-----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, HLQDk2D9nVLW7zO1mncfBiLHTXHud4soSbs1Rr0OcMSHMSE/HaTGKpuwYLB7b924 qO9FfsiPmNhaqen7nmiAoQ== 0000950120-01-500129.txt : 20010813 0000950120-01-500129.hdr.sgml : 20010813 ACCESSION NUMBER: 0000950120-01-500129 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010810 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-15973 FILM NUMBER: 1704676 BUSINESS ADDRESS: STREET 1: 220 NW SECOND AVE CITY: PORTLAND STATE: OR ZIP: 97209 BUSINESS PHONE: 5032264211 10-K/A 1 form10k.txt AMENDMENT TO FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K/A (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, 2000 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 [LOGO] NW NATURAL NORTHWEST NATURAL GAS COMPANY (Exact name of registrant as specified in its charter) OREGON 93-0256722 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 220 N.W. SECOND AVENUE, PORTLAND, OREGON 97209 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (503) 226-4211 Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- Common Stock, $3 1/6 par value, and Common Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: Title of each class Shares outstanding on February 28, 2001 - ------------------- --------------------------------------- Preference Stock, without par value 250,000 Preferred Stock, without par value 97,500
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 [X]. The aggregate market value of the shares of voting stock (common stock) held by non-affiliates of the registrant at February 28, 2001 was: $618,598,200. Indicate number of shares outstanding of each of registrant's classes of common stock as of February 28, 2001: Common Stock, $3 1/6 par value, and Common Share Purchase Rights 25,230,166 DOCUMENTS INCORPORATED BY REFERENCE List documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated. Portions of the Proxy Statement of Company, to be filed in connection with the 2001 Annual Meeting of Shareholders, are incorporated by reference in Part III. Introductory Note ----------------- This Form 10-K/A amends Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition - "Other Income (Expense)" and Item 8. Financial Statements and Supplementary Data - Note 1, Note 2 and Note 4 to the Consolidated Financial Statements contained in the Annual Report on Form 10-K of Northwest Natural Gas Company. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS The consolidated financial statements include: Regulated utility: Northwest Natural Gas Company (NW Natural) Non-regulated subsidiary businesses: NNG Financial Corporation (Financial Corporation), a wholly-owned subsidiary Canor Energy, Ltd. (Canor), a majority-owned subsidiary reclassified as a discontinued segment in 1999 and sold in the first quarter of 2000 Together these businesses are referred to herein as the "Company" (see "Subsidiary Operations" below and Note 2 to the Consolidated Financial Statements). At Dec. 31, 1999, the Company's investment in Canor was reclassified to current assets and reported as a discontinued segment. In the consolidated statements of income for 1999 and 1998, Canor's operating revenues and expenses are included in net income from discontinued segment. The following is management's assessment of the Company's financial condition including the principal factors that affect results of operations. The discussion refers to the consolidated activities of the Company for the three years ended Dec. 31, 2000. Highlights and Outlook - ---------------------- Among its accomplishments in 2000, NW Natural: o grew the customer base by more than 4 percent for the 12th year in a row, adding 22,243 customers to its gas distribution system during the year; o completed another phase in the expansion of the Mist gas storage system and placed it in service Dec. 1, 2000, on time and on budget; o filed and settled a general rate case in Washington and secured fair regulatory treatment in both Oregon and Washington for the Mist storage project, new state cost allocations and gas cost changes; o completed the replacement of the last remaining portion of its 100-year-old low-pressure gas distribution system; o sold its Canadian energy exploration and production subsidiary at a gain, redeploying $35 million in cash proceeds from the sale into the Company's growing operations in its core market; o increased productivity by 6 percent, reducing its ratio of expenses per customer from $188.56 in 1999 to $176.31 in 2000; and o began trading its common stock on the New York Stock Exchange. Among its corporate strategies for 2001, NW Natural will focus on: o supporting and strengthening its core gas distribution business; o sustaining profitable customer growth while providing excellent customer service; o enhancing service and creating shareholder value through further gas storage development; and o improving efficiency by managing costs, investments and utilization of assets. 2 Earnings and Dividends - ---------------------- The Company's earnings applicable to common stock in 2000 were $47.8 million, up from $42.8 million in 1999 and $24.7 million in 1998. Earnings for 2000 set a new record for the Company while earnings for 1999 were its third highest on record. Earnings for 1998 were reduced by write-downs of subsidiary assets and by warmer than normal weather. Diluted earnings per share from consolidated operations were $1.88 a share in 2000, compared to $1.70 a share in 1999 and $1.02 a share in 1998. NW Natural earned $1.78 a diluted share from gas utility operations in 2000, compared to $1.66 in 1999 and $1.43 in 1998. Weather conditions in its service territory in 2000 were 4 percent colder than in 1999 and 5 percent colder than the 20-year average. Weather in 1999 was 6 percent colder than in 1998 and 2 percent colder than the 20-year average. Weather in 1998 was 5 percent warmer than the 20-year average. Non-regulated operating results for 2000, excluding Canor, were earnings of 1 cent a share compared to earnings of 3 cents a share from these operations in 1999 and a loss of 42 cents a share in 1998 (see Note 2). The loss in 1998 included write-downs of subsidiary assets equivalent to 43 cents a share. The Company recognized a gain equivalent to 9 cents a share from the sale of Canor during the first quarter of 2000. Results from Canor for the years ended Dec. 31, 1999 and 1998 were equivalent to earnings of 1 cent a share (see Note 2). Results in 1998 included write-downs of assets equivalent to 7 cents a share and a gain equivalent to 15 cents a share from a transaction involving Canor (see "Discontinued Segment," below). 2000 was the 45th consecutive year in which the Company's dividends paid have increased. Dividends paid on common stock were $1.24 a share in 2000 compared to $1.225 a share in 1999 and $1.22 a share in 1998. Results of Operations - --------------------- Regulatory Matters ------------------ NW Natural provides gas utility service in Oregon and Washington, with Oregon representing approximately 92 percent of its revenues. Future earnings and cash flows from utility operations will be determined largely by the pace of continued growth in the residential and commercial markets and by NW Natural's ability to remain price competitive in the large industrial market, to control expenses, and to obtain reasonable and timely regulatory ratemaking treatment for investments made in utility plant. In October 2000, the Washington Utilities and Transportation Commission (WUTC) authorized a general rate increase totaling $4.3 million per year, or 12.1 percent. The first $3.0 million per year of the revenue increase, relating to costs allocated to Washington under a new cost allocation study approved by the WUTC and the Public Utility Commission of Oregon (OPUC), was effective on Nov. 1, 2000. The remaining increase of $1.3 million per year will be effective on Oct. 1, 2001. The WUTC authorized and based rates on a return on common equity (ROE) of 10.8 percent. In November 1999, the OPUC authorized a general rate increase of $0.2 million per year effective Dec. 1, 1999. Higher revenues from rate increases averaging 1.3 percent for residential customers were partially offset by rate decreases for certain commercial and large industrial customers. The OPUC authorized and based rates on an ROE of 10.25 percent. On Dec. 1, 2000, NW Natural reduced rates in Oregon by $3.0 million per year to implement the cost allocation study that produced the equivalent rate increase in Washington. 3 NW Natural applies rate changes each year reflecting changes in its 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. On Sept. 28, 2000, the OPUC approved, effective Oct. 1, 2000, rate increases averaging 23 percent for NW Natural's Oregon sales customers. On July 31, 2000, the WUTC approved, effective Aug. 1, 2000, rate increases also averaging 23 percent for NW Natural's Washington sales customers. These rate increases reflect sizable increases in the cost of natural gas commodity purchased under contracts with gas producers (see "Comparison of Gas Operations--Cost of Gas," below). Also reflecting changes in NW Natural's purchased gas costs, the OPUC approved rate increases averaging 9.1 percent effective Dec. 1, 1999, and increases averaging 3.4 percent, 6.1 percent and 11.4 percent effective Dec. 1, April 1 and Jan. 1, 1998, respectively. The WUTC approved rate increases averaging 11.1 percent and 5.8 percent effective Dec. 1, 1999 and 1998, respectively. In an order issued in April 1999, the OPUC formalized a process that tests for excessive earnings in connection with gas utilities' annual filings of rate changes due to increases or decreases in gas costs. The OPUC confirmed NW Natural's ability to pass through 100 percent of its prudently incurred gas costs into rates. Under this order, NW Natural is authorized to retain all of its earnings up to a threshold level equal to its authorized ROE plus 300 basis points. One-third of any earnings above that level will be refunded to customers. The excess earnings threshold is subject to adjustment up or down each year depending on movements in interest rates. Even with the commodity-related rate increases approved in Washington and Oregon in recent years, NW Natural expects to maintain a price advantage over competing fuels, including heating oil as well as electricity provided by the investor-owned electric utilities in its service territory. 4 Comparison of Gas Operations ---------------------------- The following table summarizes the composition of gas utility volumes and revenues for the three years ended Dec. 31:
Thousands (Except customers and degree days) 2000 1999 1998 - ------------------------------------------------------------------------------------------ Gas Sales and Transportation Volumes - Therms (000's): - ------------------------------------------------------ Residential and commercial sales 606,755 605,351 544,810 Unbilled volumes 8,691 (9,343) 8,645 ---------- --------- --------- Weather-sensitive volumes 615,446 52% 596,008 49% 553,455 49% Industrial firm sales 76,559 6% 84,630 7% 87,275 8% Industrial interruptible sales 56,632 5% 52,938 4% 51,521 4% ---------- --------- --------- Total gas sales 748,637 733,576 692,251 Transportation deliveries 431,136 37% 480,570 40% 446,165 39% ---------- ---- --------- ---- --------- ---- Total volumes sold and delivered 1,179,773 100% 1,214,146 100% 1,138,416 100% ========== ==== ========= ==== ========= ==== Utility Operating Revenues - Dollars (000's): - --------------------------------------------- Residential and commercial sales $ 440,302 $ 382,377 $ 323,277 Unbilled revenues 12,661 (2,671) 8,314 ---------- --------- --------- Weather-sensitive revenues 452,963 85% 379,706 83% 331,591 82% Industrial firm sales 37,378 7% 35,857 8% 34,303 8% Industrial interruptible sales 23,483 5% 17,182 4% 15,337 4% ---------- --------- --------- Total gas sales 513,824 432,745 381,231 Transportation revenues 21,491 4% 21,351 5% 19,958 5% Other revenues (3,976) (1%) 1,194 - 2,617 1% ---------- ---- --------- ---- --------- ---- Total utility operating revenues $ 531,339 100% $ 455,290 100% $ 403,806 100% ========== ==== ========= ==== ========= ==== Cost of gas sold $ 273,978 $ 212,021 $ 173,242 ========== ========= ========= Total number of customers (end of period) 523,406 501,163 477,407 ========== ========= ========= Actual degree days 4,418 4,256 4,011 ========== ========= ========= 20-year average degree days 4,197 4,193 4,234 ========== ========= =========
