-----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, Ra7TMGpz4JtFmQZshc+hogaYbC4QTZETcw3IxC82nWRAHXj2MWWLXk79Qyncg9gs dGtYG7UxtjNBRCegXpZB1w== 0000950120-02-000596.txt : 20021112 0000950120-02-000596.hdr.sgml : 20021111 20021112170552 ACCESSION NUMBER: 0000950120-02-000596 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021112 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: 02817832 BUSINESS ADDRESS: STREET 1: 220 NW SECOND AVE CITY: PORTLAND STATE: OR ZIP: 97209 BUSINESS PHONE: 5032264211 10-Q 1 nwgform_10q.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 SEPTEMBER 30, 2002 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 [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 November 6, 2002, 25,536,463 shares of the registrant's Common Stock, $3-1/6 par value (the only class of Common Stock) were outstanding. NORTHWEST NATURAL GAS COMPANY September 30, 2002 Summary of Information Reported The registrant submits herewith the following information: PART I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements (1) Consolidated Statements of Income for the three-month and nine-month periods ended Sept. 30, 2002 and 2001 3 (2) Consolidated Statements of Earnings Invested in the Business for the nine-month periods ended Sept. 30, 2002 and 2001 4 (3) Consolidated Balance Sheets at Sept. 30, 2002 and 2001 and Dec. 31, 2001 5 (4) Consolidated Statements of Cash Flows for the nine-month periods ended Sept. 30, 2002 and 2001 7 (5) Consolidated Statements of Capitalization at Sept. 30, 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 26 Item 4. Controls and Procedures 26 PART II. OTHER INFORMATION Item 5. Other Information 26 Item 6. Exhibits and Reports on Form 8-K 27 Signature 27 Certifications 28 2 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (1) Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended Thousands, except per share amounts Sept. 30, Sept. 30, - --------------------------------------------------------------------------------------------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Operating revenues: Gross operating revenues $ 78,717 $ 78,359 $ 459,153 $ 413,850 Cost of sales 40,658 41,292 253,864 230,404 ---------- ---------- --------- --------- Net operating revenues 38,059 37,067 205,289 183,446 Operating expenses: Operations and maintenance 19,685 18,749 62,087 60,778 Taxes other than income taxes 6,781 6,265 25,635 22,224 Depreciation, depletion and amortization 13,035 12,567 38,633 36,982 ---------- ---------- --------- --------- Total operating expenses 39,501 37,581 126,355 119,984 ---------- ---------- --------- --------- Income (loss) from operations (1,442) (514) 78,934 63,462 Other income (expense) 248 240 (14,179) 837 Interest charges - net 8,652 8,306 25,378 24,492 ---------- ---------- --------- --------- Income (loss) before income taxes (9,846) (8,580) 39,377 39,807 Income tax expense (benefit) (3,838) (3,604) 13,930 14,011 ---------- ---------- --------- --------- Net income (loss) (6,008) (4,976) 25,447 25,796 Redeemable preferred and preference stock dividend requirements 582 595 1,767 1,807 ---------- ---------- --------- --------- Earnings (loss) applicable to common stock $ (6,590) $ (5,571) $ 23,680 $ 23,989 ========== ========== ========= ========= Average common shares outstanding 25,492 25,133 25,389 25,148 Basic earnings (loss) per share of common stock $ (0.26) $ (0.22) $ 0.93 $ 0.95 Diluted earnings (loss) per share of common stock $ (0.26) $ (0.22) $ 0.93 $ 0.95 Dividends per share of common stock $ 0.315 $ 0.31 $ 0.945 $ 0.93
-------------------------------------------------- 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)
Nine Months Ended Sept. 30, ------------------------------------------------- Thousands 2002 2001 - ---------------------------------------------------------------------------------------------------------------------- Earnings invested in the business: Balance at beginning of period $ 147,950 $ 134,189 Net income 25,447 $ 25,447 25,796 $ 25,796 Cash dividends paid: Redeemable preferred and preference stock (1,776) (1,816) Common stock (23,980) (23,377) Common stock repurchased - (2,688) --------- --------- Balance at end of period $ 147,641 $ 132,104 ========= ========= Accumulated other comprehensive income (loss): Balance at beginning of period $ (375) $ - Other comprehensive income: Change in net unrealized gains (losses) from price risk management activities - net of tax 291 291 - - ----------------------- --------------------- Comprehensive income $ 25,738 $ 25,796 ========== ======== Balance at end of period $ (84) $ - ========= =========
-------------------------------------------------- See Notes to Consolidated Financial Statements 4 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (3) Consolidated Balance Sheets
Sept. 30, Sept. 30, 2002 2001 Dec. 31, Thousands (Unaudited) (Unaudited) 2001 - -------------------------------------------------------------------------------------------------------------------- Assets: Plant and property: Utility plant $ 1,514,489 $ 1,455,695 $ 1,465,079 Less accumulated depreciation 548,696 507,284 514,629 ------------ ------------ ----------- Utility plant - net 965,793 948,411 950,450 ------------ ------------ ----------- Non-utility property 20,831 8,653 18,203 Less accumulated depreciation and depletion 3,976 3,523 3,677 ------------ ------------ ----------- Non-utility property - net 16,855 5,130 14,526 ------------ ------------ ----------- Total plant and property 982,648 953,541 964,976 ------------ ------------ ----------- Other investments 13,174 15,207 23,233 ------------ ------------ ----------- Current assets: Cash and cash equivalents 19,701 8,074 10,440 Accounts receivable 26,106 29,072 66,684 Allowance for uncollectible accounts (1,636) (1,290) (1,962) Accrued unbilled revenue 15,193 10,152 57,749 Inventories of gas, materials and supplies 55,367 54,492 49,337 Prepayments and other current assets 30,793 33,289 28,086 ------------ ------------ ----------- Total current assets 145,524 133,789 210,334 ------------ ------------ ----------- Regulatory assets: Income tax asset 48,469 49,515 48,469 Deferred gas costs receivable - 8,464 - Unrealized loss on non-trading derivatives 4,090 119,700 111,641 Unamortized loss on debt redemption 6,624 7,086 6,970 Other 5,782 5,824 5,302 ------------ ------------ ----------- Total regulatory assets 64,965 190,589 172,382 ------------ ------------ ----------- Other assets: Investment in life insurance 54,155 51,281 53,033 Other 12,229 10,656 11,064 ------------ ------------ ----------- Total other assets 66,384 61,937 64,097 ------------ ------------ ----------- Total assets $ 1,272,695 $ 1,355,063 $ 1,435,022 ============ ============ ===========
