10-Q 1 form10qsb.txt FORM 10Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ________ to ________ Commission File No. 0-994 [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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ] At August 6, 2001, 25,115,249 shares of the registrant's Common Stock, $3-1/6 par value (the only class of Common Stock) were outstanding. NORTHWEST NATURAL GAS COMPANY June 30, 2001 Summary of Information Reported The registrant submits herewith the following information: PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Number ------ (1) Consolidated Statements of Income for the three and six-month periods ended June 30, 2001 and 2000 3 (2) Consolidated Statements of Earnings Invested in the Business for the six-month periods ended June 30, 2001 and 2000 4 (3) Consolidated Balance Sheets at June 30, 2001 and 2000 and Dec. 31, 2000 5 (4) Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2001 and 2000 7 (5) Consolidated Statements of Capitalization at June 30, 2001 and 2000 and Dec. 31, 2000 8 (6) Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 22 Item 6. Exhibits and Reports on Form 8-K 23 Signature 23 2 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (1) Consolidated Statements of Income (Thousands, Except Per Share Amounts) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 2001 2000 2001 2000 ---- ---- ---- ---- Operating Revenues: Gross operating revenues $ 114,717 $ 86,136 $ 332,058 $ 272,785 Cost of sales 59,991 40,250 185,679 133,811 --------- --------- --------- --------- Net operating revenues 54,726 45,886 146,379 138,974 Operating Expenses: Operations and maintenance 20,986 18,571 42,029 37,577 Taxes other than income taxes 6,265 5,722 15,959 14,386 Depreciation, depletion and amortization 12,287 11,779 24,415 23,218 --------- --------- --------- --------- Total operating expenses 39,538 36,072 82,403 75,181 --------- --------- --------- --------- Income from Operations 15,188 9,814 63,976 63,793 Other Income (Expense) (9) 1,426 597 2,115 Interest Charges - net 7,926 7,936 16,186 16,501 --------- --------- --------- --------- Income Before Income Taxes 7,253 3,304 48,387 49,407 Income Taxes 2,388 806 17,615 17,717 --------- --------- --------- --------- Net Income from Continuing Operations 4,865 2,498 30,772 31,690 Discontinued Segment: Gain (loss) on sale of discontinued segment - net of tax - (35) - 2,435 --------- --------- --------- --------- Net Income 4,865 2,463 30,772 34,125 Redeemable preferred and preference stock dividend requirements 604 622 1,212 1,244 --------- --------- --------- --------- Earnings Applicable to Common Stock $ 4,261 $ 1,841 $ 29,560 $ 32,881 ========= ========= ========= ========= Average Common Shares Outstanding 25,103 25,195 25,155 25,162 Basic Earnings Per Share of Common Stock: From continuing operations $ 0.17 $ 0.07 $ 1.18 $ 1.21 From gain on sale of discontinued segment - - - 0.10 --------- --------- --------- --------- Total basic earnings per share $ 0.17 $ 0.07 $ 1.18 $ 1.31 ========= ========= ========= ========= Diluted Earnings Per Share of Common Stock: From continuing operations $ 0.17 $ 0.07 $ 1.16 $ 1.19 From gain on sale of discontinued segment - - - 0.10 --------- --------- --------- --------- Total diluted earnings per share $ 0.17 $ 0.07 $ 1.16 $ 1.29 ========= ========= ========= ========= Dividends Per Share of Common Stock $ 0.31 $ 0.31 $ 0.62 $ 0.62 ========= ========= ========= =========
---------------------------------------------- See Notes to Consolidated Financial Statements 3 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (2) Consolidated Statements of Earnings Invested in the Business (Thousands of Dollars) (Unaudited)
Six Months Ended June 30, 2001 2000 ---------------------------------------------------------------------------------------- Earnings Invested in the Business: Balance at Beginning of Period $ 134,189 $ 118,711 Net Income 30,772 $ 30,772 34,125 $ 34,125 Cash Dividends Paid: Redeemable preferred and preference stock (1,221) (1,249) Common stock (15,592) (15,585) Common Stock Repurchased (2,688) (459) --------- --------- Balance at End of Period $ 145,460 $ 135,543 ========= ========= Accumulated Other Comprehensive Income (Loss): Balance at Beginning of Period $ - $ (3,181) Other comprehensive income - net of tax: Unrealized gain on securities - - 37 37 Recognition of foreign currency translation adjustment included in gain on sale of discontinued segment - - 3,181 3,181 ------------------- ------------------- Comprehensive Income $ 30,772 $ 37,343 ======== ======== Balance at End of Period $ - $ 37 ========= =========
---------------------------------------------- See Notes to Consolidated Financial Statements 4 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (3) Consolidated Balance Sheets (Thousands of Dollars)
(Unaudited) (Unaudited) June 30, June 30, Dec. 31, 2001 2000 2000 ------------------------------------------------------------------------------------ Assets: Plant and Property : Utility plant $ 1,438,183 $ 1,367,202 $ 1,406,970 Less accumulated depreciation 497,489 457,040 478,138 ----------- ----------- ----------- Utility plant - net 940,694 910,162 928,832 ----------- ----------- ----------- Non-utility property 8,653 8,532 8,649 Less accumulated depreciation and depletion 3,499 7,706 3,451 ----------- ----------- ----------- Non-utility property - net 5,154 826 5,198 ----------- ----------- ----------- Total plant and property 945,848 910,988 934,030 Investments and Other 13,877 15,716 14,526 Current Assets: Cash and cash equivalents 17,812 10,419 11,283 Accounts receivable 30,698 24,145 62,620 Allowance for doubtful accounts (2,257) (1,663) (1,867) Accrued unbilled revenue 10,346 7,201 45,619 Inventories of gas, materials and supplies 32,274 29,121 46,883 Property held for sale - 17,286 - Prepayments and other current assets 19,683 14,054 22,834 ----------- ----------- ----------- Total current assets 108,556 100,563 187,372 Regulatory Assets: Income tax asset 49,515 51,060 49,515 Deferred gas costs receivable 15,244 17,520 16,973 Non-trading derivative assets 76,502 - - Unamortized loss on debt redemption 7,202 4,934 7,433 Other 6,585 14,345 9,524 ----------- ----------- ----------- Total regulatory assets 155,048 87,859 83,445 ----------- ----------- ----------- Other Assets: Investment in life insurance 51,098 47,075 49,112 Other 10,998 9,976 10,228 ----------- ----------- ----------- Total other assets 62,096 57,051 59,340 ----------- ----------- ----------- Total Assets $ 1,285,425 $ 1,172,177 $ 1,278,713 =========== =========== ===========
---------------------------------------------- See Notes to Consolidated Financial Statements 5 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (3) Consolidated Balance Sheets (Thousands of Dollars)
