-----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, PY38NObK4XwpHu+Jzy/24J+XUhqW4L1z0ces4k9+fSwdicH1qBbqsFENZ9jJmgB/ 1pI35nvMH9ieCu0slCaAGg== 0000950120-02-000272.txt : 20020514 0000950120-02-000272.hdr.sgml : 20020514 ACCESSION NUMBER: 0000950120-02-000272 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020514 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15973 FILM NUMBER: 02646863 BUSINESS ADDRESS: STREET 1: 220 NW SECOND AVE CITY: PORTLAND STATE: OR ZIP: 97209 BUSINESS PHONE: 5032264211 10-Q 1 form10q.txt QUARTERLY REPORT 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 MARCH 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to _________ to _________ Commission File No. 0-994 [GRAPHIC OMITTED][GRAPHIC OMITTED] 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 May 8, 2002, 25,419,804 shares of the registrant's Common Stock, $3-1/6 par value (the only class of Common Stock) were outstanding. NORTHWEST NATURAL GAS COMPANY March 31, 2002 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-month periods ended March 31, 2002 and 2001 3 (2) Consolidated Statements of Earnings Invested in the Business for the three-month periods ended March 31, 2002 and 2001 4 (3) Consolidated Balance Sheets at March 31, 2002 and 2001 and Dec. 31, 2001 5 (4) Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2002 and 2001 7 (5) Consolidated Statements of Capitalization at March 31, 2002 and 2001 and Dec. 31, 2001 8 (6) Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II. OTHER INFORMATION 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 (Unaudited)
Three Months Ended March 31, ------------------------------ Thousands, except per share amounts 2002 2001 - --------------------------------------------------------------------------------------------- Operating revenues: Gross operating revenues $ 278,563 $ 217,341 Cost of sales 167,897 125,688 --------------- ------------ Net operating revenues 110,666 91,653 Operating expenses: Operations and maintenance 22,169 21,043 Taxes other than income taxes 12,002 9,694 Depreciation, depletion and amortization 12,814 12,128 --------------- ------------ Total operating expenses 46,985 42,865 --------------- ------------ Income from operations 63,681 48,788 Other income (expense) (870) 606 Interest charges - net 8,149 8,260 --------------- ------------ Income before income taxes 54,662 41,134 Income taxes 20,215 15,227 --------------- ------------ Net income 34,447 25,907 Redeemable preferred and preference stock dividend requirements 595 608 --------------- ------------ Earnings applicable to common stock $ 33,852 $ 25,299 =============== ============ Average common shares outstanding 25,266 25,207 Basic earnings per share of common stock $ 1.34 $ 1.00 Diluted earnings per share of common stock $ 1.32 $ 0.99 Dividends per share of common stock $ 0.315 $ 0.31
-------------------------------------------------- See Notes to Consolidated Financial Statements 3 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (2) Consolidated Statements of Earnings Invested in the Business (Unaudited)
Three Months Ended March 31, ------------------------------------------------------------- Thousands 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- Earnings invested in the business: Balance at beginning of period $ 147,950 $ 134,189 Net income 34,447 $ 34,447 25,907 $ 25,907 Cash dividends paid: Redeemable preferred and preference stock (594) (608) Common stock (7,953) (7,812) Common stock repurchased - (1,801) ---------------- ------------- Balance at end of period $ 173,850 $ 149,875 ================ ============= Accumulated other comprehensive income (loss): Balance at beginning of period $ (375) $ - Other comprehensive income - net of tax: Unrealized gain from price risk management activities 430 430 - - ------------------------------- --------------------------- Comprehensive income $ 34,877 $ 25,907 =========== =========== Balance at end of period $ 55 $ - ================ =============
-------------------------------------------------- See Notes to Consolidated Financial Statements 4 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (3) Consolidated Balance Sheets
March 31, March 31, 2002 2001 Dec. 31, Thousands Unaudited) (Unaudited) 2001 ---------------------------------------------------------------------------------------- Assets: Plant and property: Utility plant $ 1,478,725 $ 1,420,274 $ 1,465,079 Less accumulated depreciation 525,805 486,261 514,629 ----------- ----------- ----------- Utility plant - net 952,920 934,013 950,450 ----------- ----------- ----------- Non-utility property 18,494 8,648 18,203 Less accumulated depreciation and depletion 3,774 3,474 3,677 ----------- ----------- ----------- Non-utility property - net 14,720 5,174 14,526 ----------- ----------- ----------- Total plant and property 967,640 939,187 964,976 ----------- ----------- ----------- Other investments 25,074 14,310 23,233 ----------- ----------- ----------- Current assets: Cash and cash equivalents 30,084 12,196 10,440 Accounts receivable 81,503 57,876 66,684 Allowance for uncollectible accounts (3,648) (2,708) (1,962) Accrued unbilled revenue 39,860 26,591 57,749 Inventories of gas, materials and supplies 33,396 19,562 49,337 Prepayments and other current assets 24,100 20,554 28,086 ----------- ----------- ----------- Total current assets 205,295 134,071 210,334 ----------- ----------- ----------- Regulatory assets: Income tax asset 48,469 49,515 48,469 Deferred gas costs receivable -- 16,491 -- Unrealized loss on non-trading derivatives 48,666 -- 111,641 Unamortized loss on debt redemption 6,855 7,317 6,970 Other 4,232 7,260 5,302 ----------- ----------- ----------- Total regulatory assets 108,222 80,583 172,382 ----------- ----------- ----------- Other assets: Investment in life insurance 53,418 49,499 53,033 Other 11,168 10,225 11,064 ----------- ----------- ----------- Total other assets 64,586 59,724 64,097 ----------- ----------- ----------- Total assets $ 1,370,817 $ 1,227,875 $ 1,435,022 =========== =========== ===========
-------------------------------------------------- See Notes To Consolidated Financial Statements 5 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (3) Consolidated Balance Sheets