-------------------------------------------------- See Notes to Consolidated Financial Statements 5 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (3) Consolidated Balance Sheets
Sept. 30, Sept. 30, 2002 2001 Dec. 31, Thousands (Unaudited) (Unaudited) 2001 - -------------------------------------------------------------------------------------------------------------------- Capitalization and liabilities: Capitalization: Common stock $ 80,834 $ 79,671 $ 79,889 Premium on common stock 246,690 239,351 240,697 Earnings invested in the business 147,641 132,104 147,950 Accumulated other comprehensive income (loss) (84) - (375) ------------ ------------ ----------- Total common stock equity 475,081 451,126 468,161 Redeemable preference stock 25,000 25,000 25,000 Redeemable preferred stock 8,250 9,000 9,000 Long-term debt 446,033 398,449 378,377 ------------ ------------ ----------- Total capitalization 954,364 883,575 880,538 ------------ ------------ ----------- Current liabilities: Notes payable - 78,862 108,291 Accounts payable 45,400 39,900 70,698 Long-term debt due within one year 40,000 20,000 40,000 Taxes accrued 8,514 8,113 22,539 Interest accrued 10,655 9,690 3,658 Other current and accrued liabilities 25,379 24,309 28,396 ------------ ------------ ----------- Total current liabilities 129,948 180,874 273,582 ------------ ------------ ----------- Regulatory liabilities: Customer advances 1,818 1,956 1,985 Deferred gas costs payable 15,957 - 10,089 ------------ ------------ ----------- Total regulatory liabilities 17,775 1,956 12,074 ------------ ------------ ----------- Other liabilities: Deferred income taxes 138,130 142,485 130,424 Fair value of non-trading derivatives 4,026 119,700 111,868 Deferred investment tax credits 8,169 9,081 8,682 Other 20,283 17,392 17,854 ------------ ------------ ----------- Total other liabilities 170,608 288,658 268,828 ------------ ------------ ----------- Total capitalization and liabilities $ 1,272,695 $ 1,355,063 $ 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)
Nine Months Ended Sept. 30, --------------------------- Thousands 2002 2001 - ----------------------------------------------------------------------------------------------------------------------- Operating activities: Net income from operations $ 25,447 $ 25,796 Adjustments to reconcile net income to cash provided by operations: Depreciation, depletion and amortization 38,633 36,982 Gain on sale of assets (221) - Loss reserve for PGE acquisition costs 13,699 - Unrealized gain from price risk management activities 291 - Deferred income taxes and investment tax credits 7,193 372 Equity in (earnings) losses of investments (1,220) 182 Allowance for funds used during construction (406) (667) Deferred gas costs - net 5,868 8,509 Other (450) 2,489 ----------- ----------- Cash from operations before working capital changes 88,834 73,663 Changes in operating assets and liabilities: Accounts receivable - net of uncollectible accounts 40,252 32,971 Accrued unbilled revenue 42,556 35,467 Inventories of gas, materials and supplies (6,030) (7,609) Accounts payable (25,298) (70,798) Accrued interest and taxes (7,028) 7,041 Other current assets and liabilities (5,890) (9,784) ----------- ----------- Cash provided by operating activities 127,396 60,951 ----------- ----------- Investing activities: Acquisition and construction of utility plant assets (53,271) (55,822) Investment in non-utility property (2,628) (4) PGE acquisition costs (4,142) (1,229) Proceeds from sale of assets and other 2,109 366 ----------- ----------- Cash used in investing activities (57,932) (56,689) ----------- ----------- Financing activities: Common stock issued 5,094 3,665 Common stock repurchased - (5,792) Redeemable preferred stock retired (750) (750) Long-term debt issued 90,000 18,000 Long-term debt retired (20,500) (20,000) Change in short-term debt (108,291) 22,599 Cash dividend payments: Redeemable preferred and preference stock (1,776) (1,816) Common stock (23,980) (23,377) ----------- ----------- Cash used in financing activities (60,203) (7,471) ----------- ----------- Increase (decrease) in cash and cash equivalents 9,261 (3,209) Cash and cash equivalents - beginning of period 10,440 11,283 ----------- ----------- Cash and cash equivalents - end of period $ 19,701 $ 8,074 =========== =========== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 18,177 $ 17,582 Income taxes $ 27,912 $ 25,202 Supplemental disclosure of non-cash financing activities: Conversion to common stock: 7-1/4 % Series of Convertible Debentures $ 1,844 $ 341
-------------------------------------------------- See Notes to Consolidated Financial Statements 7 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION (5) Consolidated Statements of Capitalization
Sept. 30, 2002 Sept.30, 2001 Thousands, except share amounts (Unaudited) (Unaudited) Dec. 31, 2001 - ---------------------------------------------------------------------------------------------------------------------- Common Stock Equity: Common stock - par value $3-1/6 per share $ 80,834 $ 79,671 $ 79,889 Premium on common stock 246,690 239,351 240,697 Earnings invested in the business 147,641 132,104 147,950 Accumulated other comprehensive income (loss) (84) - (375) -------------- -------------- ------------- Total common stock equity 475,081 50% 451,126 51% 468,161 53% Redeemable Preference Stock: $6.95 Series, stated value $100 per share 25,000 2% 25,000 3% 25,000 3% Redeemable Preferred Stock: $7.125 Series, stated value $100 per share 8,250 1% 9,000 1% 9,000 1% Long-Term Debt: Medium-Term Notes ----------------- First Mortgage Bonds: 8.050% Series A due 2002 - 10,000 10,000 6.750% Series B due 2002 - 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 8,000 6.310% Series B due 2007 20,000 - - 6.800% Series B due 2007 9,500 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 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 5.820% Series B due 2032 30,000 - - Convertible Debentures 7-1/4% Series due 2012 6,533 8,449 8,377 ---------- ---------- ---------- 486,033 418,449 418,377 Less long-term debt due within one year 40,000 20,000 40,000 ---------- ---------- ---------- Total long-term debt 446,033 47% 398,449 45% 378,377 43% ---------- ---- ---------- ---- ---------- ---- Total Capitalization $ 954,364 100% $ 883,575 100% $ 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 material adjustments, including normal recurring accruals, that 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 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), 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 had been completed (see Note 7). 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 Sept. 30, 2002, NW Natural had the following derivatives outstanding covering its exposures to natural gas commodity prices and foreign currency exchange rates: a series of 23 natural gas price swap contracts, three natural gas call option contracts, and 69 foreign currency forward contracts. Each of these contracts was designated as a cash flow hedge. NW Natural also had one physical natural gas supply contract with an embedded derivative, which did not qualify as a normal sales or purchase contract. The estimated fair values and the notional amounts of derivative instruments outstanding were as follows:
Jan. 1, 2002 Sept. 30,2002 ------------------------------------------------------ Fair Value Notional Fair Value Notional Thousands Gain (Loss) Amount Gain (Loss) Amount --------------------------------------------------------------------------------------------------------------------- Fixed-price natural gas commodity swaps $ (110,935) $ 254,209 $ (6,105) $ 208,050 Fixed-price natural gas call options (832) 6,390 1,906 30,341 Physical natural gas supply contract with embedded option - - 213 4,621 Foreign currency forward purchase contracts (101) 10,223 (40) 6,536 ------------------------- ------------------------ Total $ (111,868) $ 270,822 $ (4,026) $ 249,548 ========================= ========================
9 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 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's adoption of SFAS No. 143, effective Jan. 1, 2003, is not expected to have a material impact on its financial condition or results of operations. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections," effective for financial statements issued for fiscal years beginning after May 15, 2002. SFAS No. 145, which updates, clarifies and simplifies existing accounting pronouncements, addresses the reporting of debt extinguishments and accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities, such as lease termination costs and certain employee severance costs, when they are incurred rather than at the date of a commitment to an exit or disposal plan. The primary effect of applying SFAS No. 146, which is effective for all exit or disposal activities initiated after Dec. 31, 2002, will be on the timing of recognition of costs associated with exit or disposal activities. The Company is currently evaluating the impact of the adoption of SFAS No. 145 and SFAS No. 146 upon its financial condition 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 Sept. 30, 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 condition 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 10 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 condition 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 interstate customers using storage capacity that has been developed in advance of core utility customers' requirements. The remaining segment, "Other", primarily consists of non-regulated investments in alternative energy projects in California and a Boeing 737-300 aircraft leased to Continental Airlines, and deferred costs relating to the acquisition of PGE (see Note 7). The following table presents information about the reportable segments for the three and nine months ended Sept. 30, 2002 and 2001. Inter-segment transactions are insignificant.
Three Months Ended Sept. 30, Nine Months Ended Sept. 30, ------------------------------------------------- ----------------------------------------------- Thousands Utility Gas Storage Other Total Utility Gas Storage Other Total - --------------------------------------------------------------------------------------------------------------------------------- 2002 - ---- Net operating revenues $ 36,519 $ 1,504 $ 36 $ 38,059 $ 199,434 $ 5,722 $ 133 $ 205,289 Depreciation, depletion and amortization 12,926 109 - 13,035 38,334 299 - 38,633 Other operating expenses 26,248 187 31 26,466 86,933 684 105 87,722 Income (loss) from operations (2,655) 1,208 5 (1,442) 74,167 4,739 28 78,934 Income from financial investments - - 605 605 - - 1,220 1,220 Net income (loss) (6,958) 424 526 (6,008) 30,147 2,402 (7,102) 25,447 Assets 1,238,215 16,500 17,980 1,272,695 1,238,215 16,500 17,980 1,272,695 2001 - ---- Net operating revenues $ 36,351 $ 662 $ 54 $ 37,067 $ 180,671 $ 2,654 $ 121 $ 183,446 Depreciation, depletion and amortization 12,543 24 - 12,567 36,910 72 - 36,982 Other operating expenses 24,891 130 (7) 25,014 82,863 216 (77) 83,002 Income (loss) from operations (1,083) 508 61 (514) 60,898 2,366 198 63,462 Income (loss) from financial investments - - 51 51 - - (182) (182) Net income (loss) (5,543) 280 287 (4,976) 23,762 1,365 669 25,796 Assets 1,330,281 4,847 19,935 1,355,063 1,330,281 4,847 19,935 1,355,063
6. Restated Stock Option Plan At the Company's Annual Meeting in May 2002, the shareholders approved an amendment to the Restated Stock Option Plan that increased the total number of shares authorized for option grants from 1,200,000 to 2,400,000 shares. At Sept. 30, 2002, options on 1,432,400 shares were available for grant and options to purchase 462,314 shares were outstanding. 11 7. Commitments and Contingencies Acquisition of Portland General Electric Company NW Natural recorded a loss contingency of $13.7 million at June 30, 2002 relating to transaction costs incurred in connection with its efforts to acquire PGE (see Part I, Item 2., "Application of Critical Accounting Policies - Contingencies" and "Acquisition of Portland General Electric Company," in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). This non-recurring charge, equivalent to $8.3 million after tax, or 32 cents a diluted share, was based on the Company's judgment that the acquisition was no longer considered probable. The amount of the loss reserve outstanding at Sept. 30, 2002 is $13.7 million, which is equivalent to NW Natural's deferred costs relating to the acquisition effort. NW Natural will re-evaluate the loss reserve if it resumes its acquisition efforts. Environmental Matters NW Natural has accrued all material loss contingencies relating to environmental matters which it believes to be probable of assertion and reasonably estimable. See Part II, Item 8., Note 12, "Notes to Consolidated Financial Statements," in the 2001 Form 10-K. Due to the preliminary nature of these environmental investigations, the range of any additional possible loss