(Unaudited) (Unaudited) June 30, June 30, Dec. 31, 2001 2000 2000 ------------------------------------------------------------------------------------ Capitalization and Liabilities: Capitalization: Common stock $ 317,748 $ 316,347 $ 318,120 Earnings invested in the business 145,460 135,543 134,189 Accumulated other comprehensive income - 37 - ----------- ----------- ----------- Total common stock equity 463,208 451,927 452,309 Redeemable preference stock 25,000 25,000 25,000 Redeemable preferred stock 9,000 9,793 9,750 Long-term debt 408,498 396,080 400,790 ----------- ----------- ----------- Total capitalization 905,706 882,800 887,849 ----------- ----------- ----------- Current Liabilities: Notes payable 17,961 10,307 56,263 Accounts payable 47,692 51,805 110,698 Long-term debt due within one year 30,000 10,000 20,000 Taxes accrued 10,020 5,380 8,066 Interest accrued 2,689 4,707 2,696 Other current and accrued liabilities 24,825 39,899 23,638 ----------- ----------- ----------- Total current liabilities 133,187 122,098 221,361 Regulatory Liabilities 1,766 1,743 1,720 Other Liabilities: Deferred income tax liabilities 142,185 140,828 141,656 Deferred investment tax credits 8,983 9,821 9,538 Other 93,598 14,887 16,589 ----------- ----------- ----------- Total other liabilities 244,766 165,536 167,783 ----------- ----------- ----------- Commitments and Contingencies - - - ----------- ----------- ----------- Total Capitalization and Liabilities $ 1,285,425 $ 1,172,177 $ 1,278,713 =========== =========== ===========
---------------------------------------------- See Notes to Consolidated Financial Statements 6 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (4) Consolidated Statements of Cash Flows (Thousands of Dollars) (Unaudited)
Six Months Ended June 30, 2001 2000 --------------------------------------------------------------------------------------------- Operating Activities: Net income from continuing operations $ 30,772 $ 31,690 Adjustments to reconcile net income to cash provided by operations: Depreciation, depletion and amortization 24,415 23,218 Deferred income taxes and investment tax credits (26) 4,106 Equity in (earnings) losses of investments (233) 166 Allowance for funds used during construction (414) (251) Deferred gas costs receivable 1,729 3,430 Regulatory accounts and other - net 967 1,076 -------- -------- Cash from continuing operations before working capital changes 57,210 63,435 Changes in operating assets and liabilities: Accounts receivable - net 32,312 20,867 Accrued unbilled revenue 35,273 24,349 Inventories of gas, materials and supplies 14,609 4,798 Accounts payable (63,006) (16,358) Accrued interest and taxes 1,947 1,313 Other current assets and liabilities 4,338 5,041 -------- -------- Cash Provided By Continuing Operating Activities 82,683 103,445 -------- -------- Investing Activities: Acquisition and construction of utility plant assets (35,815) (38,005) Investment in non-utility property (4) (601) Proceeds from sale of discontinued segment - 34,779 Investments and other 882 675 -------- -------- Cash Used In Investing Activities (34,937) (3,152) -------- -------- Financing Activities: Common stock issued 2,440 2,544 Common stock repurchased (5,792) (1,021) Redeemable preferred stock retired (750) (771) Long-term debt issued 18,000 - Change in short-term debt (38,302) (83,842) Cash dividend payments: Redeemable preferred and preference stock (1,221) (1,249) Common stock (15,592) (15,585) Foreign currency translation and capital stock expense - 37 -------- -------- Cash Used in Financing Activities (41,217) (99,887) -------- -------- Increase In Cash and Cash Equivalents 6,529 406 Cash and Cash Equivalents - Beginning of Period 11,283 10,013 -------- -------- Cash and Cash Equivalents - End of Period $ 17,812 $ 10,419 ======== ======== Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Interest $ 16,213 $ 16,607 Income Taxes $ 13,402 $ 17,391 Supplemental Disclosure of Non-cash Financing Activities: Conversion to common stock: 7-1/4 % Series of Convertible Debentures $ 292 $ 299
---------------------------------------------- See Notes to Consolidated Financial Statements 7 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (5) Consolidated Statements of Capitalization (Thousands, Except Per Share Amounts)
(Unaudited) (Unaudited) June 30, 2001 June 30, 2000 Dec. 31, 2000 ------------------------------------------------------------------------------------------------ COMMON STOCK EQUITY: Common stock - par value $3-1/6 per share $ 79,502 $ 79,750 $ 79,905 Premium on common stock 238,246 236,597 238,215 Earnings invested in the business 145,460 135,543 134,189 Accumulated other comprehensive income - 37 - -------- -------- -------- Total common stock equity 463,208 51% 451,927 51% 452,309 51% -------- -------- -------- PREFERENCE STOCK: $6.95 Series, stated value $100 per share 25,000 3% 25,000 3% 25,000 3% -------- -------- -------- Total redeemable preference stock 25,000 25,000 25,000 REDEEMABLE PREFERRED STOCK: Stated value $100 per share: $4.75 Series - 43 - $7.125 Series 9,000 9,750 9,750 -------- -------- -------- Total redeemable preferred stock 9,000 1% 9,793 1% 9,750 1% -------- -------- -------- LONG-TERM DEBT: First Mortgage Bonds 9-3/4% Series due 2015 - 50,000 - Medium-Term Notes First Mortgage Bonds: 5.960% Series B due 2000 - 5,000 - 5.980% Series B due 2000 - 5,000 - 6.620% Series B due 2001 10,000 10,000 10,000 8.050% Series A due 2002 10,000 10,000 10,000 6.750% Series B due 2002 10,000 10,000 10,000 5.550% Series B due 2002 20,000 20,000 20,000 6.400% Series B due 2003 20,000 20,000 20,000 6.340% Series B due 2005 5,000 5,000 5,000 6.380% Series B due 2005 5,000 5,000 5,000 6.450% Series B due 2005 5,000 5,000 5,000 6.050% Series B due 2006 8,000 - - 6.800% Series B due 2007 10,000 10,000 10,000 6.500% Series B due 2008 5,000 5,000 5,000 7.450% Series B due 2010 25,000 - 25,000 6.665% Series B due 2011 10,000 - - 8.260% Series B due 2014 10,000 10,000 10,000 7.000% Series B due 2017 40,000 40,000 40,000 6.600% Series B due 2018 22,000 22,000 22,000 8.310% Series B due 2019 10,000 10,000 10,000 7.630% Series B due 2019 20,000 20,000 20,000 9.050% Series A due 2021 10,000 10,000 10,000 7.250% Series B due 2023 20,000 20,000 20,000 7.500% Series B due 2023 4,000 4,000 4,000 7.520% Series B due 2023 11,000 11,000 11,000 7.720% Series B due 2025 20,000 - 20,000 6.520% Series B due 2025 10,000 10,000 10,000 7.050% Series B due 2026 20,000 20,000 20,000 7.000% Series B due 2027 20,000 20,000 20,000 6.650% Series B due 2027 20,000 20,000 20,000 6.650% Series B due 2028 10,000 10,000 10,000 7.740% Series B due 2030 20,000 - 20,000 7.850% Series B due 2030 10,000 - 10,000 Unsecured: 8.47% Series A due 2001 10,000 10,000 10,000 Convertible Debentures 7-1/4% Series due 2012 8,498 9,080 8,790 -------- -------- -------- 438,498 406,080 420,790 Less long-term debt due within one year 30,000 10,000 20,000 -------- -------- -------- Total long-term debt 408,498 45% 396,080 45% 400,790 45% -------- ---- -------- ---- -------- ---- TOTAL CAPITALIZATION $905,706 100% $882,800 100% $887,849 100% ======== ==== ======== ==== ======== ====
