97 $1.62 $1.64 $1.74 ======================================================== Diluted earnings per share of common stock* $1.76 $1.94 $1.60 $1.61 $1.72 ======================================================== Dividends per share of common stock* $1.205 $1.20 $1.18 $1.173 $1.167 ======================================================== Total assets - at end of period ($000) $1,111,617 $988,869 $929,277 $889,304 $849,036 ======================================================== Ratio of Earnings to Fixed Charges** 2.99 3.53 3.15 3.08 3.22 ========================================================
* Prior years have been restated to give effect to 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.
SELECTED FINANCIAL DATA (continued) 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Capitalization - at end of period ($000): Common stock equity $366,265 $346,778 $323,552 $274,408 $258,565 Redeemable preference stock 25,000 25,000 25,000 26,252 26,633 Redeemable preferred stock 12,429 13,749 14,840 15,950 17,041 Long-term debt 344,303 271,838 279,945 291,076 272,931 ------------------------------------------------------ Total capitalization $747,997 $657,365 $643,337 $607,686 $575,170 ====================================================== Gas sales and transportation deliveries (000 therms): Residential 306,356 306,310 256,462 260,218 267,818 Commercial 225,249 225,115 196,723 201,925 209,642 Industrial - firm 84,523 91,122 82,958 81,348 80,588 Industrial - interruptible 53,929 63,261 84,173 89,899 66,370 Unbilled therms 3,615 3,759 4,946 (7,519) 3,844 ------------------------------------------------------ Total gas sales 673,672 689,567 625,262 625,871 628,262 Transportation 440,452 410,062 379,116 364,461 415,367 ------------------------------------------------------ Total volumes delivered 1,114,124 1,099,629 1,004,378 990,332 1,043,629 ====================================================== Customers (average for period): Residential 394,415 374,558 355,427 338,053 320,186 Commercial 48,232 46,355 44,740 43,367 41,906 Industrial - firm 411 409 405 398 388 Industrial - interruptible 119 131 143 148 122 Transportation 120 106 79 66 100 ------------------------------------------------------ Total customers 443,297 421,559 400,794 382,032 362,702 ====================================================== Customer statistics: Heat requirements*** Actual degree days 4,092 4,427 3,779 4,020 4,452 20-year average degree days 4,264 4,273 4,306 4,324 4,313 Average annual use per customer in therms: Residential 777 823 726 776 844 Commercial 4,670 4,874 4,420 4,680 5,029 Gas purchased cost per therm - net (cents) 24.05 22.25 20.67 23.44 23.11 ======================================================
*** A degree day is the measure of the coldness of the weather experienced based on the extent to which the average of the high and low temperatures for a day falls below 65 degrees Fahrenheit. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The consolidated financial statements include: Regulated utility: Northwest Natural Gas Company (NW Natural) Non-regulated wholly-owned subsidiaries: NNG Financial Corporation (Financial Corporation) Canor Energy, Ltd. (Canor) Oregon Natural Gas Development Corporation (Oregon Natural)-merged with and into NW Natural during the second quarter of 1996 Together these businesses are referred to herein as the "Company" (see "Subsidiary Operations" below and Note 2 to the Consolidated Financial Statements). The following is management's assessment of the Company's financial condition including the principal factors that affect results of operations. The discussion refers to the consolidated activities of the Company for the three years ended December 31, 1997. Earnings and Dividends - ---------------------- In 1997, the Company's earnings applicable to common stock were $40.4 million, the second highest in the Company's history. Earnings in 1996 were a record $44.1 million, up 25 percent from $35.3 million in 1995. The higher 1996 earnings reflect both colder weather and customer growth. Earnings for both 1997 and 1995 were lower due to warmer than normal weather, the effect of which was partially offset by additional sales from customer growth. The Company's basic earnings from consolidated operations were $1.78 a share in 1997, down from $1.97 a share in 1996 and up from $1.62 a share in 1995. NW Natural earned $1.70 a share from gas utility operations in 1997, compared to $1.87 in 1996 and $1.43 in 1995. Weather conditions in NW Natural's service territory in 1997 were 8 percent warmer than in 1996 and 4 percent warmer than the 20-year average. Weather in 1996 was 17 percent colder than 1995 and 4 percent colder than the 20-year average. The estimated weather-related decrease in net operating revenues (margin) during 1997 was equivalent to about 24 cents a share compared to actual conditions during 1996. The colder weather in 1996 resulted in increased gas deliveries to, and related margin from, weather-sensitive customers. The weather-related increase in 1996 was equivalent to about 55 cents a share compared to actual conditions in 1995. Customer growth of 5.7 percent during both 1997 and 1996 contributed an estimated $12.6 million to 1997 margin and $10.9 million to 1996 margin. Customer growth of 4.7 percent during 1995 contributed an estimated $9.7 million to margin. The estimated impact on margin of weather and customer growth are derived from NW Natural's internal planning model. The model calculates expected sales to, and revenues from, residential and commercial customers for "base usage," representing gas use for water heaters, ranges, and other appliances not sensitive to outside temperatures. The model also calculates expected sales to, and revenues from, these customers for "heat sensitive" usage, primarily furnaces, as a function of heating degree days (the difference between 65 degrees Fahrenheit and the average of a day's high and low temperatures). The model then estimates the earnings effect of the difference between expected sales and revenues under actual temperature conditions, and expected sales and revenues under average temperature conditions. Subsidiary earnings for 1997 were equivalent to 8 cents a share, compared to 10 cents in 1996 and 19 cents in 1995. The decrease in 1997 from 1996 was primarily due to a one-time $2.9 million gain in 1996 from Oregon Natural's sale of its underground storage assets to NW Natural which was offset in part by an impairment loss of $1.3 million on producing wells and a $1.0 million write-down of unproven properties. The decrease in 1996 from 1995 was primarily due to a one-time $3.8 million gain in 1995 from Oregon Natural's sale of production and related gathering system assets. 1997 was the 42nd consecutive year in which the Company's dividends paid have increased. Dividends paid on common stock were $1.205 a share in 1997 compared with $1.20 in 1996 and $1.18 in 1995. Results of Operations - --------------------- Regulatory Matters ------------------ NW Natural provides gas utility service in Oregon and Washington, with Oregon representing approximately 94 percent of its revenues. Future earnings and cash flows from utility operations will be determined for the most part by continued growth in the residential and commercial markets, and by NW Natural's ability to remain price competitive in the large industrial market, to control expenses, and to obtain timely regulatory approval for rate changes reflecting investments in new utility plant. NW Natural currently has no competition from other gas utility distributors in the territory it serves. However, it competes with Northwest Pipeline Corporation (NPC) to serve large industrial customers, with oil and electricity for industrial and commercial uses, and with oil, electricity, and wood for residential use. The Pacific Northwest has historically enjoyed some of the lowest electric rates in the nation, primarily due to the proximity of federal hydropower facilities. With further deregulation of the energy business, the market for energy will become more competitive, but the Pacific Northwest is unlikely to experience the large drop in electric rates that other, high-cost areas of the country are anticipating. In 1997, NW Natural maintained its competitive advantage over electricity and approximate price parity with fuel oil in the residential and commercial markets. In October 1997, the Washington Utilities and Transportation Commission (WUTC) approved a general rate increase averaging 3 percent for NW Natural's customers in Washington. Revenue from Washington operations will increase by approximately $0.6 million annually due to the combined effects of the general rate increase of about $0.5 million and a temporary surcharge to recover over five years the balance of deferred expense related to retiree health care and life insurance benefits attributable to Washington operations. The WUTC authorized a return on common equity of 11.25 percent. Effective December 1, 1997, the WUTC approved a rate increase averaging 10.5 percent to pass through to Washington customers increases in purchased gas costs and to remove temporary rate increments to amortize balances in deferred accounts. The WUTC approved rate decreases averaging 4.9 percent and 8.0 percent, respectively, effective December 1, 1996 and 1995. Effective January 1, 1998, the Oregon Public Utility Commission (OPUC) approved rate increases averaging 11.4 percent for NW Natural's customers in Oregon. The OPUC also approved a settlement modifying the incentive formula for deferrals of variations in gas costs, from 80 percent to 67 percent. The OPUC approved rate decreases averaging 3.6 percent and 6.7 percent effective December 1, 1996 and 1995, respectively. The rate increases in Oregon in 1998 and the rate decreases in 1996 and 1995 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. None of the rate increases and decreases discussed above had a material effect on net income. Comparison of Gas Operations ----------------------------
The following table summarizes the composition of gas utility volumes and revenues for the three years ended December 31: Thousands (Except customers and degree days) 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Gas Sales and Transportation Volumes (Therms): - ---------------------------- Residential and commercial sales 531,605 531,425 453,185 Unbilled volumes 3,615 3,759 4,946 --------- ---------- --------- Weather-sensitive volumes 535,220 48% 535,184 49% 458,131 46% Industrial firm sales 84,523 7% 91,122 8% 82,958 8% Industrial interruptible sales 53,929 5% 63,261 6% 84,173 8% --------- ---------- --------- Total gas sales 673,672 689,567 625,262 Transportation deliveries 440,452 40% 410,062 37% 379,116 38% --------- ---- --------- ---- --------- ---- Total volumes sold and delivered 1,114,124 100% 1,099,629 100% 1,004,378 100% ========= ==== ========= ==== ========= ==== Utility Operating Revenues: - --------------------------- Residential and commercial revenues $278,512 $288,384 $264,741 Unbilled revenues 1,647 1,627 1,173 -------- -------- -------- Weather-sensitive revenues 280,159 80% 290,011 78% 265,914 76% Industrial firm sales revenues 27,025 8% 30,672 8% 31,268 9% Industrial interruptible sales revenues 13,944 4% 17,097 5% 24,113 7% -------- -------- -------- Total gas sales revenues 321,128 337,780 321,295 Transportation revenues 22,029 6% 22,533 6% 16,650 5% Other revenues 8,513 2% 9,943 3% 10,060 3% -------- ---- -------- ---- -------- ---- Total utility operating revenues $351,670 100% $370,256 100% $348,005 100% ======== ==== ======== ==== ======== ==== Cost of gas sold $129,094 $142,752 $144,051 ======== ======== ======== Total number of customers (end of period) 458,021 433,169 409,949 ======= ======= ======= Actual degree days 4,092 4,427 3,779 ======== ======== ======== 20-year average degree days 4,264 4,273 4,306 ======== ======== ========
Residential and Commercial -------------------------- NW Natural continues to experience a rapid customer growth rate relative to others in the industry. The 24,852 customers added during 1997 represent a growth rate of 5.7 percent, repeating the record growth rate achieved in 1996. In the three years ended December 31, 1997, more than 66,000 customers were added to the system, representing an average annual growth rate of 5.4 percent. Weather conditions were 4 percent warmer than average in 1997, 4 percent colder than average in 1996, and 12 percent warmer than average in 1995. Average weather conditions are calculated from the most recent 20 years of temperature data measured by heating degree days. Weather in 1997 was 8 percent warmer than in 1996 while 1996 was 17 percent colder than 1995. 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. The volumes of gas sold to residential and commercial customers during 1997 were comparable to 1996, reflecting the combined effects of residential and commercial volumes added from customer growth, offset by reduced gas use due to warmer weather. Related revenues decreased 3 percent primarily due to rate decreases effective December 1, 1996. The addition of 23,220 customers and 17 percent colder weather in 1996 compared to 1995 resulted in a 9 percent increase in related revenues over 1995. 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 --------------------------------------------------- The combined margin from industrial sales and transportation decreased 5 percent in 1997, from $53.9 million in 1996 to $51.3 million in 1997, and increased 9 percent from $49.6 million in 1995 to $53.9 million in 1996. Total volumes delivered to industrial customers were 15.3 million therms, or 3 percent, higher in 1997 than in 1996. The decrease in margin despite increased volumes in 1997 reflects the migration by some customers to lower rates under special anti-bypass contracts. Total volumes delivered to industrial customers were 16.7 million therms, or 3 percent, higher in 1996 than in 1995. In addition to higher volumes, margin improved in 1996 due to higher prices under industrial incentive rate schedules which are designed to track changes in oil prices. NW Natural did not experience margin losses from new bypasses of its system in 1997, 1996 or 1995. 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 NPC's system. Other revenues primarily relate to adjustments in regulatory accounts (see Note 1 to the Consolidated Financial Statements). Other revenues for 1997 included $6.1 million from the amortization of property tax savings and $1.2 million from the amortization of Oregon income tax savings. In 1996, other revenues included $4.0 million from the amortization of property tax savings, $1.6 million from regulatory amortizations, and two non-recurring gains. Specifically, NW Natural recorded a gain of $0.7 million for the recovery of costs and lost revenues related to energy conservation programs approved by the OPUC. NW Natural also recorded a gain of $0.9 million as the result of a settlement with the OPUC concerning amounts to be refunded to Oregon customers from prior-year savings in property taxes and Oregon income taxes. In 1995, other revenues included a one-time, $3.0 million payment under a contract with Portland General Electric Company (PGE), an electric utility based in Portland. This contract gave PGE the option to request gas transportation service for electric generation at one or more sites in NW Natural's service territory. Additionally, other revenues in 1995 included $2.3 million from amortization of the Interruptible Sales Adjustment account and $3.1 million from other regulatory amortizations. Cost of Gas ----------- The cost per therm of gas sold during 1997 was 7 percent lower than in 1996, while such cost in 1996 was 10 percent lower than in 1995. The cost per therm of gas sold includes current gas purchases, gas drawn from storage, demand cost equalization, regulatory deferrals, and company use. For the years 1997, 1996 and 1995, the cost of gas sold was reduced by non-regulated gas sales of $2.3 million, $1.2 million, and $0.3 million, respectively. Under an agreement with the OPUC, these sales are treated as a reduction of gas costs. The average cost per therm of gas purchased was 8 percent higher in 1997 than in 1996, due to fluctuations in prices NW Natural paid for the portion of its gas supplies tied to monthly market price indexes. 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. In 1997, NW Natural absorbed 20 percent of the higher cost of gas purchased, as compared to projections, under its Oregon PGA tariff. The remaining 80 percent of the higher gas costs was recorded as deferred debits (regulatory assets). Effective January 1, 1998, the incentive formula for deferred gas costs was modified so that NW Natural will absorb 33 percent of the difference between actual and projected gas costs and the remaining 67 percent will be deferred for recovery or refund to customers in future rates. Subsidiary Operations --------------------- Consolidated subsidiary earnings for 1997 were $1.8 million, equivalent to 8 cents a share, compared to $2.2 million, or 10 cents a share, in 1996, and $4.1 million, or 19 cents a share, in 1995 (see Note 2 to the Consolidated Financial Statements). In 1997, Financial Corporation earned $1.6 million, compared to $1.0 million in 1996 and $1.3 million in 1995. 1997 results included a $1.1 million gain from the sale of Financial Corporation's interest in a California solar electric generation partnership during the fourth quarter. The decreases in Financial Corporation's on-going operating results from 1996 to 1997 and from 1995 to 1996 were primarily due to weaker operating results attributable to its investments in windpower energy facilities in California. Canor earned $0.2 million in 1997, compared to $0.5 million in 1996. Canor's 1997 results included a $0.9 million write-down of unproven properties in the fourth quarter, while 1996 results include $0.9 million in impairment losses resulting from the application of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Oregon Natural was merged into NW Natural during 1996, thereby effecting the transfer of certain assets, including the stock of Canor, to NW Natural. As a result of this merger, Canor became a wholly-owned subsidiary of NW Natural. Earnings from Canor's operations in 1995, prior to the merger, are included in Oregon Natural's results of operations. Oregon Natural earned $0.7 million in 1996 compared to $1.8 million in 1995. Oregon Natural's earnings in 1996 and 1995 included one-time gains from asset sales, including a $2.9 million gain from the sale of underground storage assets to NW Natural in 1996, and a $3.8 million gain from the sale of its gathering system and gas producing properties in 1995. The 1996 gain was partially offset by a $1.3 million impairment loss on producing wells and a $1.0 million write-down of unproven properties. Operating Expenses ------------------ Operations and Maintenance -------------------------- Consolidated operations and maintenance expenses were $2.3 million, or 3 percent, lower in 1997 than in 1996. NW Natural's operations and maintenance expenses in 1997 decreased $2.1 million, or 3 percent, compared to 1996 primarily due to a one-time charge of $4.9 million in 1996 for 1995 litigation (see "Chase Gardens Litigation", below), offset by increases in customer service and market development expense ($2.9 million); electronic and network services ($0.6 million); and environmental investigation and remediation charges ($0.6 million). Included in 1997 operations and maintenance expense was a $4 million increase in payroll due to salary increases as well as wage increases resulting from NW Natural's new seven-year labor agreement effective April 1, 1997. Subsidiary expenses decreased $0.2 million, or 6 percent, in 1997 compared to 1996 primarily due to a decline in oil and gas production costs. NW Natural's operations and maintenance expenses in 1996 were $9.3 million higher than in 1995, while subsidiary expenses decreased $1.1 million. The increase in utility operations and maintenance expenses was primarily due to the $4.9 million judgment against NW Natural in the Chase Gardens litigation ------------- (see below); expenses related to cold weather and floods ($0.6 million); higher bonus accruals ($1.9 million); environmental investigation costs ($0.4 million); service costs tied to customer growth ($0.8 million); and market development costs ($0.7 million). Lower subsidiary operations and maintenance expenses were primarily due to a decline in oil and gas production expenses. Chase Gardens 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). The Oregon - ------------- Court of Appeals (Oregon Court of Appeals Case No. CA A90481) affirmed the trial court decision in February 1997. The Oregon Supreme Court agreed to hear the case on appeal and is expected to render a final ruling during 1998. NW Natural recorded charges of $5.6 million in the fourth quarter of 1996, equivalent to 15 cents a share, as a reserve against payment of the $4.9 million judgment plus related costs and post-judgment interest. Taxes Other Than Income ----------------------- Taxes other than income, which are comprised of property, franchise, payroll and other taxes, declined $1.6 million, or 8 percent, in 1997. Property tax expense was $1.6 million, or 17 percent, lower than in 1996, due to settlements reached in 1996 relating to property valuations and regulatory treatment of reduced