March 31, March 31, 2002 2001 Dec. 31, Thousands (Unaudited) (Unaudited) 2001 ------------------------------------------------------------------------------------------------------- Capitalization and liabilities: Capitalization: Common stock $ 80,130 $ 79,595 $ 79,889 Premium on common stock 242,245 237,970 240,697 Earnings invested in the business 173,850 149,875 147,950 Accumulated other comprehensive income (loss) 55 - (375) ----------- ---------- ----------- Total common stock equity 496,280 467,440 468,161 Redeemable preference stock 25,000 25,000 25,000 Redeemable preferred stock 9,000 9,750 9,000 Long-term debt 438,236 400,664 378,377 ----------- ---------- ----------- Total capitalization 968,516 902,854 880,538 ----------- ---------- ----------- Current liabilities: Notes payable 163 22,470 108,291 Accounts payable 59,592 60,225 70,698 Long-term debt due within one year 40,000 20,000 40,000 Taxes accrued 30,280 17,818 22,539 Interest accrued 9,847 9,904 3,658 Other current and accrued liabilities 26,673 24,232 28,396 ----------- ---------- ----------- Total current liabilities 166,555 154,649 273,582 ----------- ---------- ----------- Regulatory liabilities: Customer advances 1,824 1,709 1,985 Deferred gas costs payable 30,262 - 10,089 ----------- ---------- ----------- Total regulatory liabilities 32,086 1,709 12,074 ----------- ---------- ----------- Other liabilities: Deferred income taxes 128,886 142,810 130,424 Fair value of non-trading derivatives 48,463 - 111,868 Deferred investment tax credits 8,138 9,063 8,682 Other 18,173 16,790 17,854 ----------- ---------- ----------- Total other liabilities 203,660 168,663 268,828 ----------- ---------- ----------- Total capitalization and liabilities $ 1,370,817 $1,227,875 $1,435,022 =========== ========== ===========
-------------------------------------------------- See Notes To Consolidated Financial Statements 6 (NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (4) Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, ------------------------------- Thousands 2002 2001 - ------------------------------------------------------------------------------------------------------------------ Operating activities: Net income from operations $ 34,447 $ 25,907 Adjustments to reconcile net income to cash provided by operations: Depreciation, depletion and amortization 12,814 12,128 Gain on sale of assets (221) -- Unrealized gain from price risk management activities 430 -- Deferred income taxes and investment tax credits (2,082) 679 Equity in (earnings) losses of investments (138) 142 Allowance for funds used during construction (148) (191) Deferred gas costs - net 20,173 482 Other 424 2,186 ---------- ---------- Cash from operations before working capital changes 65,699 41,333 Changes in operating assets and liabilities: Accounts receivable - net of uncollectible accounts (13,133) 5,585 Accrued unbilled revenue 17,889 19,028 Inventories of gas, materials and supplies 15,941 27,321 Accounts payable (11,106) (50,473) Accrued interest and taxes 13,930 16,960 Other current assets and liabilities 2,097 2,782 ---------- ---------- Cash provided by operating activities 91,317 62,536 ---------- ---------- Investing activities: Acquisition and construction of utility plant assets (15,039) (17,095) Investment in non-utility property (291) -- Deferred costs for pending purchase of PGE (2,334) -- Proceeds from sale of assets 500 -- Other investments 518 167 ---------- ---------- Cash used in investing activities (16,646) (16,928) Financing activities: Common stock issued 1,648 1,290 Common stock repurchased -- (3,772) Long-term debt issued 60,000 -- Change in short-term debt (108,128) (33,793) Cash dividend payments: Redeemable preferred and preference stock (594) (608) Common stock (7,953) (7,812) ---------- ---------- Cash used in financing activities (55,027) (44,695) Increase in cash and cash equivalents 19,644 913 Cash and cash equivalents - beginning of period 10,440 11,283 ---------- ---------- Cash and cash equivalents - end of period $ 30,084 $ 12,196 ========== ========== - ------------------------------------------------------------------------------------------------------------------ Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 1,923 $ 1,041 Income taxes $ 14,111 $ 4,002 - ------------------------------------------------------------------------------------------------------------------ Supplemental disclosure of non-cash financing activities: Conversion to common stock: 7-1/4 % Series of Convertible Debentures $ 141 $ 126
-------------------------------------------------- See Notes to Consolidated Financial Statements 7 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (5) Consolidated Statements of Capitalization
March 31, 2002 March 31, 2001 Thousands, except share amounts (Unaudited) (Unaudited) Dec. 31, 2001 - -------------------------------------------------------------------------------------------------------------------- Common Stock Equity: Common stock - par value $3-1/6 per share $ 80,130 $ 79,595 $ 79,889 Premium on common stock 242,245 237,970 240,697 Earnings invested in the business 173,850 149,875 147,950 Accumulated other comprehensive income (loss) 55 - (375) --------- --------- --------- Total common stock equity 496,280 51% 467,440 52% 468,161 53% Redeemable Preference Stock: $6.95 Series, stated value $100 per share 25,000 3% 25,000 3% 25,000 3% Redeemable Preferred Stock: $7.125 Series, stated value $100 per share 9,000 1% 9,750 1% 9,000 1% Long-Term Debt: Medium-Term Notes ----------------- First Mortgage Bonds: 6.620% Series B due 2001 - 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 - 8,000 6.310% Series B due 2007 20,000 - - 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 25,000 6.665% Series B due 2011 10,000 - 10,000 7.130% Series B due 2012 40,000 - - 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 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 20,000 7.850% Series B due 2030 10,000 10,000 10,000 Unsecured: 8.470% Series A due 2001 - 10,000 - Convertible Debentures ---------------------- 7-1/4% Series due 2012 8,236 8,664 8,377 --------- --------- --------- 478,236 420,664 418,377 Less long-term debt due within one year 40,000 20,000 40,000 --------- ---- --------- ---- --------- ---- Total long-term debt 438,236 45% 400,664 44% 378,377 43% --------- ---- --------- ---- --------- ---- Total Capitalization $ 968,516 100% $ 902,854 100% $ 880,538 100% ========= ==== ========= ==== ========= ==== ---------------------------------------------------- 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 2001 Annual Report on Form 10-K (2001 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. As referred to herein, the "Company" consists of Northwest Natural Gas Company (NW Natural), a regulated utility, and non-regulated subsidiary businesses, NNG Financial Corporation (Financial Corporation), a wholly-owned subsidiary, and Northwest Energy Corporation (Northwest Energy or Holding Company), which was formed in 2001 to serve as the holding company for NW Natural and Portland General Electric Company (PGE) if the acquisition of PGE is completed (see Note 6). Certain amounts from prior periods have been reclassified to conform with the 2002 presentation. These reclassifications had no impact on prior year results of operations. 2. Use of Financial Derivatives NW Natural utilizes derivative instruments to manage commodity price risks related to natural gas purchases, foreign currency exchange rate risks related to gas purchase commitments from Canada, oil or propane commodity price risks related to gas sales and transportation services under rate schedules pegged to these commodities, and interest rate risks related to long-term debt maturing or expected to be issued in less than five years. NW Natural does not enter into derivative instruments for trading purposes. See Part II, Item 7., "Accounting for Derivative Instruments and Hedging Activities," and Part II, Item 8., Notes 1 and 11, "Notes to Consolidated Financial Statements," in the 2001 Form 10-K. At March 31, 2002, NW Natural had the following derivatives outstanding covering its exposures to commodity and foreign currency prices: a series of 18 natural gas price swap contracts and five foreign currency forward contracts. Each of these contracts was designated as a cash flow hedge. The estimated fair values and the notional amounts of derivative instruments outstanding were as follows:
Jan. 1, 2002 March 31, 2002 -------------------------- ------------------------ Fair value Notional Fair value Notional Gain (loss) Amount Gain (loss) Amount -------------------------- ------------------------ Thousands Fixed-price natural gas commodity price swaps (110,935) $ 254,209 $ (48,428) $ 264,031 Fixed-price natural gas call options (832) 6,390 - - Foreign currency forward purchase contracts (101) 10,223 (35) 8,353 -------------------------- ------------------------ Total $ (111,868) $ 270,822 $ (48,463) $ 272,384 ========================== ========================
3. Recent Accounting Pronouncements In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at 9 fair value. The liability for the asset retirement obligation is recorded as a capitalized cost increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period and the capitalized cost is depreciated over the useful life of the related asset. The Company is currently evaluating the impact of this statement upon its financial position and results of operations. 4. Adoption of New Accounting Standards Effective Jan. 1, 2002, the Company adopted SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill. SFAS No. 142 requires goodwill, of which the Company had none as of March 31, 2002, and other intangibles with indefinite lives to be tested for impairment at least annually rather than being amortized as previously required. The adoption of SFAS No. 141 and SFAS No. 142 did not have a material impact on the Company's financial position or results of operations. The Company also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," effective Jan. 1, 2002. SFAS No. 144 establishes a single accounting model for recognition and measurement of the impairment of long-lived assets to be held and used, the measurement of long-lived assets to be disposed of by sale and for segments of a business to be disposed of. SFAS No. 144 also expands the scope of discontinued operations to include all components of an entity that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. The adoption of SFAS No. 144 did not have a material impact on the Company's financial position or results of operations. 5. Segment Information The Company principally operates in a segment of business, "Utility", consisting of the distribution of natural gas. Another segment, "Gas Storage", represents natural gas storage services provided to upstream customers using storage capacity not required from time to time for service to core utility customers. The remaining segment, "Other", primarily consists of non-regulated investments in alternative energy projects in California, a Boeing 737-300 aircraft leased to Continental Airlines and deferred costs in the pending purchase of PGE. 10 The following table presents information about the reportable segments for the three months ended March 31, 2002 and 2001. Inter-segment transactions are insignificant.
Three Months Ended March 31, -------------------------------------------------------- Thousands Utility Gas Storage Other Total - --------------------------------------------------------------------------------------------------------------- 2002 - ---- Net operating revenues $ 108,838 $ 1,774 $ 54 $ 110,666 Depreciation, depletion and amortization 12,723 91 -- 12,814 Other operating expenses 33,900 249 22 34,171 Income from operations 62,221 1,428 32 63,681 Income from financial investments -- -- 138 138 Net income 33,453 786 208 34,447 Assets 1,326,968 14,453 29,396 1,370,817 2001 - ---- Net operating revenues $ 90,384 $ 1,223 $ 46 $ 91,653 Depreciation, depletion and amortization 12,104 24 -- 12,128 Other operating expenses 30,795 31 (89) 30,737 Income from operations 47,485 1,168 135 48,788 Income (loss) from financial investments -- -- (142) (142) Net income 25,059 693 155 25,907 Assets 1,201,355 4,895 21,625 1,227,875
6. Commitments and Contingencies Acquisition of Portland General Electric Company ------------------------------------------------ On Oct. 5, 2001, NW Natural and Enron Corp., an Oregon corporation (Enron), entered into an agreement (the Stock Purchase Agreement) providing for the acquisition, by a wholly-owned subsidiary of NW Natural formed to serve as a holding company (Holding Company), of all of the issued and outstanding common stock of PGE, an Oregon corporation and wholly-owned subsidiary of Enron. See Part I, Item 1., "Acquisition of Portland General Electric Company," and Part II, Item 8., Note 12, in the 2001 Form 10-K, and Part I, Item 2., "Acquisition of Portland General Electric Company," in this Form 10-Q. The Stock Purchase Agreement provides that, if the closing has not occurred by Dec. 8, 2002, NW Natural and Holding Company have the obligation to use their best efforts to obtain an extension of the Financing Commitment or enter into or extend a new financing commitment which provides for similar financing, and Holding Company shall accept any such extended Financing Commitment or new financing commitment if the funding conditions and other terms are not materially adverse to Holding Company in comparison to the Financing Commitment originally issued. Environmental Matters --------------------- NW Natural has accrued all material loss contingencies relating to environmental matters which it believes to be probable of assertion. See Part II, Item 8., Note 12, "Notes to Consolidated Financial Statements," in the 2001 Form 10-K. However, due to the preliminary nature of these environmental investigations, the range of any additional possible loss cannot be currently estimated. NW Natural expects that its costs of further investigation and remediation for which it may be responsible with respect to the Linnton site, the Wacker site and the Portland Harbor Superfund site, if any, 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. 11 Litigation ---------- The Company is party to certain legal actions in which claimants seek material amounts. Although it is impossible to predict the outcome with certainty, based upon the opinions of legal counsel, management does not expect disposition of these matters to have a materially adverse effect on the Company's financial position, results of operations or cash flows. 