---------------------------------------------- See Notes to Consolidated Financial Statements 8 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (6) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Financial Statements The information presented in the consolidated financial statements is unaudited, but includes all adjustments, consisting of only normal recurring accruals, which the management of the Company considers necessary for a fair presentation of the results of such periods. These consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company's 2000 Annual Report on Form 10-K, as amended (2000 Form 10-K). A significant part of the business of the Company is of a seasonal nature; therefore, results of operations for the interim periods are not necessarily indicative of the results for a full year. Certain amounts from prior periods have been reclassified to conform with the 2001 presentation. These reclassifications had no impact on prior period results of operations. 2. 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 in 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. Guaranteed minimum obligations for gas storage services are recognized over the term of the contract. 3. Derivatives Policy NW Natural's Derivatives Policy allows the use of selected financial derivative products to support prudent risk management strategies within designated parameters for natural gas commodity prices, for foreign currency exchange rates related to the Company's natural gas purchase commitments, for oil or propane commodity prices related to natural gas sales or transportation under rate schedules pegged to commodities other than natural gas, and for interest rates on outstanding long-term debt instruments maturing in less than five years. The objective is to use derivative products to structure "hedge" positions as defined by the policy. Use of derivatives is permitted only after the purchase price, exchange rate, oil or propane index price, and interest rate exposures that have been identified are determined to exceed defined tolerance levels and are considered to be unavoidable because they are necessary or support normal business activities. The Derivatives Policy is intended to decrease the Company's net exposures to commodity price, exchange rate and interest rate risks (market risks) by using hedging strategies and derivative structures within certain limitations. The policy is intended to prevent speculative risk. The Company believes that any increase in market risk created by the use of the derivatives should be offset by the exposures they modify. 9 4. New Accounting Standards In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (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 measure all derivatives at fair value and recognize those derivatives as either assets or liabilities on the balance sheet. If the derivative is designated as a fair value hedge, the net changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in current earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (OCI), or in deferred asset accounts for regulated activities (see Note 5, below), and recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in current earnings. Some of the Company's gas purchase, sales and transportation contracts are derivative instruments as defined under SFAS No. 133. 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. 5. Adoption of New Accounting Standard The Company adopted SFAS No. 133, as amended, on Jan. 1, 2001. The Company's primary derivatives hedging activities are being accounted for as cash flow hedges under this statement. Unrealized gains or losses resulting from mark-to-market valuations of the underlying hedge contracts are subject to deferral under the Company's tariffs with the Oregon Public Utility Commission (OPUC) and the Washington Utilities and Transportation Commission (WUTC). Pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," contracts representing unrealized gain or loss positions are reported as derivative assets or liabilities and are offset by a corresponding deferred account included under "Regulatory Assets" or "Regulatory Liabilities." Due to their regulatory deferral treatment, effective portions of changes in the fair value of these derivatives are not recorded in OCI, but are deferred as a regulatory asset or liability. Effectiveness is measured by comparing changes in cash flows of the hedged item to gains or losses on derivative instruments. The Company formally documents all relationships between hedging contracts and hedged items, as well as its risk management objective and strategy for undertaking the hedge. This process includes specific identification of the hedging contract and the hedge transaction, the nature of the risk being hedged and how the hedging instrument's effectiveness will be measured. Both at the inception of the hedge and on an ongoing basis, the Company measures effectiveness of the derivatives used in hedging transactions. NW Natural enters into short-term and long-term natural gas purchase contracts with demand and commodity fixed-price and variable-price components, along with associated short-term and long-term natural gas transportation contracts. The prices of natural gas commodity are subject to fluctuations due to unpredictable factors including weather, pipeline transportation congestion and the economy, each of which affects short-term supply and demand. NW Natural uses natural gas commodity swap and cap agreements to convert certain of its long-term purchase contracts from floating prices to fixed prices. 10 Many of the purchases made under these gas purchase contracts are priced in Canadian dollars. The costs of natural gas commodity and pipeline services purchased from certain Canadian suppliers are subject to changes in the value of Canadian currency in relation to U.S. currency. NW Natural uses foreign currency forward contracts to hedge against fluctuations in currency exchange rates with respect to its purchases of natural gas from suppliers in Canada. The adoption of SFAS No. 133 effective Jan. 1, 2001 resulted in the Company recording a one-time transition adjustment by debiting a derivative asset account and crediting an offsetting regulatory asset account on the balance sheet for approximately $165 million. This transition adjustment represented the initial recognition of the fair values of hedge derivatives outstanding on the adoption date. At June 30, 2001, the Company had two types of natural gas commodity cash flow hedges open: a series of 17 natural gas price swap agreements and four call option agreements. The net decrease in the fair value of these hedge derivatives for the six months ended June 30, 2001 ($241.5 