property taxes. NW Natural's franchise taxes, which are incurred as a percentage of revenue, decreased 4 percent, from $8.2 million in 1996 to $7.9 million in 1997, paralleling the percentage decrease in gas sales revenues from 1996 to 1997. The decrease in franchise taxes was offset by increased payroll taxes and regulatory fees. Depreciation, Depletion and Amortization ---------------------------------------- Depreciation, depletion and amortization expense increased $1.6 million, or 4 percent, in 1997 compared to 1996, and $2.5 million, or 6 percent, in 1996 compared to 1995. NW Natural's depreciation expense increased $3.1 million from 1996 to 1997 due to an additional $111.1 million of utility plant placed in service. The new Customer Information System (CIS), placed in service in the fourth quarter of 1997, increased depreciation expense by $0.2 million compared to 1996. NW Natural's depreciation expense decreased $0.7 million, or 2 percent, in 1996 compared to 1995 primarily due to lower depreciation rates approved by the OPUC and WUTC effective January 1, 1996. Depreciation, depletion and amortization expense for subsidiaries decreased $1.5 million in 1997. Depreciation expense for 1997 included expenses of $1.7 million recorded by Canor for the write-down of unproven properties and the abandonment of dry wells. Subsidiary depreciation, depletion and amortization expense increased $3.2 million, or 79 percent, in 1996 compared to 1995 primarily due to impairment and abandonment expenses totaling $2.3 million which were recorded by Oregon Natural pursuant to SFAS No. 121 and the write-down of unproven properties. Canor also recorded a $0.9 million expense during 1996 pursuant to SFAS No. 121. Other Income ------------ The variations in other income during the past three years resulted primarily from non-recurring items and a $1.4 million decline in interest income in 1997 from 1996. Oregon Natural recorded a gain in 1996 on the sale of its underground storage facilities, and recorded a gain in 1995 on the sale of its gathering system and interests in production assets in Oregon. NNG Energy Systems, Inc., a wholly-owned subsidiary of the Company that was dissolved in 1995, recorded a gain in 1995 resulting from the reorganization of its California cogeneration subsidiary. Interest Charges ---------------- NW Natural's interest charges increased $2.7 million, or 10 percent, in 1997 compared to 1996 due to the issuance of $90 million of Medium-Term Notes during 1997 and higher commercial paper balances outstanding. The average commercial paper balances increased from $14.0 million in 1996 to $45.8 million in 1997. The increases in NW Natural's long-term and short-term debt balances were primarily due to the financing of its $117 million utility construction program and $28.6 million in deferred gas costs. Interest charges in 1996 increased $1.2 million, or 5 percent, compared to 1995, also due to higher long-term and short-term debt balances outstanding related to the financing of NW Natural's utility construction expenditures, and to accrued interest charges of $0.7 million for post-judgment interest for the Chase Gardens litigation. Allowance for Funds Used During Construction (AFUDC) represents the cost of funds used during the construction of utility plant (see Note 1 to the Consolidated Financial Statements). In 1997, 1996 and 1995, AFUDC reduced interest expense by $1.7 million , $0.8 million and $0.6 million, respectively. The weighted average AFUDC rates were 5.8 percent in 1997, 8.9 percent in 1996 and 5.3 percent in 1995 (See "Financing Activities" below). Income Taxes ------------ The effective corporate income tax rate for the years ended December 31, was 33 percent for 1997 and 37 percent for both 1996 and 1995. The lower 1997 tax rate was primarily due to permanent tax savings from the change in book depreciation rates, an increase in tax credits, and a reversal of amounts previously recorded for a California solar energy investment that was sold by Financial Corporation (see Note 7 to the Consolidated Financial Statements). The significant increase in 1996 income tax expense was due to the $14 million, or 23 percent, increase in income before income taxes compared to 1995. In 1996, NW Natural recorded an adjustment reducing tax expense for the year by $1.9 million, or 8 cents a share, for reversal of deferred tax amounts provided in prior years. Redeemable Preferred and Preference Stock Dividend Requirements --------------------------------------------------------------- Redeemable preferred and preference stock dividend requirements for 1997 were lower by $0.1 million, or 3 percent, compared to 1996, due to sinking fund redemptions and the redemption of all the outstanding shares of the $4.68 series of preferred stock in June 1997. 1996 requirements were $0.1 million, or 3 percent, lower than 1995 due to sinking fund redemptions and the conversion or redemption of the remaining shares of the Convertible Preference Stock, $2.375 Series, in May 1995. Financial Condition - ------------------- Capital Structure ----------------- NW Natural's capital expenditures are incurred primarily for utility construction resulting from customer growth and system improvements. NW Natural finances these expenditures from cash provided by operations and from short-term borrowings which are periodically refinanced through the sale of long-term debt or equity securities. In addition to its capital expenditures, the weather-sensitive nature of gas usage by NW Natural's residential and commercial customers influences the Company's financing requirements. Short-term liquidity requirements are satisfied primarily through the sale of commercial paper, which is supported by commercial bank lines of credit (see Note 6 to the Consolidated Financial Statements). The Company's long-term goal is to maintain a capital structure comprised of 45 to 50 percent common stock equity, 5 to 10 percent preferred and preference stock and 45 to 50 percent short-term and long-term debt. When additional capital is required, the Company issues debt or equity securities depending upon both the target capital structure and market conditions. The Company also uses these sources to meet long-term debt and preferred and preference stock redemption requirements (see Notes 3 and 5 to the Consolidated Financial Statements). Cash Flows ---------- Operating Activities -------------------- Cash provided by operating activities in 1997 was $44.1 million, or 49 percent, lower than in 1996. The decrease was primarily due to an increase in deferred gas costs ($36.7 million) and a decrease in accounts payable ($6.0 million). In 1996, cash provided by operating activities was $6.1 million, or 7 percent, higher than in 1995, primarily due to increased gas deliveries and the related margin from weather-sensitive customers resulting from colder weather and customer growth. The increase in margin in 1996 was partially offset by the continuing effects of rate reductions effective in December 1994 and 1995 to amortize credit balances in regulatory accounts. The Company has lease and purchase commitments related to its operating activities which are financed with cash flows from operations (see Note 13 to the Consolidated Financial Statements). Investing Activities -------------------- Cash requirements for NW Natural's capital expenditures in 1997 totaled $115.9 million, up $32.5 million, or 39 percent, from 1996. The increase included expenditures for expansion of the Mist underground storage facility ($10.8 million); completion of the new customer information system (CIS) software development ($7.9 million); transportation equipment ($2.2 million); expansion and reinforcement of the gas distribution system to accommodate customer growth ($3.2 million); land purchases for a new service center ($1.6 million); and the upgrading of other computer system hardware and software ($1.5 million). The $16.2 million increase in capital expenditures in 1996 compared to 1995 resulted largely from higher amounts expended for the gas distribution system in order to serve significant customer growth ($8.8 million); the ongoing development of the new CIS which had been delayed in 1995 ($3.7 million); and the development of a remote data terminal system ($1.9 million). NW Natural's construction expenditures are estimated at $90 million for 1998. Over the five year period 1998 through 2002, these expenditures are estimated to be $500 million to $550 million. The higher projected level of capital expenditures over the next five years reflects continued high customer growth, a major system reinforcement project and the development of additional underground storage facilities. About half of the required funds are 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 invested $3.0 million in both 1996 and 1997 in Canor's exploration and production program to supplement Canor's internally-generated funds. Financing Activities -------------------- Cash provided by financing activities in 1997 totaled $76.8 million, compared to cash used for financing of $6.5 million in 1996 and $7.2 million in 1995. The primary financing activities which accounted for the change from 1996 were NW Natural's sale of $90 million of its Medium-Term Notes in 1997 and the net issuance of $39.3 million of commercial paper, partially offset by the redemption of $27 million of long-term debt. Significant financing activity in 1996 consisted of NW Natural's sale of $20 million of Medium-Term Notes, the net issuance of $21.2 million of commercial paper and the redemption of $22 million of long-term debt. In 1995, financing activity consisted primarily of NW Natural's sales of $33 million of common stock and $10 million of Medium-Term Notes, the redemption of the remaining shares of the $2.375 series of Convertible Preference Stock and a net decrease of $24.8 million of commercial paper. Ratios of Earnings to Fixed Charges ----------------------------------- For the years ended December 31, 1997, 1996 and 1995, the Company's ratios of earnings to fixed charges, computed using the Securities and Exchange Commission method, were 2.99, 3.53 and 3.15, respectively. For this purpose, earnings consist of net income before taxes plus fixed charges, and fixed charges consist of interest on all indebtedness, the amortization of debt expense and discount or premium, and the estimated interest portion of rentals charged to income. Contingent Liabilities - ---------------------- Like all companies with business application software programs, the Company is affected by the "Year 2000" issue. Much of this software, which includes NW Natural's customer service, operations, and financial systems, was written using two digits to define the year, rather than four. Any of the Company's software that is time-sensitive may recognize a date using "00" as the year 1900 rather than 2000. This could result in the computer shutting down or performing incorrect calculations. NW Natural has identified and is in the process of correcting the systems within its control that could be affected by the Year 2000 issue. In 1997, the consultant that performed an assessment of NW Natural's application software estimated that the cost of making its application source code for these systems Year 2000-compliant would be about $4.0 million. NW Natural believes that with the appropriate modifications, it will be able to operate its time-sensitive software programs beyond the turn of the century. NW Natural has identified major vendors for which it depends on products or services and is contacting such vendors to hear what plans they have to correct problems they may face with Year 2000 compliance. The Company can make no assurances regarding the Year 2000 compliance status of systems or parties outside its control, and cannot assess the effect on it of any non-compliance by such systems or parties. In December 1997, the OPUC authorized NW Natural to defer and amortize over five years, commencing January 1, 1998, its incremental costs for assessment, planning and renovation of systems for Year 2000 compliance. 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. NW Natural continues to monitor this site. NW Natural expects that its costs of investigation and any remediation at the Linnton site for which it may be responsible should be recoverable, in large part, from insurance or through future rates. During the period from 1993 through 1997, NW Natural recorded as expense a total of $1.6 million for the estimated costs of consultants' fees, ODEQ oversight and the voluntary investigation. In 1996, the Eugene Water and Electric Board (EWEB) asked NW Natural to participate in an investigation and the 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 system was converted to natural gas, and continued to use the site as a service center until 1976 when it was sold. 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. Forward-Looking Statements - -------------------------- This report and other presentations made by the Company from time to time may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and other statements which are other than statements of historical facts. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis. However, each such forward-looking statement involves uncertainties and is qualified in its entirety by reference to the following important factors that could cause the actual results of the Company to differ materially from those projected in such forward-looking statements: (i) prevailing governmental policies and regulatory actions, including those of the Oregon Public Utility Commission and the Washington Utilities and Transportation Commission, with respect to allowed rates of return, industry and rate structure, purchased gas and investment recovery, acquisitions and dispositions of assets and facilities, operation and construction of plant facilities, present or prospective wholesale and retail competition, changes in tax laws and policies and changes in and compliance with environmental and safety laws and policies; (ii) weather conditions and other natural phenomena; (iii) unanticipated population growth or decline, and changes in market demand and demographic patterns; (iv) competition for retail and wholesale customers; (v) pricing of natural gas relative to other energy sources; (vi) unanticipated changes in interest rates 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TABLE OF CONTENTS ----------------- Page ---- 1. Management's Responsibility for Financial Statements............... 32 2. Independent Auditors' Reports...................................... 33 3. Consolidated Financial Statements: Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995................................... 35 Consolidated Statements of Earnings Invested in the Business for the Years Ended December 31, 1997, 1996 and 1995.................. 36 Consolidated Balance Sheets, December 31, 1997 and 1996............ 37 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.................................. 39 Consolidated Statements of Capitalization, December 31, 1997 and 1996.......................................................... 40 Notes to Consolidated Financial Statements......................... 41 4. Quarterly Financial Information (unaudited)........................ 62 Supplemental Schedules Omitted ------------------------------ All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included elsewhere in the financial statements. MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS ---------------------------------------------------- The financial statements in this report were prepared by management, which is responsible for their objectivity and integrity. The statements have been prepared in conformity with generally accepted accounting principles and, where appropriate, reflect informed estimates based on judgments of management. The responsibility of the Company's independent auditors is to render an independent report on the financial statements. The Company's system of internal accounting controls is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorizations, that transactions are recorded to permit the preparation of financial statements in conformity with orders of regulatory authorities and generally accepted accounting principles and that accountability for assets is maintained. The Company's system of internal controls has provided such reasonable assurances during the periods reported herein. The system includes written policies, procedures and guidelines, an organization structure that segregates duties and an established program for monitoring the system by internal auditors. In addition, Northwest Natural Gas Company has prepared and annually distributes to its employees a Code of Ethics covering its policies for conducting business affairs in a lawful and ethical manner. Ongoing review programs are carried out to ensure compliance with these policies. The Board of Directors, through its Audit Committee, oversees management's financial reporting responsibilities. The committee meets regularly with management, the internal auditors, and representatives of the Company's independent auditors. Both internal and external auditors have free and independent access to the committee and the Board of Directors. No member of the committee is an employee of the Company. The committee reports the results of its activities to the full Board of Directors. Annually, the Audit Committee recommends the nomination of independent auditors to the Board of Directors for shareholder approval. /s/ Richard G. Reiten ------------------------- Richard G. Reiten President and Chief Executive Officer /s/ Bruce R. DeBolt -------------------------- Bruce R. DeBolt Senior Vice President, Finance, and Chief Financial Officer REPORT OF INDEPENDENT ACCOUNTANTS February 20, 1998 To the Board of Directors and Stockholders of NW Natural In our opinion, the accompanying consolidated balance sheets and statements of capitalization and the related consolidated statements of income, of cash flows and of changes in earnings invested in the business present fairly, in all material respects, the financial position of Northwest Natural Gas Company (doing business as NW Natural) and its subsidiaries at December 31, 1997, and the results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards 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 audit provides a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Portland, Oregon INDEPENDENT AUDITORS' REPORT To the Directors and Shareholders of Northwest Natural Gas Company We have audited the accompanying consolidated balance sheet and statement of capitalization of Northwest Natural Gas Company and subsidiaries, as of December 31, 1996, and the related consolidated statements of income, earnings invested in the business, and cash flows for each of the two years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of Northwest Natural Gas Company and subsidiaries at December 31, 1996, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Portland, Oregon February 12, 1997 NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME (Thousands, Except Per Share Amounts)
Year Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------- NET OPERATING REVENUES: Operating revenues $361,756 $380,318 $356,276 Cost of sales 129,312 142,805 144,051 -------- -------- -------- Net operating revenues 232,444 237,513 212,225 OPERATING EXPENSES: Operations and maintenance 77,879 80,218 72,018 Taxes other than income taxes 19,952 21,597 24,181 Depreciation, depletion and amortization 44,619 43,047 40,594 -------- -------- -------- Total operating expenses 142,450 144,862 136,793 -------- -------- -------- INCOME FROM OPERATIONS 89,994 92,651 75,432 -------- -------- -------- OTHER INCOME 2,654 8,196 10,432 -------- -------- -------- INTEREST CHARGES: Interest on long-term debt 24,918 23,176 23,141 Other interest 4,500 3,448 2,252 Amortization of debt discount and expense 730 865 882 -------- -------- -------- Total interest charges 30,148 27,489 26,275 Allowance for funds used during construction (1,665) (782) (596) -------- -------- -------- Total interest charges-net 28,483 26,707 25,679 -------- -------- -------- INCOME BEFORE INCOME TAXES 64,165 74,140 60,185 INCOME TAXES 21,106 27,347 22,120 -------- ------- -------- NET INCOME 43,059 46,793 38,065 Redeemable preferred and preference stock dividend requirements 2,646 2,723 2,806 -------- -------- -------- EARNINGS APPLICABLE TO COMMON STOCK $ 40,413 $ 44,070 $ 35,259 ======== ======== ======== AVERAGE COMMON SHARES OUTSTANDING 22,698 22,391 21,817 ====== ====== ====== BASIC EARNINGS PER SHARE OF COMMON STOCK $1.78 $1.97 $1.62 ===== ===== ===== DILUTED EARNINGS PER SHARE OF COMMON STOCK $1.76 $1.94 $1.60 ===== ===== ===== DIVIDENDS PER SHARE OF COMMON STOCK $1.205 $1.20 $1.18 ====== ===== ===== ----------------------------------------------- See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF EARNINGS INVESTED IN THE BUSINESS (Thousands) 1997 1996 1995 - -------------------------------------------------------------------------------- BALANCE AT BEGINNING OF YEAR $ 98,376 $105,651 $ 97,275 Net Income 43,059 46,793 38,065 Cash dividends: Redeemable preferred and preference stock (2,660) (2,735) (2,836) Common stock (27,321) (26,836) (25,517) Stock Dividend: Common stock -- (23,704) -- Foreign currency translation and capital stock expense (591) (793) (1,336) -------- ------- ------- BALANCE AT END OF YEAR $110,863 $ 98,376 $105,651 ======== ======== ========