12 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The consolidated financial statements include: Regulated utility: Northwest Natural Gas Company (NW Natural) Non-regulated subsidiary businesses: NNG Financial Corporation (Financial Corporation), a wholly-owned subsidiary Northwest Energy Corporation (Northwest Energy or Holding Company), a wholly-owned subsidiary formed in 2001 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 2001 Annual Report on Form 10-K (2001 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 months ended March 31, 2002 and 2001. Earnings and Dividends - ---------------------- The Company's earnings applicable to common stock were $33.9 million in the quarter ended March 31, 2002, up from $25.3 million in the quarter ended March 31, 2001. Earnings per diluted share from consolidated operations were $1.32 a share in the first quarter of 2002, compared to 99 cents a share in last year's first quarter. NW Natural earned $1.28 a diluted share from gas utility operations in the first quarter of 2002, compared to 96 cents in the same period in 2001. Weather conditions in NW Natural's service territory in the first quarter of 2002 were 5 percent colder than the 20-year average and 2 percent colder than the first quarter of 2001. Residential and commercial customers' consumptions per heating degree day were an estimated 8 percent and 12 percent lower, respectively, during the first quarter of 2002 than average consumptions prior to significant increases in gas commodity prices during 2000 and 2001. The Company estimates that the lower consumptions per degree day reduced residential and commercial sales in the first quarter of 2002 by about 21 million therms and margin revenues (gross revenues minus cost of sales) by about $6.0 million, equivalent to 14 cents a share. Non-utility operating results for the first quarter of 2002 were earnings of 4 cents a share, compared to earnings of 3 cents a share from these operations in the first quarter of 2001. See "Non-utility Operations," below. Dividends paid on common stock were 31.5 cents a share for the three-month period ended March 31, 2002 and 31 cents a share for the three-month period ended March 31, 2001. In April 2002, the Company's Board of Directors declared a quarterly dividend of 31.5 cents a share on the common stock, payable May 15, 2002, to shareholders of record of April 30, 2002. The current indicated annual dividend rate is $1.26 a share. 13 Application of Critical Accounting Policies - ------------------------------------------- In preparing the Company's financial statements using generally accepted accounting principles in the United States of America (GAAP), management exercises judgment in the selection and application of accounting principles, including making estimates and assumptions. Management considers its critical accounting policies to be those which are most important to the representation of the Company's financial condition and results of operations and which require management's most difficult and subjective or complex judgments, including those which could result in materially different amounts if the Company reported under different conditions or using different assumptions. Management considers its current critical accounting policies to be in the areas of regulatory accounting, revenue recognition and derivative and hedging activities (see "Part II, Item 7., "Critical Accounting Policies - Regulatory Accounting, Revenue Recognition and Accounting for Derivative Instruments and Hedging Activities," in the Company's 2001 Form 10-K). There have been no material changes in the policies management considers its critical accounting policies. In addition to the accounting policies referred to above, management believes that Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," could become critical accounting policies in the event that NW Natural completes its acquisition of Portland General Electric Company (PGE). Acquisition of Portland General Electric Company - ------------------------------------------------ On Oct. 5, 2001, NW Natural and Enron Corp., an Oregon corporation (Enron), entered into an agreement (the Stock Purchase Agreement) providing for the acquisition, by a wholly-owned subsidiary of NW Natural formed to serve as a holding company (Holding Company), of all of the issued and outstanding common stock of PGE, an Oregon corporation and wholly-owned subsidiary of Enron. See Part I, Item 1., "Acquisition of Portland General Electric Company," in the 2001 Form 10-K. On Dec. 2, 2001, Enron, along with certain of its subsidiaries, filed petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. PGE has not filed for reorganization under Chapter 11. At this time, it continues to be difficult to assess the impact of Enron's bankruptcy filing on PGE. It is possible that Enron's situation could adversely affect PGE, because, as a subsidiary of Enron, PGE has relationships with Enron that could expose PGE to liabilities. At this time, the potential magnitude of any such liabilities has not been determined. Notwithstanding Enron's bankruptcy, the Stock Purchase Agreement remains a valid contractual obligation of Enron to sell, and for Holding Company to acquire, the common stock of PGE. However, in the Enron bankruptcy case, Enron must decide to either assume or reject the Stock Purchase Agreement. If Enron elects to reject the Stock Purchase Agreement, Enron could either retain ownership of PGE or sell PGE to another party. Enron's determination whether to assume or reject the Stock Purchase Agreement is a business judgment to be made by Enron on the basis of the best interests of the bankruptcy estate and Enron's creditors. Furthermore, the decision is subject to approval by the Bankruptcy Court. On May 3, 2002, Enron publicly announced that it had presented a process to its Unsecured Creditors' Committee which contemplated the establishment of a new energy infrastructure company focused on the transportation, distribution, generation and production of natural gas and electricity. Enron disclosed that the new company, currently called OpCo Energy Company, would be a holding company which may own PGE. Although Enron has stated that it believes the OpCo Energy Company process is feasible whether or not PGE is owned by such company, Enron has indicated its preference to retain PGE as part of such company. 14 NW Natural understands that the Unsecured Creditors' Committee is reviewing Enron's proposal and has not determined whether or not it will support the OpCo Energy Company process. NW Natural is in discussions with Enron to seek to determine whether the parties should agree to mutually terminate the Stock Purchase Agreement or should continue to pursue the transaction. NW Natural understands that Enron will consult with its debtor-in-possession lenders and the Unsecured Creditors' Committee in reaching such a determination. Any agreement by Enron and NW Natural to terminate the Stock Purchase Agreement would be subject to approval by the Bankruptcy Court. Through March 31, 2002, NW Natural has recorded approximately $11.9 million of costs relating to the acquisition as deferred costs for the purchase of PGE. If the acquisition is not completed, NW Natural would recognize these costs incurred as current expense. Results of Operations - --------------------- Comparison of Gas Operations ---------------------------- The following table summarizes the composition of gas utility volumes and revenues for the three months ended March 31:
(Thousands, except customers and degree days) 2002 2001 - ------------------------------------------------------------------------------------------------------ Gas Sales and Transportation Volumes - Therms: - ---------------------------------------------- Residential and commercial sales 262,937 258,873 Unbilled volumes (18,622) (24,223) --------- --------- Weather-sensitive volumes 244,315 62% 234,650 61% Industrial firm sales 23,755 6% 23,464 6% Industrial interruptible sales 14,375 4% 13,798 4% --------- ----- --------- ---- Total gas sales 282,445 72% 271,912 71% Transportation deliveries 110,732 28% 112,473 29% --------- ----- --------- ---- Total volumes sold and delivered 393,177 100% 384,385 100% ========= ===== ========= ==== Utility Operating Revenues - Dollars: - ------------------------------------- Residential and commercial sales $ 259,491 $ 198,232 Unbilled revenues (17,895) (5,690) --------- --------- Weather-sensitive revenues 241,596 88% 192,542 89% Industrial firm sales 17,865 6% 13,658 6% Industrial interruptible sales 9,896 4% 7,225 3% --------- ----- --------- ---- Total gas sales 269,357 98% 213,425 98% Transportation revenues 6,452 2% 4,419 2% Other revenues 173 -- (1,782) -- --------- ----- --------- ---- Total utility operating revenues $ 275,982 100% $ 216,062 100% ========= ===== ========= ==== Cost of gas sold $ 167,144 $ 125,678 ========= ========= Total number of customers (end of period) 546,806 528,008 ========= ========= Actual degree days 1,920 1,890 ========= ========= 20-year average degree days 1,836 1,827 ========= =========
15 Residential and Commercial -------------------------- NW Natural continues to experience rapid customer growth, with 18,798 customers added since March 31, 2001 for a growth rate of 3.6 percent. In the three years ended Dec. 31, 2001, more than 63,000 customers were added to the system, representing an average annual growth rate of 4.4 percent. Typically, 80 percent or more of NW Natural's annual operating revenues are derived from gas sales to weather-sensitive residential and commercial customers. Accordingly, variations in temperatures between periods will affect volumes of gas sold to these customers. Average weather conditions are calculated from the most recent 20 years of temperature data measured by heating degree-days. Weather conditions were 5 percent colder than average in the first quarter of 2002 and 2 percent colder than average in the first quarter of 2001. Volumes of gas sold to residential and commercial customers were 9.7 million therms, or 4 percent, higher in the first quarter of 2002 than in the first quarter of 2001. Related revenues increased $49.1 million, or 25 percent, partially due to higher sales volumes but more significantly due to rate increases effective Oct. 1, 2001. (See Part II, Item 7, "Results of Operations - Regulatory Matters," in the 2001 Form 10-K.) Customer growth in the residential and commercial segments since March 31, 2001, contributed an estimated 7 million therms in sales volumes and $2.7 million in additional margin during the first quarter of 2002. NW Natural believes that reductions in recent years in its customers' gas consumptions per degree day (see "Earnings and Dividends," above) were caused by the higher cost of purchased gas, which is passed on to customers as rate increases, and to efforts throughout the region to conserve energy. NW Natural filed with the Oregon Public Utility Commission (OPUC) in 2001 for approval of a new regulatory mechanism that is intended to stabilize margin revenues in the face of variable consumption patterns. The proposed regulatory mechanism is intended to stabilize margin revenues to assure NW Natural of fixed cost recovery and more predictable shareholder earnings. NW Natural has proposed that this be accomplished through a balancing account that would compare actual usage of residential and commercial customers against their normal usage levels and treat any variations as refunds or collections of revenues. In February 2002, the administrative law judge in this proceeding issued a memorandum to the parties advising them that the OPUC has decided to hold the docket regarding NW Natural's proposed regulatory mechanism in abeyance, along with a docket involving a similar filing by PGE, pending its review of NW Natural's application to acquire PGE. NW Natural estimates that if customers' gas consumption patterns as experienced in 2001 and early 2002 were to continue for the full year 2002, but a margin stabilization mechanism were not approved, it could reduce margin revenues for the last nine months of this year by the equivalent of 13 to 18 cents a share compared to results with such a mechanism in place. 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. End of period balances are affected by weather conditions, rate changes and customer billing dates from one period to the next. Industrial, Transportation and Other Revenues --------------------------------------------- Total volumes delivered to industrial and electric generation customers in the first quarter of 2002 were 148.1 million therms, down 1 percent from the same period of 2001. Combined margin from these customers increased, however, from $11.7 million in the first quarter of 2001 to $14.7 million in the first quarter of 2002. In the industrial market, volumes delivered to industrial sales and transportation customers in the first quarter of 2002 were 144.9 million therms. This was 30.6 million therms, or 27 percent, higher than in the first quarter of 2001. Several large customers switched back to gas after having used oil during the same period last year. Related margins in the industrial market increased from $11.3 million to $12.4 million. 16 In the electric generation market, volumes delivered in the first quarter of 2002 were 3.2 million therms. This was 31.3 million therms, or 91 percent, lower than in the first quarter of 2001. Margin in this market increased, however, from $0.4 million in the first quarter of 2001 to $2.3 million in the first quarter of 2002. A customer served on a contract with low fixed charges and relatively high volumetric charges used 34.5 million therms during the first quarter of 2001 but only about 3 million therms during the first quarter of 2002. On the other hand, two new electric generation customers added in mid-2001 used only about 0.3 million therms in the first quarter of 2002, but generated $2.3 million in margin because they are served on contracts with high fixed charges and low volumetric charges. The contracts with these two customers will continue in place at least through the end of the second quarter of 2002. Other revenues include amortizations from regulatory accounts and miscellaneous fee income (see Part II, Item 8., Note 1, "Notes to Consolidated Financial Statements," in the 2001 