million), included net gains of $86.9 million realized as reductions to the cost of gas upon settlement of various cash flow hedges. During the six months ended June 30, 2001, the amount of hedge ineffectiveness recognized in earnings from derivatives that are designated and qualify as cash flow hedges was negligible. All remaining outstanding derivative instruments in these categories at June 30, 2001, were determined to be 100 percent effective (see Part I, Item 2., "Results of Operations - Cost of Gas," below). The estimated fair values for these derivative hedge instruments at Jan. 1 and June 30, 2001 are presented below: Jan. 1, June 30, --------- --------- 2001 2001 --------- --------- Non-trading derivative assets ($000): Fixed-price natural gas commodity swaps $ 122,588 $ 404 Fixed-price natural gas call options 41,980 152 Foreign currency forward contracts 405 79 Non-trading derivative liabilities ($000): Fixed-price natural gas commodity swaps - (77,137) Fixed-price natural gas call options - - Foreign currency forward contracts - - --------- --------- Total non-trading derivative assets (liabilities) $ 164,973 $ (76,502) ========= ========= The fair value of fixed-price contracts as of June 30, 2001 was estimated based on market prices for the periods covered by the contracts. The net differential between the prices in each contract and market prices for future periods, as adjusted for estimated basis, where applicable, has been applied to the volumes stipulated in each contract to arrive at an estimated future value. As of June 30, 2001, a total of nine natural gas price swap agreements have contract periods that extend beyond Dec. 31, 2001. As of June 30, 2001, the Company had not entered into any natural gas call option contracts extending beyond Dec. 31, 2001. The Company recorded a $0.1 million loss for the first six months of 2001, representing the change in value of an embedded derivative relating to a contract for an equipment financing program under which NW Natural guarantees a minimum level of return for the lender. The Derivatives Implementation Group (DIG), a group sponsored by the FASB, continues to develop interpretive guidance relating to SFAS No. 133. 11 Future interpretations of SFAS No. 133 by the DIG or the FASB could impact the Company's application of the standard and, thereby, its financial statement disclosures. 6. Segment Reporting The Company principally operates in a segment of business consisting of the distribution of natural gas ("Utility"). Another segment, which was immaterial prior to Jan. 1, 2001, represents natural gas storage services provided to upstream customers using storage capacity not required from time to time for service to utility customers ("Gas Storage"). The remaining segment primarily consists of non-regulated investments in alternative energy projects in California, the oil and gas exploration properties sold in 2000 and a Boeing 737-300 aircraft which is leased to Continental Airlines ("Other"). The following table presents information about the reportable segments for the three and six months ended June 30, 2001 and 2000. Inter-segment transactions are insignificant.
Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------ -------------------------------------------- Thousands Utility Gas Storage Other Total Utility Gas Storage Other Total ----------------------------------------------------------------------- -------------------------------------------- 2001 ---- Net operating revenues $ 53,936 $ 769 $ 21 $ 54,726 $ 144,320 $ 1,992 $ 67 $ 146,379 Depreciation, depletion and amortization 12,263 24 - 12,287 24,367 48 - 24,415 Other operating expenses 27,179 53 19 27,251 57,972 86 (70) 57,988 Income from operations 14,494 692 2 15,188 61,981 1,858 137 63,976 Net income from continuing operations 4,246 392 227 4,865 29,305 1,085 382 30,772 Income (loss) from financial investments - - (91) (91) - - (233) (233) Total assets 1,259,914 4,871 20,640 1,285,425 1,259,914 4,871 20,640 1,285,425 2000 ---- Net operating revenues $ 45,724 $ 72 $ 90 $ 45,886 $ 138,727 $ 72 $ 175 $ 138,974 Depreciation, depletion and amortization 11,706 - 73 11,779 23,123 - 95 23,218 Other operating expenses 24,226 50 17 24,293 51,955 50 (42) 51,963 Income from operations 9,792 22 - 9,814 63,649 22 122 63,793 Net income (loss) from continuing operations 2,849 22 (373) 2,498 31,821 22 (153) 31,690 Income (loss) from financial investments - - (33) (33) - - (111) (111) Gain (loss) on sale of discontinued segment - - (35) (35) - - 2,435 2,435 Total assets 1,151,221 - 20,956 1,172,177 1,151,221 - 20,956 1,172,177
7. Property Held for Sale Property held for sale at June 30, 2000 consisted of a new headquarters building that was constructed for the Port of Portland. This property was sold during the third quarter of 2000 (see Part II, Item 7., "Financial Condition - Cash Flows - Port of Portland Building," in the 2000 Form 10-K). 12 8. Discontinued Segment 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. As of March 31, 2000, the Company realized an after-tax gain from the sale of Canor of $2.4 million, net of Canadian tax on dividends ($0.6 million) and U.S. income tax ($2.8 million) (see Part II, Item 8., Note 2, "Canor Energy, Ltd.," in the 2000 Form 10-K). Proceeds from the sale of Canor are reflected in the statement of cash flows (Investing Activities) as proceeds from sale of discontinued segment. 9. Contingencies 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 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). The Linnton site and the Wacker site have been under investigation by the Company under program oversight by the Oregon Department of Environmental Quality (ODEQ). 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. See Part II, Item 8., Note 12, "Notes to Consolidated Financial Statements," in the 2000 Form 10-K. NW Natural has accrued all material loss contingencies which it believes to be probable of assertion, including those relating to the Linnton site, the Wacker site and the Portland Harbor Superfund site. However, due to the preliminary nature of these environmental investigations, the range of any additional possible loss cannot be presently estimated. The Company expects that its costs of investigation and any remediation for which it may be responsible with respect to the Linnton site, 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 ---------- NW Natural is party to a lawsuit, Northwest Natural Gas Company v. Chase Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370), involving claims by a commercial customer. In 1999, the Oregon Supreme Court ruled in the Company's favor on the larger of the two claims in the case and the Oregon Court of Appeals ruled in the Company's favor on the smaller (contract) claims. The Oregon Supreme Court initially declined to review the Court of Appeals' decision 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. See Part I, Item 3., "Legal Proceedings," in the 2000 Form 10-K. 