---------------------------------------------- See Notes to Consolidated Financial Statements. NORTHWEST NATURAL GAS COMPANY CONSOLIDATED BALANCE SHEETS (Thousands)
December 31 1997 1996 - ------------------------------------------------------------------------------- ASSETS: PLANT AND PROPERTY: Utility plant $1,164,499 $1,055,112 Less accumulated depreciation 366,607 336,141 ---------- ----------- Utility plant - net 797,892 718,971 Non-utility property 52,422 45,689 Less accumulated depreciation and depletion 22,843 19,388 ---------- ---------- Non-utility property - net 29,579 26,301 ---------- ---------- Total plant and property 827,471 745,272 ---------- --------- INVESTMENTS AND OTHER: Investments 34,148 33,008 Long-term notes receivable 978 1,715 ---------- --------- Total investments and other 35,126 34,723 ---------- --------- CURRENT ASSETS: Cash and cash equivalents 6,731 8,219 Accounts receivable - customers 40,673 41,890 Allowance for uncollectible accounts (1,253) (1,057) Accrued unbilled revenue 23,911 22,340 Inventories of gas, materials and supplies 17,385 14,439 Prepayments and other current assets 17,226 12,483 ---------- --------- Total current assets 104,673 98,314 ---------- --------- REGULATORY TAX ASSETS 56,860 57,940 ---------- --------- DEFERRED GAS COSTS RECEIVABLE 28,628 -- ---------- ---------- DEFERRED DEBITS AND OTHER 58,859 52,620 ---------- ---------- TOTAL ASSETS $1,111,617 $ 988,869 ========== ==========
----------------------------------------------- See Notes to Consolidated Financial Statements. NORTHWEST NATURAL GAS COMPANY CONSOLIDATED BALANCE SHEETS (Thousands)
December 31 1997 1996 - -------------------------------------------------------------------------------- CAPITALIZATION AND LIABILITIES: CAPITALIZATION (See Consolidated Statements of Capitalization): Common stock $ 72,404 $ 71,425 Premium on common stock 182,998 176,977 Earnings invested in the business 110,863 98,376 ---------- -------- Total common stock equity 366,265 346,778 Redeemable preference stock 25,000 25,000 Redeemable preferred stock 12,429 13,749 Long-term debt 344,303 271,838 ---------- -------- Total capitalization 747,997 657,365 ---------- -------- CURRENT LIABILITIES: Notes payable 89,317 50,058 Accounts payable 58,775 64,795 Long-term debt due within one year 16,000 26,000 Taxes accrued 4,656 3,196 Interest accrued 6,058 5,396 Other current and accrued liabilities 21,390 19,418 ---------- -------- Total current liabilities 196,196 168,863 ---------- -------- DEFERRED INVESTMENT TAX CREDITS 11,949 11,668 ---------- -------- DEFERRED INCOME TAXES 139,953 123,625 ---------- -------- DEFERRED GAS COSTS LIABILITY -- 8,058 ---------- -------- REGULATORY ACCOUNTS AND OTHER 15,522 19,290 ---------- -------- COMMITMENTS AND CONTINGENCIES (Note 13) -- -- ---------- -------- TOTAL CAPITALIZATION AND LIABILITIES $1,111,617 $988,869 ========== ========
----------------------------------------------- See Notes to Consolidated Financial Statements. NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands)
Year Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net income $ 43,059 $ 46,793 $ 38,065 Adjustments to reconcile net income to net cash provided by operations: Depreciation, depletion and amortization 44,619 43,047 40,594 Gain on sale of assets (849) (2,897) (4,636) Deferred income taxes and investment tax credits 16,609 4,108 5,222 Equity in (earnings) losses of investments (468) (773) (2,141) Allowance for funds used during construction (1,868) (1,593) (620) Deferred gas costs (36,686) (11,856) -- Regulatory accounts and other - net (5,159) (2,491) 3,974 --------- -------- -------- Cash from operations before working capital changes 59,257 74,338 80,458 Changes in operating assets and liabilities: Accounts receivable 1,413 (6,448) 7,767 Accrued unbilled revenue (1,571) (847) (1,173) Inventories of gas, materials and supplies (2,946) (185) 704 Accounts payable (6,020) 23,011 (6,733) Accrued interest and taxes 2,122 (6,306) 3,744 Other current assets and liabilities (6,439) 6,377 (908) ---------- -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES 45,816 89,940 83,859 ---------- -------- -------- INVESTING ACTIVITIES: Acquisition and construction of utility plant assets (115,886) (83,400) (67,163) Investment in non-utility plant (9,229) (3,246) (18,964) Proceeds from sale of non-utility assets 1,014 -- 7,862 Investments and other (35) 3,682 1,356 --------- -------- -------- CASH USED IN INVESTING ACTIVITIES (124,136) (82,964) (76,909) --------- ------- -------- FINANCING ACTIVITIES: Common stock issued 6,465 5,690 39,569 Redeemable preference stock retired -- -- (174) Redeemable preferred stock retired (1,320) (1,091) (989) Long-term debt: Issued 90,000 20,000 10,000 Retired (27,000) (22,000) (1,131) Change in short-term debt 39,259 21,226 (24,822) Cash dividend payments: Redeemable preferred and preference stock (2,660) (2,735) (2,836) Common stock (27,321) (26,836) (25,517) Foreign currency translation and capital stock expense (591) (793) (1,336) --------- --------- --------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 76,832 (6,539) (7,236) --------- --------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,488) 437 (286) CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 8,219 7,782 8,068 --------- --------- --------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 6,731 $ 8,219 $ 7,782 ========= ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 28,756 $25,846 $ 25,346 Income taxes $ 7,288 $27,266 $ 15,819 SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Conversion to common stock: $2.375 Series of Convertible Preference Stock -- -- $ 1,078 7-1/4 percent Series of Convertible Debentures $ 535 $1,107 $ 121 ----------------------------------------------- See Notes to Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Thousands, Except Share Amounts)
December 31 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- COMMON STOCK EQUITY: Common stock - par value $3-1/6 per share; authorized 60,000,000 shares: outstanding - 1997, 22,864,328 shares; 1996, 22,555,184 shares $ 72,404 $ 71,425 Premium on common stock 182,998 176,977 Earnings invested in the business 110,863 98,376 -------- -------- Total common stock equity 366,265 49% 346,778 53% -------- ---- -------- ---- REDEEMABLE PREFERENCE STOCK, authorized 2,000,000 shares; $6.95 Series, stated value $100 per share; outstanding - 1997, 250,000 shares; 1996, 250,000 shares 25,000 25,000 -------- -------- Total redeemable preference stock 25,000 3% 25,000 4% -------- ---- -------- ---- REDEEMABLE PREFERRED STOCK, authorized 1,500,000 shares; all outstanding series have a stated value of $100 per share: $4.68 Series, outstanding -1997, 0 shares; 1996, 3,905 shares -- 391 $4.75 Series, outstanding -1997, 4,285 shares; 1996, 6,085 shares 429 608 $7.125 Series, outstanding -1997, 120,000 shares; 1996, 127,500 shares 12,000 12,750 -------- --------- Total redeemable preferred stock 12,429 2% 13,749 2% -------- ---- --------- ---- LONG-TERM DEBT: First Mortgage Bonds -------------------- 9-3/4% Series due 2015 50,000 50,000 9-1/8% Series due 2019 20,000 22,000 Medium-Term Notes ----------------- First Mortgage Bonds: 7.38% Series A due 1997 -- 20,000 7.69% Series A due 1999 10,000 10,000 5.96% Series B due 2000 5,000 5,000 5.98% Series B due 2000 5,000 5,000 8.05% Series A due 2002 10,000 10,000 6.40% Series B due 2003 20,000 20,000 6.34% Series B due 2005 5,000 5,000 6.38% Series B due 2005 5,000 5,000 6.45% Series B due 2005 5,000 5,000 6.80% Series B due 2007 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 -- 8.31% Series B due 2019 10,000 10,000 9.05% Series A due 2021 10,000 10,000 7.25% Series B due 2023 20,000 20,000 7.50% Series B due 2023 4,000 4,000 7.52% Series B due 2023 11,000 11,000 6.52% Series B due 2025 10,000 10,000 7.05% Series B due 2026 20,000 20,000 7.00% Series B due 2027 20,000 -- 6.65% Series B due 2027 20,000 -- Unsecured: 7.40% Series A due 1997 -- 5,000 8.93% Series A due 1998 5,000 5,000 8.95% Series A due 1998 10,000 10,000 8.47% Series A due 2001 10,000 10,000 Convertible Debentures ---------------------- 7-1/4% Series due 2012 10,303 10,838 -------- -------- 360,303 297,838 Less long-term debt due within one-year 16,000 26,000 -------- -------- Total long-term debt 344,303 46% 271,838 41% -------- ---- -------- ---- TOTAL CAPITALIZATION $747,997 100% $657,365 100% ======== ==== ======== ====
----------------------------------------------- See Notes to Consolidated Financial Statements. NORTHWEST NATURAL GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: - ----------------------------------------------------- Organization and Principles of Consolidation - -------------------------------------------- The consolidated financial statements include: Regulated utility: --Northwest Natural Gas Company (doing business as NW Natural) Non-regulated wholly-owned businesses: --NNG Financial Corporation (Financial Corporation) --Canor Energy, Ltd. (Canor) --Oregon Natural Gas Development Corporation (Oregon Natural) Oregon Natural was merged with and into NW Natural during the second quarter of 1996. Together these businesses are referred to herein as the "Company." Intercompany accounts and transactions have been eliminated. Investments in corporate joint ventures and partnerships in which the Company's ownership is 50 percent or less are accounted for by the equity method or the cost method (see Note 10). Certain amounts from prior years have been reclassified to conform with the 1997 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 - ------------- NW Natural's utility plant is stated at original cost (see table in Note 10). When a depreciable unit of property is retired, the original cost is removed from both utility plant and the accumulated provision for depreciation together with the cost of removal, less any salvage. No gain or loss is recognized upon normal retirement. 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 3.8 percent of average depreciable plant in both 1997 and 1996 and 4.2 percent in 1995. The rate of depreciation approximates the economic life of the utility property. Certain additions to utility plant include an allowance for funds used during construction (AFUDC), a non-cash item. AFUDC represents the cost of funds borrowed during construction and is calculated using actual commercial paper interest rates. If commercial paper borrowings are insufficient to finance the total work in progress, then a composite rate of interest on all debt, shown as a reduction to interest charges, and a return on equity funds, shown as other income, is used to compute AFUDC. While cash is not realized currently from AFUDC, it is realized in the ratemaking process over the service life of the related property through increased revenues resulting from higher rate base and higher depreciation expense. NW Natural's weighted average AFUDC rates were 5.8 percent for 1997, 8.9 percent for 1996, and 5.3 percent for 1995. 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, utility customers in future periods. At December 31, 1997 and 1996, regulatory tax assets were $56.9 million and $57.9 million, respectively, while other regulatory assets and liabilities (net) were $36.9 million and $8.2 million, respectively. If, in the future, NW Natural determines that all or a portion of these regulatory assets and liabilities no longer meets the criteria for ccontinued application of SFAS No. 71, it would be required to write off that portion which it could not recover or refund. Cash and Cash Equivalents - ------------------------- For purposes of reporting cash flows, cash and cash equivalents include cash on hand and highly liquid temporary investments with original maturity dates of three months or less. Unbilled Revenue - ---------------- 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 has a "Derivatives Policy" which allows up to a 100 percent hedge position in currency derivatives to match and lock-in prices on individual Canadian natural gas purchase transactions; interest rate derivatives to match specific outstanding debt instruments maturing in less than five years; and natural gas commodity derivatives to lock-in 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 swap contracts, are deferred and recognized as adjustments to gas purchase costs upon concurrent settlement of these contracts (see Note 12). Income Taxes - ------------ NW Natural uses the liability method of accounting for deferred income taxes. Deferred tax liabilities and assets reflect the expected future tax consequences, based on enacted tax law, of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts. Consistent with rate and accounting instructions of regulatory authorities, deferred income taxes are not currently collected for those 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 such 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 $56.9 million at December 31, 1997 and $57.9 million at December 31, 1996 (see Note 7). Investment tax credits on utility property additions and leveraged leases, which reduce income taxes payable, are deferred for financial statement purposes and 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 - ------------ Other income consists of interest income, gain on the sale of assets, including non-recurring gains from the sale of Oregon Natural's underground gas storage assets, gathering system and gas producing properties to NW Natural in 1996 and 1995, investment income of Financial Corporation, and other miscellaneous income from merchandise sales, rent, the aircraft lease and other items. Earnings Per Share - ------------------ The Company adopted SFAS No. 128, "Earnings Per Share", for the year ended December 31, 1997. SFAS No. 128 requires disclosure of basic and diluted earnings per share. All prior years have been restated to reflect the adoption of SFAS No. 128. 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:
1997 1996 1995 ------------------------------------------------------------------------------- (Thousands, except per share amounts) Earnings applicable to common stock $40,413 $44,070 $35,259 Debenture interest less taxes 455 479 528 ------- ------- ------- Earnings applicable to diluted common stock $40,868 $44,549 $35,787 ======= ======= ======= Average common shares outstanding 22,698 22,391 21,817 Stock options 32 27 11 Convertible debentures 518 545 600 ------- ------- ------ Diluted average common shares outstanding 23,248 22,963 22,428 ======= ====== ====== Diluted earnings per share of common stock $1.76 $1.94 $1.60 ===== ===== =====
2. CONSOLIDATED SUBSIDIARY OPERATIONS: - -------------------------------------------- At December 31, 1997, the Company had two active wholly-owned subsidiaries, Financial Corporation and Canor. Another wholly-owned subsidiary, Oregon Natural, was merged into NW Natural during 1996. NNG Financial Corporation - ------------------------- Financial Corporation provides 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 10). Canor Energy, Ltd. - ------------------ Canor, an Alberta, Canada corporation, is engaged in natural gas and oil exploration, development and production in Alberta and Saskatchewan, Canada. Canor began operations in 1990 as a wholly-owned subsidiary of Oregon Natural. When Oregon Natural was merged into NW Natural during 1996, Canor became a wholly-owned subsidiary of NW Natural. Summarized financial information for the consolidated subsidiaries follows:
Thousands 1997 1996 1995 - ------------------------------------------------------------------------------- Statements of income for the year ended December 31: Net operating revenues $ 9,868 $10,009 $ 8,271 Operating expenses 9,917 11,671 9,727 ------- ------- ------- Income (loss) from operations (49) (1,662) (1,456) Income from financial investments 468 773 2,063 Other income and interest charges 962 4,197 5,991 ------- ------- ------- Income before income taxes 1,381 3,308 6,598 Income tax expense (benefit) (381) 1,076 2,497 ------- ------- ------- Net income $ 1,762 $ 2,232 $ 4,101 ======= ======= ======= Balance sheets as of December 31: Assets: Non-utility property - net $29,135 $25,704 $36,053 Investments and other 25,896 26,081 37,364 Current assets 19,012 20,898 20,750 ------- ------- ------- Total assets $74,043 $72,683 $94,167 ======= ======= ======= Capitalization and liabilities: Equity $34,883 $30,706 $30,392 Current liabilities 13,668 13,590 37,459 Other liabilities 25,492 28,387 26,316 ------- ------- ------- Total capitalization and liabilities $74,043 $72,683 $94,167 ======= ======= ======= - -------------------------------------------------------------------------------
3. CAPITAL STOCK: - ------------------- Common Stock - ------------ At December 31, 1997, NW Natural had reserved 68,181 shares of common stock for issuance under the Employee Stock Purchase Plan, 737,153 shares under its Dividend Reinvestment and Stock Purchase Plan, 833,858 shares under its 1985 Stock Option Plan (see Note 4), 578,033 shares for future conversions of its 7-1/4 percent Convertible Debentures and 3,000,000 shares under the Shareholder Rights Plan. During 1996, the Board of Directors adopted a Shareholder Rights Plan and declared a dividend of one Right for each outstanding share of common stock. Each Right entitles the shareholder to purchase one tenth of a share of common stock for $6.67. In the event that any person acquired more than 15 percent of the outstanding common stock, or should the Company be acquired in a merger or other business combination transaction, subject to the terms of the Rights Plan, the Right would become exercisable, entitling each holder (other than the acquiring person or group), for a purchase price equal to 10 times the current purchase price of the Right, to purchase that number of shares of common stock having a market value equal to 20 times the purchase price of the Right. The Rights will expire on March 15, 2006. Effective September 6, 1996, additional shares of common stock were distributed to shareholders of record on August 23, 1996, in connection with a three-for-two stock split. All share disclosures and per share data related to the common stock included in these financial statements are presented on a post-split basis. Amounts associated with common stock for years prior to the effective date of the stock split have been adjusted to reflect the split. Redeemable Preference Stock - --------------------------- The $6.95 Series of Preference Stock is not redeemable prior to December 31, 2002, but is subject to mandatory redemption on that date. Redeemable Preferred Stock - -------------------------- The mandatory preferred stock redemption requirements aggregate $1.0 million in both 1998 and 1999, and $0.8 million in each of the years 2000, 2001 and 2002. These requirements are noncumulative. 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 redeemable preferred stock were redeemed on June 2, 1997. The redeemable preferred stock is callable at stipulated prices, plus accrued dividends. At December 31, 1997, redemption prices were $100 per share for the $4.75 Series. Shares of the $7.125 Series are redeemable on or after May 1, 1998 at a price of $104.75 per share decreasing each year thereafter to $100 per share on or after May 1, 2008. The following table shows the changes in the number of shares of NW Natural's capital stock and the premium on common stock for the years 1997, 1996 and 1995:
Premium ------------Shares-------------- on Common Preference Preferred Stock Stock Stock Stock Thousands) - ------------------------------------------------------------------------------------- Balance, December 31, 1994 20,128,028 300,079 159,504 $134,641 Sales to the public 1,725,000 -- -- 30,571 Sales to employees 21,046 -- -- 346 Sales to stockholders 237,985 -- -- 4,376 Exercise of stock options - net 18,359 -- -- 45 Conversion of preference stock to common 106,755 (43,137) -- 853 Conversion of convertible debentures to common 6,078 -- -- 108 Sinking fund purchases -- -- (11,100) -- Redemptions -- (6,942) -- -- Other -- -- -- 3 ---------- ------- ------- -------- Balance, December 31, 1995 22,243,251 250,000 148,404 170,943 Sales to employees 15,043 -- -- 255 Sales to stockholders 235,878 -- -- 4,834 Exercise of stock options - net 5,400 -- -- (11) Conversion of convertible debentures to common 55,612 -- -- 956 Sinking fund purchases -- -- (10,914) -- ---------- ------- ------- -------- Balance, December 31, 1996 22,555,184 250,000 137,490 176,977 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 -- -- (9,300) -- Redemptions -- -- (3,905) -- ---------- ------- ------- -------- Balance, December 31, 1997 22,864,328 250,000 124,285 $182,998 ========== ======= ======= ======== - --------------------------------------------------------------------------------
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 649,173 shares of common stock have been granted at prices ranging from $11.75 to $24.00 per share, and options on 55,296 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. Had compensation cost for NW Natural's two stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans in a manner consistent with the method determined under SFAS No. 123, "Accounting for Stock-Based Compensation," net income and earnings per share would have been reduced to the pro forma amounts shown below:
1997 1996 ---- ---- Earnings applicable to common stock ($000): - ------------------------------------------- As reported $40,413 $44,070 Pro forma 40,302 43,480 Basic earnings per share - ------------------------ As reported $1.78 $1.97 Pro forma 1.78 1.94 Diluted earnings per share - -------------------------- As reported $1.76 $1.94 Pro forma 1.75 1.89
For purposes of the pro forma expense, the fair value of each option is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: a dividend yield of 5 and 5.4 percent; expected volatility of 22 and 21 percent; risk-free interest rates of 6 and 7 percent; and, for both of such years, expected lives of seven years. Information regarding the Plan is summarized as follows:
Options ------------------------------- 1997 1996 1995 ---- ---- ---- Outstanding, beginning of year 308,663 167,846 208,506 $11.75 Options: Exchanged by holders -- -- (10,284) Exercised -- -- (14,310) $16.59 Options: Exchanged by holders (20,598) (12,933) (14,268) Exercised (10,432) (5,400) (4,048) $24.00 Options: Exchanged by holders (7,184) -- -- Exercised (12,243) (8,250) (9,000) Expired (4,773) -- -- $20.17 Options: Granted -- -- 11,250 Exercised (500) -- -- $20.92 Options: Granted -- 170,400 -- Exchanged by holders (5,159) -- -- Exercised (20,041) -- -- Expired -- (3,000) -- ------- ------- --------- Outstanding, end of year 227,733 308,663 167,846 ======= ======= ======= Available for grant, end of year 606,125 601,352 760,500 - --------------------------------------------------------------------------------
NW Natural has an employee stock purchase plan whereby employees may purchase common stock at 92 percent of the average bid and ask market price on the subscription date. The subscription date is set annually, and each employee may purchase up to 900 shares payable through payroll deduction over a six to 12 month period. 5. LONG-TERM DEBT: - ------------------ The issuance of first mortgage bonds under the Mortgage and Deed of Trust is limited by property, earnings and other provisions of the mortgage. NW Natural's Mortgage and Deed of Trust constitutes a first mortgage lien on substantially all of its utility property. The 7-1/4 percent Series of Convertible Debentures may be converted at any time into 50-1/4 shares of common stock for each $1,000 face value ($19.90 per share). The sinking fund requirements and maturities for the five years ending December 31, 2002, on the long-term debt outstanding at December 31, 1997, amount to: $16.0 million in 1998; and $11.0 million in each of the years 1999, 2000, 2001 and 2002. 6. NOTES PAYABLE AND LINES OF CREDIT: - ------------------------------------------- NW Natural has available through September 30, 1998, committed lines of credit with five commercial banks totaling $100 million, consisting of a primary fixed amount of $50 million plus an excess amount of up to $50 million available as needed, at NW Natural's option, on a monthly basis. Financial Corporation has available through September 30, 1998, committed lines of credit with two commercial banks totaling $20 million, consisting of a primary fixed amount of $15 million plus an excess amount of up to $5 million available as needed, at Financial Corporation's option, on a monthly basis. Financial Corporation's lines are supported by the guaranty of NW Natural. Under the terms of these lines of credit, which are used as backup lines for commercial paper programs, NW Natural and Financial Corporation pay commitment fees but are not required to maintain compensating bank balances. The interest rates on borrowings under these lines of credit are based on current market rates as negotiated. There were no outstanding balances on either the NW Natural or the Financial Corporation line of credit as of December 31, 1997 or 1996. NW Natural and Financial Corporation issue domestic commercial paper, which is supported by the committed bank lines, under agency agreements with a commercial bank. Additionally, Financial Corporation's commercial paper is supported by the guaranty of NW Natural. The amounts and average interest rates of commercial paper outstanding were as follows at December 31:
1997 1996 -------------- -------------- Thousands Amount Rate Amount Rate ------------------------------------------------------------ NW Natural $82,634 5.5% $43,532 5.4% Financial Corporation 6,683 5.6% 6,526 5.4% ------- ------- Total $89,317 $50,058 ======= =======
7. INCOME TAXES: - ---------------------- A reconciliation between income taxes calculated at the statutory federal tax rate and the tax provision reflected in the financial statements is as follows:
Thousands 1997 1996 1995 - ---------------------------------------------------------------------------------------- Computed income taxes based on statutory federal income tax rate of 35% $22,457 $25,949 $21,065 Increase (reduction) in taxes resulting from: Differences between book and tax depreciation 221 1,313 1,575 Current state income tax, net of federal tax benefit 1,944 3,235 2,051 Federal income tax credits (360) (228) (384) Restoration of investment and energy tax credits (844) (849) (1,088) Removal costs (544) (538) (552) Reversal of amounts provided in prior years (1,455) (1,900) -- Unconsolidated foreign subsidiary income (loss) (13) 113 266 Gains on Company-Owned Life Insurance (470) (324) (260) Other - net 170 576 (552) ------- ------- ------- Total provision for income taxes $21,106 $27,347 $22,121 ======= ======= ======= - ------------------------------------------------------------------------------------------
The provision for income taxes consists of the following: Thousands 1997 1996 1995 - ----------------------------------------------------------------------------------------- Income taxes currently payable: Federal $ 5,852 $17,634 $16,104 State (1,644) 2,912 1,052 Foreign 62 126 284 ------- ------- ------- Total 4,270 20,672 17,440 ------- ------- ------- Deferred taxes - net: Federal 13,032 5,451 4,086 State 4,635 1,889 1,683 Foreign 13 184 -- ------- ------- ------ Total 17,680 7,524 5,769 ------- ------- ------ Investment and energy tax credits restored: From utility operations (800) (800) (800) From subsidiary operations (44) (49) (288) ------ ------ ------- Total (844) (849) (1,088) Total provision for income taxes $21,106 $27,347 $22,121 ======= ======= ======= Percentage of pretax income 32.9% 36.9% 36.8% ===== ===== ====== - -----------------------------------------------------------------------------------------
Deferred tax assets and liabilities are comprised of the following: Thousands 1997 1996 - ------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment $113,121 $112,210 Regulatory asset 22,177 22,597 -------- -------- Total 135,298 134,807 -------- -------- Deferred tax assets: Regulatory liability (asset) $(13,971) $ 3,609 Other deferred assets 9,316 7,554 Alternative minimum tax credits -- 19 -------- -------- Total (4,655) 11,182 -------- -------- Net accumulated deferred income tax liability $139,953 $123,625 ======== ========
- -------------------------------------------------------------------------------- 8. EMPLOYEE RETIREMENT PLANS: - ----------------------------------- NW Natural has two non-contributory defined benefit retirement plans covering all regular employees with more than one year of service. The benefits under the plans are based upon years of service and the employee's average compensation during the final years of service. NW Natural's funding policy is to make the annual contribution required by applicable regulations and recommended by its actuary. Plan assets consist primarily of marketable foreign and domestic equity securities, corporate obligations, U.S. government obligations and cash equivalents. The following table sets forth the amounts recognized in the financial statements and the combined funded status of the retirement plans:
Thousands 1997 1996 1995 ----------------------------------------------------------------------- Service cost $ 3,010 $ 3,082 $ 2,819 Interest cost 7,575 6,980 6,843 Return on assets (29,298) (14,935) (29,291) Net amortization and deferral 17,900 4,110 19,927 -------- -------- -------- Annual pension cost $ (813) $ (763) $ 298 ======== ======== ======== ----------------------------------------------------------------------- Vested benefit obligation $ 91,078 $ 84,502 $ 79,805 Total accumulated benefit obligation $ 96,364 $ 84,915 $ 80,079 -----------------------------------------------------------------------
Thousands 1997 1996 1995 ----------------------------------------------------------------------- Funded status as of December 31: Plan assets at fair value $158,118 $134,376 $124,748 Projected benefit obligation for service rendered to date 114,368 100,481 96,999 -------- -------- --------- Funded status 43,750 33,895 27,749 Unrecognized net gain (45,820) (35,326) (30,185) Unrecognized net asset at transition (727) (1,123) (1,518) Unrecognized prior service costs 6,068 5,012 5,650 -------- -------- -------- Prepaid pension cost $ 3,271 $ 2,458 $ 1,696 ======== ======== ======== Total cash contribution $ 0 $ 0 $ 0 ======== ======== ======== ----------------------------------------------------------------------- Discount rate: Funded status 7.25% 7.50% 7.50% ===== ===== ===== Pension cost 7.50% 7.50% 8.00% ===== ===== ===== Expected long-term rate of return on plan assets 9.00% 9.00% 9.00% ===== ===== ===== Rate for compensation increases 4.50% 5.00% 5.00% ===== ===== ===== -----------------------------------------------------------------------
Effective December 31, 1997, NW Natural changed the assumed discount rate used in determining the funded status of the plans from 7.50 percent to 7.25 percent. The 7.25 percent discount rate was used in determining the funded status of the plans at year-end 1997 and 7.50 percent was used to determine annual pension cost in 1997 and 1996. The 7.25 percent discount rate will be used to determine funded status and pension cost in 1998. NW Natural has a qualified "Retirement K Savings Plan" under Internal Revenue Code Section 401(k) and a non-qualified "Executive Deferred Compensation Plan," for eligible employees. These plans are designed to enhance the existing retirement program of employees and to assist them in strengthening their financial security by providing an incentive to save and invest regularly. NW Natural's contributions to these plans in 1997, 1996 and 1995 were $1.1 million, $1.0 million and $0.8 million, respectively. NW Natural has a non-qualified supplemental retirement plan for eligible executive officers which it is funding with trust-owned life insurance. The amount of coverage is designed to provide sufficient returns to recover all costs of the plan if assumptions made as to mortality experience, policy earnings, and other factors are realized. Expenses related to the plan were $1.3 million in both 1997 and 1996 and $1.0 million in 1995. 9. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS: - ---------------------------------------------------------------- The Company provides continued health care and life insurance coverage after retirement for exempt employees. These benefits and similar benefits for active employees are provided by insurance companies, and related premiums are based on the amount of benefits paid during the year. The accrued costs in excess of benefits paid relating to SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions," are not included in NW Natural's rates in Oregon. The staff of the OPUC has recommended that NW Natural's portion of these costs allocated to Oregon be authorized for recovery in rates only pursuant to a general rate case filing, and has recommended against the use of deferred accounting treatment for their recovery. NW Natural is charging the Oregon portion of these costs to expense. In Washington, the WUTC's order in NW Natural's 1997 general rate case authorized NW Natural to begin amortizing the deferred SFAS No. 106 costs attributable to Washington operations that had accrued since adoption of SFAS No. 106 in 1993, to be collected from customers over a five year period. Additionally, the ongoing annual SFAS No. 106 cost relating to Washington operations was placed into rates and deferrals were discontinued. The following table sets forth the postretirement health care and life insurance plan's status at December 31:
Thousands 1997 1996 1995 ------------------------------------------------------------------------- Retirees $ 5,903 $ 5,753 $ 5,983 Fully eligible active plan participants 1,418 1,232 1,254 Other active plan participants 5,011 3,878 4,236 ------- ------- ------- Total accumulated postretirement benefit obligation 12,332 10,863 11,473 Fair value of plan assets -- -- -- ------- ------- ------- Accumulated postretirement benefit obligation in excess of plan assets 12,332 10,863 11,473 Unrecognized transition obligation (8,460) (9,024) (9,588) Unrecognized gain 1,230 2,273 1,262 ------- ------- ------- Accrued postretirement benefit cost $ 5,102 $ 4,112 $ 3,147 ======= ======= ======= Service cost - benefits earned during the period $ 238 $ 262 $ 239 Interest cost on accumulated postretirement benefit obligation 845 838 859 Amortization of transition obligation 477 556 503 ------- ------- ------- Net postretirement benefit cost $ 1,560 $ 1,656 $ 1,601 ======= ======= =======
The unrecognized transition obligation is being amortized over a period of 20 years beginning January 1, 1993. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation for pre-Medicare eligibility is 8.5 percent for 1998; 8 percent for 1999; 7.5 percent for 2000; 7 percent for 2001; 6.5 percent for 2002; then decreasing over the next five years to 4 percent. The assumed rate for the HMO plan is 5 percent for 1998; 4.5 percent for 1999; and 4 percent for the next eight years. The assumed rate for post-Medicare eligibility is 8 percent for 1998; 7.5 percent for 1999; 7 percent for 2000; 6.5 percent for 2001; 6 percent for 2002; then decreasing over the next five years to 4 percent. A one-percentage-point change in the assumed health care cost trend rate for each year would adjust the accumulated postretirement benefit obligation and net postretirement health care cost as of December 31, 1997 by approximately 14.8 percent and 16.1 percent, respectively. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent at December 31, 1997, 8.0 percent at December 31, 1996, and 7.5 percent at December 31, 1995. 10. PROPERTY AND INVESTMENTS: - ------------------------------- The following table sets forth the major classifications of NW Natural's utility plant and accumulated provision for depreciation at December 31:
1997 1996 --------------------- ----------------------- Average Average Depreciation Depreciation Thousands Amount Rate Amount Rate - ------------------------------------------------------------------------------- Transmission and distribution $ 938,760 3.5% $ 873,862 3.6% Storage 66,827 2.6% 66,624 2.7% General 76,518 7.1% 66,483 6.8% Intangible and other 47,205 6.0% 11,287 12.5% ---------- ---------- Utility plant in service 1,129,310 3.8% 1,018,256 3.8% Gas stored long-term 11,190 10,708 Work in progress 23,999 26,148 ---------- ---------- Total utility plant 1,164,499 1,055,112 Less accumulated depreciation 366,607 336,141 ---------- --------- Utility plant-net $ 797,892 $ 718,971 ========== ========= - --------------------------------------------------------------------------------
The following table summarizes the Company's investments in affiliated entities accounted for under the equity and cost methods, and its investment in a leveraged lease at December 31:
Thousands 1997 1996 ----------------------------------------------------------------------- Electric generation $23,060 $22,035 Aircraft leveraged lease 8,932 8,265 Gas pipeline and other 2,156 2,708 ------- ------- Total investments and other $34,148 $33,008 ======= =======
Financial Corporation has invested 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's ownership interests in these projects range from 4.0 percent to 5.3 percent. Financial Corporation also has invested in U. S. Windpower Partners electric generating projects, with facilities located near Livermore and Palm Springs, California. The wind-generated power is sold to Pacific Gas and Electric Company and Southern California Edison Company under long-term contracts. Financial Corporation's ownership interests in these projects range from 8.5 percent to 41 percent. In 1987, Oregon Natural purchased a Boeing 737-300 aircraft which was leased to Continental Airlines for 20 years under a leveraged lease agreement. As part of Oregon Natural's merger with NW Natural in 1996, ownership of the aircraft was transferred to NW Natural. 11. 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:
December 31, 1997 December 31, 1996 ----------------------- ---------------------- Carrying Estimated Carrying Estimated Thousands Amount Fair Value Amount Fair Value - ------------------------------------------------------------------------------------- Redeemable preference stock $ 25,000 $ 25,250 $ 25,000 $ 22,750 Redeemable preferred stock $ 12,429 $ 12,411 $ 13,749 $ 12,956 Long-term debt including amount due within one year $360,303 $389,536 $297,838 $316,205 - ------------------------------------------------------------------------------------
Fair value of the redeemable preference stock and the redeemable preferred stock was estimated using quoted market prices. Interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities were used to estimate fair value for debt issues. The carrying amount of long-term notes receivable was stated at estimated fair value at December 31, 1997 and 1996. 12. 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 December 31, 1997 totaled $5.6 million, and, if settled on that date, NW Natural would have realized a negligible loss on these contracts. As part of an overall strategy to maintain an acceptable level of exposure to the risk of gas price fluctuations, 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 uses 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 December 31, 1997 and 1996, NW Natural had cap and swap agreements with broker-dealers to cover notional quantities of 131,635 and 30,000 million British Thermal Units (MMBtu) per day of gas, respectively. Under the swap agreements in effect at December 31, 1997, NW Natural pays fixed prices averaging $1.687 per MMBtu. In return, it receives a price that varies from month to month with market conditions. The notional amount of the swap agreements at December 31, 1997 was $23 million, and, if settled on that date, NW Natural would have realized a loss on these swaps of $4.4 million. (See Note 1, "Derivatives Policy," for a summary of accounting for gains and losses.) 13. COMMITMENTS AND CONTINGENCIES: - ----------------------------------- Lease Commitments ----------------- Future lease commitments are: $5.3 million in 1998; $2.8 million in 1999; $2.5 million in 2000; $2.3 million in 2001; and $2.1 million in 2002. Thereafter, total commitments amount to $6.2 million. These commitments principally relate to the lease of NW Natural's office headquarters, vehicles and computer systems. Total rental expense for 1997, 1996 and 1995 was $ 6.4 million, $5.4 million and $5.3 million, respectively. 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 December 31, 1997:
Capacity Capacity Purchase Release Thousands Agreements Agreements ----------------------------------------------------------------------- 1998 $ 80,100 $ 4,296 1999 80,100 4,296 2000 80,100 4,296 2001 79,379 4,296 2002 77,297 4,296 2003 through 2023 523,459 33,651 -------- ------- Total 920,435 55,131 Less: Amount representing interest 284,800 16,334 -------- ------- Total at present value $635,635 $38,797 ======== ======= -----------------------------------------------------------------------
NW Natural's total payments of fixed charges under capacity purchase agreements in 1997, 1996 and 1995 were $76.7 million, $73.4 million and $62.2 million, respectively. Included in the amounts for 1997, 1996 and 1995 were reductions for capacity release sales totaling $4.2 million, $4.2 million and $4.8 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 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. NW Natural continues to monitor this site. NW Natural expects that its costs of investigation and any remediation at the Linnton site for which it may be responsible should be recoverable, in large part, from insurance or through future rates. During the period from 1993 through 1997, NW Natural recorded as expense a total of $1.6 million for the estimated costs of consultants' fees, ODEQ oversight and the voluntary investigation. In 1996, the Eugene Water and Electric Board (EWEB) asked NW Natural to participate in an investigation and the 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 system was converted to natural gas, and continued to use the site as a service center until 1976 when it was sold. 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. 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). ------------------- The Oregon Court of Appeals (Oregon Court of Appeals Case No. CA A90481) affirmed the trial court decision in February 1997. The Oregon Supreme Court agreed to hear the case on appeal and is expected to render a final ruling during 1998. 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 payment of the judgment, costs and post-judgment interest from the case. The Company is party to certain other legal proceedings in which claimants seek material amounts. Although it is not possible to predict the outcome with certainty, based upon the opinions of legal counsel, management does not expect disposition of these matters to have a materially adverse effect on the Company's financial position, results of operations or cash flows. NORTHWEST NATURAL GAS COMPANY QUARTERLY FINANCIAL INFORMATION (UNAUDITED) - --------------------------------------------------------------------------------