Form 10-K). Other revenues amounted to a net increase to utility operating revenues of $0.2 million during the first quarter of 2002, inluding increased revenues from customer late payment and collection fees ($1.1 million) and miscellaneous revenues ($0.4 million), partially offset by amortizations from regulatory accounts covering conservation programs ($0.8 million) and Year 2000 costs ($0.5 million). Amortizations of regulatory accounts for conservation programs amounted to $2.4 million for the three months ended March 31, 2002, which accounted for the $2.0 million increase in other revenues from the three months ended March 31, 2001. Cost of Gas ----------- The cost per therm of gas sold was 28 percent higher during the first quarter of 2002 than in the first quarter of 2001, primarily due to higher natural gas commodity prices. The cost per therm of gas sold includes current gas purchases, gas drawn from storage inventory, gains or losses from commodity hedges, demand costs, regulatory deferrals and company use. NW Natural uses an active natural gas commodity hedge program under the terms of its Derivatives Policy (see Part II, Item 7., "Critical Accounting Policies -- Accounting for Derivative Instruments and Hedging Activities," in the Company's 2001 Form 10-K) to help manage its gas commodity costs. NW Natural recorded net losses from commodity swap and call option contracts of $28 million in the first quarter of 2002, compared to net gains of $74 million in the first quarter of 2001. Gains (losses) from commodity hedges are recorded as reductions (increases) to the cost of gas. NW Natural has a Purchased Gas Adjustment (PGA) tariff under which its net income from Oregon operations is affected 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 projected costs built into rates. 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. Net savings realized from gas commodity purchases in the first quarter of 2002 contributed $8.7 million of margin, equivalent to 21 cents a share of earnings. The Company credited the remaining portion of its first quarter 2002 purchased gas costs savings, about $17.4 million, plus interest, to a deferred account for future refund to Oregon customers. In the first quarter of 2001, NW Natural absorbed $1.4 million of excess gas costs, generating a loss of 3 cents a share. Under an agreement with the OPUC, revenues from off-system gas sales are treated as a reduction of gas costs. These sales reduced the cost of gas sold by $0.7 million and $0.6 million for the first quarters of 2002 and 2001, respectively. Non-utility Operations ---------------------- At March 31, 2002 and 2001, the Company had one active wholly-owned subsidiary, Financial Corporation. Northwest Energy, which was formed in 2001 to serve as the holding company for NW Natural and PGE if the acquisition of PGE is completed, has had no active operations since its inception in 2001. 17 Financial Corporation --------------------- Financial Corporation's operating results for the three months ended March 31, 2002 were net income of $0.2 million, compared to income of $0.1 million for the first quarter of 2001. Earnings were equivalent to 1 cent a share for each of the three-month periods ended March 31, 2002 and 2001. Financial Corporation's net assets at March 31, 2002 and 2001 were $8.1 million and $7.4 million, respectively. Gas Storage Services -------------------- NW Natural realized net income, after regulatory sharing and income tax, from gas storage services of $0.8 million, or 3 cents a share, in the three months ended March 31, 2002, up from $0.7 million, or 2 cents a share, in the three months ended March 31, 2001. Gas storage services are provided to customers using storage capacity not required from time to time for utility services. NW Natural retains 80 percent of the income before tax from storage services and credits the remaining 20 percent to a deferred regulatory account for refund to its core utility customers. Operating Expenses ------------------ Operations and Maintenance -------------------------- Consolidated operations and maintenance expenses were $1.1 million, or 5 percent, higher in the first quarter of 2002 compared to the same period in 2001. The increase was caused primarily by higher net pension costs ($0.7 million) due to reduced earnings on pension assets; higher uncollectible expense ($0.5 million) due to economic conditions in the Northwest and the impact of higher customer gas bills resulting from recent rate increases; and higher payroll costs ($0.3 million) due to wage and salary increases. Taxes Other than Income Taxes ----------------------------- Taxes other than income, which are comprised of property, franchise, payroll and other taxes, were $2.3 million, or 24 percent, higher in the first quarter of 2002 compared to the same period in 2001. Franchise taxes, which are based on gross revenues, increased $1.7 million, or 35 percent, reflecting higher revenues due to an increase in NW Natural's customer base and rate increases effective in late 2001. Property tax expense increased $0.6 million, or 22 percent, due to higher property tax rates and an increase in utility plant. Depreciation, Depletion and Amortization ---------------------------------------- Depreciation, depletion and amortization expense increased $0.7 million, or 6 percent, compared to the first quarter of 2001. The increase was primarily due to a 5 percent increase in plant in service. As a percentage of average plant and property, depreciation, depletion and amortization expense was approximately 1 percent for each of the three months ended March 31, 2002 and 2001. Other Income (Expense) ---------------------- Other income (expense) decreased $1.5 million in the first quarter of 2002 compared to the first quarter of 2001. The decrease was primarily due to a change in interest income on deferred regulatory account balances. The first quarter of 2002 included interest expense of $0.9 million on deferred gas cost liability balances totaling $30.3 million as of March 31, 2002, compared to interest income of $0.2 million on receivable balances of $16.5 million as of March 31, 2001. The change in deferred gas cost balances, from an asset as of March 31, 2001 to a liability at March 31, 2002, resulted in a combined decrease of $1.2 million in interest on deferred regulatory accounts. The first quarter of 2001 also included interest income on short-term investments of $0.4 million. 