contingency cannot be currently estimated. The City of Portland has notified NW Natural that it is planning a sewer improvement project that would include excavation within the former site of a gas manufacturing plant (the Front Street site) that was owned and operated by a predecessor of the Company between 1860 and 1913. The preliminary assessment of this site performed by a consultant for NW Natural in 1987 indicated that it could be assumed that by-product tars may have been disposed of on the site. The report concluded, however, that it is likely that waste residues from the plant, if present on the site, were covered by deep fill during construction of the nearby seawall and probably have stabilized due to physical and chemical processes. Neither the City of Portland nor the Oregon Department of Environmental Quality has notified NW Natural whether a further investigation or potential remediation might be required on the site in connection with the sewer excavation. Available information is insufficient to determine either the total amount of liability, if any, or a range of any potential liability. 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, the Portland Harbor Superfund site and the Front Street 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. 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 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 wholly-owned subsidiary businesses: NNG Financial Corporation (Financial Corporation), and its wholly-owned subsidiaries Northwest Energy Corporation (Northwest Energy), and its wholly-owned subsidiary 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 and nine months ended Sept. 30, 2002 and 2001. Application of Critical Accounting Policies In preparing the Company's financial statements using generally accepted accounting principles in the United States of America, 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, 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), and loss contingencies. Contingencies The Company records loss contingencies when it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. Estimating probable losses requires analysis of uncertainties that often depend upon judgments about potential actions by third parties. In the normal course of business, NW Natural's accruals for loss contingencies include allowances for uncollectible accounts, environmental claims and property damage claims. In addition, NW Natural records receivables for anticipated recoveries under existing insurance contracts when recovery is probable. NW Natural recorded a loss contingency of $13.7 million at June 30, 2002 relating to transaction costs incurred in connection with its efforts to acquire Portland General Electric Company from Enron Corp. (Enron) (see Part I, Item 6., "Application of Critical Accounting Policies - Contingencies" and "Acquisition of Portland General Electric Company" in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002). This non-recurring charge, equivalent to $8.3 million after tax or 32 cents a diluted share, was based on the Company's judgment that the acquisition was no longer considered probable. The amount of the loss reserve outstanding at Sept. 30, 2002 is $13.7 million, which is equivalent to NW Natural's deferred costs relating to the acquisition effort. NW Natural will re-evaluate the loss reserve if it resumes its acquisition efforts. 13 Earnings and Dividends The Company incurred losses applicable to common stock of $6.6 million and $5.6 million for the quarters ended Sept. 30, 2002 and 2001, respectively. The loss applicable to common stock for the third quarter of 2002 was equivalent to 26 cents a diluted share, compared to a loss of 22 cents a share for the third quarter of 2001. A third quarter loss is customary for NW Natural, reflecting low summertime use of natural gas. NW Natural lost 29 cents a diluted share from gas utility operations in the third quarter of 2002, compared to a loss of 24 cents a share in the same period in 2001. Operating margin from gas utility operations was $0.2 million, or 1 percent, higher in the third quarter of 2002, but this improvement was more than offset by higher utility operating expenses. The Company reported consolidated earnings applicable to common stock of $23.7 million, or 93 cents a diluted share, for the nine months ended Sept. 30, 2002, compared to earnings of $24.0 million, or 95 cents a share, for the nine months ended Sept. 30, 2001. Results before non-recurring charges for the first nine months of 2002 were earnings applicable to common stock of $32.0 million, or $1.25 a diluted share. The reported results for the first nine months of 2002 include a non-recurring charge to a loss reserve for NW Natural's transaction costs incurred in its efforts to acquire PGE from Enron. The amount of the charge was $13.7 million, or $8.3 million after tax, equivalent to 32 cents a diluted share. The charge represents NW Natural's deferred costs including financial advisory and legal fees, loan arrangement fees and other costs relating to the acquisition effort. (See Note 7, "Commitments and Contingencies - Acquisition of Portland General Electric Company.") For the year-to-date, NW Natural earned $1.11 a diluted share from utility operations compared to earnings of 87 cents a share in the same period in 2001. Weather in the first nine months of the year was 4 percent colder than the 20-year average, but 2 percent warmer than in 2001. Residential and commercial customers' consumptions per heating degree day were an estimated 11 percent and 16 percent lower, respectively, during the first nine months of 2002 than average consumptions prior to the significant increases in gas commodity prices experienced and tracked into rates during 2000 and 2001. The Company estimates that the lower average consumptions per degree day reduced residential and commercial sales in the first nine months of 2002 by about 37 million therms and margin revenues by about $10.7 million, equivalent to 25 cents a share (see "Results of Operations - Regulatory Developments," below). NW Natural's share of the savings and margins realized from the gas commodity and upstream gas sales programs under its Purchased Gas Adjustment (PGA) tariff (see "Results of Operations - Cost of Gas," below) contributed $12.0 million of margin in the first nine months of 2002, equivalent to 28 cents a share of earnings. The equivalent result in the first nine months of 2001 was a negative $0.6 million, equivalent to a loss of 1 cent a share, primarily representing the absorption of $1.1 million in excess gas costs. Non-utility operating results for the quarter were earnings of 3 cents a share compared to earnings of 2 cents a share from these operations in 2001. Excluding the non-recurring charge taken in the second quarter of 2002, non-utility operating results year-to-date were earnings of 14 cents a share compared to earnings of 8 cents a share from these operations during the comparable period in 2001. See "Non-utility Operations," below. Dividends paid on common stock were 31.5 cents and 31 cents a share, respectively, for the three-month periods ended Sept. 30, 2002 and 2001. In October 2002, the Company's Board of Directors declared a quarterly dividend of 31.5 cents a share on the common stock, payable Nov. 15, 2002, to shareholders of record on Oct. 31, 2002. The current indicated annual dividend rate is $1.26 a share. 