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The consolidated financial statements include: Regulated utility: Northwest Natural Gas Company (NW Natural) Non-regulated subsidiary businesses: NNG Financial Corporation (Financial Corporation), a wholly-owned subsidiary Canor Energy, Ltd. (Canor), a majority-owned subsidiary, reclassified as a discontinued segment and sold in the first quarter of 2000 Together these businesses are referred to herein as the "Company" (see "Non-utility Operations," below, and Part II, Item 8., Note 2, "Notes to Consolidated Financial Statements," in the Company's 2000 Annual Report on Form 10-K, as amended (2000 Form 10-K)). The following is management's assessment of the Company's financial condition including the principal factors that affect results of operations. The discussion refers to the consolidated activities of the Company for the three and six months ended June 30, 2001 and 2000. Earnings and Dividends ---------------------- The Company's earnings applicable to common stock were $4.3 million or 17 cents a diluted share in the quarter ended June 30, 2001, up from $1.8 million or 7 cents a diluted share in the second quarter of 2000. NW Natural earned 14 cents a diluted share from gas utility operations in the second quarter of 2001, compared to 9 cents in the same period in 2000. Weather conditions in its service territory in the second quarter of 2001 were 19 percent colder than the 20-year average and 29 percent colder than the second quarter of 2000. Sales to residential customers were 12 percent higher in the second quarter of 2001 than in the second quarter of 2000. However, reflecting the effect of recent tracking rate increases to recover higher gas costs (see "Results of Operations - Comparison of Gas Operations - Residential and Commercial," below), residential customers' consumptions per heating degree day were about 10 percent lower during the second quarter of 2001 than in the second quarter of 2000. Sales to commercial customers were 9 percent higher in the second quarter of 2001 than in the second quarter of 2000, but their consumptions per heating degree day were about 11 percent lower. The Company earned $29.6 million, or $1.16 a diluted share, and $32.9 million, or $1.29 a diluted share, for the six months ended June 30, 2001 and 2000, respectively. Year-to-date, NW Natural earned $1.10 a share from utility operations compared to $1.20 a share in the same period in 2000. Weather in the first half of the year was 8 percent colder than the 20-year average and 3.5 percent colder than in 2000. Residential customers' consumptions per heating degree day were about 9 percent lower during the first six months of 2001 than in the first half of 2000, while commercial customers' consumptions were about 8.5 percent lower. Non-utility operating results for the second quarter of 2001 were earnings of 3 cents a share compared to a loss of 2 cents a share from these operations in 2000. Non-utility operating results year-to-date were earnings of 6 cents a share compared to a loss of 1 cent a share from these operations during the comparable period in 2000. See "Non-utility Operations," below. 14 Dividends paid on common stock were 31 cents a share for each of the three-month periods ended June 30, 2001 and 2000. In July 2001, the Company's Board of Directors declared a quarterly dividend of 31 cents a share on the common stock, payable Aug. 15, 2001, to shareholders of record on July 31, 2001. The current indicated annual dividend rate is $1.24 a share. Results of Operations --------------------- Comparison of Gas Operations ---------------------------- The following table summarizes the composition of gas utility volumes and revenues:
Thousands Three Months Ended Six Months Ended (Except customers and degree days) June 30, June 30, ---------------------- ---------------------- 2001 2000 2001 2000 ---------------------- ---------------------- Gas Sales and Transportation Volumes - Therms: ---------------------------------------------- Residential and commercial sales 127,105 114,246 385,978 382,334 Unbilled volumes (20,678) (19,044) (44,901) (38,403) --------- --------- --------- --------- Weather-sensitive volumes 106,427 95,202 341,077 343,931 Industrial firm sales 18,830 17,843 42,294 41,909 Industrial interruptible sales 14,761 12,950 28,559 28,520 --------- --------- --------- --------- Total gas sales 140,018 125,995 411,930 414,360 Transportation deliveries 91,866 109,829 204,339 237,660 --------- --------- --------- --------- Total volumes sold and delivered 231,884 235,824 616,269 652,020 ========= ========= ========= ========= Utility Operating Revenues - Dollars: ------------------------------------- Residential and commercial sales $ 107,406 $ 79,995 $ 318,287 $ 258,347 Unbilled revenues (15,645) (11,687) (33,984) (24,336) --------- --------- --------- --------- Weather-sensitive revenues 91,761 68,308 284,303 234,011 Industrial firm sales 11,008 8,099 24,666 19,058 Industrial interruptible sales 7,273 4,861 14,498 10,694 --------- --------- --------- --------- Total gas sales 110,042 81,268 323,467 263,763 Transportation revenues 4,299 5,208 8,718 11,193 Other revenues (466) (548) (2,248) (2,516) --------- --------- --------- --------- Total utility operating revenues $ 113,875 $ 85,928 $ 329,937 $ 272,440 ========= ========= ========= ========= Cost of gas sold $ 59,942 $ 40,204 $ 185,620 $ 133,713 ========= ========= ========= ========= Total number of customers (end of period) 528,602 508,795 528,602 508,795 ========= ========= ========= ========= Actual degree days 796 616 2,686 2,595 ========= ========= ========= ========= 20-year average degree days 670 673 2,497 2,508 ========= ========= ========= =========
15 Residential and Commercial -------------------------- NW Natural continues to experience rapid customer growth, with 19,807 customers added since June 30, 2000, for a growth rate of 3.9 percent. 