5 Residential and Commercial -------------------------- NW Natural continues to experience rapid customer growth, with 22,243 customers added since Dec. 31, 1999. This represents a growth rate of 4.4 percent, compared to 5 percent in 1999 and 4.2 percent in 1998. In the three years ended Dec. 31, 2000, more than 65,000 customers were added to the system, representing an average annual growth rate of 4.6 percent. Typically, 75 percent or more of NW Natural's annual operating revenues are derived from gas sales to weather-sensitive residential and commercial customers. Accordingly, variations in temperatures between periods will affect volumes of gas sold to and revenues derived from these customers. Weather conditions were 5 percent colder than average in 2000, 2 percent colder than average in 1999 and 5 percent warmer than average in 1998. Average weather conditions are calculated from the most recent 20 years of temperature data measured by heating degree days. Weather in 2000 was 4 percent colder than 1999 and 1999 was 6 percent colder than 1998. The volumes of gas sold to residential and commercial customers were 3 percent higher in 2000 than in 1999 and 8 percent higher in 1999 than in 1998, reflecting the continued customer growth and colder weather. Partially offsetting the effects of the customer growth and colder weather on sales to these customers in 2000, however, was a reduction from 1999 of about 7 percent in residential and commercial customers' consumption per heating degree day, probably due to the impact of gas commodity cost-related rate increases in recent years (see "Regulatory Matters," above). Revenue from residential and commercial customers was up 19 percent in 2000 due to increased volumes and the rate increases effective in 1999 and 2000, and up 15 percent in 1999 due to increased volumes and rate increases effective in 1998 and 1999. In order to match revenues with related purchased gas costs, NW Natural records unbilled revenues for gas delivered but not yet billed to customers through the end of the period. Amounts reported as unbilled revenues reflect the increase or decrease in the balance of unbilled revenues over the prior year end. Year-end balances are affected by weather conditions, rate changes and customer billing dates from one period to the next. Industrial Sales, Transportation and Other Revenues --------------------------------------------------- Total volumes of gas delivered to industrial customers were 9 percent lower in 2000 than in 1999 and 6 percent higher in 1999 than in 1998. During 1999, industrial transportation volumes included 33 million therms of deliveries to an electric generating plant during a temporary shutdown of its primary gas supply line. The combined margin from industrial sales and transportation decreased 2 percent in 2000 from 1999 and increased slightly in 1999 from 1998. The 2000 results include the positive effects on industrial margins of higher oil prices in an industrial schedule in which rates vary with oil prices. The slight increase in industrial margin in 1999 from 1998 reflected the effect of low oil prices on rates under this schedule, and transfers of some industrial customers to rate schedules or special contracts with lower margins. Other revenues include amortizations from regulatory accounts and miscellaneous fees charged to gas sales customers. Other revenues in 2000 amounted to a net reduction to utility operating revenues of $4.0 million, compared to a net increase of $1.2 million in 1999. Factors contributing to the reduction in 2000 were higher amortizations from regulatory accounts covering conservation programs ($1.9 million), property taxes ($1.7 million) and Year 2000 costs ($1.1 million), and lower miscellaneous revenues ($1.0 million), partially offset by higher revenues from customer late payment and reconnection fees ($0.6 million). In 1999, other revenues totaled $1.2 million, including fees assessed to customers ($1.6 million), partially offset by other regulatory account adjustments ($0.4 million). In 1998, other revenues included the deferral of $2.0 million in revenue reductions required under a settlement approved by the 6 OPUC as part of the Jan. 1, 1998 rate changes, offset by $3.1 million from the amortization of property tax savings and $1.4 million from amortizations of other regulatory accounts. Cost of Gas ----------- NW Natural's cost per therm of gas sold was 27 percent higher in 2000 than in 1999, primarily due to higher prevailing prices in the natural gas commodity market. Its cost of gas sold was 15 percent higher in 1999 than in 1998. The cost per therm of gas sold includes current gas purchases, gas drawn from storage inventory, gains or losses from commodity hedges, demand cost equalization, regulatory deferrals and company use. NW Natural was able to offset some of the impact of the higher gas prices during 2000 through an active natural gas commodity hedge program conducted under the terms of the Company's Derivatives Policy (see Note 1, "Derivatives Policy"). NW Natural recorded net gains from commodity swap and call option contracts of $56 million in 2000, compared to net gains of $4 million in 1999. Gains (losses) from commodity hedges are recorded as reductions (increases) to the cost of gas. The cost of gas sold also was reduced by off-system gas sales of $3.0 million in 2000, compared to $1.7 million in 1999 and $4.6 million in 1998. Under an agreement with the OPUC, revenues from these sales are treated as a reduction of gas costs. NW Natural has a Purchased Gas Adjustment (PGA) tariff under which its net income from Oregon operations is affected only within defined limits by changes in purchased gas costs. NW Natural absorbs 33 percent of the higher cost of gas sold, or retains 33 percent of the lower cost, in either case as compared to projections. The remaining 67 percent of the higher or lower gas costs are recorded as deferred debits or credits (regulatory assets or liabilities) for recovery from or refund to customers in future rates. NW Natural deferred $6.1 million of higher gas costs in 2000 and expects to recover these amounts from customers during the next two years. The combined impact of NW Natural's higher gas costs and its partially offsetting off-system gas sales under the PGA sharing mechanism in 2000 was that the Company absorbed $2.0 million of its higher gas costs, reducing earnings by about 5 cents a share. Non-regulated Operations ------------------------ Non-regulated operating results in 2000 were earnings of 1 cent a share, compared to earnings of 3 cents a share from these operations in 1999 and a loss of 42 cents a share in 1998 (see Note 2). Financial Corporation's operating results in 2000 were net income of $0.1 million, compared to $0.5 million in 1999 and $0.1 million in 1998. The decrease in income from 1999 to 2000 was primarily due to an adjustment to deferred taxes in 2000. The increase in income from 1998 to 1999 was primarily due to stronger operating results from Financial Corporation's investments in limited partnerships in solar electric, wind-power electric and hydroelectric generation projects in California. Financial Corporation recorded asset impairment charges in 1998 totaling $16.6 million, equivalent to 43 cents a share. The charges resulted from the application of Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," to Financial Corporation's limited partnership investments. The determinations of impairments for Financial Corporation's assets resulted from estimates in 1998 of lower prices for future sales of electricity from the partnerships' power projects. The Company's investment in Financial Corporation at Dec. 31, 2000, was $7.2 million, compared to $7.1 million at Dec. 31, 1999 and $6.6 million at Dec. 31, 1998. The Company realized income of $0.1 million in 2000 from non-utility gas storage, involving the sale of gas storage services to upstream customers using storage capacity not required from time to time for service to utility customers. NW Natural retains 80 percent of the revenues from the upstream storage services and credits the remaining 20 percent to its utility customers. 7 Discontinued Segment -------------------- On Jan. 26, 2000, the Company sold its interest in Canor at a gain of $2.4 million, equivalent to 9 cents a diluted share (see Note 2). Net income from Canor for 1999 and 1998 was $0.4 million in both years. Results for 1998 included asset write-downs totaling $2.8 million, equivalent to 7 cents a share, and a $3.5 million gain, equivalent to 15 cents a share, from a merger involving Canor. The gain from the merger was not subject to U.S. income tax in 1998, but it was effectively taxed upon disposition of Canor in 2000. The Company's investment in Canor of $29.2 million at Dec. 31, 1999, was reported in current assets as an investment in discontinued segment. Operating Expenses ------------------ Operations and Maintenance -------------------------- Consolidated operations and maintenance expenses were $4.6 million, or 6 percent, higher in 2000 than in 1999. The increase was primarily due to credits to a litigation reserve in 1999 totaling $4.9 million resulting from favorable decisions by the Oregon Supreme Court and the Oregon Court of Appeals in a case involving claims by a commercial customer (see Note 12), and to increased payroll costs ($0.9 million) and accruals for environmental claims ($0.6 million) in 2000, partially offset by a lower bonus accrual ($1.3 million) in 2000. Operations and maintenance expenses in 1999 were $5.0 million, or 6 percent, lower than in 1998. The decrease was primarily due to the $4.9 million credit to the litigation reserve (see above). Lower expenses in 1999 for uncollectible accounts ($0.6 million), pensions ($0.4 million) and other miscellaneous operating costs ($2.0 million) were approximately offset by higher expenses for bonus accruals ($2.5 million) and early retirement and severance charges ($0.9 million). Taxes Other Than Income ----------------------- Taxes other than income, which are comprised of property, franchise, payroll and other taxes, increased $3.7 million, or 15 percent, in 2000. Franchise taxes, which are based on gross revenues, increased $2.6 million, or 25 percent, reflecting higher revenues due to an increase in the Company's customer base and rate increases effective in late 1999 and 2000. Property tax expense was $0.6 million, or 7 percent, higher than in 1999 due to more plant in service. Payroll tax expense was $0.3 million, or 9 percent, higher than in 1999 due to an increase in payroll expense. Taxes other than income increased $2.7 million, or 12 percent, in 1999. Property tax expense was $0.9 million, or 10 percent, higher than in 1998 due to more plant in service. Franchise taxes increased $1.4 million, or 16 percent, reflecting higher revenues due to rate increases effective Dec. 1, 1998 and 1999. 8 Depreciation, Depletion and Amortization ---------------------------------------- Depreciation, depletion and amortization expense was $3.6 million lower in 2000 than in 1999. The reduction was due to charges to NW Natural's depreciation expense in both years relating to regulatory treatment of a new customer information system (CIS) completed in 1997. NW Natural wrote down its CIS assets by $6.5 million in 1999 pursuant to the OPUC's order in its Oregon general rate case concluded in November 1999, and by a further $0.4 million in 2000 pursuant to the WUTC's order in its Washington general rate case concluded in October 2000. (See "Results of Operations - Regulatory Matters," above.) Exclusive of these regulatory mandated charges, consolidated depreciation, depletion and amortization expense increased $2.6 million, or 6 percent, in 2000 compared to 1999 and $0.5 million, or 1 percent, in 1999 compared to 1998. As a percentage of average plant and property, depreciation, depletion and amortization expense was 3.5 percent for both 2000 and 1999. Other Income (Expense) - ---------------------- Other income was $3.9 million in 2000, $1.0 million lower than in 1999, primarily due to a reduction of interest income from $3.9 million to $3.1 million. Other income was $4.8 million in 1999, compared to Other expense of $13.7 million in 1998, reflecting $16.6 million in asset write-downs recorded in 1998 related to Financial Corporation's limited partnership interests in solar electric, wind-power electric and hydroelectric generation projects in California (see "Non-regulated Operations," above). These asset write-downs resulted primarily from the effect of projected lower prices for future sales of electricity from these projects during the period of their expected remaining lives ranging from 18 to 20 years. As a result of the outlook for reduced cash flows due to lower energy prices in California, the Company investigated a potential sale of its interests in these projects and conducted an impairment analysis. The Company concluded that the aggregate fair value of these assets was potentially much lower than their book value, but that the market was limited and market prices were not readily available. The Company then determined these projects were held for use and did an impairment test on that basis. Impairment tests were conducted using a model based on SFAS No. 121. The assumptions used were determined to be reasonable based on historical data, best available information and previous analyses performed. The Company's cash flow projections focused primarily on future projected electricity prices. The projections also included assumptions related to project operating and maintenance costs, production availabilities, avoided power costs and discount rates. The impairment tests compared the undiscounted estimated future cash flows from the assets to their book value. Because the undiscounted future cash flows were less than the book value, the assets were deemed to be impaired, requiring write-downs by the amount of the difference between the book value and the discounted value of their estimated future cash flows. The SFAS No. 121 valuation model used, including key assumptions and present value of estimated expected future cash flows using a discount rate commensurate with the risks involved, represented the best estimate of fair value for these projects. Interest Charges - Net ---------------------- Interest charges increased $3.5 million, or 12 percent, in 2000 compared to 1999, primarily due to an increase in long-term debt outstanding and an adjustment relating to the favorable decisions by the Oregon Supreme Court and the Oregon Court of Appeals in a case involving claims by a commercial customer that reduced interest expense by $1.7 million in 1999 (see Note 12). 