14 Results of Operations Regulatory Developments On Sept. 12, 2002, the Oregon Public Utility Commission (OPUC) approved a settlement that NW Natural entered into with respect to a conservation tariff filed in 2001. The new regulatory mechanisms implemented under the settlement are intended to help stabilize margin revenues to assure NW Natural of fixed cost recovery and more predictable earnings in the face of above or below normal consumption patterns. The approved settlement includes an elasticity adjustment which became effective on Oct. 1, 2002. This elasticity adjustment is intended to mitigate the impact of changes in customer consumption due to rate changes. NW Natural believes that reductions in recent years in its customers' gas consumptions per degree day were caused by the higher cost of purchased gas, which was passed on to customers as rate increases, and to efforts throughout the region to conserve energy. NW Natural estimates that lower average consumptions per degree day reduced margin from residential and commercial sales by $11 million, equivalent to 26 cents a share, in 2001, and by $10.7 million, equivalent to 25 cents a share, in the first nine months of 2002. Under the elasticity adjustment, NW Natural has increased rates by 2.6 cents a therm to residential customers and 1.3 cents a therm to commercial customers, effective Oct. 1, 2002. Also, under the settlement approved by the OPUC, NW Natural implemented a partial decoupling mechanism, effective Oct. 1, 2002. Decoupling mechanisms are used to break the link between a utility's earnings and the energy consumed by its customers so that the utility does not have an incentive to discourage customers' conservation efforts. The decoupling mechanism works by adding margin revenues during periods when customer consumptions are lower than baseline consumption or by deducting margin revenues when higher than the baseline. Under the partial decoupling mechanism, a balancing account is established whereby NW Natural will defer and subsequently amortize 90 percent of the margin revenue differentials between baseline usage by its residential and commercial customers and weather-normalized actual usage by these customers. The deferred amounts are treated as adjustments to be refunded or collected in future periods. Baseline consumption is based on current customer consumption patterns, adjusted for consumptions resulting from new customers. NW Natural will continue to bear the risk of weather-related variations in customer usage. The partial decoupling mechanism will expire at the end of September 2005 unless the OPUC approves an extension based on the results of an independent study to measure the mechanism's effectiveness. In connection with the settlement, NW Natural agreed to adopt certain service quality measures that establish the Company's performance goal for minimizing at-fault complaints. If the Company exceeds the prescribed level of at-fault complaints, it will be subject to penalties. Under the settlement, NW Natural agreed to file a general rate case by the end of November 2002, enabling a full review of NW Natural's cost and rate structures, including an assessment of the costs related to the extension of the Company's South Mist Pipeline, with new rates expected to be implemented in the third or fourth quarter of 2003. The amount of the general rate increase to be requested has not been determined. On Sept. 26, 2002, the OPUC approved rate decreases effective Oct. 1, 2002 averaging 14 percent for NW Natural's Oregon sales customers, and on Sept. 25, 2002, the Washington Utilities and Transportation Commission (WUTC) approved rate decreases effective Oct. 1, 2002 averaging 25 percent for NW Natural's Washington sales customers. These rate decreases reflect changes in NW Natural's purchased gas costs, the application of temporary rate adjustments to amortize regulatory balancing accounts, and the removal of temporary rate 15 adjustments effective the previous year. These changes are all part of NW Natural's annual PGA tariff filing (see "Comparison of Gas Operations - Cost of Gas," below). Comparison of Gas Operations The following table summarizes the composition of gas utility volumes and revenues for the three and nine months ended Sept. 30, 2002 and 2001:
Three Months Ended Nine Months Ended Sept. 30, Sept. 30, -------------------------------------------------------- (Thousands, except customers and degree days) 2002 2001 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- Gas Sales and Transportation Volumes - Therms: Residential and commercial sales 53,100 54,505 446,392 440,483 Unbilled volumes 1,940 (485) (44,589) (45,386) ---------- ----------- ------------ ---------- Weather-sensitive volumes 55,040 54,020 401,803 395,097 Industrial firm sales 10,544 17,962 49,974 60,256 Industrial interruptible sales 2,444 18,969 22,724 47,528 ---------- ----------- ------------ ---------- Total gas sales 68,028 90,951 474,501 502,881 Transportation deliveries 107,927 85,328 325,275 289,667 ---------- ----------- ------------ ---------- Total volumes sold and delivered 175,955 176,279 799,776 792,548 ========== =========== ============ ========== Utility Operating Revenues - Dollars: Residential and commercial sales $ 58,954 $ 50,830 $ 423,509 $ 369,117 Unbilled revenues 2,062 (179) (42,564) (34,163) ---------- ----------- ------------ ---------- Weather-sensitive revenues 61,016 50,651 380,945 334,954 Industrial firm sales 8,198 10,451 35,089 35,117 Industrial interruptible sales 1,595 9,347 14,166 23,845 ---------- ----------- ------------ ---------- Total gas sales 70,809 70,449 430,200 393,916 Transportation revenues 5,984 5,777 19,867 14,495 Other revenues 363 (41) 2,442 (2,289) ---------- ----------- ------------ ---------- Total utility operating revenues $ 77,156 $ 76,185 $ 452,509 $ 406,122 ========== =========== ============ ========== Cost of gas sold $ 40,637 $ 39,834 $ 253,075 $ 225,451 ========== =========== ============ ========== Net operating revenues (utility margin) $ 36,519 $ 36,351 $ 199,434 $ 180,671 ========== =========== ============ ========== Total number of customers (end of period) 546,644 527,719 546,644 527,719 ========== =========== ============ ========== Actual degree days 75 82 2,724 2,768 ========== =========== ============ ========== 20-year average degree days 97 98 2,607 2,595 ========== =========== ============ ==========