18 Interest Charges - net ---------------------- The Company's net interest expense decreased $0.1 million, or 1 percent, in the first quarter of 2002 compared to the first quarter of 2001. Interest expense on commercial paper was $0.2 million lower due to a lower average balance of commercial paper outstanding during the period. Income Taxes ------------ The effective corporate income tax rate from continuing operations was 37.0 percent for both three-month periods ended March 31, 2002 and 2001. Financial Condition - ------------------- Capital Structure ----------------- The Company's 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, debt or equity securities are issued depending upon both the target capital structure and market conditions. These sources also are used to meet long-term debt and preferred and preference stock redemption requirements (see Part II, Item 8., Notes 3 and 5, "Notes to Consolidated Financial Statements," in the 2001 Form 10-K). Liquidity and Capital Resources ------------------------------- At March 31, 2002, the Company had $30.1 million in cash and cash equivalents compared to $12.2 million at March 31, 2001. Short-term liquidity is provided by cash from operations and from the sale of the Company's commercial paper notes, which are supported by commercial bank lines of credit (see Part II, Item 8., Note 6, "Notes to Consolidated Financial Statements," in the Company's 2001 Form 10-K). The Company has available through Sept. 30, 2002, committed lines of credit totaling $170 million (see "Cash Flows - Lines of Credit," below). The Company's lines of credit are renewed annually. NW Natural's lines of credit require that credit ratings be maintained in effect at all times and that notice be given of any change in its commercial paper ratings. A change in NW Natural's commercial paper rating is not an event of default, nor is the maintenance of a specific minimum level of credit rating a condition to drawing upon the lines of credit. However, interest rates on any loans outstanding under NW Natural's bank lines are tied to credit ratings, which would increase or decrease the cost of bank debt, if any, when ratings are changed. The lines of credit require NW Natural to maintain a specified ratio of indebtedness to total capitalization. Failure to comply with this covenant would entitle the banks to terminate their lending commitments and to accelerate the maturity of all amounts outstanding. At March 31, 2002, NW Natural was in compliance with this covenant. 19 The following table shows NW Natural's contractual obligations by maturity and type of obligation:
Commercial Preferred Long-term Total Thousands Paper and Capital Gas Supply Contractual Payments Due in Years Supported by Preference Long-term Lease Operating Purchase Cash Ending March 31, Lines of Credit Stock Debt Obligations Leases Obligations Obligations - -------------------------------------------------------------------------------------------------------------------------------- 2002 $ 163 $ 25,750 $ 40,000 $ 569 $ 2,966 $ 82,104 $ 151,552 2003 - 750 20,000 132 2,753 67,391 91,026 2004 - 750 - 5 2,641 46,467 49,863 2005 - 750 15,000 - 2,585 43,926 62,261 2006 - 750 28,000 - 365 41,912 71,027 ------------------------------------------------------------------------------------------------------- Total 2002 - 2006 163 28,750 103,000 706 11,310 281,800 425,729 Thereafter - 5,250 375,236 - 3,423 239,940 623,849 Less: imputed interest - - - (32) - (111,540) (111,572) ------------------------------------------------------------------------------------------------------- Total $ 163 $ 34,000 $ 478,236 $ 674 $ 14,733 $ 410,200 $ 938,006 =======================================================================================================
One of Financial Corporation's lines of credit in the amount of $10 million, which is guaranteed by NW Natural, provides that it is an event of default if any governmental authority takes action which the bank believes has a material adverse effect on NW Natural's financial condition or ability to repay, or if a material adverse change occurs in NW Natural's business condition. NW Natural's capital expenditures are primarily related to utility construction resulting from customer growth and system improvements (see "Cash Flows - Investing Activities," below). In addition, NW Natural has certain long-term contractual obligations such as capital lease obligations, operating leases and long-term gas supply purchase obligations that require an adequate source of funding. These capital and contractual expenditures are financed through cash from operations and from the issuance of short-term debt, which is periodically refinanced through the sale of long-term debt or equity securities. Cash Flows ---------- Operating Activities -------------------- Operations provided net cash of $91.3 million in the three months ended March 31, 2002, compared to $62.5 million in the first three months of 2001. The $28.8 million, or 46 percent, increase was due to increased cash from operations before working capital changes ($24.4 million) and lower working capital requirements ($4.4 million). The increase in cash from operations before working capital changes was due to an increase in deferred gas costs payable in the first quarter of 2002 ($19.7 million), an increase in income from operations ($8.5 million) and an increase in depreciation, depletion and amortization ($0.7 million), partially offset by a decrease in deferred investment tax credits and income taxes ($2.8 million) and a decrease in other adjustments ($1.8 million). The decrease in working capital requirements was primarily due to a smaller decrease in accounts payable ($39.4 million), partially offset by an increase in accounts receivable ($18.7 million), a smaller increase in accrued interest and taxes ($3.0 million), and a smaller decrease in inventories ($11.4 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 2001 Form 10-K). 20 Investing Activities -------------------- Cash requirements for investing activities in the first quarter of 2002 totaled $16.6 million, down from $16.9 million in the same period of 2001. Cash requirements for utility construction totaled $15.0 million, down $2.1 million from the first quarter of 2001. The decrease in cash requirements for utility construction in 2002 was primarily the result of the completion of another phase in the expansion of NW Natural's Mist gas storage system in December 2001. NW Natural's utility construction expenditures are estimated to total $83 million for 2002. Over the five-year period 2002 through 2006, these expenditures are estimated at between $450 million and $500 million. The level of capital expenditures over the next five years reflects projected customer growth, system replacement and reinforcement projects, and the development of additional gas storage facilities including the extension of a pipeline that moves gas from NW Natural's Mist Storage Field into growing portions of its service area. 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 quarter of 2002 totaled $0.3 million and were negligible during the first quarter of 2001. Investing activities during the first three months of 2002 also included $2.3 million in cash used for financial advisory and legal fees, loan arrangement fees and other costs relating to the Company's contract for the purchase of PGE. In the event that the acquisition is not completed, the Company would recognize costs accumulated to date of $11.9 million as current expenses. Financing Activities -------------------- Cash used in financing activities in the first quarter of 2002 totaled $55.0 million, compared to $44.7 million in the first quarter of 2001. NW Natural sold $60 million of its secured Medium-Term Notes, Series B (MTNs) in March 2002 and used the proceeds, together with internally generated cash to reduce short-term debt by $108.1 million in the first quarter of 2002. Internally generated cash was used to reduce short-term debt by $33.8 million in the first quarter of 2001. 