9 Interest charges decreased $1.5 million, or 5 percent, in 1999 compared to 1998, primarily due to reversals of interest charges recorded in prior years following the favorable decisions by the Oregon Supreme Court and the Oregon Court of Appeals in the case involving claims by a commercial customer (see Note 12). Allowance for Funds Used During Construction (AFUDC) represents the cost of funds used during the construction of utility plant (see Note 1). In 2000, AFUDC reduced interest expense by $0.8 million compared to $1.2 million in 1999 and $1.4 million in 1998. The weighted average AFUDC rates were 6.0 percent in 2000 and 1999 and 5.5 percent in 1998 (see "Financing Activities," below). Income Taxes ------------ The effective corporate income tax rates for 2000, 1999 and 1998 were 35.9 percent, 35.4 percent and 35.1 percent, respectively. Redeemable Preferred and Preference Stock Dividend Requirements --------------------------------------------------------------- Redeemable preferred and preference stock dividend requirements for 2000 and 1999 were lower by $0.1 million, or 2 percent, in 2000 and 3 percent in 1999, due to sinking fund redemptions. Financial Condition - ------------------- Capital Structure ----------------- NW Natural's capital expenditures are primarily related to utility construction resulting from customer growth, system improvements and the development of underground gas storage. NW Natural finances these expenditures from cash provided by operations and from short-term borrowings which are periodically refinanced through the sale of long-term debt or equity securities. In addition to its capital expenditures, the weather-sensitive nature of gas usage by NW Natural's residential and commercial customers influences the Company's financing requirements. Short-term liquidity is satisfied primarily through the sale of commercial paper, which is supported by commercial bank lines of credit (see Note 6). The Company's long-term goal is to maintain a capital structure comprised of 45 to 50 percent common stock equity, 5 to 10 percent preferred and preference stock and 45 to 50 percent short-term and long-term debt. When additional capital is required, the Company issues debt or equity securities depending upon both the target capital structure and market conditions. The Company also uses these sources to meet long-term debt and preferred and preference stock redemption requirements (see Notes 3 and 5). Cash Flows ---------- Operating Activities -------------------- Continuing operations provided net cash of $87.2 million in 2000 compared to $108.2 million in 1999. An increase in cash from operations before working capital changes ($14.8 million) was offset by higher working capital requirements ($35.8 million). The increase in cash from continuing operations before working capital changes was primarily due to an increase in the balance of deferred income taxes and investment tax credits compared to a decrease in 1999 ($9.7 million), a decrease in regulatory account net debit balances compared to an increase in 1999 ($8.1 million) and higher net income from continuing operations ($2.9 million), offset in part by lower depreciation, depletion and amortization ($3.6 million) and a smaller decrease in deferred gas costs receivable ($2.9 million). The increase in working capital requirements was due to changes in net balances of other current assets and liabilities ($33.0 million) (see "Port of Portland Building," below), an increase in accounts receivable compared to a decrease in 1999 ($18.2 million) and an increase in accrued unbilled revenue compared to a decrease in 1999 ($16.8 million), offset in part by a larger increase in accounts payable ($25.6 million) and an increase in accrued interest and taxes compared to a decrease in 1999 ($6.9 million). 10 Cash provided by continuing operations in 1999 was $108.2 million compared to $66.6 million in 1998. The 62 percent increase was due to increased cash from operations ($6.8 million) and lower working capital requirements ($34.8 million). The increase in cash from continuing operations before working capital changes compared to 1998 was primarily due to higher net income from continuing operations ($18.0 million) and a greater reduction in deferred gas costs receivable ($6.0 million), offset in part by non-cash investment losses in 1998 including the asset write-downs by Financial Corporation ($16.1 million). The decrease in working capital requirements in 1999 was primarily due to an increase in accounts payable compared to a decrease in 1998 ($19.6 million) and reductions in accrued unbilled revenue and accounts receivable compared to increases in 1998 ($13.1 million and $8.8 million, respectively). The decreases in working capital requirements were partially offset by a larger increase in inventories of gas, materials and supplies ($8.8 million). The Company has lease and purchase commitments relating to its operating activities which are financed with cash flows from operations (see Note 12). Port of Portland Building ------------------------- A large portion of the change in cash from continuing operations in 2000, compared to 1999, was due to cash flows relating to NW Natural's development contract for construction of a new headquarters building for the Port of Portland. The Port made construction progress payments totaling $18.8 million in the second and third quarters of 1999. NW Natural recorded current liabilities in the amounts of these payments, pending closing on the sale of the building, with the effect of reducing working capital requirements in the first nine months of 1999. The Port made its final payment of $1.2 million at closing on the sale of the building in the third quarter of 2000. At that time NW Natural reversed the balance of current liabilities relating to the building ($19.3 million), with the effect of increasing working capital requirements by that amount in 2000. Cash used in construction of the building was recorded in both periods as an investment in non-utility property (see "Investing Activities," below). NW Natural used a portion of the Port's progress payments to pay off the balance outstanding under a bank line of credit arranged for construction of the building ($12.3 million), contributing to a reduction in short-term debt in 1999. Investing Activities -------------------- Cash requirements for investing activities in 2000 totaled $30.9 million, down from $118.9 million in 1999. Cash requirements for utility construction totaled $80.4 million, down $28.7 million from 1999. The decrease in cash requirements for utility construction in 2000 resulted from lower expenditures for completion of another phase of the Company's gas storage expansion project ($24.8 million); lower construction overhead ($1.9 million); and reduced expenditures for computer hardware and software ($1.6 million). Cash requirements for NW Natural's capital program in 1999 totaled $109.1 million, up $29.1 million from 1998. The increase in cash requirements for utility construction in 1999 resulted from higher expenditures for gas storage development ($23.9 million); higher expenditures for computer hardware and software ($2.3 million), communications technology ($0.8 million) and large system improvement projects ($1.3 million); and higher construction overhead ($2.0 million). NW Natural's construction expenditures are estimated to total $75 million for 2001. Over the five-year period 2001 through 2005, these expenditures are estimated at between $450 million and $500 million. The level of capital expenditures over the next five years reflects projected high customer growth plus a major system reinforcement project and the development of additional underground gas storage facilities. An estimated 60 percent of the required funds is expected to be internally generated over the five-year period, with the remainder funded through a combination of long-term debt and equity securities with short-term debt providing liquidity and bridge financing. 11 Investments in non-utility property in 2000 included expenditures for completion of the portion of the Company's gas storage expansion project utilized for interstate storage ($4.9 million) and final payments of $2.6 million for the construction of the Port of Portland building. Total proceeds from the sale of the building in 2000 ($20.0 million) were recognized as proceeds from sale of assets. Investments in non-utility property in 1999 were $10.7 million, including $9.7 million relating to the Port of Portland building. There were no new capital investments in either of the Company's subsidiaries during 1999. Non-utility capital expenditures totaled $19.8 million in 1998, including Canor's investments of $13.5 million in Canadian exploration and production properties. NW Natural's non-utility expenditures in 1998 totaling $6.3 million included expenditures relating to the Port of Portland building ($6.0 million) and additions to existing facilities ($0.3 million). The sale of Canor provided net cash of $34.8 million in 2000. Financing Activities -------------------- Cash used in financing activities in 2000 totaled $55 million, compared to cash provided by financing activities in 1999 of $13 million. Factors contributing to the $68 million difference were retirements of long-term debt of $60 million in 2000 compared to $10 million in 1999, and a reduction in short-term debt ($38 million) in 2000 compared to an increase in short-term debt ($13 million) in 1999, partially offset by an increase in long-term debt issued ($35 million) in 2000. NW Natural sold $75 million of its Medium-Term Notes (MTNs) in 2000. It sold $50 million of secured MTNs with a weighted average maturity of 28 years and a weighted average coupon rate of 7.75% and used the proceeds to redeem all $50 million of the callable 9-3/4% Series of First Mortgage Bonds due 2015. The refunding will save the Company about $0.8 million per year (net) in future interest expense. NW Natural used $10 million from the remaining $25 million of proceeds from sales of secured MTNs in 2000 to refund maturing long-term debt, and $15 million to meet capital requirements for the Company's ongoing construction program or to reduce short-term debt. In May 2000, the Company commenced a program to repurchase up to 2 million shares, or up to $35 million in value, of NW Natural's common stock through a repurchase program to extend through May 2001. The purchases are made in the open market or through privately negotiated transactions. As of Dec. 31, 2000, the Company had repurchased 108,700 shares of common stock at a total cost of $2.4 million. Cash provided by financing activities in 1999 totaled $13 million, down from $32 million in 1998. The decrease was due to lower proceeds from sales of common stock ($47 million), partially offset by higher net proceeds from the issuance and retirement of long-term debt ($13 million) and an increase in short-term debt ($15 million). Proceeds from the sales of $20 million of secured MTNs were used in part to refund maturing long-term debt ($10 million). Stock Listing ------------- On July 27, 2000, the Company's Common Stock, $3-1/6 par value, and the Common Share Purchase Rights appurtenant thereto, began trading on the New York Stock Exchange, Inc. under the symbol "NWN". The stock previously traded on the Nasdaq National Market with the symbol NWNG. Ratios of Earnings to Fixed Charges ----------------------------------- For the years ended Dec. 31, 2000, 1999 and 1998, the Company's ratios of earnings to fixed charges, computed using the Securities and Exchange Commission method, were 3.14, 3.12 and 2.20, respectively. For this purpose, earnings consist of net income before taxes plus fixed charges. Fixed charges 12 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 - ---------------------- Environmental Matters --------------------- Since 1993, NW Natural has recorded expenses of $2.6 million for the costs of a continuing investigation of property it owns in Linnton, Oregon, that is the site of a former gas manufacturing plant that was closed in 1956 (the Linnton site). In 2000, NW Natural recorded an additional accrued liability of $1.4 million representing the estimated costs of further investigation and interim remediation on this site. Correspondingly, the Company recorded a receivable for its estimated recovery of these additional costs from insurance or through future rates. Also in 2000, NW Natural recorded expenses of $0.4 million relating to an investigation of a site adjacent to the Linnton site that now is the location of a manufacturing plant (the Wacker site), and $0.6 million relating to a segment of the Willamette River (the Portland Harbor) that includes the area adjacent to the Linnton site and the Wacker site. See Note 12. Forward-Looking Statements - -------------------------- This report and other presentations made by the Company from time to time may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and other statements which are other than statements of historical facts. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis. However, each such forward-looking statement involves uncertainties and is qualified in its entirety by reference to the following important factors that could cause the actual results of the Company to differ materially from those projected in such forward-looking statements: (i) prevailing governmental policies and regulatory actions, including those of the OPUC and the WUTC, with respect to allowed rates of return, industry and rate structure, purchased gas and investment recovery, acquisitions and dispositions of assets and facilities, operation and construction of plant facilities, present or prospective wholesale and retail competition, changes in tax laws and policies and changes in and compliance with environmental and safety laws and policies; (ii) weather conditions and other natural phenomena; (iii) unanticipated population growth or decline, and changes in market demand and demographic patterns; (iv) competition for retail and wholesale customers; (v) pricing of natural gas relative to other energy sources; (vi) unanticipated changes in interest or foreign currency exchange rates or in rates of inflation; (vii) unanticipated changes in operating expenses and capital expenditures; (viii) capital market conditions; (ix) competition for new energy development opportunities; and (x) legal and administrative proceedings and settlements. All subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, also are expressly qualified by these cautionary statements. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for the Company to predict all such factors, nor can it assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. 13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TABLE OF CONTENTS Page ---- 1. Management's Responsibility for Financial Statements................. 15 2. Report of Independent Accountants.................................... 16 3. Consolidated Financial Statements: Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998.................................................. 