---------------------Quarter Ended ----------------------- Dollars (Thousands, Except Per Share Amounts) Mar. 31 June 30 Sept. 30 Dec. 31 Total - ------------------------------------------------------------------------------------------------------ 1997 Operating revenues 134,347 65,855 46,283 115,271 361,756 Net operating revenues 84,039 43,726 32,488 72,191 232,444 Net income 24,753 2,360 (2,448) 18,394 43,059 Basic Earnings (loss) per share 1.07 0.07 (0.14) 0.78 1.78* Diluted Earnings (loss) per share 1.04 0.07 (0.14) 0.76 1.76* 1996 Operating revenues 137,561 71,884 50,585 120,288 380,318 Net operating revenues 83,504 46,183 34,578 73,248 237,513 Net income 23,356 5,508 255 17,674** 46,793 Basic Earnings (loss) per share 1.02 0.22 (0.02) 0.76** 1.97* Diluted Earnings (loss) per share 1.00 0.22 (0.02) 0.74** 1.94* - --------------------------------------------------------------------------------------------------------
* 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 may not equal earnings per share for the year. Variations in earnings between quarterly periods are due primarily to the seasonal nature of the Company's business. ** Results for the fourth quarter of 1996 include a charge equivalent to 15 cents a share resulting from a judgment against NW Natural in litigation dating from 1995, and an adjustment reducing tax expense by $1.9 million, or 8 cents a share, for reversal of deferred tax amounts provided in prior years. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 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 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 December 18, 1997. *(4a.) Copy of Mortgage and Deed of Trust, dated as of July 1, 1946, to Bankers Trust and R. G. Page (to whom Stanley Burg is now successor), Trustees (incorporated herein by reference to Exhibit 7(j) in File No. 2-6494); and copies of Supplemental Indentures Nos. 1 through 14 to the Mortgage and Deed of Trust, dated respectively, as of June 1, 1949, March 1, 1954, April 1, 1956, February 1, 1959, July 1, 1961, January 1, 1964, March 1, 1966, December 1, 1969, April 1, 1971, January 1, 1975, December 1, 1975, July 1, 1981, June 1, 1985 and November 1, 1985 (incorporated herein by reference to Exhibit 4(d) in File No. 33-1929); Supplemental Indenture No. 15 to the Mortgage and Deed of Trust, dated as of July 1, 1986 (filed as Exhibit (4)(c) in File No. 33-24168); Supplemental Indentures Nos. 16, 17 and 18 to the Mortgage and Deed of Trust, dated, respectively, as of November 1, 1988, October 1, 1989 and July 1, Exhibit (4)(c) in File No. 33-40482); Supplemental Indenture No. 19 to the Mortgage, and Deed of Trust, dated as of June 1, 1991 (incorporated herein by reference to Exhibit 4(c) in File No. 33-64014); and Supplemental Indenture No. 20 to the Mortgage and Deed of Trust, dated as of June 1, 1993 (incorporated herein by reference to Exhibit 4(c) in File No. 33-53795). *(4d.) Copy of Indenture, dated as of June 1, 1991, between the Company and Bankers Trust Company, Trustee, relating to the Company's Unsecured Medium-Term Notes (incorporated herein by reference to Exhibit 4(e) in File No. 33-64014). *(4e.) Officers' Certificate dated June 12, 1991 creating Series A of the Company's Unsecured Medium-Term Notes (incorporated herein by reference to Exhibit (4e.) to Form 10-K for 1993, File No. 0-994). *(4f.) Officers' Certificate dated June 18, 1993 creating Series B of the Company's Unsecured Medium-Term Notes (incorporated herein by reference to Exhibit (4f.) to Form 10-K for 1993, File No. 0-994). *(4g.) Rights Agreement, dated as of February 27, 1996, between the Company and Boatmen's Trust Company (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 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. (11) Statement re computation of per share earnings. (12) Statement re computation of ratios. (23a.) Consent of Deloitte & Touche LLP. (23b.) Consent of Price Waterhouse 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). *(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. (10f.) Directors Deferred Compensation Plan, effective June 1, 1981, restated as of December 1, 1997. *(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. *(10k.) Executive Annual Incentive Plan, effective March 1, 1990, as amended effective January 1, 1992 and January 1, 1996 (incorporated by reference to Exhibit (10k.) to Form 10-K for 1995, File No. 0-994). *(10l.) Employment agreement dated November 27, 1989, between the Company and an executive officer (incorporated herein by reference to Exhibit (10l.) to Form 10-K for 1991, File No. 0-994). *(10m.) Agreement dated September 22, 1994, between the Company and an executive officer (incorporated herein by reference to Exhibit (10m.) to Form 10-K for 1994, File No. 0-994). *(10n.) Employment agreement dated November 2, 1995, as amended February 27, 1996, between the Company and an executive officer (incorporated herein by reference to Exhibit (10n.) to Form 10-K for 1995, File No. 0-994). (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. *(10o.) Form of Severance Agreement as entered into between the Company and designated executive officers (incorporated herein by reference to Exhibit (10o.) to Form 10-K for 1995, File No. 0-994). *(10p.) Employment Agreement dated July 2, 1997, between the Company and an executive officer (incorporated herein by reference to Exhibit 10 (a) to 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. The Company agrees to furnish the Commission, upon request, a copy of certain instruments defining rights of holders of long-term debt of the Company or its consolidated subsidiaries which authorize securities thereunder in amounts which do not exceed 10% of the total assets of the Company. (b) Reports on Form 8-K. No Current Reports on Form 8-K were filed during the quarter ended December 31, 1997. - ------------------------------------------- *Incorporated herein by reference as indicated SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHWEST NATURAL GAS COMPANY Date: March 17, 1998 By: /s/ Richard G. Reiten ----------------------- Richard G. Reiten, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE - ------------------------------ ---------------------------------------- -------------- Richard G. Reiten Principal Executive Officer and Director March 17, 1998 - ------------------------------ Richard G. Reiten, President and Chief Executive Officer /s/ Bruce R. DeBolt Principal Financial Officer March 17, 1998 - ------------------------------ Bruce R. DeBolt Senior Vice President, Finance, and Chief Financial Officer /s/ D. James Wilson Principal Accounting Officer March 17, 1998 - ------------------------------- D. James Wilson Treasurer and Controller /s/ Mary Arnstad Director ) - ------------------------------- ) Mary Arnstad ) ) /s/ Thomas E. Dewey, Jr. Director ) - ------------------------------- ) Thomas E. Dewey, Jr. ) ) /s/ Tod R. Hamachek Director ) - ------------------------------- ) Tod R. Hamachek ) ) /s/ Richard B. Keller Director ) - ------------------------------- ) Richard B. Keller ) ) /s/ Wayne D. Kuni Director ) - ------------------------------- ) Wayne D. Kuni ) ) March 17, 1998 Director ) - ------------------------------ ) Randall C. Pape ) ) /s/ Robert L. Ridgley Director ) - ------------------------------ ) Robert L. Ridgley ) ) /s/ Dwight A. Sangrey Director ) - ------------------------------ ) Dwight A. Sangrey ) ) /s/ Melody C. Teppola Director ) - ------------------------------ ) Melody C. Teppola ) ) /s/ Russell F. Tromley Director ) - ------------------------------ ) Russell F. Tromley ) ) /s/ Benjamin R. Whiteley Director ) - ------------------------------ Benjamin R. Whiteley
NORTHWEST NATURAL GAS COMPANY EXHIBIT INDEX To Annual Report on Form 10-K For Fiscal Year Ended December 31, 1997 Exhibit Document Number -------- ------- * Restated Articles of Incorporation, as filed June 24, 1988 and amended December 8, 1992, December 1, 1993 and May 27, 1994 (3a.) Bylaws as amended December 18, 1997 (3b.) * Mortgage and Deed of Trust, dated as of July 1, 1946, as supplemented by Supplemental Indenture Nos. 1 through 20 (4a.) * Indenture, dated as of June 1, 1991, between the Company and Bankers Trust Company (4d.) * Officers' Certificate dated June 12, 1991 creating Unsecured Medium-Term Notes Series A (4e.) * Officers' Certificate dated June 18, 1993 creating Unsecured Medium-Term Notes Series B (4f.) * Rights Agreement, dated as of February 27, 1996, between the Company and Boatmen's Trust Company (ChaseMellon Shareholder Services, successor) (4g.) * Transportation Agreement, dated June 29, 1990, between the Company and Northwest Pipeline Corporation (10j.) * Replacement Firm Transportation Agreement, dated July 31, 1991, between the Company and Northwest Pipeline Corporation (10j.(1)) * Firm Transportation Service Agreement, dated November 10, 1993, between the Company and Pacific Gas Transmission Company (10j.(2)) * Service Agreement, dated June 17, 1993, between Northwest Pipeline Corporation and the Company (10j.(3)) * Firm Transportation Service Agreement, dated October 22, 1993, between Pacific Gas Transmission Company and the Company (10j.(4)) * Firm Transportation Service Agreement, dated June 22, 1994, between Pacific Gas Transmission Company and the Company (10j.(5)) Firm Transportation and Supply Agreement, dated May 9, 1997, between PanEnergy Trading and Market Services, Inland Pacific Energy Services Corp., and the Company (10j.(6)) Statement re computation of per share earnings (11) Statement re computation of ratios (12) Consent of Deloitte & Touche LLP (23a.) Consent of Price Waterhouse LLP (23b.) Financial Data Schedule (27) Executive Compensation Plans and Arrangements --------------------------------------------- * Executive Supplemental Retirement Income Plan, 1995 Restatement (10b.) * 1995 Amendment to Executive Supplemental Retirement Income Plan (1995 Restatement) (10b.-1) * 1985 Stock Option Plan as amended effective May 25, 1995 (10c.) * Executive Deferred Compensation Plan, 1990 Restatement, effective January 1, 1990 (10e.) * Amendment No. 1 to Executive Deferred Compensation Plan (10e.-1) * Amendment No. 2 to Executive Deferred Compensation Plan (10e.-2) Amendment No. 3 to Executive Deferred Compensation Plan (10e.-3) Directors Deferred Compensation Plan, effective June 1, 1981, restated as of December 1, 1997 (10f.) * Form of Indemnity Agreement entered into between the Company and each director and executive officer (10g.) Non-Employee Directors Stock Compensation Plan, as amended effective January 1, 1998 (10i.) * Executive Annual Incentive Plan, effective March 1, 1990, as amended effective January 1, 1992 and January 1, 1996 (10k.) * Employment agreement dated November 27, 1989 between the Company and an executive officer (10l.) * Agreement dated September 22, 1994 between the Company and an executive officer (10m.) * Employment agreement dated November 2, 1995, as amended February 27, 1996, between the Company and an executive officer (10n.) Amendment dated December 18, 1997 to employment agreement dated November 2, 1995 (10n.-1) * Form of Severance Agreement as entered into between the Company and designated executive officers (10o.) * Employment agreement dated July 2, 1997 between the Company and an executive officer (10p.) Amendment dated December 18, 1997 to employment agreement dated July 2, 1997 (10p.-1) - ---------------------------------- * Incorporated by reference EX-3.(II) 2 BYLAWS EXHIBIT (3b.) BYLAWS of NORTHWEST NATURAL GAS COMPANY As Adopted by the Board of Directors July 17, 1975 As Amended Through December 18, 1997 CONTENTS ARTICLE I. OFFICES: Page ---- Section 1. Office .................................................. 1 Section 2. Registered Office........................................ 1 ARTICLE II. MEETINGS OF SHAREHOLDERS: Section 1. Annual Meeting........................................... 1 Section 2. Special Meetings ........................................ 1 Section 3. Notice .................................................. 1 Section 4. Fixing Record Date ...................................... 1 Section 5. Record of Shareholders .................................. 2 Section 6. Quorum................................................... 2 Section 7. Voting .................................................. 2 Section 8. Conduct of Meetings ..................................... 2 ARTICLE III. BOARD OF DIRECTORS: Section 1. Directors ............................................... 2 Section 2. Chairman of the Board ................................... 2 Section 3. Lead Director............................................ 3 Section 4. Retired Directors ....................................... 3 Section 5. Compensation ............................................ 3 ARTICLE IV. MEETINGS OF THE BOARD OF DIRECTORS: Section 1. Regular Meetings......................................... 3 Section 2. Special Meetings......................................... 3 Section 3. Waiver of Notice......................................... 3 Section 4. Quorum.................................................... 3 Section 5. Manner of Acting.......................................... 3 Section 6. Action Without a Meeting.................................. 4 ARTICLE V. COMMITTEES OF THE BOARD: Section 1. Executive Committee....................................... 4 Section 2. Audit Committee.......................................... 4 Section 3. Retirement Committee..................................... 4 Section 4. Pension Committee........................................ 4 Section 5. Organization and Executive Compensation Committee ........................................... 4 Section 6. Environmental Policy Committee........................... 4 Section 7. Finance Committee........................................ 5 Section 8. Other Committees......................................... 5 Section 9. Changes of Size and Function............................. 5 Section 10.Conduct of Meetings...................................... 5 Section 11.Compensation............................................. 5 ARTICLE VI. NOTICES: Section 1. Form and Manner .......................................... 5 Section 2. Waiver.................................................... 5 ARTICLE VII. OFFICERS: Section 1. Election.................................................. 6 Section 2. Compensation.............................................. 6 Section 3. Term...................................................... 6 Section 4. Removal................................................... 6 Section 5. President................................................. 6 Section 6. Vice Presidents........................................... 6 Section 7. Secretary................................................. 6 Section 8. Treasurer................................................. 6 ARTICLE VIII. CONTRACTS, LOANS, CHECKS AND DEPOSITS: Section 1. Contracts................................................. 7 Section 2. Loans..................................................... 7 Section 3. Checks and Drafts......................................... 7 Section 4. Deposits.................................................. 7 ARTICLE IX. CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 1. Certificates for Shares................................... 7 Section 2. Transfer.................................................. 7 Section 3. Owner of Record........................................... 7 ARTICLE X. INDEMNIFICATION AND INSURANCE: Section 1. Indemnification........................................... 8 Section 2. Insurance................................................. 8 ARTICLE XI. SEAL.................................................................... 8 ARTICLE XII. AMENDMENTS.............................................................. 8 The following Bylaws were adopted by Northwest Natural Gas Company on July 17, 1975 superseding amended Bylaws originally adopted in conformity with an order of the District Court of the United States for the District of Oregon enforcing a plan for rearrangement of the Company's capital structure effective December 31, 1951, and subsequently amended by the stockholders on May 17, 1954, May 20, 1957, May 21, 1973, and May 20, 1974. BYLAWS OF NORTHWEST NATURAL GAS COMPANY ARTICLE I. OFFICES SECTION 1. OFFICE. The principal office of the company shall be located in the City of Portland, Oregon. The company also may have offices at such other places both within and without the State of Oregon as the board of directors from time to time may determine. SECTION 2. REGISTERED OFFICE. The registered office of the company required by law to be maintained in the state shall be at the same location as the principal office unless otherwise designated by resolution of the board of directors. ARTICLE II. MEETINGS OF SHAREHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of shareholders of the company for the election of directors and for the transaction of other business shall be held at the company's office in the City of Portland, Oregon, or such other place in that City as shall be determined by the board of directors, on the fourth Thursday of May in each year, unless such day shall be a legal holiday, in which event such meeting shall be held on the next business day. If such meeting shall not be held on such day in any year, it shall be held within 60 days thereafter on such day as shall be fixed by the board of directors and be specified in the notice of the meeting. Every such meeting shall be held at the hour of two o'clock p.m., or at such other hour as shall be fixed by the board and specified in such notice. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders of the company may be called by the board of directors or the holders of not less than one-tenth of all shares entitled to vote at the meeting. Each special meeting shall be held for such purposes, at such place in the City of Portland, Oregon, and at such time as shall be specified in the notice thereof. SECTION 3. NOTICE. Written or printed notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the board of directors or the persons calling the meeting, to each shareholder of record entitled to vote at such meeting. SECTION 4. FIXING RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than 50 days and, in the case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the board declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof. SECTION 5. RECORD OF SHAREHOLDERS. The officer or agent having charge of the transfer books for shares of the company shall make, at least 10 days before each meeting of shareholders, a complete record of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order with the address of and the number of shares held by each, which record, for a period of 10 days prior to such meeting, shall be kept on file at the registered office of the company and shall be subject to inspection by any shareholder at any time during usual business hours. Such record also shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original transfer books for shares shall be prima facie evidence as to who are the shareholders entitled to examine such record or transfer books or to vote at any meeting of the shareholders. SECTION 6. QUORUM. A majority of the shares of the company entitled to vote, represented in person or by proxy, shall constitute a quorum at all meetings of shareholders. If a quorum is present, in person or by proxy, the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number, or voting by classes, is required by law or the Restated Articles of Incorporation. If a quorum shall not be represented at any meeting of shareholders, the shareholders represented may adjourn the meeting from time to time without further notice. At such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The shareholders represented at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. SECTION 7. VOTING. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or classes are limited or denied by law or the Restated Articles of Incorporation. At each election of directors holders of shares of common stock have the right to cumulative voting as provided for in the Restated Articles of Incorporation. A shareholder may vote either in person or by proxy executed in writing by the shareholder or by his or her duly authorized attorney-in-fact. Such proxy shall be filed with the secretary of the company before or at the time of the meeting. SECTION 8. CONDUCT OF MEETINGS. Every meeting of shareholders shall be presided over by the chairman of the board, in his or her absence by the president, in their absence by a vice president or, if none be present, by a chairman appointed by the shareholders present at the meeting. The minutes of such meeting shall be recorded by the secretary or an assistant secretary but, if neither be present, by a secretary appointed for that purpose by the chairman of the meeting. ARTICLE III. BOARD OF DIRECTORS SECTION 1. DIRECTORS. The business and affairs of the Company shall be managed by its board of directors. The number of members of the board, their classification and terms of office, and the manner of their election and removal shall be determined as provided by the Restated Articles of Incorporation. Directors need not be residents of the State of Oregon or shareholders of the Company. No person who has reached the age of 72 years shall be eligible to be elected a director, but a director may serve until the next annual meeting of shareholders after reaching that age. SECTION 2. CHAIRMAN OF THE BOARD. The board of directors may elect one of its members as chairman of the board. The chairman of the board, if that position be filled, shall preside at all meetings of the shareholders and the board of directors and shall have such other duties and responsibilities as may be prescribed by the board of directors. If there shall be no chairman of the board, or in his or her absence or disability, the president also shall exercise the duties and responsibilities of that position. SECTION 3. LEAD DIRECTOR. The board of directors shall elect one of its members as lead director. The lead director shall, in the absence of the chairman of the board, preside at meetings of the board of directors and shall preside at all meetings of the executive committee. The lead director shall have such other duties and responsibilities as may be prescribed by the board of directors. SECTION 4. RETIRED DIRECTORS. Any person who, upon retirement as a director after reaching age 72, shall have served as a director of the company for ten or more years shall be appointed a retired director of the company for life. Any other person who shall have served as a director of the company may be elected by the board as a retired director of the company for one or more terms of one year or less. A retired director may attend meetings of the board but shall not have the right to vote at such meetings. SECTION 5. COMPENSATION. Directors shall receive such reasonable compensation for their services as may be fixed from time to time by resolution of the board of directors, and shall be reimbursed for their expenses properly incurred in the performance of their duties as directors. No such payment shall preclude any director from serving the company in any other capacity and receiving such reasonable compensation for such services as may be fixed by resolution of the board. Retired directors who retired prior to January 1, 1998 shall receive such compensation as from time to time may be fixed by resolution of the board of directors as the annual retainer for members of the board of directors. Directors who retire subsequent to December 31, 1997 shall not be entitled to receive such compensation. ARTICLE IV. MEETINGS OF THE BOARD OF DIRECTORS SECTION 1. REGULAR MEETINGS. Regular meetings of the board of directors shall be held on the fourth Thursday of February, April, May, July and September, and on the third Thursday of November and December, at such hour and place as shall be specified in the notice of meeting. The date, time and place for holding regular meetings of the board of directors may be changed upon the giving of notice to all directors by or at the request of the chairman of the board or the president. The board may provide by resolution the time and place either within or without the State of Oregon for holding of meetings or may omit the holding of any meeting without other notice than such resolution. SECTION 2. SPECIAL MEETINGS. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the lead director, the president or any two directors. The person or persons authorized to call special meetings of the board may fix any place, either within or without the State of Oregon, as the place for holding any special meeting of the board called by them. Notice of the time and place of special meetings shall be given to each director at least one day in advance by the secretary or other officer performing his or her duties. SECTION 3. WAIVER OF NOTICE. Any director may waive notice of any meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Except as otherwise provided by law or the Restated Articles of Incorporation, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. SECTION 4. QUORUM. A majority of the number of directors at any time fixed by resolution adopted by the affirmative vote of a majority of the entire board of directors shall constitute a quorum for the transaction of business. If a quorum shall not be present at any meeting of directors, the directors present may adjourn the meeting from time to time without further notice until a quorum shall be present. SECTION 5. MANNER OF ACTING. Except as otherwise provided by law or the Restated Articles of Incorporation, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. SECTION 6. ACTION WITHOUT A MEETING. Any action required or permitted to be taken at a meeting of the board of directors may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter thereof. ARTICLE V. COMMITTEES OF THE BOARD SECTION 1. EXECUTIVE COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint an executive committee composed of the chairman of the board, the lead director, and such other number of directors as the board may from time to time determine. The lead director, or in his or her absence, the chairman of the board, shall act as chairman. The committee shall have and may exercise all of the authority of the board of directors in the management of the company, except with respect to matters upon which by law only the board of directors may act. The duties of the committee shall include recommending to the board nominees for election as directors, the conduct of periodic reviews of board effectiveness and the performance of such other functions as the board by resolution from time to time may direct. SECTION 2. AUDIT COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint an audit committee composed of three or more directors, none of whom shall be an officer of the company. The board shall designate one member of the committee as chairman. The duties of the committee shall be to discuss and review with the company's independent auditors the annual audit of the company, including the scope of the audit, and report the results of this review to the board; to meet with the independent auditors at such other times as the committee shall deem to be advisable; and to perform such other functions as the board by resolution from time to time may direct. SECTION 3. RETIREMENT COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, shall appoint a retirement committee composed of three or more directors, none of whom shall be members under the company's Non-Bargaining Unit Employees Retirement Plan established by the board. The duties of the committee shall be to monitor the general administration of the company's Non-Bargaining Unit Employees Retirement Plan and the committee shall be responsible for monitoring the carrying out of its provisions as more fully set forth under the terms of the Plan. SECTION 4. PENSION COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, shall appoint three or more directors to serve on the pension committee provided for in the company's Bargaining Unit Employees Retirement Plan established by the board. The duties of the committee shall be to monitor the general administration of the Bargaining Unit Employees Retirement Plan and the committee shall be responsible for monitoring the carrying out of its provisions as more fully set forth under the terms of the Plan. SECTION 5. ORGANIZATION AND EXECUTIVE COMPENSATION COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint an organization and executive compensation committee composed of three or more directors, none of whom shall be an officer of the company. The board shall designate one member of the committee as chairman. The duties of the committee shall be to discuss and review the management of the affairs of the company relating to its organization and to executive personnel and their compensation, and to perform such other functions as the board by resolution from time to time may direct. SECTION 6. ENVIRONMENTAL POLICY COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint an environmental policy committee composed of three or more directors, none of whom shall be an officer of the company. The board shall designate one member of the committee as chairman. The duties of the committee shall be to develop and recommend to the board appropriate environmental policies and to perform such other functions as the board by resolution from time to time may direct. SECTION 7. FINANCE COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint a finance committee composed of three or more directors, none of whom shall be an officer of the Company. The board shall designate one member of the committee as chairman. The duties of the committee shall be to discuss and review the management of the affairs of the company relating to financing, including the development of long-range financial planning goals and financial policy, and to perform such other functions as the board by resolution from time to time may direct. SECTION 8. OTHER COMMITTEES. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint from among its members such other committees and the chairmen thereof as it may deem to be advisable. Each such committee shall have such powers and authority as are set forth in the resolutions pertaining thereto from time to time adopted by the board. SECTION 9. CHANGES OF SIZE AND FUNCTION. Subject to the provisions of law, the board of directors shall have the power at any time to increase or decrease the number of members of any committee, to fill vacancies thereon, to change any members thereof and to change the functions and terminate the existence thereof. SECTION 10. CONDUCT OF MEETINGS. Each committee shall conduct its meetings in accordance with the applicable provisions of these bylaws relating to the conduct of meetings of the board of directors. Each committee shall adopt such further rules and regulations regarding its conduct, keep such minutes and other records and appoint such subcommittees and assistants as it shall deem to be appropriate. SECTION 11. COMPENSATION. Persons serving on any committee shall receive such reasonable compensation for their services on such committee as may be fixed by resolution of the board of directors, provided that no person shall receive compensation for his or her services on any committee while serving as an officer of the company. ARTICLE VI. NOTICES SECTION 1. FORM AND MANNER. Whenever, under the provisions of law or the Restated Articles of Incorporation, notice is required to be given to any director or shareholder, unless otherwise specified, it shall be given in writing by mail addressed to such director or shareholder at his or her address as it appears on the stock transfer books or other records of the company, with postage thereon prepaid, and such notice shall be deemed to be delivered when deposited in the United States Mail. Notice to directors also may be given by telephone or in any other manner which is reasonably calculated to give adequate notice. SECTION 2. WAIVER. Whenever any notice whatever is required to be given under the provisions of law, the Restated Articles of Incorporation or these bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. ARTICLE VII. OFFICERS SECTION 1. ELECTION. The board of directors, at its first meeting following the annual meeting of shareholders each year, shall elect one of its members as president and shall elect a secretary. At such meeting, or at any other time it shall deem appropriate, the board may elect one or more vice presidents and a treasurer. The board also may elect or appoint such other officers and agents as it may deem necessary. Any two or more offices may be held by the same person, except the offices of president and secretary. SECTION 2. COMPENSATION. The officers of the company shall receive such reasonable compensation for their services as from time to time may be fixed by resolution of the board of directors. SECTION 3. TERM. The term of office of all officers shall commence upon their election or appointment and shall continue until the first meeting of the board of directors following the annual meeting of shareholders and thereafter until their successors shall be elected or until their resignation or removal. A vacancy occurring in any office of the company for whatever reason may be filled by the board. SECTION 4. REMOVAL. Any officer or agent elected or appointed by the board of directors may be removed by the board whenever in its judgment the best interests of the company will be served thereby but such removal shall be without prejudice to the contract rights, if any, of the officer or agent so removed. SECTION 5. PRESIDENT. Unless otherwise determined by the board of directors, the president shall be the chief executive officer of the company and, subject to the control of the board of directors, shall be responsible for the general administration and operation of the company. He shall have such other duties and responsibilities as may pertain to such office or be prescribed by the board of directors. In the absence or disability of the president, an officer designated by the board shall exercise the duties and responsibilities of the president. SECTION 6. VICE PRESIDENTS. Each vice president shall have such duties and responsibilities as may be prescribed by the board of directors and the president. The board or the president may confer a special title upon a vice president. SECTION 7. SECRETARY. The secretary shall record and keep the minutes of the shareholders in one or more books provided for that purpose; see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; and perform such other duties as may be prescribed by the board or the president. The secretary shall have custody of the corporate seal of the company and shall affix the seal to any instrument requiring it and attest the same by his or her signature. The assistant secretaries shall have such duties as may be prescribed from time to time by the board, the president or the secretary. In the absence or disability of the secretary, his or her duties shall be performed by an assistant secretary. SECTION 8. TREASURER. The treasurer shall have charge and custody and be responsible for all funds and securities of the company; deposit all moneys and other valuable effects in the name and to the credit of the company in such depositories as may be designated by the board of directors; and disburse the funds of the company as may be authorized by the board and take proper vouchers for such disbursements. The treasurer shall have such other duties as may be prescribed from time to time by the board or the president. In the absence or disability of the treasurer, his or her duties shall be performed by an assistant treasurer. ARTICLE VIII. CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. CONTRACTS. The board of directors by resolution may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the company, and such authority may be general or confined to specific instances. SECTION 2. LOANS. No loans shall be contracted on behalf of the company and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors. Such authority may be general or confined to specific instances. SECTION 3. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the company shall be signed by such officer or officers, agent or agents of the company and in such manner as shall from time to time be determined by resolution of the board of directors. SECTION 4. DEPOSITS. All funds of the company not otherwise employed shall be deposited from time to time to the credit of the company in such banks, trust companies or other depositories as the board of directors or officers of the company designated by the board may select, or be invested as authorized by the board. ARTICLE IX. CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of the company shall be issued only for whole numbers of shares and shall be in such form as the board of directors may, from time to time, prescribe in accordance with the laws of the State of Oregon. Such certificates shall be signed by the president or a vice president and by the secretary or an assistant secretary and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles thereof. In case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the company as the board may authorize. SECTION 2. TRANSFER. Shares of stock of the company shall be transferable on the books of the company by the holder of record thereof, or by his or her legal representative who shall furnish proper evidence of authority to transfer, or by his or her attorney thereunto authorized by duly executed power of attorney, and on surrender for cancellation of the certificates for such shares. The board of directors may appoint one or more transfer agents and registrars of stock of the company. SECTION 3. OWNER OF RECORD. The company shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE X. INDEMNIFICATION AND INSURANCE SECTION 1. INDEMNIFICATION. The company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was director, officer, employee or agent of the company, or is or was serving at the request of the company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise or any employee benefit plan, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the defense or settlement of such action, suit or proceeding to the fullest extent permissible under the Oregon Business Corporation Act or the indemnification provisions of any successor Act. The foregoing rights of indemnification shall not be exclusive of any other rights to which any such person so indemnified may be entitled, under any agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office; shall continue as to a person who has ceased to be a director, officer, employee or agent; and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 2. INSURANCE. The company may purchase and maintain insurance (and pay the entire premium therefor) on behalf of any person who is or was a director, officer, employee or agent of the company, or is or was serving at the request of the company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity or arising out of his or her status as such, whether or not the company would have the power to indemnify him or her against such liability under the provisions of the Oregon Business Corporation Act or any successor Act; and on behalf of any person who is or was a fiduciary under the Employee Retirement Income Security Act of 1974 with regard to an employee benefit plan of the company against any liability asserted against him or her and incurred by him or her in his or her fiduciary capacity. ARTICLE XI. SEAL The corporate seal of the company shall be circular in form and shall bear an inscription containing the name of the company, the year of its organization, the state of its incorporation and the words "Corporate Seal." ARTICLE XII. AMENDMENTS These bylaws, or any of them, may be altered, amended or repealed, or new bylaws adopted, by resolution of a majority of the board of directors, subject to repeal or change by action of the shareholders. EX-10 3 LETTER AGREEMENT RE: FIRM TRANSPORTATION & SUPPLY Exhibit (10j.(6)) May 9, 1997 Ms. Cheryl Flaim Transportation Rep., PNW Division PanEnergy Trading and Market Services, LLC 4 Triad Center, Suite 1000 Salt Lake City, UT 84180 Subject: Letter Agreement Regarding Firm Transportation and Supply --------------------------------------------------------- Dear Ms. Flaim: Confirming your recent conversation and correspondence with Randy Friedman, PanEnergy Trading and Market Services, LLC/Inland Pacific Energy Services Corp. (PanEnergy) and Northwest Natural Gas (NNG) hereby agree to the following: 1. PanEnergy will release and assign to NNG 5,000 Dth/day of its Northwest Pipeline (NWP) firm transportation capacity at the maximum applicable NWP rate. There will be no recall or other special provisions. Sumas will be the primary receipt point for all 5,000 Dth/day. The primary delivery points will consist of Vanalco (2,200 Dth/day), Rivergate (2,000 Dth/day) and Portland West (800 Dth/day). The assignment will commence November 1, 1997, continuing through the primary term of PanEnergy's capacity contract with NWP, i.e., March 31, 2008, and year-to-year thereafter at NNG's option. 2. PanEnergy consents to permanent changes made by NNG to the primary delivery points specified above as long as such points remain within or adjacent to NNG's service territory in northwest Oregon and southwest Washington. It is understood that NNG must gain approval for any such changes from Northwest Pipeline. 3. NNG will provide PanEnergy with at least 60 days prior notice if NNG decides, in its sole judgment, not to continue the capacity assignment after the end of the primary term or beyond any annual extension after March 31, 2008. If NNG so elects to terminate the assignment, it will return 5,000 Dth/day to PanEnergy with receipt capacity at Sumas. The delivery points will be as specified in section 1 above, subject to any modifications made pursuant to section 2 above. 4. PanEnergy will perform the above capacity assignment using NWP's electronic bulletin board process within 10 working days of the execution date of this Letter Agreement, or such later date as may be mutually agreeable. 5. PanEnergy warrants that the firm capacity it is assigning to NNG will be free and clear of all adverse claims, liens or other encumbrances. PanEnergy remains financially liable for all costs or penalties incurred using this capacity prior to November 1, 1997. 6. NNG will enter into a 1-year contract to purchase 5,000 Dth/day (plus NWP fuel) from PanEnergy commencing November 1, 1997, for delivery into NWP at market competitive prices. This transaction may be structured as a baseload contract, as synthetic storage (NNG buys in the summer and PanEnergy delivers in the winter), or as such other arrangement as is mutually agreeable. Negotiations are to be concluded no later than September 30, 1997. 7. NNG extends to PanEnergy a right of first refusal on the first 5,000 Dth/day (plus NWP fuel) of 1-year supply contracted by NNG for delivery into Northwest Pipeline on or after November 1, 1998. This right continues to and through the contract year commencing November 1, 2007, after which it expires. 8. The right of first refusal shall mean that PanEnergy has the right to match or beat any bona fide offers for 1-year supply received by NNG. If PanEnergy does so, NNG will contract with PanEnergy for the first 5,000 Dth/day of its 1-year supply requirement. To exercise this right, PanEnergy must respond within 10 working days of notice by NNG of bona fide offers for 1-year supply and NNG's intent to so contract. 9. The right of first refusal does not apply to or displace any of NNG's currently existing 1-year or longer gas supply contracts. 10. The right of first refusal is granted solely to PanEnergy and its successors, and does not extend to any of PanEnergy's assignees, transferees or trustees, unless NNG otherwise consents. Please indicate your acceptance with the foregoing by executing below and returning one original to Mr. Friedman's attention. Very truly yours, /s/ W. R. Harper, Jr. --------------------- W. R. Harper, Jr. PANENERGY TRADING AND MARKET SERVICES, LLC ACCEPTED and AGREED to this 22nd day of May, 1997 By: /s/ Scot E. Allen ------------------ Name: Scot E. Allen ------------------ Title: Vice President, Marketing PNW ----------------------------- INLAND PACIFIC ENERGY SERVICES CORP. ACCEPTED and AGREED to this 22nd day of May, 1997 By: /s/ J. Gary Stauffer --------------------- Name: Gary Stauffer --------------------- Title: Senior Vice President --------------------- EX-11 4 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Exhibit (11) NORTHWEST NATURAL GAS COMPANY Statement Re: Computation of Per Share Earnings (Thousands, except per share amounts) (Unaudited)