16 NW Natural refunded deferred gas cost savings to its Oregon customers through billing credits in June 2002. The refunds were the customers' 67 percent portion of gas cost savings realized between October 2001 and March 2002, which had been deferred, with interest, pursuant to NW Natural's PGA tariff in Oregon (see "Cost of Gas," below). The refunds reduced gross operating revenues for the first nine months of 2002 by $30.4 million, cost of gas by $29.5 million and deferred gas costs payable by $29.5 million. The refunds also reduced margin revenues by about $0.9 million, but this amount was largely offset by corresponding reductions in franchise tax expense and uncollectible expense with the result that the effect of the refunds on net income was negligible. Residential and Commercial NW Natural continues to experience rapid customer growth, with 18,925 customers added since Sept. 30, 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 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 third quarter of 2002 were 23 percent warmer than average and 9 percent warmer than in the third quarter of 2001. For the first nine months of 2002, weather was 4 percent colder than average, but 2 percent warmer than in the first nine months of 2001. Volumes of gas sold to residential and commercial customers were 1.0 million therms, or 1.9 percent, higher in the third quarter of 2002 than in the third quarter of 2001. Related revenues increased $10.4 million, or 20.5 percent. Year-to-date, volumes of gas sold to residential and commercial customers were 6.7 million therms, or 1.7 percent, higher than in the same period of 2001. Excluding the impact of the refunds in the nine months ended Sept. 30, 2002, related revenues increased $71.9 million, or 21.5 percent, primarily due to PGA tariff 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 Sept. 30, 2001 contributed an estimated 11.2 million therms in sales volumes and $4.8 million in additional margin during the first nine months of 2002. In order to match revenues with related purchased gas costs, NW Natural records unbilled revenues for gas delivered and sold to customers, but not yet billed, 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 third quarter of 2002 decreased 1.3 million therms, or 1 percent, from 122 million therms in the third quarter of 2001. However, combined margins from these customers decreased $3.3 million, or 27 percent, from $12.4 million in the third quarter of 2001. Year-to-date, volumes of gas delivered to industrial and electric generation customers were 398 million therms compared to 397 million therms in the first nine months of 2001. Related margins increased 3 percent, from $34.5 million in 2001 to $35.5 million in 2002. 17 Excluding volumes delivered to electric generation customers, volumes delivered to end-use industrial sales and transportation customers in the third quarter of 2002 totaled 121 million therms. This was 4.8 million therms, or 4 percent, higher than in the third quarter of 2001. Related margins decreased, however, from $10.3 million to $9.1 million, due to migrations of some industrial customers from higher margin firm service to lower margin interruptible service. Volumes delivered to industrial sales and transportation customers in the first nine months of 2002 increased 11 percent from 353 million therms in 2001 to 393 million therms in 2002. Margins to these customers decreased $1.0 million reflecting the migration of industrial customers to lower margin rate schedules. In the electric generation segment of the industrial market, volumes delivered in the third quarter of 2002 totaled 0.1 million therms. This was 6.0 million therms, or 99 percent, lower than in the third quarter of 2001. Margin from the electric generation market was lower by $2.2 million, or 5 cents a share, in the third quarter of 2002. Contracts for service to two customers in this market were for one-year terms, going into effect in the second half of 2001 and expiring at the end of the second quarter of 2002. Year-to-date, volumes delivered to electric generation customers decreased from 45.9 million therms in 2001 to 3.4 million therms in 2002. The related margin increased from $2.6 million in 2001 to $4.6 million in 2002, an increase of 79 percent. One customer served under a contract with low fixed and relatively high volumetric charges used 36.8 million therms in the first nine months of 2001 and 3.0 million therms in the first nine months of 2002. On the other hand, the two electric generation customers added in mid-2001 used only 0.4 million therms in the first six months of 2002, but generated $4.5 million in margin as compared to $2.2 million in 2001 because they were served on contracts with high fixed and low volumetric charges. Other revenues include amortizations from regulatory accounts and miscellaneous fee income. Other revenues increased $0.4 million during the third quarter of 2002 compared to the third quarter of 2001. Year-to-date, other revenues increased $4.7 million compared to the first nine months of 2001. Factors contributing to the increase in the first nine months of 2002 were reduced amortizations from regulatory accounts related to conservation programs ($2.8 million), refunds due to sharing of income from interstate gas storage service ($1.2 million), reduced property tax amortizations ($0.2 million), higher revenues from customer late payment and reconnection fees ($0.1 million) and increased miscellaneous revenues ($0.3 million). Cost of Gas The cost per therm of gas sold was 36 percent higher during the third quarter of 2002 than in the third quarter of 2001. Year-to-date, the cost per therm of gas sold was 19 percent higher than the first nine months of 2001. 