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 these customers. Average weather conditions are calculated from the most recent 20 years of temperature data measured by heating degree-days. Weather conditions in the second quarter of 2001 were 19 percent colder than average and 29 percent colder than in the second quarter of 2000. For the first six months of 2001, weather was 8 percent colder than average and 3.5 percent colder than in the first six months of 2000. Volumes of gas sold to residential and commercial customers increased 11.2 million therms, or 12 percent, in the second quarter of 2001 compared to the second quarter of 2000. Related revenues increased $23.5 million, or 34 percent, due to the higher volumes of gas sold and to rate increases averaging 23 percent during 2000. (See Part II, Item 7, "Results of Operations - Regulatory Matters," in the 2000 Form 10-K.) Customer growth in the residential and commercial segments since June 30, 2000 contributed an estimated 3 million therms in sales volumes and $1.4 million in additional margin during the first six months of 2001. NW Natural believes the recent reductions in its customers' gas consumptions per degree day (see "Earnings and Dividends," above) are caused by the Company's much higher cost of purchased gas, which NW Natural passed through to customers as rate increases last fall, and to efforts throughout the region to conserve energy. NW Natural has filed with the Oregon Public Utility Commission (OPUC) for approval of a new regulatory mechanism that is intended to stabilize margin revenues in the face of variable consumption patterns. If approved, this mechanism would increase margin revenues during periods when residential and commercial customers' consumptions are less than the average assumed in the Company's 1998 general rate case. Conversely, margin revenues would be reduced when consumptions were higher than the average. The mechanism also would allow the Company to be more proactive in encouraging customers' efforts to use energy efficiently in their homes and businesses and to manage their energy bills. The Company's goal is to have such a mechanism in place before the next heating season starts in October, thereby reducing future earnings volatility. Industrial, Transportation and Other Revenues --------------------------------------------- Total volumes delivered to industrial firm, industrial interruptible, and transportation customers were 11 percent lower in the second quarter of 2001 than in the same period of 2000. Margin from these customers decreased from $10.8 million in the second quarter of 2000 to $10.3 million in the second quarter of 2001. The primary factor contributing to this decrease was a $0.5 million decrease in margin from customers who used oil during this period because the cost of oil was lower than the cost of natural gas purchased on the spot market. Besides its core market, another developing market for NW Natural is the delivery of natural gas for use in the generation of electricity. A number of generation projects are being developed in the Company's service area in order to help meet the demand for power in the western United States. NW Natural commenced gas deliveries in July 2001 to Clark Public Utility District (Clark PUD) in Vancouver, Washington, for a one-year term of service. Clark PUD will use the gas to produce up to 50 megawatts of electricity. 16 Other revenues include amortizations from regulatory accounts and miscellaneous fees charged to gas sales customers (see Part II, Item 8., Note 1, "Notes to Consolidated Financial Statements," in the 2000 Form 10-K). Other revenues increased $0.1 million during the second quarter of 2001 compared to the second quarter of 2000. Year-to-date, other revenues increased $0.3 million compared to the first six months of 2000. Factors contributing to the increase in the first six months of 2001 were higher amortizations from regulatory accounts covering conservation programs ($2.6 million), partially offset by higher property tax amortizations ($1.7 million) and higher revenues from customer late payment and reconnection fees ($1.1 million). Cost of Gas ----------- The cost per therm of gas sold was 34 percent higher during the second quarter of 2001 than in the second quarter of 2000, primarily due to higher prices in the natural gas commodity market. The cost 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. Results for the three months ended June 30, 2001 include an adjustment reducing the cost of gas and a partially offsetting adjustment reducing interest income (see "Other Income (Expense)," below). These adjustments were based on a clarification of the treatment of gas storage inventory, approved by the OPUC effective June 30, 2001, under NW Natural's Purchased Gas Adjustment (PGA) mechanism in Oregon. Excluding this adjustment ($3.0 million), the cost per therm of gas sold was 41 percent higher during the second quarter of 2001 than in the second quarter of 2000 and was 40 percent higher year-to-date. Of the total adjustment to the cost of gas, $1.6 million applied to deferrals in the first and second quarters of 2001 and $1.4 million applied to a prior period from Dec. 1, 1999 through Dec. 31, 2000. Under an agreement between the Company and the OPUC staff, the methodology applied in this adjustment to cost of gas will continue to be applied in the future. NW Natural offset some of the impact of its higher gas costs during the second quarter of 2001 through an active natural gas commodity hedge program conducted under the terms of the Company's Derivatives Policy (see Item 1, Note 3., "Notes to Consolidated Financial Statements," above). NW Natural recorded net gains from commodity swap and call option contracts of $13.4 million in the second quarter of 2001, compared to net gains of $4.1 million in the second quarter of 2000. Year-to-date, NW Natural recorded net gains of $86.9 million, compared to net gains of $3.2 million during the first six months of 2000. 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 $1.2 million and $1.4 million for the first six months of 2001 and 2000, respectively. Under an agreement with the OPUC, revenues from these sales are treated as a reduction of gas costs. NW Natural has a PGA tariff in Oregon under which its net income from Oregon operations is affected only within defined limits by changes in purchased gas costs. NW Natural 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 is recorded as deferred debits or credits (regulatory assets or liabilities) for recovery from or refund to customers in future rates. NW Natural deferred $2.3 million of higher gas costs during the second quarter of 2001 and $6.2 million year-to-date, 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 during the second quarter of 2001 was that the Company absorbed $0.7 million of its higher gas costs, reducing earnings by about 2 cents a share. 