12 Months Ended December 31 --------------------------------- 1997 1996 1995 ---- ---- ---- Earnings Applicable to Common Stock $40,413 $44,070 $35,259 Debenture Interest Less Taxes 455 479 528 ------- ------- ------- Earnings Applicable to Diluted Common Stock $40,868 $44,549 $35,787 ======= ======= ======= Average Common Shares Outstanding 22,698 22,391 21,817 Stock Options 32 27 11 Convertible Debentures 518 545 600 ------ ------ ------ Diluted Average Common Shares Outstanding 23,248 22,963 22,428 ====== ====== ====== Diluted Earnings Per Share of Common Stock $1.76 $1.94 $1.60 ===== ===== =====
Note: Primary earnings per share are computed on the weighted daily average number of common shares outstanding each year. Outstanding stock options are common stock equivalents but are excluded from primary earnings per share computations due to immateriality. EX-12 5 STATEMENT RE: COMPUTATION OF RATIO OF EARNINGS Exhibit (12) NORTHWEST NATURAL GAS COMPANY Computation of Ratio of Earnings to Fixed Charges January 1, 1993 - December 31, 1997 ($000)
Year Ended December 31 ------------------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Fixed Charges, as defined: Interest on Long-Term Debt $22,578 $21,921 $23,141 $ 23,176 $ 24,918 Other Interest 1,906 2,473 2,252 3,448 4,500 Amortization of Debt Discount and Expense 775 850 882 865 730 Interest Portion of Rentals 1,701 1,697 1,764 1,798 2,111 -------- -------- -------- --------- -------- Total Fixed Charges, as defined $26,960 $26,941 $28,039 $ 29,287 $ 32,259 ======= ======= ======= ======== ======== Earnings, as defined: Net Income $37,647 $35,461 $38,065 $ 46,793 $ 43,059 Taxes on Income 22,096 20,473 22,120 27,347 21,106 Fixed Charges, as above 26,960 26,941 28,039 29,287 32,259 ------- ------- -------- -------- -------- Total Earnings, as defined $86,703 $82,875 $88,224 $103,427 $ 96,424 ======= ======= ======= ======== ======== Ratio of Earnings to Fixed Charges 3.22 3.08 3.15 3.53 2.99 ==== ==== ==== ==== ====
EX-23 6 INDEPENDENT AUDITORS' CONSENT Exhibit (23a.) INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-63017 and 33-63585, Post-Effective Amendment No. 1 to Registration Statement No. 2-76276, and Post-Effective Amendment No. 2 to Registration Statement No. 2-77195 on Form S-8 and in Registration Statement Nos. 33-53795, 333-15323, and 333-32989 and Post-Effective Amendments No. 1 to Registration Statements Nos. 33-1304 and 33-20384 on Form S-3 of our report dated February 12, 1997 appearing in this Annual Report on Form 10-K of Northwest Natural Gas Company for the year ended December 31, 1997. DELOITTE & TOUCHE LLP March 13, 1998 EX-23 7 INDEPENDENT AUDITORS' CONSENT Exhibit (23b.) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in Registration Statement Nos. 33-63017 and 33-63585, Post-Effective Amendment No. 1 to Registration Statement No. 2-76276, and Post-Effective Amendment No. 2 to Registration Statement No. 2-77195 on Form S-8 and in the Prospectus constituting part of Registration Statements Nos. 33-53795, 333-15323 and 333-32989 and Post-Effective Amendment No. 1 to Registration Statements Nos. 33-1304 and 33-20384 on Form S-3 of our report dated February 20, 1998 appearing in this Annual Report on Form 10-K of Northwest Natural Gas Company for the year ended December 31, 1997. PRICE WATERHOUSE LLP Portland, Oregon March 13, 1998 EX-27 8 FDS -- WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
UT This schedule contains summary financial information extracted from the consolidated financial statements and is qualified in its entirety by reference to such financial statements. 0000073020 Northwest Natural Gas Company YEAR DEC-31-97 DEC-31-97 PER-BOOK 797,892 64,705 104,673 58,859 85,488 1,111,617 72,404 182,998 110,863 366,265 36,499 0 344,303 0 0 89,317 16,000 930 0 0 258,303 1,111,617 361,756 21,106 271,762 292,868 68,888 2,654 71,542 28,483 43,059 2,646 40,413 27,321 21,849 45,816 1.78 1.76
EX-10 9 AMENDMENT NO. 3 TO EXEC. DEFERRED COMP. PLAN Exhibit (10e.-3) AMENDMENT NO. 3 TO THE NORTHWEST NATURAL GAS COMPANY EXECUTIVE DEFERRED COMPENSATION PLAN 1990 RESTATEMENT This Amendment No. 3 to the Northwest Natural Gas Company Executive Deferred Compensation Plan, 1990 Restatement (the "Plan"), is effective as of January 1, 1998 and has been executed as of this 18th day of December, 1997. The Plan is hereby amended as follows: FIRST: Section 4.2 is amended to read as follows: 4.2 Matching Contribution. The Corporation shall credit a Matching Contribution to the Executive's Account with respect to Deferral Commitments. The amount of the Matching Contribution shall be twenty-five percent (25%) of the first eight percent (8%) of the Executive's Elective Deferred Compensation during the calendar year, but the total Matching Contribution shall not exceed two percent (2%) of the Executive's Compensation during such calendar year. The Matching Contribution shall be reduced by the amount, if any, the Corporation has contributed as a matching contribution for the Executive to the Corporation's Retirement K Savings Plan. Matching Contributions shall be credited to the Executive's Account on the last day of the calendar quarter in which the Matching Contribution was earned. If the Executive is not eligible to participate in the Retirement K Savings Plan, no Matching Contributions shall be made to this Plan until such time of eligibility. 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. 3 to be executed as of the date first written above. NORTHWEST NATURAL GAS COMPANY By: /s/ Richard G. Reiten -------------------------- Richard G. Reiten President and CEO EX-10 10 DIRECTORS DEFERRED COMPENSATION PLAN Exhibit (10f.) NORTHWEST NATURAL GAS COMPANY DIRECTORS DEFERRED COMPENSATION PLAN EFFECTIVE JUNE 1, 1981 RESTATED AS OF DECEMBER 1, 1997 TABLE OF CONTENTS Page ---- 1. Restatement....................................... 1 2. Election by Directors............................. 1 3. Accounts.......................................... 2 4. Interest.......................................... 3 5. Terms of Payment.................................. 4 6. Death of Director................................. 5 7. Administration.................................... 5 8. Change in Control................................. 6 9. Amendment and Termination of the Plan............. 7 10. Miscellaneous..................................... 7 NORTHWEST NATURAL GAS COMPANY DIRECTORS DEFERRED COMPENSATION PLAN 1. RESTATEMENT. The Board of Directors (the "Board") of Northwest Natural Gas Company (hereinafter, the "Company") adopted a Director's Deferred Compensation Plan (hereinafter, the "Plan") effective June 1, 1981, which was previously restated effective as of January 1, 1988 and then amended effective as of February 23, 1995. The existing Plan is amended by this Restatement, effective as of December 1, 1997. 2. Election by Directors. ---------------------- (1) ELIGIBILITY. Any director of the Company or any corporation or other entity affiliated with or subsidiary to it (a "Director") is eligible to elect to defer receipt of all or part of (i) the fees paid to him or her as a Director or as a member of a committee of the Board ("Fees"), or (ii) the shares of restricted common stock of the Company ("Common Stock") awarded to the Director under the Company's Non-Employee Directors Stock Compensation Plan ("NEDSCP Shares"). (2) DEFERRAL OF FEES. Any Director may elect, prior to the beginning of any calendar year, to defer receipt of fees for that calendar year, whether or not the fees are actually payable in that calendar year; and any newly elected Director prior to assuming office may elect to defer receipt of fees commencing after the date on which the Director assumes office. Any election under the preceding sentence shall apply only to fees earned subsequent to the date the election is filed. Total deferrals of Fees by a Director in a calendar year must be at least $1,500. (3) DEFERRAL OF NEDSCP SHARES. Any Director may elect, prior to the beginning of any calendar year, to defer receipt of unvested NEDSCP Shares that are scheduled to vest in that calendar year; and any newly elected Director prior to assuming office may elect to defer receipt of NEDSCP Shares that will vest in the remainder of the calendar year after the date on which the Director assumes office. Total deferrals of NEDSCP Shares by a Director in a calendar year must be at least 100% of the NEDSCP Shares scheduled to vest in that year. No deferral shall be allowed of NEDSCP Shares as to which a Director has made an election under Section 83(b) of the Internal Revenue Code. (4) CONTINUATION AND MODIFICATION. An election to defer Fees or NEDSCP Shares by a Director shall automatically continue from year to year unless the Director terminates or modifies the election by written request. Any such termination or modification shall not become applicable until the calendar year following the year in which such written termination or modification is filed. In the event of a termination of a deferral election, any amounts already deferred by a Director shall not be paid until he or she ceases to serve as a Director, and then only pursuant to the terms, conditions, limitations and restrictions of the Plan. 3. Accounts. --------- (1) ACCOUNTS. The Company shall establish on its books one, two or three separate accounts (individually, an "Account" and collectively, the "Accounts") for each Director who participates in the Plan: a Stock Account, a Cash Account, and/or for each person who is a Director as of January 1, 1998, a Retirement Benefit Account. The number of NEDSCP Shares deferred by a Director shall be credited to the Stock Account. Fees deferred by a Director shall be credited to the Stock Account or the Cash Account as elected by the Director at the time the Director elects to defer Fees. Such election may be divided between the two Accounts in increments of 25 percent of the deferred Fees covered by the election. An election between the Stock Account and the Cash Account shall be irrevocable as to the deferred Fees covered by the election and no transfers between the Stock Account and the Cash Account shall be permitted. The credit for deferred Fees shall be entered on the Company's books of account each month at the time that Fees are paid to other Directors who do not elect to defer the payment of such Fees. The credit for deferred NEDSCP Shares shall be entered on the Company's books of account as soon as practicable after January 1 of the year subject to the deferral. No special fund shall be established nor shall any notes or securities be issued by the Company with respect to a Director's Accounts. (2) STOCK ACCOUNT. A Director's Stock Account shall be denominated in shares of Common Stock, including fractional shares. With respect to each amount of Fees deferred to a Director's Stock Account, the Stock Account shall be credited with a number of shares equal to the deferred Fees divided by the purchase price for shares of Common Stock under the Company's Dividend Reinvestment and Stock Purchase Plan (the "DRSPP") on the Investment Date (as defined in the DRSPP) next succeeding the day the deferred Fees would have been paid if not for the deferral. As of each date for payment of dividends on the Common Stock, the Stock 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 Stock 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. (3) FORFEITURE OF NEDSCP SHARES. If any NEDSCP Shares deferred by a Director under this Plan are forfeited under the terms of the Company's Non-Employee Directors Stock Compensation Plan, the Director's Stock Account shall be reduced by the number of shares so forfeited. (4) 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 all Retirement Benefit Accounts will be fully vested and noncancellable upon a Change in Control as defined in Paragraph 8. (5) STATEMENT OF ACCOUNT. At the end of each calendar quarter, a report shall be issued by the Company to each participating Director setting forth the balances of the Director's Accounts under the Plan. The credit entries made to a Director's Accounts constitute merely a general obligation of the Company to pay such Accounts to the Director, or to his or her beneficiary or estate when due under the Plan. 4. INTEREST. Interest shall be credited to the Cash Account balance (including both principal and interest) of each participating Director based on the balance at the end of each calendar quarter. The rate of interest to be applied at the end of each calendar quarter shall be the quarterly equivalent of an annual yield that is three (3) percentage points higher than the annual yield on 30-Year, Long-Term Government Securities for the preceding quarter, as published by the Federal Reserve Board (or any successor thereto), or if such index is no longer published, a substantially similar index selected by the Board. At no time shall the interest rate be less than six percent (6%) annually. The interest credit shall continue to be applied to the Cash Account of a Director, even if ceasing to serve as a Director, until all amounts credited to his or her Cash Account have been paid. Said interest shall be calculated quarterly, based upon the average daily balance of the Director's Cash Account since the preceding calendar quarter, after giving effect to any reduction in the Cash Account as a result of any payments. The remaining annual payments will be recomputed to reflect the additional interest credits. 5. Terms of Payment. ----------------- (1) PLAN BENEFITS. The amounts contained in a Director's Accounts are subject to the terms of payment as set forth in this paragraph. When a Director ceases to serve as a Director of the Company, either by retirement or otherwise, or upon a Change in Control as defined in Paragraph 8, the individual shall be entitled to payment of the amounts in his or her Accounts. (2) TIMING OF BENEFIT PAYMENT. At the time the Director elects to defer Fees or NEDSCP Shares, and with respect to Retirement Benefit Accounts before January 1, 1998, the Director may designate the number of annual installments, not to exceed ten, in which the applicable Account balance shall be paid, or the Director may elect to receive such Account balance in a lump sum payment, or in a combination of a partial lump sum and the remainder in installment payments. Such elections may be modified by written request at any time with respect to Fees earned or NEDSCP Shares that vest in subsequent calendar years, but shall be irrevocable with respect to Retirement Benefit Accounts and with respect to Fees earned and NEDSCP Shares that vest during the year the request is filed and prior years as well as all interest and dividend credits with respect to such amounts. (3) FORM OF BENEFIT PAYMENT. Benefits payable to a Director from a Stock Account or a Retirement Benefit Account shall only be paid to such Director as a distribution of Common Stock plus cash for fractional shares. Benefits payable to a Director from a Cash Account shall only be paid to such Director in cash. (4) COMMENCEMENT OF PAYMENT. Any lump sum payment or the first annual installment payment owed to a Director shall not be due earlier than the first business day of January in the year following the year in which he or she ceases to serve as a Director of the Company. In the event a Director terminates the election to defer Fees or NEDSCP Shares, any Fees or NEDSCP Shares already deferred shall not be payable to the Director until such time as he or she ceases to serve as a Director, and then only subject to the terms and conditions contained herein. The provisions of this paragraph are subject to the terms of Paragraph 6 covering the death of a Director and to the terms of Paragraph 8 covering a Change in Control. (5) PAYMENT TO GUARDIAN. If a benefit under the Plan is payable to a minor or a person declared incompetent or to a person incapable of handling the disposition of his property, the Committee may direct payment of such Plan benefit to the guardian, legal representative or person responsible for the care and custody of such minor, incompetent or person. The Committee may require proof of incompetency, minority, incapacity or guardianship as it may deem appropriate prior to distribution of the Plan benefit. Such distribution shall completely discharge the Committee and the Company from all liability with respect to such benefit. (6) WITHHOLDING; PAYROLL TAXES. The Company shall withhold from payments made hereunder any taxes required to be withheld from such payments under federal, state or local law. 6. Death of Director. ------------------ (1) PLAN DEATH BENEFIT. Upon the death of a Director or a former Director prior to the receipt of the full amount credited to his or her Accounts, the balance of the Director's Accounts shall be paid to the designated beneficiary or beneficiaries in the manner elected in writing by the Director at the time of the deferral election, or if no such election is made, by lump sum payment. (2) BENEFICIARY. At the time a Director elects to defer payment of Fees or NEDSCP Shares, and with respect to Retirement Benefit Accounts before January 1, 1998, the Director may designate a beneficiary or beneficiaries. If greater than 50% of the benefit is designated to a beneficiary other than the Director's spouse, such beneficiary designation shall be consented to by the Director's spouse. Such designation may be changed by the Director at any time without the consent of a beneficiary, subject to the spousal consent requirement above. If no designated beneficiary survives the Director or former Director, the balance of the Director's Accounts shall be paid to the Director's estate. 