17 Consolidated Statements of Earnings Invested in the Business for the Years Ended December 31, 2000, 1999 and 1998......................... 18 Consolidated Balance Sheets, December 31, 2000 and 1999.............. 19 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998.................................................. 21 Consolidated Statements of Capitalization, December 31, 2000 and 1999................................................................. 22 Notes to Consolidated Financial Statements........................... 23 4. Quarterly Financial Information (unaudited).......................... 42 5. Supplementary Data: Financial Statement Schedules for the Years Ended December 31, 2000, 1999 and 1998: Schedule II - Valuation and Qualifying Accounts and Reserves............................................................. 43 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. 14 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS ---------------------------------------------------- The financial statements in this report were prepared by management, which is responsible for their objectivity and integrity. The statements have been prepared in conformity with generally accepted accounting principles and, where appropriate, reflect informed estimates based on judgments of management. The responsibility of the Company's independent accountants is to render an independent report on the financial statements. The Company's system of internal accounting controls is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorizations, that transactions are recorded to permit the preparation of financial statements in conformity with orders of regulatory authorities and generally accepted accounting principles and that accountability for assets is maintained. The Company's system of internal controls has provided such reasonable assurances during the periods reported herein. The system includes written policies, procedures and guidelines, an organization structure that segregates duties and an established program for monitoring the system by internal auditors. In addition, the Company has prepared and annually distributes to its employees a Code of Ethics covering its policies for conducting business affairs in a lawful and ethical manner. Ongoing review programs are carried out to ensure compliance with these policies. The Board of Directors, through its Audit Committee, oversees management's financial reporting responsibilities. The Committee meets regularly with management, the internal auditors, and representatives of the Company's independent accountants. Both internal auditors and external accountants have free and independent access to the Committee and the Board of Directors. No member of the Committee is an employee of the Company. The Committee reports the results of its activities to the full Board of Directors. Annually, the Committee recommends the nomination of independent accountants to the Board of Directors for shareholder approval. /s/ Richard G. Reiten ---------------------------------- Richard G. Reiten President and Chief Executive Officer /s/ Bruce R. DeBolt ---------------------------------- Bruce R. DeBolt Senior Vice President, Finance, and Chief Financial Officer 15 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of NW Natural In our opinion, the consolidated financial statements listed in the accompanying table of contents present fairly, in all material respects, the financial position of Northwest Natural Gas Company (doing business as NW Natural) and its subsidiaries (the "Company") at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying table of contents presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and this financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and this financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Portland, Oregon February 16, 2001 16 NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME (Thousands, Except Per Share Amounts)
Year Ended December 31 2000 1999 1998 - --------------------------------------------------------------------------------------------------------- Operating Revenues: Gross operating revenues $ 532,110 $ 455,834 $ 404,390 Cost of sales 274,160 212,197 173,424 ---------- ---------- ---------- Net operating revenues 257,950 243,637 230,966 Operating Expenses: Operations and maintenance 77,817 73,209 78,226 Taxes other than income taxes 28,351 24,652 21,939 Depreciation, depletion and amortization 47,440 51,008 43,937 ---------- ---------- ---------- Total operating expenses 153,608 148,869 144,102 ---------- ---------- ---------- Income from Operations 104,342 94,768 86,864 Other Income (Expense) 3,860 4,816 (13,723) Interest Charges - net 33,561 30,052 31,586 ---------- ---------- ---------- Income Before Income Taxes 74,641 69,532 41,555 Income Taxes 26,829 24,591 14,604 ---------- ---------- ---------- Net Income from Continuing Operations 47,812 44,941 26,951 Discontinued Segment: Income from discontinued segment - net of tax - 355 350 Gain on sale of discontinued segment - net of tax 2,412 - - ---------- ---------- ---------- Net Income 50,224 45,296 27,301 Redeemable preferred and preference stock dividend requirements 2,456 2,515 2,577 ---------- ---------- ---------- Earnings Applicable to Common Stock $ 47,768 $ 42,781 $ 24,724 ========== ========== ========== Average Common Shares Outstanding 25,183 24,976 24,233 Basic Earnings Per Share of Common Stock: From continuing operations $ 1.80 $ 1.70 $ 1.01 From discontinued segment - 0.01 0.01 From gain on sale of discontinued segment 0.10 - - ---------- ---------- ---------- Total basic earnings per share $ 1.90 $ 1.71 $ 1.02 ========== ========== ========== Diluted Earnings Per Share of Common Stock: From continuing operations $ 1.79 $ 1.69 $ 1.01 From discontinued segment - 0.01 0.01 From gain on sale of discontinued segment 0.09 - - ---------- ---------- ---------- Total diluted earnings per share $ 1.88 $ 1.70 $ 1.02 ========== ========== ========== Dividends Per Share of Common Stock $ 1.24 $ 1.225 $ 1.22 ========== ========== ==========
------------------------------------ See Notes to Consolidated Financial Statements. 17 NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF EARNINGS INVESTED IN THE BUSINESS (Thousands) Year Ended December 31,
2000 1999 1998 --------------------- --------------------- --------------------- Earnings Invested in the Business: Balance at Beginning of Year $ 118,711 $ 106,513 $ 113,098 Net Income 50,224 $ 50,224 45,296 $ 45,296 27,301 $ 27,301 Cash Dividends Paid: Redeemable preferred and preference stock (2,466) (2,525) (2,587) Common stock (31,198) (30,569) (29,615) Common Stock Repurchased (1,080) - - Common Stock Expense (2) (4) (1,684) ---------- ---------- ---------- Balance at End of Year $ 134,189 $ 118,711 $ 106,513 ========== ========== ========== Accumulated Other Comprehensive Income (Loss): Balance at Beginning of Year $ (3,181) $ (2,460) $ (2,235) Other comprehensive income (loss) - net of tax: Foreign currency translation adjustments from discontinued segment - - (721) (721) (225) (225) Recognition of foreign currency translation adjustment included in gain on sale of discontinued segment 3,181 3,181 - - - - ---------- --------- ---------- --------- ---------- --------- Comprehensive Income $ 53,405 $ 44,575 $ 27,076 ========= ========= ========= Balance at End of Year $ - $ (3,181) $ (2,460) ========== ========== ==========
------------------------------------ See Notes to Consolidated Financial Statements. 18 NORTHWEST NATURAL GAS COMPANY CONSOLIDATED BALANCE SHEETS (Thousands)
December 31 2000 1999 - ----------------------------------------------------------------------------------------- Assets: Plant and Property: Utility plant $ 1,406,970 $ 1,331,415 Less accumulated depreciation 478,138 436,386 ------------ ------------ Utility plant - net 928,832 895,029 ------------ ------------ Non-utility property 8,649 8,548 Less accumulated depreciation and depletion 3,451 7,654 ------------ ------------ Non-utility property - net 5,198 894 ------------ ------------ Total plant and property 934,030 895,923 ------------ ------------ Investments and Other 14,526 16,557 Current Assets: Cash and cash equivalents 11,283 10,013 Accounts receivable, less allowance for uncollectible accounts of $1,867 in 2000 and $1,669 in 1999 60,753 43,349 Accrued unbilled revenue 45,619 31,550 Inventories of gas, materials and supplies 46,883 33,919 Investment in discontinued segment - 29,163 Property held for sale - 16,712 Prepayments and other current assets 22,834 18,349 ------------ ------------ Total current assets 187,372 183,055 Regulatory Tax Assets 49,515 51,060 ------------ ------------ Deferred Gas Costs Receivable 16,973 20,950 ------------ ------------ Deferred Debits and Other 76,297 76,878 ------------ ------------ Total Assets $ 1,278,713 $ 1,244,423 ============ ============
----------------------------------- See Notes to Consolidated Financial Statements. 19 NORTHWEST NATURAL GAS COMPANY CONSOLIDATED BALANCE SHEETS (Thousands)
December 31 2000 1999 - ----------------------------------------------------------------------------------------- Capitalization and Liabilities: Capitalization (See Consolidated Statements of Capitalization): Common stock $ 79,905 $ 79,458 Premium on common stock 238,215 234,608 Earnings invested in the business 134,189 118,711 Accumulated other comprehensive income (loss) - (3,181) ------------ ------------ Total common stock equity 452,309 429,596 Redeemable preference stock 25,000 25,000 Redeemable preferred stock 9,750 10,564 Long-term debt 400,790 396,379 ------------ ------------ Total capitalization 887,849 861,539 ------------ ------------ Current Liabilities: Notes payable 56,263 94,149 Accounts payable 110,698 68,163 Long-term debt due within one year 20,000 10,000 Taxes accrued 8,066 4,101 Interest accrued 2,696 4,673 Other current and accrued liabilities 23,638 39,153 ------------ ------------ Total current liabilities 221,361 220,239 Deferred Investment Tax Credits 9,538 10,393 ------------ ------------ Deferred Income Taxes 141,656 136,150 ------------ ------------ Regulatory Liabilities and Other 18,309 16,102 ------------ ------------ Commitments and Contingencies (see Note 12) - - ------------ ------------ Total Capitalization and Liabilities $ 1,278,713 $ 1,244,423 ============ ============
----------------------------------- See Notes to Consolidated Financial Statements. 20 NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands)
Year Ended December 31 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------ Operating Activities: Net income from continuing operations $ 47,812 $ 44,941 $ 26,951 Adjustments to reconcile net income to cash provided by operations: Depreciation, depletion and amortization 47,440 51,008 55,822 Gain on sale of assets (491) - (3,782) Deferred income taxes and investment tax credits 4,651 (5,015) (344) Equity in (earnings) losses of investments 221 (490) 15,572 Allowance for funds used during construction (789) (1,153) (1,426) Deferred gas costs receivable 3,977 6,845 833 Regulatory accounts and other - net 4,333 (3,795) (8,109) --------- --------- --------- Cash from operations before working capital changes 107,154 92,341 85,517 Changes in operating assets and liabilities: Accounts receivable - net (17,404) 792 (8,056) Accrued unbilled revenue (14,069) 2,708 (10,347) Inventories of gas, materials and supplies (12,964) (12,661) (3,873) Accounts payable 42,535 16,910 (2,736) Accrued interest and taxes 1,988 (4,916) 2,976 Other current assets and liabilities (20,000) 12,992 3,108 --------- --------- --------- Cash Provided by Continuing Operating Activities 87,240 108,166 66,589 --------- --------- --------- Cash Provided by Operations of Discontinued Segment - 46 2,633 --------- --------- --------- Investing Activities: Acquisition and construction of utility plant assets (80,444) (109,144) (80,022) Investment in non-utility property (6,923) (10,713) (19,780) Proceeds from sale of discontinued segment 34,756 - - Proceeds from sale of assets 21,012 - - Investments and other 610 956 (1,057) --------- --------- --------- Cash Used in Investing Activities (30,989) (118,901) (100,859) Financing Activities: Common stock issued 4,826 5,356 52,384 Common stock repurchased (2,441) - - Redeemable preferred stock retired (814) (935) (930) Long-term debt issued 75,000 40,000 52,000 Long-term debt retired (60,000) (10,000) (35,000) Change in short-term debt (37,886) 12,717 (2,054) Cash dividend payments: Redeemable preferred and preference stock (2,466) (2,525) (2,587) Common stock (31,198) (30,569) (29,615) Foreign currency translation and capital stock expense (2) (725) (1,909) --------- --------- --------- Cash Provided by (Used in) Financing Activities (54,981) 13,319 32,289 Increase in Cash and Cash Equivalents 1,270 2,630 652 Cash and Cash Equivalents - Beginning of Year 10,013 7,383 6,731 --------- --------- --------- Cash and Cash Equivalents - End of Year $ 11,283 $ 10,013 $ 7,383 ========= ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 35,592 $ 30,506 $ 32,323 Income Taxes $ 22,552 $ 27,302 $ 8,205 Supplemental Disclosure of Non-cash Financing Activities: Conversion to common stock: 7-1/4 % Series of Convertible Debentures $ 589 $ 359 $ 565
------------------------------------ See Notes to Consolidated Financial Statements 21 NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Thousands, Except Share Amounts)