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 nine months ended Sept. 30, 2002 include an adjustment reducing cost of gas by $29.5 million (see "Comparison of Gas Operations," above). Excluding the impact of this adjustment, cost per therm of gas sold was 33 percent higher in the first nine months of 2002 compared to the same period in 2001, primarily due to higher prices in the natural gas commodity market. Results for the nine months ended Sept. 30, 2002 also include adjustments reducing cost of gas by $2.9 million to correct the amount of deferred expenses related to the recovery of pipeline demand charges under NW Natural's PGA mechanism. These adjustments contributed 7 cents a share to earnings in the second quarter. The corrected methodology will continue to be applied in the future. NW Natural uses a natural gas commodity hedge program under the terms of its Derivatives Policy (see Part II, Item 7., "Management's Discussion and Analysis of Results of Operations and Financial Condition," and Item 8., Note 11, "Notes to Consolidated Financial Statements," in the Company's 2001 Form 10-K) to help manage its variable 18 price gas commodity contracts. NW Natural recorded net losses from commodity swap and call option contracts of $24.9 million in the third quarter of 2002, compared to net losses of $8.7 million in the third quarter of 2001. Year-to-date, NW Natural realized net losses of $70.3 million, compared to net gains of $78.2 million during the first nine months of 2001. Gains (losses) from commodity hedges are recorded as reductions (increases) to the cost of gas and the majority of these hedge contracts are included in annual PGA rate adjustments. Under NW Natural's PGA tariff in Oregon, 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 is 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 third quarter of 2002 contributed $1.6 million of margin, equivalent to 4 cents a share of earnings. The equivalent result in the third quarter of 2001 was shared savings and margins of $0.2 million, equivalent to less than 1 cent a share of earnings. Year-to-date, net savings realized from gas commodity purchases contributed $12.0 million of margin, equivalent to 28 cents a share of earnings, and $24.4 million of deferred gas costs credits to be refunded to customers. The equivalent results in the first nine months of 2001 were a negative $0.6 million of margin, equivalent to a loss of 1 cent a share, and $1.1 million of deferred gas cost charges to be collected from customers. 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 $2.3 million and $1.6 million for the first nine months of 2002 and 2001, respectively. Non-utility Operations At Sept. 30, 2002 and 2001, the Company had two direct wholly-owned subsidiaries, Financial Corporation and Northwest Energy. Northwest Energy was formed in 2001 to serve as the holding company for NW Natural and PGE if the acquisition of PGE had been completed. A loss reserve for costs relating to the acquisition of PGE ($13.7 million, before tax) was recorded by Northwest Energy in the second quarter of 2002. Financial Corporation Financial Corporation's operating results for the three months ended Sept. 30, 2002 and 2001, were net income of $0.5 million and $0.3 million, respectively, equivalent to 1 cent a share in both periods. Year-to-date, operating results in 2002 were net income of $1.2 million compared to net income of $0.6 million for the comparable period in 2001. The increase in year-to-date net income from 2001 to 2002 was due to a $0.6 million improvement in the operating results of Financial Corporation's investments in solar and wind-power electric projects in California. Financial Corporation's net assets at Sept. 30, 2002 were $9.1 million, compared to $7.8 million at Sept. 30, 2001. Gas Storage Services NW Natural realized net income from gas storage services, after regulatory sharing and income taxes, of $0.4 million, or 2 cents a share, in the three months ended Sept. 30, 2002, up from $0.3 million, or 1 cent a share, in the three months ended Sept. 30, 2001. Year-to-date operating results were net income of $2.4 million, compared to net income of $1.4 million for the same period in 2001. Gas storage services are provided to upstream interstate customers using storage capacity that has been developed in advance of core utility customers' requirements. NW Natural retains 80 percent of the income before tax from storage services and 19 credits the remaining 20 percent to a deferred regulatory account for sharing with its core utility customers. Operating Expenses Operations and Maintenance Consolidated operations and maintenance expenses increased $0.9 million, or 5 percent, and $1.3 million, or 2 percent, in the three- and nine- month periods ended Sept. 30, 2002, respectively, compared to the same periods in 2001. In the three-month period, the increase was due to higher expenses for pensions ($0.4 million), health benefits ($0.4 million), and customer service ($0.3 million), which were partially offset by lower information technology costs ($0.4 million). In the nine-month period, the increase was due to higher expenses for pensions ($2.0 million), customer service ($0.7 million) and health benefits ($0.6 million), partially offset by lower expenses for information technology ($1.7 million) and market services ($0.4 million). The Company expects to incur continued increases in pension costs, reflecting changes in the market values of its retirement plan assets, and health care costs. Taxes Other than Income Taxes Taxes other than income taxes, which are principally comprised of property, franchise and payroll taxes, were $3.4 million, or 15 percent, higher in the first nine months of 2002 compared to the same period in 2001. Property taxes increased $1.5 million, or 18 percent, due to higher property tax rates and utility plant additions. Franchise taxes, which are based on gross revenues, increased $1.4 million, or 16 percent, reflecting higher revenues due to NW Natural's growing customer base and rate increases effective in late 2001. Regulatory fees and payroll tax expenses also increased slightly. Depreciation, Depletion and Amortization The Company's depreciation, depletion and amortization expense in the nine months ended Sept. 30, 2002, increased $1.7 million, or 4 percent, compared to the first nine months of 2001. The increase was primarily due to a 5 percent increase in utility plant in service. Depreciation, depletion and amortization expense was approximately 3 percent of average plant and property for both of the nine-month periods ended Sept. 30, 2002 and 2001. Other Income (Expense) The Company's other income (expense) decreased $15.0 million in the nine months ended Sept. 30, 2002, compared to the same period in 2001, primarily due to a $13.7 million charge to a loss reserve for costs incurred in the effort to acquire PGE. Excluding the charge for PGE acquisition costs, other income (expense) decreased $1.3 million in the nine-month period ended Sept. 30, 2002 compared to the same period in 2001. This decrease was due to an increase in interest expense on deferred regulatory account balances ($2.5 million), partially offset by an increase in earnings from investments ($1.4 million). The first nine months of 2002 included interest expense of $2.3 million on deferred regulatory account balances, compared to interest income of $0.2 million in the first nine months of 2001. Interest Charges - net The Company's net interest expense increased by $0.9 million, or 4 percent, in the nine months ended Sept. 30, 2002, compared to the same period in 2001, primarily due to higher average balances of long-term debt outstanding. 