7. Administration. --------------- (1) COMMITTEE DUTIES. This Plan shall be administered by the Organization and Executive Compensation Committee of the Board (the "Committee"). The Committee shall have responsibility for the general administration of the Plan and for carrying out its intent and provisions. The Committee shall interpret the Plan and have such powers and duties as may be necessary to discharge its responsibilities. The Committee may, from time to time, employ other agents and delegate to them such administrative duties as it sees fit, and may from time to time consult with counsel who may be counsel to the Company. (2) BINDING EFFECT OF DECISIONS. The decision or action of the Committee in respect of any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Plan. (3) INDEMNITY OF COMMITTEE. To the extent permitted by applicable law, the Company shall indemnify, hold harmless and defend the members of the Committee against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan, provided that the members of the Committee were acting in accordance with the applicable standard of care. 8. CHANGE IN CONTROL. In the event of a Change in Control, any lump sum payment or the first annual payment, as elected by the Director in Paragraph 5(b) above, shall be made immediately, with any subsequent annual payments to be made thereafter in the manner elected by the Director in the applicable deferral election. For purposes of this Plan, a "Change in Control" of the Company shall mean the occurrence of any of the following events: (a) The approval by the shareholders of the Company of: (1) any consolidation, merger or plan of share exchange involving the Company (a "Merger") in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a Merger involving shares of Common Stock in which the holders of shares of Common Stock immediately prior to the Merger have the same proportionate ownership of common stock of the surviving corporation immediately after the Merger; (2) any sale,lease,exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or (3) the adoption of any plan or proposal for the liquidation or dissolution of the Company; (b) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the board of directors of the Company ("Incumbent Directors") shall cease for any reason to constitute at least a majority thereof; provided, however, that the term "Incumbent Director" shall also include each new director elected during such two-year period whose nomination or election was approved by two-thirds of the Incumbent Directors then in office; or (c) Any person (as such term is used in Section 14(d) of the Securities Exchange Act of 1934, other than the Company or any employee benefit plan sponsored by the Company) shall, as a result of a tender or exchange offer, open market purchases or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company ordinarily having the right to vote for the election of directors ("Voting Securities") representing twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities. 9. Amendment and Termination of the Plan. -------------------------------------- (1) AMENDMENT. The Board may at any time amend the Plan in whole or in part; provided, however, that no amendment shall decrease or restrict the amount credited to any Account maintained under the Plan as of the date of amendment. An amendment affecting the interest rate credited under Paragraph 4 shall not become effective before the first day of the calendar year which follows the adoption of the amendment and at least 30 days written notice of the amendment to the Director. (2) TERMINATION. The Board may at any time partially or completely terminate the Plan if, in its judgment, the tax, accounting, or other effects of the continuance of the Plan, or potential payments thereunder, would not be in the best interests of the Company. (1) PARTIAL TERMINATION. The Board may partially terminate the Plan by instructing the Committee not to accept any additional deferrals. In the event of such a partial termination, the Plan shall continue to operate and be effective with regard to deferrals entered into prior to the effective date of such partial termination. (2) COMPLETE TERMINATION. The Board may completely terminate the Plan by instructing the Committee not to accept any additional deferrals, and terminate all ongoing deferrals. In the event of such a complete termination, the Plan shall cease to operate and the Committee shall pay out to each Director the balance in each of his or her Accounts in equal annual installments amortized over the period listed below based on the balance in the particular Account at the time of such complete termination: Appropriate Account Balance Payout Period ------------------------------ ------------- Less than $10,000 2 Years $10,000 but less than $50,000 5 Years More than $50,000 10 Years Interest earned on the unpaid balance in a Director's Cash Account shall be the applicable interest rate at the end of the calendar quarter immediately preceding the effective date of such complete termination. 10. Miscellaneous. -------------- (1) UNSECURED GENERAL CREDITOR. The Accounts shall be established solely for the purpose of measuring the amounts owed to a Director or beneficiary under the Plan. Directors and their beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in any property or assets of the Company, nor shall they be beneficiaries of, or have any rights, claims or interests in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by the Company. Except as may be provided in Paragraph 10(b), such policies, annuity contracts or other assets of the Company shall not be held under any trust for the benefit of the Directors, their beneficiaries, heirs, successors or assigns, or held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan. Any and all of the Company's assets and policies shall be, and remain, the general, unpledged, unrestricted assets of the Company. The Company's obligation under the Plan shall be that of an unfunded and unsecured promise to pay money in the future. (2) TRUST FUND. The Company shall be responsible for the payment of all benefits provided under the Plan. At its discretion, the Company may establish one or more trusts, with such trustees as the Board may approve, for the purpose of providing for the payment of such benefits. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of the Company's creditors. To the extent any benefits provided under the Plan are actually paid from any such trust, the Company shall have no further obligation with respect thereto, but to the extent not so paid, such benefits shall remain the obligation of, and shall be paid by, the Company. (3) NONASSIGNABILITY. No assignment or alienation may be made of any deferred fees or interest thereon, except in accordance with Paragraph 6. (4) GOVERNING LAW. The provisions of this Plan shall be construed and interpreted according to the laws of the State of Oregon. (5) SUCCESSORS. The provisions of this Plan shall bind and inure to the benefit of the Company and its successors and assigns. The term successors as used herein shall include any corporate or other business entity which shall, whether by merger, consolidation, purchase or otherwise acquire all or substantially all of the business and assets of the Company, and successors of any such corporation or other business entity. The foregoing restatement of the Plan was approved by the Board of Directors of Northwest Natural Gas Company on December 18, 1997. NORTHWEST NATURAL GAS COMPANY By: /s/ Richard G. Reiten ------------------------- Attest: /s/ C. J. Rue EX-10 11 NON-EMPLOYEE DIRECTORS STOCK COMPENSATION PLAN (Exhibit 10i.) NORTHWEST NATURAL GAS COMPANY NON-EMPLOYEE DIRECTORS STOCK COMPENSATION PLAN January 1, 1989 Northwest Natural Gas Company an Oregon corporation 220 NW Second Avenue Portland, OR 97209 the Company The Company believes it desirable that members of its board of directors, who represent the Company's shareholders, be themselves shareholders. To supplement the efforts of the directors towards this end, the Company wishes to increase the ownership interest of non-employee directors through awards of Company Common Stock. The Company expects by this means to increase the community of interest of its shareholders at large and the Company's directors and to make stock ownership a dynamic influence on the attitudes of its board of directors. The following plan is therefore adopted: 1. Administration. --------------- Unless otherwise determined pursuant to this section, this plan shall be administered by the corporate secretary of the Company (the Administrator), who may delegate all or part of that authority and responsibility. The Administrator shall interpret the plan, arrange for the purchase and delivery of shares, determine forfeitures, and otherwise assume general responsibility for administration of the plan. Any decision by the Administrator shall be final and bind all parties. The Administrator may be replaced from time to time in the discretion of the chief executive officer of the Company. 2. Awards. ------- 2.1 Each non-employee director of the Company, including those directors who have been employees of the Company in the past but are not employees at the time of any award under this plan, shall be awarded Common Stock of the Company as of the following award dates: (a) January 1, 1989; or (b) In the case of (i) directors elected after January 1, 1989 and (ii) persons who become non-employee directors after January 1, 1989 by ceasing to be employees of the Company, the date on which such director is first elected, whether by the shareholders or board of directors of the Company, or ceases to be an employee of the Company, as the case may be; and (c) On January 1 of each year thereafter, commencing with January 1, 1998. 2.2 As of each award date, a participant shall receive an award calculated in the following manner. The "Number of Award Months" shall be determined by subtracting the number of month ends remaining until all, if any, previous awards to the participant under this plan will be vested from the number of month ends remaining until the fifth year end after the award date; provided, however, that if, assuming the participant were reelected, a participant's term as a director would end because of age before the fifth year end after the award date, the "Number of Award Months" shall be determined by subtracting the number of month ends remaining until all, if any, previous awards to the participant under this plan will be vested from the number of month ends remaining until the participant's term will end because of age. The amount awarded shall then be calculated by multiplying the Number of Award Months by $833.33. 2.3 As of each award date, the dollar amount calculated under 2.2 shall be awarded to the participant in Common Stock as follows: (a) As soon as practicable after the award date, the Administrator shall deliver cash in the amount of the award and applicable commissions to one or more brokers or other persons with instructions to purchase Company Common Stock in the open market. It is understood that market conditions or regulations affecting the purchases by a corporation of its own shares may extend the period of purchase over several days or weeks. (b) When several participants have the same award date, all of the stock shall be purchased and then divided among the participants in proportion to their respective awards, regardless of any changes in price that occur while purchases are being carried out. (c) When all of the stock has been purchased with respect to any award date, certificates in the names of the participants for their respective shares shall be delivered to the Administrator. Each participant shall deliver to the Administrator a blank stock power duly executed in a form satisfactory to the Administrator for each certificate for shares issued in the participant's name. (d) The Administrator shall hold the certificates and stock powers until the shares are vested and released as provided in 3.4. 2.4 Upon any amendment of this plan to increase the dollar amount of awards set forth in 2.2, each participant shall receive an additional award in accordance with the procedures set forth in 2.3. The amount of the additional award for each participant shall be determined by multiplying the amount of the increase in the award amount by the number of month ends remaining until the participant's most recent prior award under this plan will be fully vested. The resulting dollar amount shall then be used to purchase Common Stock for the participant as set forth in 2.3. 3. Vesting; Delivery of Shares; Forfeitures. ----------------------------------------- 3.1 For each award under 2.2 and 2.3, the number of awarded shares that will vest per month shall be determined by dividing the number of awarded shares by the Number of Award Months. This monthly amount shall vest as of the last day of each calendar month commencing with the later of the month in which the award is made or the first month after all previous awards to the participant under this plan shall have vested. 3.2 For each award under 2.3 and 2.4, the number of awarded shares that will vest per month shall be determined by dividing the number of awarded shares by the number of month ends remaining until the participant's most recent prior award under 2.2 and 2.3 will be fully vested. This monthly amount shall vest as of the last day of each calendar month commencing with the month in which the award is made. 3.3 Notwithstanding 3.1 and 3.2, all awarded shares shall vest upon a change in control of the Company. For purposes of this plan, a "change in control" of the Company shall mean the occurrence of any of the following events: (a) The approval by the shareholders of the Company of: (1) any consolidation, merger or plan of share exchange involving the Company (a "Merger") in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a Merger involving shares of Common Stock in which the holders of shares of Common Stock immediately prior to the Merger have the same proportionate ownership of common stock of the surviving corporation immediately after the Merger; (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or (3) the adoption of any plan or proposal for the liquidation or dissolution of the Company; (b) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the board of directors of the Company ("Incumbent Directors") shall cease for any reason to constitute at least a majority thereof; provided, however, that the term "Incumbent Director" shall also include each new director elected during such two-year period whose nomination or election was approved by two-thirds of the Incumbent Directors then in office; or (c) Any person (as such term is used in Section 14(d) of the Securities Exchange Act of 1934, other than the Company or any employee benefit plan sponsored by the Company) shall, as a result of a tender or exchange offer, open market purchases or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company ordinarily having the right to vote for the election of directors ("Voting Securities") representing twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities. 3.4 The certificate and stock power for vested shares shall be delivered to the participant or in accordance with 5.2 as soon as practicable after the participant ceases to be a director of the Company or, if earlier, as soon as practicable after a change in control of the Company. 3.5 If a participant ceases to be a director (other than pursuant to a simultaneous change in control of the Company), awarded shares remaining unvested shall be forfeited. The Administrator, acting for the participant pursuant to the executed stock power, shall transfer the unvested shares to the Company, and these shares shall be cancelled. The participant or the participant's representative shall execute any documents reasonably requested by the Administrator to facilitate the transfer. 4. Status Before Full Vesting; Transfer of Shares. ----------------------------------------------- 4.1 Each participant shall be a shareholder of record with respect to all shares awarded, whether or not vested, and shall be entitled to all of the rights of such a holder, except that a participant's share certificates shall be held by the Administrator until delivered in accordance with 3.4. 4.2 Any dividends or communications to shareholders received by the Administrator with respect to shares held by the Administrator shall promptly be transmitted to the participant. 4.3 No participant may transfer any interest in unvested shares to any person other than the Company. 4.4 No participant may transfer any interest in any shares awarded under this plan, whether vested or not, until he or she ceases to be a director of the Company. 4.5 Notwithstanding 2.3(d), 3.4, 4.1, 4.3 and 4.4, if a participant in the Company's Directors Deferred Compensation Plan (the "DDCP") elects under the DDCP to defer shares of Company Common Stock awarded to the participant under this plan, promptly after the deferral election becomes irrevocable the Administrator shall cause the Common Stock subject to such irrevocable deferral to be transferred to the trustee of the Northwest Natural Gas Company Umbrella Trust(TM) For Directors. The Common Stock so transferred shall nevertheless remain subject to forfeiture under 3.5 if the participant ceases to be a director prior to vesting of the shares. 5. Death of a Participant. ----------------------- 5.1 Any vested shares held by the Administrator for a participant who has died shall be delivered as soon as practicable to the participant's death beneficiary under 5.2. 5.2 Any vested shares to be delivered on death of a participant under 5.1 shall go to a participant's beneficiary in the following order of priority: (a) To the surviving beneficiary designated by the participant in writing to the Administrator; (b) To the participant's surviving spouse; or (c) To the participant's estate. 6. Amendment or Termination; Miscellaneous. ---------------------------------------- 6.1 The board of directors of the Company may amend or terminate this plan at any time. No amendment or termination shall adversely affect any outstanding award. 6.2 Subject to the rights of amendment and termination in 6.1, this plan shall continue indefinitely and future awards will be made in accordance with 2.1. 6.3 Nothing in this plan shall create any obligation on the part of the board of directors of the Company to nominate any director for reelection by the shareholders or the board of directors. Adopted by the board of directors of Northwest Natural Gas Company on November 17, 1988, effective January 1, 1989. Amended by the board of directors of Northwest Natural Gas Company on May 23, 1991, effective July 1, 1991. Amended by the board of directors of Northwest Natural Gas Company on July 24, 1997, effective July 1, 1997. Amended by the board of directors of Northwest Natural Gas Company on December 18, 1997, effective January 1, 1998. EX-10 12 AMENDMENT TO EMPLOYMENT AGREEMNT Exhibit (10n.-1) AMENDMENT TO EMPLOYMENT AGREEMENT Paragraphs 6.3 and 6.4 of the Employment Agreement between the undersigned parties dated November 2, 1995, as amended February 22, 1996, hereby are deleted and replaced by the following, to conform to the original intent of the parties: 6.3 If, despite the employment covenants included herein, Reiten's employment is terminated without cause or without disability under Paragraph 6.2, or if Reiten becomes entitled to a lump sum severance payment under Section 7 below, then Reiten shall be immediately vested under the ESRIP and shall be granted early retirement with all benefits under ESRIP, without any reduction based on age at retirement under the schedule in the Appendix to the ESRIP, as if he were fully and completely vested. 6.4 The accelerated vesting and the benefits provided under this Section 6 shall be deemed to constitute liquidated damages and not a penalty under this agreement. IT IS SO AGREED: NORTHWEST NATURAL RICHARD G. REITEN GAS COMPANY /s/ Robert L. Ridgley /s/ Richard G. Reiten - ------------------------------- --------------------------- Title: Chairman of the Board Dated: December 18, 1997 Dated: December 18, 1997 APPROVED BY THE BOARD OF DIRECTORS OF NORTHWEST NATURAL GAS COMPANY By: /s/ Benjamin R. Whiteley ------------------------------- Its Lead Director Dated: December 18, 1997 EX-10 13 AMENDMENT TO EMPLOYMENT AGREEMENT Exhibit 10p.-1) AMENDMENT TO EMPLOYMENT AGREEMENT Paragraph 5.1 of the Employment Agreement between the undersigned parties dated July 2, 1997 is amended to delete the last four lines of the paragraph and to add the language below and Paragraphs 5.2 and 5.3 hereby are deleted and replaced by the following, to conform to the original intent of the parties: 5.1 ...Company's Retirement Plan without any reduction based on age at retirement under the schedule in the Appendix to the ESRIP. If entitled to receive ESRIP benefits under this Agreement, Dodson may select any of the benefit payment options under Section 3.01 of the ESRIP for which he is eligible. 5.2 Full ESRIP. NNG shall be liable under the ESRIP to pay Dodson the full ESRIP benefit using the 65 percent normal retirement income target provided under Section 2.01-1(b) of the ESRIP once any of the following conditions has been satisfied: (a) Dodson's employment is terminated for any reason after he completes the Second Term; (b) Dodson becomes totally and permanently disabled at any time during employment by NNG; (c) NNG terminates Dodson without cause, where "cause" has the meaning set forth in paragraph 4(iii) of Dodson's separate severance agreement dated September 15, 1997; or (d) Dodson becomes entitled to receive severance benefits for termination of employment in connection with a change of control, where such entitlement is determined under the provisions of Dodson's separate severance agreement dated September 15, 1997. 5.3 One-half ESRIP. At the end of the initial Term, or at any time thereafter prior to completing the Second Term, NNG shall be liable under the ESRIP to pay Dodson a one-half ESRIP benefit using a 32.5 percent normal retirement income target under ESRIP Section 2.01-1(b) in place of the 65 percent target if Dodson terminates employment with NNG under circumstances where he is not entitled to full ESRIP benefits under 5.2 above. IT IS SO AGREED: NORTHWEST NATURAL MARK S. DODSON GAS COMPANY /s/ Richard G. Reiten /s/ Mark S. Dodson - -------------------------- -------------------- Title: President and CEO Dated: December 18, 1997 Dated: December 18, 1997 APPROVED BY THE BOARD OF DIRECTORS OF NORTHWEST NATURAL GAS COMPANY By: /s/ Benjamin R. Whiteley ---------------------------- Its Lead Director Dated: December 18, 1997 -----END PRIVACY-ENHANCED MESSAGE-----