December 31 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Common Stock Equity: Common stock - par value $3-1/6 per share; authorized 60,000,000 shares: outstanding - 2000, 25,233,424 shares; 1999, 25,091,938 shares $ 79,905 $ 79,458 Premium on common stock 238,215 234,608 Earnings invested in the business 134,189 118,711 Accumulated other comprehensive income (loss) - (3,181) --------- --------- Total common stock equity 452,309 51% 429,596 50% --------- --------- Redeemable Preference Stock, authorized 2,000,000 shares; $6.95 Series, stated value $100 per share; outstanding - 2000, 250,000 shares; 1999, 250,000 shares 25,000 25,000 --------- --------- Total redeemable preference stock 25,000 3% 25,000 3% Redeemable Preferred Stock, authorized 1,500,000 shares; all outstanding series have a stated value of $100 per share $4.75 Series, outstanding - 1999, 643 shares - 64 $7.125 Series, outstanding - 2000, 97,500 shares; 1999, 105,000 shares 9,750 10,500 --------- --------- Total redeemable preferred stock 9,750 1% 10,564 1% Long-Term Debt: First Mortgage Bonds -------------------- 9-3/4% Series due 2015 - 50,000 Medium-Term Notes ----------------- First Mortgage Bonds: 5.96% Series B due 2000 - 5,000 5.98% Series B due 2000 - 5,000 6.62% Series B due 2001 10,000 10,000 6.75% Series B due 2002 10,000 10,000 8.05% Series A due 2002 10,000 10,000 5.55% Series B due 2002 20,000 20,000 6.40% Series B due 2003 20,000 20,000 6.34% Series B due 2005 5,000 5,000 6.38% Series B due 2005 5,000 5,000 6.45% Series B due 2005 5,000 5,000 6.80% Series B due 2007 10,000 10,000 6.50% Series B due 2008 5,000 5,000 7.45% Series B due 2010 25,000 - 8.26% Series B due 2014 10,000 10,000 7.00% Series B due 2017 40,000 40,000 6.60% Series B due 2018 22,000 22,000 8.31% Series B due 2019 10,000 10,000 7.63% Series B due 2019 20,000 20,000 9.05% Series A due 2021 10,000 10,000 7.25% Series B due 2023 20,000 20,000 7.50% Series B due 2023 4,000 4,000 7.52% Series B due 2023 11,000 11,000 7.72% Series B due 2025 20,000 - 6.52% Series B due 2025 10,000 10,000 7.05% Series B due 2026 20,000 20,000 7.00% Series B due 2027 20,000 20,000 6.65% Series B due 2027 20,000 20,000 6.65% Series B due 2028 10,000 10,000 7.74% Series B due 2030 20,000 - 7.85% Series B due 2030 10,000 - Unsecured: 8.47% Series A due 2001 10,000 10,000 Convertible Debentures ---------------------- 7-1/4% Series due 2012 8,790 9,379 --------- --------- 420,790 406,379 Less long-term debt due within one year 20,000 10,000 --------- --------- Total long-term debt 400,790 45% 396,379 46% --------- ----- --------- ----- Total capitalization $ 887,849 100% $ 861,539 100% ========= ===== ========= =====
------------------------------------ See Notes to Consolidated Financial Statements. 22 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 (NW Natural) Non-regulated subsidiary businesses: NNG Financial Corporation (Financial Corporation), a wholly-owned subsidiary Canor Energy, Ltd. (Canor), a majority-owned subsidiary reclassified as a discontinued segment in 1999 and sold in the first quarter of 2000 Together these businesses are referred to herein as the "Company." Intercompany accounts and transactions have been eliminated. Investments in corporate joint ventures and partnerships in which the Company's ownership is 50 percent or less are accounted for by the equity method or the cost method (see Note 9). Certain amounts from prior years have been reclassified to conform with the 2000 presentation. These reclassifications had no impact on prior year results of operations. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts in the consolidated financial statements and accompanying notes. Changes in such estimates may affect amounts reported in future periods. Industry Regulation - ------------------- The Company's principal business is the distribution of natural gas which is regulated by the Oregon Public Utility Commission (OPUC) and the Washington Utilities and Transportation Commission (WUTC). Accounting records and practices conform to the requirements and uniform system of accounts prescribed by these regulatory authorities in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Utility Plant - ------------- Utility plant for NW Natural is stated at cost (see table in Note 9). When a depreciable unit of property is retired, the cost is removed from both utility plant and the accumulated provision for depreciation together with the cost of removal, less any salvage. No gain or loss is recognized upon normal retirement. NW Natural's provision for depreciation of utility property, which is computed under the straight-line, age-life method in accordance with independent engineering studies and as approved by regulatory authorities, approximated 3.5 percent of average depreciable plant in 2000, 4.0 percent in 1999 and 3.9 percent in 1998. The rate of depreciation approximates the economic life of the utility property. 23 Northwest Natural Gas Company Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Certain additions to utility plant include an allowance for funds used during construction (AFUDC), a non-cash item. AFUDC represents the cost of funds borrowed during construction and is calculated using actual commercial paper interest rates. If commercial paper borrowings are insufficient to finance the total work in progress, then a composite rate of interest on all debt, shown as a reduction to interest charges, and a return on equity funds, shown as other income, is used to compute AFUDC. While cash is not realized currently from AFUDC, it is realized in the ratemaking process over the service life of the related property through increased revenues resulting from higher rate base and higher depreciation expense. NW Natural's weighted average AFUDC rates were 6.0 percent for both 2000 and 1999 and 5.5 percent for 1998. Regulatory Accounts - ------------------- In applying SFAS No. 71, NW Natural has capitalized certain costs and benefits as regulatory assets and liabilities pursuant to orders of the state utility regulatory commissions, in general rate proceedings or expense deferral proceedings, in order to provide for recovery of revenues or expenses from, or refunds to, NW Natural's utility customers in future periods. At Dec. 31, 2000 and 1999, regulatory tax assets were $49.5 million and $51.1 million, respectively, while other regulatory assets and liabilities (net) were $26.5 million and $37.4 million, respectively. If NW Natural should determine in the future that all or a portion of these regulatory assets and liabilities no longer meet the criteria for continued application of SFAS No. 71, then NW Natural would be required to write off that portion which it could not recover or refund. Cash and Cash Equivalents - ------------------------- For purposes of reporting cash flows, cash and cash equivalents include cash on hand and highly liquid temporary investments with expected maturity dates of three months or less. Revenue Recognition - ------------------- The Company's utility revenues are derived primarily from the sale and transportation of natural gas. The Company recognizes utility revenue from gas sales and transportation when the gas is delivered to customers. Estimated revenues are accrued for gas deliveries not billed to customers from meter reading dates to month end (unbilled revenue) and are reversed the following month when actual billings occur. Revenues from non-utility services, including gas storage services, are recognized upon delivery of the service to customers. Inventories - ----------- NW Natural's inventories of gas in storage and materials and supplies are stated at the lower of average cost or net realizable value. Derivatives Policy - ------------------ NW Natural's "Derivatives Policy" allows up to a 100 percent hedge position in currency derivatives to match and lock in prices on individual Canadian natural gas purchase transactions; interest rate derivatives to match specific outstanding debt instruments maturing in less than five years; and natural gas commodity derivatives to lock in or cap prices on gas purchased for a future period under contracts with market-indexed pricing. The policy requires derivatives to be used within prescribed limitations and only in order to reduce price risk, so as to qualify for hedge accounting treatment. The Company's derivatives policy also has specific requirements in terms of counterparty credit-worthiness. Changes in market values of foreign currency contracts, and gains or losses on commodity derivative contracts, are deferred and recognized as adjustments to gas purchase costs upon concurrent settlement of these contracts (see Note 11). 24 Northwest Natural Gas Company Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedge accounting. It requires that an entity recognize all derivatives as either assets or liabilities and measure those instruments at fair value. SFAS No. 133 requires that changes in the fair value of a derivative be recognized currently in earnings, unless specific hedge accounting criteria are met. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", amending portions of SFAS No. 133. Among other things, SFAS No. 138 provides an exception for contracts intended for the normal purchase and normal sale of something other than a financial instrument or derivative instrument, for which physical delivery is probable. Some of the Company's gas supply and transportation contracts are derivative instruments as defined under SFAS No. 133. These standards will be effective for the Company beginning Jan. 1, 2001. Adoption of these new accounting standards, as of Jan. 1, 2001, is not expected to have a material affect on net income or financial position. The Company's primary derivatives hedging activities will be accounted for as cash flow hedges under SFAS No. 133. Due to the nature of the Company's hedging strategy, cash flow hedges are expected to be highly effective. Furthermore, because the results of the Company's hedging program are included in the regulated cost of gas, unrealized hedging gains or losses will be tracked in deferred gas costs rather than other comprehensive income. 25 Northwest Natural Gas Company Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Segment Reporting - ----------------- The Company principally operates in a single line of utility business consisting of distribution of natural gas. Other segments are primarily investments in alternative energy projects in California, the discontinued oil and gas exploration business, a Boeing 737-300 Aircraft which is leased to Continental Airlines and non-utility gas storage. The following table presents information about reportable segments for 2000, 1999 and 1998. Inter-segment transactions are insignificant.
Thousands Utility Other Total ------------------------------------------------------------------------------- 2000 ---- Net operating revenues $ 257,361 $ 589 $ 257,950 Income from operations 103,902 440 104,342 Net income from continuing operations 47,519 293 47,812 Income from financial investments - 103 103 Income from non-utility storage - 102 102 Gain on sale of discontinued segment - 2,412 2,412 Assets 1,260,013 18,700 1,278,713 1999 ---- Net operating revenues $ 243,269 $ 368 $ 243,637 Income from operations 94,744 24 94,768 Net income from continuing operations 44,323 618 44,941 Income (loss) from financial investments - (82) (82) Net income from discontinued segment - 355 355 Assets 1,197,673 46,750 1,244,423 1998 ---- Net operating revenues $ 230,564 $ 402 $ 230,966 Income (loss) from operations 86,981 (117) 86,864 Net income (loss) from continuing operations 37,530 (10,579) 26,951 Income (loss) from financial investments - (17,192) (17,192) Net income from discontinued segment - 350 350 Assets 1,120,706 71,030 1,191,736
Income Taxes - ------------ NW Natural uses the balance sheet method of accounting for deferred income taxes. Deferred tax liabilities and assets reflect the expected future tax consequences, based on enacted tax law, of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts (see Note 8). Consistent with rate and accounting instructions of regulatory authorities, deferred income taxes are not currently collected for those temporary income tax differences where the prescribed regulatory accounting methods do not provide for current recovery in rates. NW Natural has recorded a regulatory tax asset for amounts pending recovery from customers in future rates. These amounts are primarily differences between the book and tax basis of net utility plant in service. This asset balance was $49.5 million and $51.1 million at Dec. 31, 2000 and 1999, respectively. Investment tax credits on utility property additions and leveraged leases which reduce income taxes payable are deferred for financial statement purposes and are amortized over the life of the related property or lease. Investment and energy tax credits generated by non-regulated subsidiaries are amortized over a period of one to five years. 26 Northwest Natural Gas Company Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Other Income (Expense) - ---------------------- Other income (expense) consists of interest income; gain on sale of assets; investment income (loss) of Financial Corporation, including write-downs due to asset impairments in 1998; and other miscellaneous income from merchandise sales, rents, an aircraft lease and other items. Earnings Per Share - ------------------ Basic earnings per share are computed based on the weighted average number of common shares outstanding each year. Diluted earnings per share reflect the potential effects of the conversion of any outstanding convertible debentures and the exercise of outstanding stock options. Diluted earnings are calculated as follows:
Thousands, except per share amounts 2000 1999 1998 ------------------------------------------------------------------------------ Earnings applicable to common stock $ 47,768 $ 42,781 $ 24,724 Debenture interest less taxes 389 415 431 -------- -------- -------- Net income available for diluted common stock $ 48,157 $ 43,196 $ 25,155 ======== ======== ======== Average common shares outstanding 25,183 24,976 24,233 Stock options 13 21 41 Convertible debentures 442 471 489 -------- -------- -------- Diluted average common shares outstanding 25,638 25,468 24,763 ======== ======== ======== Diluted earnings per share of common stock $ 1.88 $ 1.70 $ 1.02 ======== ======== ========