17 Non-utility Operations ---------------------- At June 30, 2001 and 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 (see "Discontinued Segment," below). Financial Corporation --------------------- Financial Corporation's operating results for the three months ended June 30, 2001 were net income of $0.2 million, equivalent to 1 cent a share, compared to a loss of $0.4 million, or 2 cents a share, for the second quarter of 2000. Year-to-date, operating results were net income of $0.3 million, compared to a loss of $0.2 million for the comparable period in 2000. Results were weaker for the six months ended June 30, 2000 due to adjustments totaling $0.6 million to Financial Corporation's deferred income tax accounts recorded in the second quarter of 2000. Financial Corporation's net assets at June 30, 2001 were $7.6 million, compared to $7.0 million at June 30, 2000. Discontinued Segment -------------------- During the first quarter of 2000, the Company sold its interest in Canor at a gain of $2.5 million, equivalent to 10 cents a share (see Item 1, Note 8., "Notes to Consolidated Financial Statements," above, and Part II, Item 7., "Results of Operations - Discontinued Segment," in the 2000 Form 10-K). Gas Storage Services -------------------- The Company realized net income after-tax of $0.4 million, or 1 cent a share, in the three months ended June 30, 2001 and $1.1 million, or 4 cents a share, year-to-date, from gas storage services to customers using storage capacity not required from time to time for utility services. Gas storage net income for the three and six months ended June 30, 2000 was negligible. Operating Expenses ------------------ Operations and Maintenance -------------------------- Operations and maintenance expenses increased $2.4 million, or 13 percent, and $4.5 million, or 12 percent, in the three and six month periods ended June 30, 2001, respectively, compared to the same periods in 2000. Key factors that contributed to the increases in the current year periods were higher employees' health and life insurance benefit costs, higher uncollectible accounts expense, higher payroll costs due to wage and salary increases and increases in weatherization program costs. Taxes Other than Income Taxes ----------------------------- Taxes other than income taxes increased $1.6 million, or 11 percent, in the first six months of 2001 compared to the first half of 2000. Franchise tax expense increased $0.9 million due to higher utility operating revenues and property taxes increased $0.4 million due to utility plant additions. Also, regulatory fees and payroll tax expenses increased slightly. Depreciation, Depletion and Amortization ---------------------------------------- The Company's depreciation, depletion and amortization expense increased $1.2 million, or 5 percent, compared to the first six months of 2000. The increase was primarily due to a 5 percent increase in utility plant in service. Depreciation, depletion and amortization expense was approximately 2 percent of average plant and property for the six months ended June 30, 2001 and 2000. 18 Other Income (Expense) ---------------------- The Company's other income (expense) decreased $1.4 million and $1.5 million in the three and six month periods ended June 30, 2001, respectively, compared to the same periods in 2000. The decreases in both periods were primarily due to lower interest income on deferred regulatory account balances, miscellaneous non-operating income and investment income from Company-owned life insurance policies, offset by higher net rental income. During the three months ended June 30, 2001, an adjustment relating to the treatment of gas storage inventory under NW Natural's PGA mechanism reduced interest income by $0.4 million (see "Cost of Gas," above). Interest Charges - net ---------------------- The Company's net interest expense decreased by $0.3 million, or 2 percent, in the six months ended June 30, 2001 compared to the same period in 2000 due to lower average balances of short term debt and lower average interest rates. Income Taxes ------------ The effective corporate income tax rates from continuing operations for the three months ended June 30, 2001 and 2000, were 32.9 percent and 24.4 percent, respectively. The difference in tax rates between the respective quarters was primarily due to a reduction in income tax expense ($0.2 million) at June 30, 2000 as a result of true-up adjustments to the 1999 federal and state income tax returns. Year-to-date, the effective corporate income tax rates from continuing operations was 36.4 percent, compared to 35.9 percent at June 30, 2000. Financial Condition ------------------- Capital Structure ----------------- NW Natural's capital expenditures are primarily related to utility construction resulting from customer growth and system improvements. NW Natural finances these expenditures from cash provided by operations and from short-term borrowings which are periodically refinanced through the sale of long-term debt or equity securities. In addition to its capital expenditures, the weather-sensitive nature of revenue derived from gas usage by NW Natural's residential and commercial customers influences the Company's financing requirements from one quarter to the next. Short-term liquidity is satisfied primarily through the sale of commercial paper, which is supported by commercial bank lines of credit (see Part II, Item 8., Note 6, "Notes to Consolidated Financial Statements," in the 2000 Form 10-K). The Company's long-term goal is to maintain a capital structure comprised of 45 to 50 percent common stock equity, 5 to 10 percent preferred and preference stock and 45 to 50 percent short-term and long-term debt. When additional capital is required, the Company issues debt or equity securities depending upon both the target capital structure and market conditions. The Company also uses these sources to meet long-term debt and preferred stock redemption requirements (see Part II, Item 8., Notes 3 and 5, "Notes to Consolidated Financial Statements," in the 2000 Form 10-K). 19 Cash Flows ---------- Operating Activities -------------------- Continuing operations provided net cash of $82.7 million in the six months ended June 30, 2001, compared to $103.4 million in the first six months of 2000. The 20 percent decrease was due to decreased cash from operations before working capital changes ($6.2 million) and higher working capital requirements ($14.5 million). The decrease in cash from continuing operations before working capital changes was due to a larger increase in deferred income taxes and investment tax credits in 2001 ($4.1 million), lower income from continuing operations ($0.9 million) and smaller reductions in deferred gas cost receivable ($1.7 million) and earnings of equity investments ($0.4 million) in 2001, partially offset by an increase in depreciation, depletion and amortization in 2001 ($1.2 million). The increase in working capital requirements was primarily due to a larger reduction in accounts payable ($46.6 million), partially offset by larger reductions in accounts receivable ($11.4 million), accrued unbilled revenues ($10.9 million) and inventories of gas, materials and supplies ($9.8 million). The Company has lease and purchase commitments relating to its operating activities which are financed with cash flows from operations (see Part II, Item 8., Note 12, "Notes to Consolidated Financial Statements," in the 2000 Form 10-K). Investing Activities -------------------- Cash requirements for utility construction in the first six months of 2001 totaled $35.8 million, down $2.2 million from the first six months of 2000. NW Natural's construction expenditures for 2001 were initially estimated at $75 million. In April 2001, however, the Company accelerated plans for an additional $10 million investment in storage facilities, increasing the projected total construction budget for 2001 to $85 million. 