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 2003. The 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 2001. No shares were repurchased during the six months ended Dec. 31, 2001, while the Company was negotiating the purchase of PGE, or the three months ended March 31, 2002. Since the program's inception in 2000, the Company has repurchased 355,400 shares of common stock at a total cost of $8.2 million. Commercial Paper ---------------- The Company's primary source of short-term funds is commercial paper notes payable. Both NW Natural and Financial Corporation issue commercial paper under agency agreements with a commercial bank. NW Natural's commercial paper is supported by its committed bank lines of credit (see below), while Financial Corporation's commercial paper is supported by committed bank lines of credit and the guaranty of NW Natural (see Part II, Item 8., Note 6, "Notes to Consolidated Financial Statements," in the 2001 Form 10-K). NW Natural had $0.2 million of commercial paper notes outstanding at March 31, 2002, compared to $22.5 million and $108.3 million at March 31 and Dec. 31, 2001, respectively. Financial Corporation had no commercial paper notes outstanding at March 31, 2002. 21 Lines of Credit --------------- NW Natural has available through Sept. 30, 2002, committed lines of credit with four commercial banks totaling $150 million. In addition, Financial Corporation has available through Sept. 30, 2002, 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 March 31, 2002 or 2001. Ratios of Earnings to Fixed Charges ----------------------------------- For the 12 months ended March 31, 2002, and Dec. 31, 2001, the Company's ratios of earnings to fixed charges, computed using the Securities and Exchange Commission method, were 3.52 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 that are other than statements of historical facts. The Company's expectations, beliefs and projections are expressed in good faith and are believed 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) risks and uncertainties relating to delays in obtaining, or adverse conditions contained in, regulatory approvals necessary for the plan of reorganization and acquisition of PGE; (iii) failure to realize the synergies and other benefits expected from the acquisition of PGE, if completed; (iv) risks relating to the interest rate environment as it may affect the financing commitment and interest rates borne by the debt financing for the PGE transaction, if completed; (v) weather conditions and other natural phenomena; (vi) unanticipated population growth or decline, and changes in market demand and demographic patterns; (vii) competition for retail and wholesale customers; (viii) pricing of natural gas relative to other energy sources; (ix) changes in customer consumption patterns due to gas commodity price changes; (x) unanticipated changes in interest or foreign currency exchange rates or in rates of inflation; (xi) economic factors that could cause a severe downturn in certain key industries, thus affecting demand for natural gas; (xii) unanticipated changes in operating expenses and capital expenditures; (xiii) capital market conditions; (xiv) competition for new energy development opportunities; (xv) legal and administrative proceedings and settlements; and (xvi) the impact of Enron's bankruptcy filing on PGE and on the proposed acquisition of PGE. 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. 22 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 2001 Form 10-K. PART II. OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 11 - Statement re: Computation of Per Share Earnings Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges (b) Reports on Form 8-K On March 1, 2002, the Company filed its Current Report on Form 8-K relating to: 1) a litigation decision adverse to the Company; 2) the Company's 2001 earnings; 3) a regulatory development; and 4) the status of the Company's proposed acquisition of Portland General Electric Company. 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: May 14, 2002 /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 March 31, 2002 Exhibit Number Document Statement re: Computation of Per Share Earnings 11 Computation of Ratios of Earnings to Fixed Charges 12 EXHIBIT 11 NORTHWEST NATURAL GAS COMPANY Statement re: Computation of Per Share Earnings (Unaudited) Thousands, except per share amounts Three Months Ended March 31, - -------------------------------------------------------------------------------- 2002 2001 ---------------------------- Earning Applicable to Common Stock $ 33,852 $ 25,299 Debenture Interest Less Taxes 91 96 ---------- ---------- Net Income Available for Diluted Common Stock $ 33,943 $ 25,395 ========== ========== Average Common Shares Outstanding 25,266 25,207 Stock Options 54 41 Convertible Debentures 414 435 ---------- ---------- Diluted Common Shares 25,734 25,683 ========== ========== Diluted Earnings per Share of Common Stock $ 1.32 $ 0.99 ========== ========== EXHIBIT 12 NORTHWEST NATURAL GAS COMPANY Computation of Ratio of Earnings to Fixed Charges January 1, 1997 - March 31, 2002 (Thousands, except ratio of earnings to fixed charges) (Unaudited)
12 Months Three Months Year Ended December 31, Ended Ended ------------------------------------------------------------ March 31, March 31, 1997 1998 1999 2000 2001 2002 2002 ------------------------------------------------------------ ---------- ------------ Fixed Charges, as Defined: Interest on Long-Term Debt $ 24,904 $ 27,389 $ 27,728 $ 29,987 $ 30,224 $ 30,047 $ 7,343 Other Interest 4,500 4,909 2,778 3,628 3,772 3,812 769 Amortization of Debt Discount and Expense 730 714 699 735 768 751 185 Interest Portion of Rentals 2,111 1,986 1,707 1,628 1,572 1,558 393 -------- -------- --------- --------- --------- --------- -------- Total Fixed Charges, as defined $ 32,245 $ 34,998 $ 32,912 $ 35,978 $ 36,336 36,168 $ 8,690 ======== ======== ========= ========= ========= ========= ======== Earnings, as Defined: Net Income $ 43,059 $ 27,301 $ 45,296 $ 50,224 $ 50,187 58,727 $ 34,447 Taxes on Income 21,034 14,604 24,591 26,829 27,553 32,541 20,215 Fixed Charges, as above 32,245 34,998 32,912 35,978 36,336 36,168 8,690 -------- -------- --------- --------- --------- --------- -------- Total Earnings, as defined $ 96,338 $ 76,903 $ 102,799 $ 113,031 $ 114,076 $ 127,436 $ 63,352 ======== ======== ========= ========= ========= ========= ======== Ratio of Earnings to Fixed Charges 2.99 2.20 3.12 3.14 3.14 3.52 7.29 ======== ======== ========= ========= ========= ========= ========
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