2. CONSOLIDATED SUBSIDIARY OPERATIONS AND DISCONTINUED SEGMENT: - ----------------------------------------------------------------- At Dec. 31, 2000, the Company had one active subsidiary, Financial Corporation, a wholly-owned subsidiary. One discontinued segment, Canor, a majority-owned subsidiary, was sold in January 2000. NNG Financial Corporation - ------------------------- Financial Corporation provided short-term financing for Canor and has several financial investments, including investments as a limited partner in solar electric generating systems, windpower electric generating projects, a hydroelectric facility and low-income housing projects. It also held interests in certain gas producing properties in the western United States (see Note 9). During the fourth quarter of 1998, Financial Corporation recorded asset impairment charges resulting from the application of an impairment model based on SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," to limited partnership investments in solar electric, windpower electric and hydroelectric projects in California. The pre-tax write-down of $16.6 million is included in other income (expense) in the consolidated statements of income. These asset write-downs resulted primarily from the effect of projected lower prices for future sales of electricity from these projects during the period of their expected remaining lives ranging from 18 to 20 years. As a result of the outlook for reduced cash flows due to lower energy prices in California, the Company investigated a potential sale of its interests in these projects and conducted an impairment analysis. The Company concluded that the aggregate fair value of these assets was potentially much lower than their book value, but that the market was limited and market prices were not readily available. The Company then concluded that it would not currently sell its interests in the projects and determined that an impairment test would provide a best estimate of fair value. 27 Northwest Natural Gas Company Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Impairment tests were conducted using a model based on SFAS No. 121. The assumptions used were determined to be reasonable based on historical data, best available information and previous analyses performed. The Company's cash flow projections focused primarily on future projected electricity prices. However, the projections also included assumptions related to project operating and maintenance costs, production availabilities, avoided power costs and discount rates. The Company used a discount rate of 15 percent, a rate which was deemed to be commensurate with the risk that would be involved in similar investments with like risks. Production forecasts as well as projected operating, maintenance and other operating expenses used in the cash flow analyses were consistent on a project-by-project basis with historical data for the projects since their inception and estimates provided by the projects' operators, and also included a reasonable trend line for projected future costs. The impairment tests compared the undiscounted estimated future cash flows from the assets to their book value. Because the undiscounted future cash flows were determined to be less than the book value, the assets were determined to be impaired, requiring write-downs by the amount of the difference between the book value and the discounted value of their estimated future cash flows. The SFAS No. 121 valuation model used, including key assumptions and present value of estimated expected future cash flows using a discount rate commensurate with the risks involved, represented the best estimate of fair value for these projects. Canor Energy, Ltd. - ------------------ On Jan. 26, 2000, the Company sold its interest in Canor Energy Ltd. (Canor), an Alberta, Canada corporation engaged in natural gas and oil exploration, development and production in Alberta and Saskatchewan, Canada. The after-tax gain from the sale was $2.4 million, net of Canadian tax on dividends ($0.6 million) and U.S. income tax ($2.8 million) and is shown as gain on sale of discontinued segment. The consolidated financial statements of the Company have been restated to reflect Canor as a discontinued segment. Accordingly, Canor's operating revenues and expenses are included in net income from discontinued segment for 1999 and 1998, and its cash flows are reported as cash provided by discontinued segment for all periods presented. At Dec. 31, 1999, the Company's investment in Canor was $29.2 million and is shown as investment in discontinued segment (in current assets). Canor began operations in 1990 as a wholly-owned indirect subsidiary. In 1998, Canor acquired all of the capital stock of Southlake Energy, Inc. (Southlake), an indirect subsidiary of NIPSCO Industries, Inc. (NI), in exchange for shares of common stock representing a 34 percent interest in Canor. In January 2000, the Company acquired NI's interest in Canor and then sold 100 percent of Canor's stock. During 1998, Canor recorded asset write-downs of $4.2 million for its oil and gas production properties. Approximately half of the write-downs were due to impairment charges under SFAS No. 121 resulting from the impact of low oil prices on Canor's oil properties in Canada. The additional write-downs were due to determinations that some of Canor's oil and gas wells were no longer productive due to water encroachment. 3. CAPITAL STOCK: - ------------------- Common Stock - ------------ At Dec. 31, 2000, NW Natural had reserved 222,229 shares of common stock for issuance under the Employee Stock Purchase Plan, 153,577 shares under its Dividend Reinvestment and Stock Purchase Plan, 781,347 shares under its 1985 Stock Option Plan (see Note 4), 502,056 shares for future conversions of its 7-1/4% Convertible Debentures and 3,000,000 shares under the Shareholder Rights Plan. 28 Northwest Natural Gas Company Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- Redeemable Preference Stock - --------------------------- The $6.95 Series of Preference Stock is not redeemable prior to Dec. 31, 2002, but is subject to mandatory redemption on that date. Redeemable Preferred Stock - -------------------------- The mandatory preferred stock redemption requirements aggregate $0.8 million in 2001, 2002, 2003, 2004 and 2005. These requirements are non-cumulative. At any time NW Natural is in default on any of its obligations to make the prescribed sinking fund payments, it may not pay cash dividends on common stock or preference stock. Upon involuntary liquidation, all series of redeemable preferred stock are entitled to their stated value. The remaining shares of the $4.75 Series of redeemable preferred stock were redeemed on Sept. 1, 2000. The redeemable preferred stock is callable at stipulated prices, plus accrued dividends. At Dec. 31, 2000, shares of the $7.125 Series are redeemable on or after May 1, 2001 at a price of $103.325 per share decreasing each year thereafter to $100 per share on or after May 1, 2008. Stock Repurchase Program - ------------------------ In May 2000, the Company commenced a program to repurchase up to 2 million shares, or up to $35 million in value, of its common stock through a repurchase program to extend through May 2001. Purchases are made in the open market or through privately negotiated transactions. As of Dec. 31, 2000, the Company had repurchased 108,700 shares of common stock at a total cost of $2.4 million. 29 Northwest Natural Gas Company Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The following table shows the changes in the number of shares of NW Natural's capital stock and the premium on common stock for the years 2000, 1999 and 1998:
-------------Shares-------------- Premium-on Redeemable Redeemable common Common preference preferred stock stock stock stock (thousands) -------------------------------------------- Balance, Dec. 31, 1997 22,864,328 250,000 124,285 $ 182,998 Sales to the public 1,725,000 - - 40,789 Sales to employees 17,637 - - 366 Sales to stockholders 194,835 - - 4,644 Exercise of stock options - net 22,946 - - 377 Conversion of convertible debentures to common 28,375 - - 475 Sinking fund purchases - - (9,300) 1 ---------- ---------- --------- ---------- Balance, Dec. 31, 1998 24,853,121 250,000 114,985 229,650 Sales to employees 13,619 - - 295 Sales to stockholders 188,821 - - 4,028 Exercise of stock options - net 18,355 - - 334 Conversion of convertible debentures to common 18,022 - - 301 Sinking fund purchases - - (9,342) - ---------- ---------- --------- ---------- Balance, Dec. 31, 1999 25,091,938 250,000 105,643 234,608 Sales to employees 14,696 - - 278 Sales to stockholders 199,920 - - 3,769 Exercise of stock options - net 5,990 - - 81 Conversion of convertible debentures to common 29,580 - - 495 Stock repurchase (108,700) - - (1,016) Sinking fund purchases - - (8,143) - ---------- ---------- --------- ---------- Balance, Dec. 31, 2000 25,233,424 250,000 97,500 $ 238,215 ========== ========== ========= ==========
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 922,171 shares of common stock have been granted at prices ranging from $11.75 to $27.875 per share, and options on 79,296 shares have expired. NW Natural applies Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for either the Plan or the Employee Stock Purchase Plan. If compensation cost for awards under NW Natural's two stock-based compensation plans had 30 Northwest Natural Gas Company Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- been determined based on the fair value at the grant dates using the method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," net income and earnings per share would have been reduced to the pro forma amounts indicated below:
2000 1999 1998 ---- ---- ---- Earnings applicable to common stock ($000): ------------------------------------------- As reported $ 47,768 $ 42,781 $ 24,724 Pro forma 47,190 42,525 24,518 Basic earnings per share ------------------------ As reported $ 1.90 $ 1.71 $ 1.02 Pro forma 1.87 1.70 1.01 Diluted earnings per share -------------------------- As reported $ 1.88 $ 1.70 $ 1.02 Pro forma 1.86 1.69 1.01
For purposes of determining the pro forma expense, the fair value of each option is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2000 and 1998, respectively: a dividend yield of 5.2 and 4.7 percent; expected volatility of 31.4 and 27 percent; risk-free interest rates of 5 and 5 percent; and expected lives of seven years. There were no new grants during 1999. Information regarding the Plan is summarized as follows:
Options ---------------------------- 2000 1999 1998 ---- ---- ---- Outstanding, beginning of year 290,212 320,032 227,733 $16.59 Options: --------------- Exchanged by holder - - (2,608) Exercised (88) - (2,264) $24.00 Options: --------------- Exchanged by holder (6,305) - - Exercised (2,320) (7,500) (8,082) Expired (1,500) - - $20.17 Options: --------------- Exchanged by holder (1,912) (1,465) - Exercised (582) (5,755) (247) $20.92 Options -------------- Exchanged by holder - - (1,147) Exercised (3,000) (5,100) (12,353) Expired (3,000) - - $27.875 Options --------------- Granted - - 116,000 Expired (6,000) (10,000) (1,000) $26.75 Options -------------- Granted - - 4,000 $20.25 Options -------------- Granted 145,500 - - Expired (2,500) - - $21.625 Options --------------- Granted 2,500 - - $22.875 Options --------------- Granted 5,000 - - -------- -------- -------- Outstanding, end of year 416,005 290,212 320,032 ======== ======== ======== Available for grant, end of year 357,125 497,125 487,125 ======== ======== ========
31 Northwest Natural Gas Company Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The weighted average grant-date market value for options granted during 2000 was $20.36. For options outstanding at December 31, 2000, the range of exercise prices was $20.17 to $27.875, and the weighted average remaining contractual life was 6.9 years. NW Natural's Employee Stock Purchase Plan, as amended in 2000, allows employees to purchase common stock at 85 percent of the average bid and ask market price on the subscription date which is set annually. Each eligible employee may purchase up to 900 shares through payroll deduction over a six to 12 month period. 5. LONG-TERM DEBT: - -------------------- The issuance of first mortgage bonds, including secured medium-term notes, under the Mortgage and Deed of Trust (Mortgage) is limited by property, earnings and other provisions of the Mortgage. The Mortgage constitutes a first mortgage lien on substantially all of NW Natural's utility property. The 7-1/4 % Series of Convertible Debentures may be converted at any time into 50-1/4 shares of common stock for each $1,000 face value ($19.90 per share). The maturities for the five years ending Dec. 31, 2005, on the long-term debt outstanding at Dec. 31, 2000 amount to: $20 million in 2001, $40 million in 2002, $20 million in 2003, no maturity in 2004 and $15 million in 2005. 6. NOTES PAYABLE AND LINES OF CREDIT: - --------------------------------------- NW Natural has available through Sept. 30, 2001, committed lines of credit with four commercial banks totaling $120 million which are used as backup lines for the commercial paper program. In addition, Financial Corporation has available through Sept. 30, 2001, committed lines of credit with two commercial banks totaling $20 million. Financial Corporation's lines are supported by the guaranty of NW Natural. Under the terms of these lines of credit, NW Natural and Financial Corporation pay commitment fees but are not required to maintain compensating bank balances. The interest rates on borrowings under these lines of credit are based on current market rates as negotiated. There were no outstanding balances on either the NW Natural or Financial Corporation lines of credit as of Dec. 31, 2000 or 1999. The Company's primary source of short-term funds is commercial paper. Both NW Natural and Financial Corporation issue commercial paper under agency agreements with a commercial bank. The commercial paper is supported by the Company's lines of credit. Financial Corporation's commercial paper is supported by the guaranty of NW Natural. The amounts and average interest rates of commercial paper outstanding were as follows at Dec. 31: --------2000------ --------1999----- Thousands Amount Rate Amount Rate NW Natural $ 56,263 6.5% $ 94,149 5.8% Financial Corporation - - ---------- ---------- Total $ 56,263 $ 94,149 ========== ========== 32 Northwest Natural Gas Company Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 7. PENSION AND OTHER POSTRETIREMENT BENEFITS: - ----------------------------------------------- NW Natural has two qualified non-contributory defined benefit plans covering all regular employees with more than one year of service, a non-qualified supplemental pension plan for eligible executive officers and other postretirement benefit plans for its employees. The following tables provide a reconciliation of the changes in the plans' benefit obligations and fair value of assets over the three-year period ended Dec. 31, 2000 and a statement of the funded status as of Dec. 31, 2000, 1999 and 1998:
Pension Benefits Other Benefits ---------------------------------- ---------------------------------- Thousands 2000 1999 1998 2000 1999 1998 - --------- ---- ---- ---- ---- ---- ---- Change in benefit obligation: Benefit obligation at Jan. 1 $ 136,198 $ 142,619 $ 127,879 $ 11,902 $ 15,717 $ 12,332 Service cost 3,475 4,259 3,430 234 162 288 Interest cost 10,312 9,379 9,282 995 715 891 Expected benefits paid (8,035) (6,911) (6,762) (878) (766) (578) Plan amendments 12 4,057 (2,948) - (1,583) - Net actuarial (gain) loss 4,840 (17,205) 11,738 1,816 (2,343) 2,784 ---------- ---------- ---------- ---------- ---------- ---------- Benefit obligation at Dec. 31 146,802 136,198 142,619 14,069 11,902 15,717 ---------- ---------- ---------- ---------- ---------- ---------- Change in plan assets: Fair value of plan assets at Jan. 1 193,427 175,554 158,118 - - - Actual return on plan assets 4,351 24,104 23,532 - - - Employer contributions 708 680 666 878 766 578 Benefits paid (8,035) (6,911) (6,762) (878) (766) (578) ---------- ---------- ---------- ---------- ---------- ---------- Fair value of plan assets at Dec. 31 190,451 193,427 175,554 - - - ---------- ---------- ---------- ---------- ---------- ---------- Funded status: Funded status at Dec. 31 43,649 57,229 32,935 (14,069) (11,902) (15,717) Unrecognized transition obligation 701 1,035 1,072 5,232 5,667 7,896 Unrecognized prior service cost 8,022 9,184 5,601 191 210 - Unrecognized net actuarial (gain) loss (47,661) (67,656) (40,936) 1,061 (755) 1,553 ---------- ---------- ---------- ---------- ---------- ---------- Net amount recognized $ 4,711 $ (208) $ (1,328) $ (7,585) $ (6,780) $ (6,268) ========== ========== ========== ========== ========== ========== Amounts recognized in the consolidated balance sheets: Prepaid benefit cost $ 13,150 $ 7,712 $ 5,900 $ - $ - $ - Accrued benefit liability (8,932) (8,578) (8,902) (7,585) (6,780) (6,268) Intangible asset 493 658 1,674 - - - ---------- ---------- ---------- ---------- ---------- ---------- Net amount recognized $ 4,711 $ (208) $ (1,328) $ (7,585) $ (6,780) (6,268) ========== ========== ========== ========== ========== ==========
The Company's non-qualified supplemental pension plan was the only pension plan with an accumulated benefit obligation in excess of plan assets. The plan's accumulated benefit obligation was $10.4 million, $9.8 million and $11.1 million at Dec. 31, 2000, 1999 and 1998, respectively. There were no plan assets in the non-qualified plan due to the nature of the plan, but the Company funds its obligation with trust-owned life insurance. The amount of the life insurance coverage is designed to provide sufficient returns to recover all costs of the plan. The Company's plans for postretirement benefits other than pensions also have no plan assets. The aggregate benefit obligation for those plans is $14.1 million, $11.9 million and $15.7 million at Dec. 31, 2000, 1999 and 1998, respectively. The following tables provide the components of net periodic cost (benefit) for the plans for the years ended Dec. 31, 2000, 1999 and 1998 and the assumptions used in the measurement of these costs and the Company's benefit obligations: 33 Northwest Natural Gas Company Notes to Consolidated Financial Statements - --------------------------------------------------------------------------------
Pension Benefits Other Benefits ------------------------------------ ------------------------------------ Thousands 2000 1999 1998 2000 1999 1998 - --------- ---- ---- ---- ---- ---- ---- Service cost $ 3,475 $ 4,259 $ 3,430 $ 234 $ 162 $ 288 Interest cost 10,312 9,379 9,282 995 715 890 Expected return on plan assets (16,056) (15,570) (13,926) - - - Amortization of transition (asset) obligation 334 37 (45) 436 436 564 Amortization of prior service cost 1,174 827 1,481 19 - - Recognized actuarial (gain) loss (3,449) (781) (969) - (35) 2 Special termination benefits - 1,410 - - - - ---------- ---------- ---------- ---------- ---------- ---------- Net periodic cost (benefit) $ (4,210) $ (439) $ (747) $ 1,684 $ 1,278 $ 1,744 ========== ========== ========== ========== ========== ========== Weighted average assumptions as of Dec. 31: Discount rate 7.50% 7.75% 6.75% 7.50% 7.75% 6.75% Expected return on plan assets 9.00% 10.00% 10.00% n/a n/a n/a Rate of compensation increase 4.25%-5.0% 4.25%-5.0% 4.50% n/a n/a n/a
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 9.0 percent during 2000. The rate was assumed to decrease gradually each year to a rate of 4.5 percent for 2005 and remain at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percent change in assumed health care cost trend rates would have the following effects: Thousands 1% Increase 1% Decrease --------- ----------- ----------- Effect on the total service and interest cost components of net periodic postretirement health care benefit cost $50 ($48) Effect on the health care component of the accumulated postretirement benefit obligation $459 ($460) NW Natural also has a qualified defined benefit contribution plan under Internal Revenue Code Section 401(k) and a non-qualified deferred compensation plan for eligible employees. These plans are designed to enhance the retirement program of employees and to assist them in strengthening their financial security by providing an incentive to save and invest regularly. NW Natural's contributions to these plans were $1.3 million in 2000, $1.0 million in 1999 and $1.1 million in 1998. 34 Northwest Natural Gas Company Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 8. INCOME TAXES: - ------------------ A reconciliation between income taxes calculated at the statutory federal tax rate and the tax provision reflected in the financial statements is as follows:
Thousands 2000 1999 1998 - --------------------------------------------------------------------------------------- Computed income taxes based on statutory federal income tax rate of 35% $ 26,124 $ 24,336 $ 14,544 Increase (reduction) in taxes resulting from: Difference between book and tax depreciation 222 222 310 Current state income tax, net of federal tax benefit 2,622 2,450 1,976 Federal income tax credits (357) (357) (574) Amortization of investment tax credits (855) (855) (700) Removal costs (480) (485) (424) Reversal of amounts provided in prior years (25) (655) (361) Gains on Company-owned life insurance (611) (703) (504) Other - net 189 638 337 -------- -------- -------- Total provision for income taxes $ 26,829 $ 24,591 $ 14,604 ======== ======== ========
35 - -------------------------------------------------------------------------------- The provision for income taxes consists of the following:
Thousands 2000 1999 1998 - --------------------------------------------------------------------------------------- Income taxes currently payable: Federal $ 18,228 $ 20,518 $ 13,004 State 2,444 3,288 1,790 -------- -------- -------- Total 20,672 23,806 14,794 -------- -------- -------- Deferred taxes - net: Federal 7,495 1,283 (876) State (483) 357 1,386 -------- -------- -------- Total 7,012 1,640 510 -------- -------- -------- Investment and energy tax credits restored: From utility operations (800) (800) (645) From subsidiary operations (55) (55) (55) -------- -------- -------- Total (855) (855) (700) -------- -------- -------- Total provision for income taxes $ 26,829 $ 24,591 $ 14,604 ======== ======== ======== Percentage of pretax income 35.9% 35.4% 35.1% ======== ======== ======== - ---------------------------------------------------------------------------------------
Deferred tax assets and liabilities are comprised of the following:
Thousands 2000 1999 1998 - --------------------------------------------------------------------------------------- Deferred tax liabilities: Property, plant and equipment $123,559 $114,664 $112,495 Regulatory asset 14,349 15,894 21,388 -------- -------- -------- Total 137,908 130,558 133,883 -------- -------- -------- Deferred tax assets: Regulatory liability (9,558) (10,784) (14,684) Other deferred assets 5,810 5,192 8,257 -------- -------- -------- Total (3,748) (5,592) (6,427) -------- -------- -------- Net accumulated deferred income tax liability $141,656 $136,150 $140,310 ======== ======== ======== - ---------------------------------------------------------------------------------------
36 9. PROPERTY AND INVESTMENTS: - ------------------------------ The following table sets forth the major classifications of NW Natural's utility plant and accumulated provision for depreciation at Dec. 31: 2000 1999 ---------------------- --------------------- Average Average Depreciation Depreciation Thousands Amount Rate Amount Rate - ---------------------------------------------------------- --------------------- Transmission and distribution $ 1,144,107 3.3% $ 1,086,891 3.3% Storage 103,506 2.7% 98,750 2.6% General 82,723 6.3% 80,509 4.7% Intangible and other 46,344 5.5% 45,173 21.1% ----------- ----------- Utility plant in service 1,376,680 3.5% 1,311,323 4.0% Gas stored long-term 11,301 11,301 Work in progress 18,989 8,791 ----------- ----------- Total utility plant 1,406,970 1,331,415 Less accumulated depreciation 478,138 436,386 ----------- ----------- Utility plant - net $ 928,832 $ 895,029 =========== =========== The following table summarizes the Company's investments in non-utility plant at Dec. 31: Thousands 2000 1999 - -------------------------------------------------------------------------------- Storage $ 4,929 $ - Dock, land and oil station 3,713 3,565 Other 7 4,983 ----------- ----------- Total non-utility plant 8,649 8,548 Less accumulated depreciation 3,451 7,654 ----------- ----------- Non-utility plant - net $ 5,198 $ 894 =========== =========== - -------------------------------------------------------------------------------- Investments in Canadian oil and gas properties and the Port of Portland building were included in current assets at Dec. 31, 1999. The Canadian oil and gas properties were included in investment in a discontinued segment (see Note 2) and the Port of Portland building was classified as property held for sale. Both were sold in 2000. Also in 2000, Financial Corporation sold domestic oil and gas properties that had been included among other non-utility plant as of Dec. 31, 1999 ($4.9 million). The following table summarizes the Company's investments in affiliated entities accounted for under the equity and cost methods, and its investment in an aircraft leveraged lease at Dec. 31: Thousands 2000 1999 - -------------------------------------------------------------------------------- Electric generation $ 4,898 $ 5,165 Aircraft leveraged lease 7,479 7,925 Gas pipeline and other 1,776 2,919 Long-term notes receivable 373 548 ----------- ----------- Total investments and other $ 14,526 $ 16,557 =========== =========== - -------------------------------------------------------------------------------- Financial Corporation has ownership interests ranging from 4.0 to 5.3 percent in solar electric generation plants located near Barstow, California. Power generated by these plants is sold to Southern California Edison Company under long-term contracts. 37 Financial Corporation also has ownership interests ranging from 8.5 to 41 percent in U. S. Windpower Partners electric generation projects located near Livermore and Palm Springs, California. The wind-generated power is sold to Pacific Gas and Electric Company and Southern California Edison Company under long-term contracts. In 1987, the Company invested in a Boeing 737-300 aircraft which was leased to Continental Airlines for 20 years under a leveraged lease agreement. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS: - ----------------------------------------- The estimated fair values of NW Natural's financial instruments have been determined using available market information and appropriate valuation methodologies. The following is a list of financial instruments whose carrying values are sensitive to market conditions: December 31, 2000 December 31, 1999 ----------------------- -------------------- Carrying Estimated Carrying Estimated Thousands Amount Fair Value Amount Fair Value ------------------------------------------------------ -------------------- Redeemable preference stock $ 25,000 $ 22,750 $ 25,000 $ 23,500 Redeemable preferred stock $ 9,750 $ 9,750 $ 10,564 $ 9,618 Long-term debt including amount due within one year $420,790 $460,929 $406,379 $415,412 --------------------------------------------------------------------------- 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 approximates fair value at Dec. 31, 2000 and 1999. 