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. Investments in non-utility property during the first six months of 2001 were negligible. The $0.6 million investment in non-utility property in the first six months of 2000 consisted of final costs for the construction of the new headquarters building for the Port of Portland (see Item 1, Note 7, "Notes to Consolidated Financial Statements," above). The discontinued segment provided net cash of $34.8 million in the first quarter of 2000 from sale of the Company's interest in Canor. Financing Activities -------------------- Cash used for financing activities in the first six months of 2001 totaled $41.2 million, a decrease of $58.7 million from the first six months of 2000. Proceeds from the sales of $18 million of Medium-Term Notes, Series B, in June 2001, together with internally generated cash, were used to reduce short-term debt ($38.3 million). Internally generated cash, including proceeds from the sale of Canor ($34.8 million), was used to reduce short-term debt ($83.8 million) in the first six months of 2000. 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 which has been extended through May 2002. The 20 purchases are made in the open market or through privately negotiated transactions. The Company used $5.8 million for the repurchase of 246,700 shares under the program in the first six months of 2001. The Company has repurchased 355,400 shares of common stock at a total cost of $8.2 million from the program's inception through June 30, 2001. Commercial Paper ---------------- The Company's primary source of short-term funds is commercial paper. Both NW Natural and Financial Corporation issue commercial paper under agency agreements with a commercial bank. The commercial paper is supported by bank lines of credit (see "Lines of Credit," below). Financial Corporation's commercial paper is supported by the guaranty of NW Natural (see Part II, Item 8., Note 6, "Notes to Consolidated Financial Statements," in the 2000 Form 10-K). NW Natural had $18.0 million of commercial paper notes outstanding at June 30, 2001, compared to $10.3 million and $56.3 million at June 30 and Dec. 31, 2000, respectively. Financial Corporation had no commercial paper notes outstanding at Dec. 31, 2000, or June 30, 2001 or 2000. 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 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 June 30, 2001 or 2000. Ratios of Earnings to Fixed Charges ----------------------------------- For the 6 months and 12 months ended June 30, 2001, and the 12 months ended Dec. 31, 2000, the Company's ratios of earnings to fixed charges, computed using the Securities and Exchange Commission method, were 3.77, 3.05 and 3.14, respectively. For this purpose, earnings consist of net income before taxes plus fixed charges, and fixed charges consist of interest on all indebtedness, the amortization of debt expense and discount or premium and the estimated interest portion of rentals charged to income. 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 21 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. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the information provided in Part II, Item 7A., "Quantitative and Qualitative Disclosures About Market Risk," in the 2000 Form 10-K. PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NW Natural's Annual Meeting of Shareholders was held in Portland, Oregon on May 24, 2001. At the meeting, one Class I director-nominee was elected to a two-year term and four Class II director-nominees were elected to three-year terms, as follows: Term Share Votes Share Votes Director-nominee Expiring For Withheld ------------------------------------------------------------------ Richard L. Woolworth 2003 21,573,535 395,214 Tod R. Hamachek 2004 21,579,293 389,456 Wayne D. Kuni 2004 21,562,407 406,342 Melody C. Teppola 2004 21,584,761 383,988 Russell F. Tromley 2004 21,589,296 379,453 The other seven directors whose terms of office as directors continued after the Annual Meeting are: Mary Arnstad, Thomas E. Dewey, Jr., Randall C. Pape, Richard G. Reiten, Robert L. Ridgley, Dwight A. Sangrey and Benjamin R. Whiteley. In accordance with the Company's Bylaws, Richard B. Keller retired as a director at the conclusion of the meeting following 18 years of distinguished service. 22 The shareholders approved the Company's Long-Term Incentive Plan by the following vote: 19,252,474 shares voted for; 2,195,521 shares voted against; and 520,453 shares abstained from voting. The shareholders also elected PricewaterhouseCoopers LLP, certified public accountants, as NW Natural's independent auditors for the year 2001 by the following vote: 21,716,631 shares for; 99,495 against; and 152,623 abstained. There were no broker non-votes on either the election of directors or auditors at the 2001 annual meeting. There were 301 shares that were broker non-votes with respect to the approval of the Company's Long-Term Incentive Plan. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10(a) - Form of amended and restated executive change in control severance agreement as entered into between the Company and each executive officer Exhibit 10(b) - Restricted stock retention agreement, dated August 1, 2001, as entered into between the Company and an executive officer Exhibit 10(c) - Long-Term Incentive Plan as amended and restated July 26, 2001 Exhibit 11 - Statement re: Computation of Per Share Earnings Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges (b) Reports on Form 8-K On April 5, 2001 and May 24, 2001, the Company filed its Current Reports on Form 8-K relating, respectively, to (a) estimated first quarter 2001 earnings and the potential effect on earnings for the year 2001 of declining customer consumptions, and (b) the appointment of a new president and chief operating officer. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTHWEST NATURAL GAS COMPANY (Registrant) Dated: August 13, 2001 /s/ Stephen P. Feltz -------------------------------------- Stephen P. Feltz Principal Accounting Officer Treasurer and Controller 23 NORTHWEST NATURAL GAS COMPANY EXHIBIT INDEX To Quarterly Report on Form 10-Q For Quarter Ended June 30, 2001 Exhibit Number ------- Document -------- Form of amended and restated executive change in control severance agreement as entered into between the Company and each executive officer 10(a) Restricted stock retention agreement, dated August 1, 2001, as entered into between the Company and an executive officer 10(b) Long-Term Incentive Plan as amended and restated July 26, 2001 10(c) Statement re: Computation of Per Share Earnings 11 Computation of Ratios of Earnings to Fixed Charges 12