11. USE OF FINANCIAL DERIVATIVES: - ---------------------------------- In connection with its Canadian gas purchase commitments, NW Natural uses foreign currency forward contracts to hedge against fluctuations in currency values. The forward contracts have terms ranging up to 12 months. Such contracts are purchased in an amount up to 100 percent of estimated daily requirements for commodity gas purchased in Canadian currency from gas suppliers in Canada. The notional amount of these contracts at Dec. 31, 2000 and 1999, totaled $34.1 million and $8.6 million, respectively, and, if settled on those dates, NW Natural would have realized a gain of $0.4 million in 2000 and a gain of $0.2 million in 1999. As part of an overall strategy to maintain an acceptable level of exposure to the risk of gas price fluctuation, NW Natural has developed a targeted mix of fixed-rate and cap-protected natural gas commodity contracts versus variable rate contracts. To efficiently manage this mix, NW Natural utilizes natural gas commodity swap and cap agreements to effectively convert the gas purchase commitments into an acceptable fixed-rate and capped rate mix. NW Natural uses natural gas commodity swap agreements to convert certain long-term gas purchase contracts from floating prices to fixed prices. Under the commodity swap agreements, NW Natural receives or makes payments based on the differential between a specified price and the actual price of natural gas as measured by price indices relating to the market area where it purchases the gas. The swap agreements have terms ranging up to 12 months. At Dec. 31, 2000 and 1999, the Company had swap agreements with broker-dealers to cover notional quantities of 30.9 million and 24.1 million MMBtu, respectively. Under the swap agreements in effect at Dec. 31, 2000 and 1999, the Company paid fixed prices averaging $3.457 and $2.396 per MMBtu, respectively. In return, it received a price that varied from month to month with market conditions. The notional amounts of the swap agreements at Dec. 31, 2000 and 1999 were $106.7 million and $57.7 million, respectively, and, if settled on those dates, NW Natural would 38 have realized a gain of $122.6 million and a loss of $6.9 million, respectively. At Dec. 31, 2000, the Company had cap agreements with broker-dealers to cover notional quantities of 13.2 million MMBtu. Under the cap agreements in effect at Dec. 31, 2000, the Company paid fixed prices averaging $3.862 per MMBtu. The notional amounts of the cap agreements at Dec. 31, 2000 were $51.1 million, and, if settled on those dates, NW Natural would have realized a gain of $42.0 million. (See Note 1 for a summary of accounting for gains and losses.) Canor, a discontinued segment, also managed its commodity price risk through the use of gas and oil commodity swaps and collars. At Dec. 31, 1999, the notional amount of these contracts was $4.3 million and, if settled, Canor would have realized a loss of $0.8 million. 12. COMMITMENTS AND CONTINGENCIES: - ----------------------------------- Lease Commitments ----------------- The Company leases land, buildings and equipment under agreements that expire in various years through 2006. Rental expense under operating leases was $4.9 million, $5.2 million and $6.0 million for the years ended Dec. 31, 2000, 1999 and 1998, respectively. The table below reflects the future minimum lease payments due under non-cancelable leases at Dec. 31, 2000. Such payments total $19.6 million for operating leases. The net present value of payments on capital leases was $1.6 million after deducting imputed interest of $0.1 million. These commitments principally relate to the lease of the Company's office headquarters, underground gas storage facilities, vehicles and computer systems. Later Millions 2001 2002 2003 2004 2005 years --------------------------------------------------------------------------- Operating leases $ 4.3 $ 4.0 $ 2.7 $ 2.3 $ 2.3 $ 4.0 Capital leases $ 0.8 $ 0.8 $ 0.1 $ - $ - $ - Minimum lease payments $ 5.1 $ 4.8 $ 2.8 $ 2.3 $ 2.3 $ 4.0 Purchase Commitments -------------------- NW Natural has signed agreements providing for the availability of firm pipeline capacity under which it must make fixed monthly payments for contracted capacity. The pricing component of the monthly payment is established, subject to change, by U.S. or Canadian regulatory bodies. In addition, NW Natural has entered into long-term agreements to release firm pipeline capacity. The aggregate amounts of these agreements were as follows at Dec. 31, 2000: Capacity Capacity Purchase Release Thousands Agreements Agreements -------------------------------------------------------------------------- 2001 $ 84,493 $ 3,840 2002 80,943 3,840 2003 75,919 3,840 2004 50,458 3,840 2005 48,153 3,840 2006 through 2023 313,144 18,537 -------- -------- Total 653,110 37,737 Less: Amount representing interest 174,530 9,322 -------- -------- Total at present value $478,580 $ 28,415 ======== ======== NW Natural's total payments of fixed charges under capacity purchase agreements in 2000, 1999 and 1998 were $81.5 million, $78.2 million and $76.2 million, respectively. Included in the amounts for 2000, 1999 and 1998 were reductions for capacity release sales totaling $3.8 million, $3.8 million and $3.9 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. 39 Environmental Matters --------------------- The Company owns property in Linnton, Oregon that is the site of a former gas manufacturing plant that was closed in 1956 (the Linnton site). The Linnton site has been under investigation by the Company in recent years under program oversight by the Oregon Department of Environmental Quality (ODEQ). Since 1993, NW Natural has recorded expenses of $2.6 million for its costs of the voluntary investigation including consultants' fees, ODEQ oversight reimbursement and legal fees. In 2000, NW Natural recorded an additional accrued liability and corresponding receivable of $1.4 million representing the estimated costs of further investigation and interim remediation on this site. The Company expects that it will be able to recover its costs of further investigation and any remediation for which it may be responsible with respect to the Linnton site from insurance or through future rates. The Company previously owned property adjacent to the Linnton site that now is the location of a manufacturing plant owned by Wacker Siltronic Corporation (the Wacker site). In October 2000, the ODEQ issued an order requiring Wacker and NW Natural to determine the nature and extent of releases of hazardous substances to Willamette River sediments from the Wacker site. The Company recorded a liability of $0.4 million for the estimated costs of the investigation and initial remediation on the Wacker site. In 1998, the ODEQ and the U.S. Environmental Protection Agency (EPA) completed a study of sediments in a 5.5 mile segment of the Willamette River (the Portland Harbor) that includes the area adjacent to the Linnton site and the Wacker site. In 2000, the EPA listed the Portland Harbor as a Superfund site and notified the Company that it is a potentially responsible party. In 2000, NW Natural recorded an expense of $0.6 million for its estimated share of the costs of remedial investigation of the Portland Harbor. Although available information is insufficient to determine either the total amount of liability for investigation and remediation of the Portland Harbor or the Company's share of that liability, this amount is an estimate of NW Natural's share of the lower end of a range of probable liability. NW Natural expects that its costs of investigation and any remediation for which it may be responsible with respect to the Wacker site and the Portland Harbor Superfund site should be recoverable, in large part, from insurance. In the event these costs are not recovered from insurance, NW Natural will seek recovery through future rates. Litigation ---------- In July 1995, a jury in an Oregon state court returned a verdict against NW Natural in the case of Northwest Natural Gas Company v. Chase Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370). In 1996, after the Oregon Court of Appeals affirmed the trial court decision, NW Natural recorded charges to operating expense and interest expense equivalent to 15 cents per share as a reserve against payment of the judgment, related costs and post-judgment interest. In May 1999, the Oregon Supreme Court reversed the Court of Appeals' decision, overturned the trial court verdict on the larger of the two claims in the case and remanded the case to the Court of Appeals for further proceedings on NW Natural's appeal of the judgment on the smaller (contract) claims in the case. Reflecting the Supreme Court's decision, NW Natural reduced the litigation reserve by a total of $3.9 million in the second quarter of 1999, reducing operating expense by $3.0 million and interest expense by $0.9 million. The Court of Appeals subsequently issued an opinion in favor of NW Natural on the contract claims. Based on that decision, NW Natural reversed the remaining reserve balance of $2.7 million at Dec. 31, 1999, further reducing operating expense for 1999 by $1.9 million and interest expense by $0.8 million. The Oregon Supreme Court initially declined to review the Court of Appeals' decision in favor of NW Natural on the contract claims, including a verdict against the Company in the amount of $2.0 million plus interest. On reconsideration, however, in December 2000 the Supreme Court agreed to review the Court of Appeals' decision on the contract claims and is expected to issue an opinion in 2001. The Company is party to certain other legal actions in which claimants seek material amounts. Although it is impossible to predict the outcome with certainty, based upon the opinions of legal counsel, management does not 40 expect disposition of these matters to have a materially adverse effect on the Company's financial position, results of operations or cash flows. 41 NORTHWEST NATURAL GAS COMPANY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Dollars Quarter ended --------------------------------------------------------------------- (Thousands Except Per Share Amounts) March 31 June 30 Sept. 30 Dec. 31 Total - ------------------------------------------------------------------------------------------------------- 2000 Operating revenues 186,649 86,136 61,255 198,070 532,110 Net operating revenues 93,088 45,886 35,566 83,410 257,950 Net income (loss) from continuing operations 29,192 2,498 (4,868) 20,990 47,812 Gain (loss) on sale of discontinued segment 2,470 (35) (17) (6) 2,412 Net income (loss) 31,662 2,463 (4,885) 20,984 50,224 Basic earnings (loss) per share 1.24 0.07 (0.22) 0.81 1.90 * Diluted earnings (loss) per share 1.22 0.07 (0.22) 0.80 1.88 * 1999 Operating revenues 167,873 94,252 55,737 137,972 455,834 Net operating revenues 85,905 55,241 33,605 68,886 243,637 Net income (loss) from continuing operations 24,184 10,529 (3,608) 13,836 44,941 Net income (loss) from discontinued segment (141) 255 48 193 355 Net income (loss) 24,043 10,784 (3,560) 14,029 45,296 Basic earnings (loss) per share 0.94 0.41 (0.17) 0.53 1.71 * Diluted earnings (loss) per share 0.93 0.40 (0.17) 0.53 1.70 *
* 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. 42 NORTHWEST NATURAL GAS COMPANY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
- ------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------------------------------------------------------------------------------- Additions Deductions Balance at ------------------------ ---------- Balance beginning Charged to Charged to at end of costs other Net of period and expenses accounts write-offs period ------ ------------ -------- ---------- ------ Thousands - --------- Years ended December 31: 2000 Reserves deducted in balance sheet from assets to which they apply: Reserve for doubtful accounts: $ 1,669 $ 2,344 $ - $ 2,146 $ 1,867 1999 Reserves deducted in balance sheet from assets to which they apply: Reserve for doubtful accounts: $ 1,547 $ 2,380 $ - $ 2,258 $ 1,669 1998 Reserves deducted in balance sheet from assets to which they apply: Reserve for doubtful accounts: $ 1,253 $ 3,005 $ - $ 2,711 $ 1,547
43 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: (23) Consent of PricewaterhouseCoopers LLP. 44 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: August 10, 2001 By: /s/ Richard G. Reiten ------------------------------- Richard G. Reiten, Chairman 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 - -------------------------------------------------------------------------------- /s/ Richard G. Reiten Principal Executive Officer August 10, 2001 - ---------------------------------- and Director Richard G. Reiten, Chairman and Chief Executive Officer /s/ Bruce R. DeBolt Principal Financial Officer August 10, 2001 - ---------------------------------- Bruce R. DeBolt Senior Vice President, Finance, and Chief Financial Officer /s/ Stephen P. Feltz Principal Accounting Officer August 10, 2001 - ---------------------------------- Stephen P. Feltz Treasurer and Controller /s/ Mary Arnstad Director ) - ---------------------------------- ) Mary Arnstad ) ) /s/ Thomas E. Dewey, Jr. Director ) - ---------------------------------- ) Thomas E. Dewey, Jr. ) ) /s/ Tod R. Hamachek Director ) - ---------------------------------- ) Tod R. Hamachek ) ) /s/ Richard B. Keller Director ) - ---------------------------------- ) Richard B. Keller ) ) /s/ Wayne D. Kuni Director ) - ---------------------------------- ) Wayne D. Kuni ) ) /s/ Randall C. Pape Director ) August 10, 2001 - ---------------------------------- ) 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 ) ) /s/ Richard L. Woolworth Director ) - ---------------------------------- ) Richard L. Woolworth ) 45 NORTHWEST NATURAL GAS COMPANY ----------------------------- EXHIBIT INDEX ------------- To Annual Report on Form 10-K For Fiscal Year Ended December 31, 2000 Exhibit Document Number -------- ------------- Consent of PricewaterhouseCoopers LLP (23) EX-23 3 exhibit23.txt EXHIBIT 23 EXHIBIT (23) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in Registration Statement Nos. 33-63017, 333-46430 and 333-55002, Post-Effective Amendment No. 1 to Registration Statement No. 2-76276, and Post-Effective Amendment No. 2 to Registration Statement No. 2-77195 on Form S-8 of Northwest Natural Gas Company, and in the Prospectus constituting part of Registration Statement Nos. 33-53795, and 333-55366, and Post-Effective Amendment No. 1 to Registration Statement Nos. 33-1304, 33-20384, and 333-32989 on Form S-3 of Northwest Natural Gas Company of our report dated February 16, 2001 relating to the consolidated financial statements and financial statement schedule, which appears in this Form 10-K/A. /s/ PricewaterhouseCoopers LLP Portland, Oregon August 10, 2001 -----END PRIVACY-ENHANCED MESSAGE-----