20 Income Taxes The effective corporate income tax rates for the three months ended Sept. 30, 2002 and 2001, were 39.0 percent and 42.0 percent, respectively. Year-to-date, the effective corporate income tax rate was 35.4 percent, compared to 35.2 percent for the first nine months of 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 "Liquidity and Capital Resources," below, and Part II, Item 8., Notes 3 and 5, "Notes to Consolidated Financial Statements," in the 2001 Form 10-K). Liquidity and Capital Resources At Sept. 30, 2002, the Company had $19.7 million in cash and cash equivalents compared to $8.1 million at Sept. 30, 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, 2004, committed lines of credit with four commercial banks (see "Lines of Credit," below). On Dec. 31, 2002, NW Natural will redeem all 250,000 outstanding shares of its $6.95 Series of Redeemable Preference Stock at $100 per share plus accrued dividends. NW Natural expects to use its short-term cash or to borrow through its commercial paper program to fund this redemption. 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. 21 The following table shows NW Natural's contractual obligations (in thousands) by maturity and type of obligation:
Commercial Paper Preferred Total Payments Due in Years Supported and Capital Long-term Gas Contractual by Lines Preference Long-term Lease Operating Supply Purchase Cash Ending Sept. 30, of Credit Stock Debt Obligations Leases Obligations Obligations - ------------------------------------------------------------------------------------------------------------------------ 2003 $ - $ 25,750 $ 50,000 $ 328 $ 2,760 $ 81,915 $ 160,753 2004 - 750 - 43 2,672 50,189 53,654 2005 - 750 - - 2,602 45,442 48,794 2006 - 750 15,000 - 1,582 42,287 59,619 2007 - 750 38,000 - 156 41,912 80,818 ------------------------------------------------------------------------------------------------ Total 2003 - 2007 - 28,750 103,000 371 9,772 261,745 403,638 Thereafter - 4,500 383,033 - 3,371 219,321 610,225 Less: imputed interest - - - (17) - (84,893) (84,910) ------------------------------------------------------------------------------------------------ Total $ - $ 33,250 $ 486,033 $ 354 $ 13,143 $ 396,173 $ 928,953 ================================================================================================
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 "Lines of Credit," 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 no commercial paper notes outstanding at Sept. 30, 2002, compared to $78.9 million and $108.3 million at Sept. 30, 2001 and Dec. 31, 2001, respectively. Financial Corporation had no commercial paper notes outstanding at Sept. 30, 2002 or 2001, or at Dec. 31, 2001. Lines of Credit NW Natural has renewed its lines of credit effective Oct. 1, 2002, with four commercial banks totaling $150 million. Half of the credit with each bank, totaling $75 million, is committed and available through Sept. 30, 2003, and the other $75 million is committed and available through Sept. 30, 2004. In addition, Financial Corporation has available through Sept. 30, 2003, 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, if any, are based on current market rates. There were no outstanding balances on either the NW Natural or Financial Corporation lines of credit as of Dec. 31, 2001, or Sept. 30, 2002 or 2001. 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 senior unsecured debt ratings. A change in NW Natural's credit 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 that NW Natural maintain an indebtedness to total capitalization ratio, as defined in the credit agreements, of 65 percent or less. Also, effective Oct. 1, 2002, the lines of credit require NW Natural to maintain a net worth at least equal to 80 percent of its net worth at Sept. 30, 2002, plus 50 percent 22 of the Company's net income for each subsequent fiscal quarter. Failure to comply with either of these covenants would entitle the banks to terminate their lending commitments and to accelerate the maturity of all amounts outstanding. At Sept. 30, 2002, NW Natural was in compliance with the debt to total capital covenant and, had it been in effect, would have been in compliance with the minimum net worth covenant. Cash Flows Operating Activities Cash provided by operating activities was $127.4 million in the nine months ended Sept. 30, 2002, compared to $61.0 million in the first nine months of 2001. The 109 percent increase was due to a $15.2 million increase in cash from operations before working capital changes and a $51.3 million decrease in working capital requirements. The increase in cash from operations before working capital changes was primarily due to higher net income excluding the non-cash loss reserve for PGE acquisition costs ($13.7 million), combined with an increase in deferred income taxes and investment tax credits ($6.8 million) and an increase in depreciation, depletion and amortization ($1.7 million), partially offset by a decrease in deferred gas costs ($2.6 million) and an increase in earnings of investments accounted for on an equity basis ($1.4 million). The decrease in working capital requirements was primarily due to a smaller reduction in accounts payable ($45.5 million), a larger reduction in accounts receivable ($7.3 million) and a larger reduction in accrued unbilled revenue ($7.1 million), partially offset by a decrease in accrued interest and taxes in 2002 compared to an increase in these items in 2001 ($14.1 million). NW Natural's refunds to customers of approximately $30.4 million of deferred gas cost savings in the nine months ended Sept. 30, 2002 (see "Results of Operations - Comparison of Gas Operations," above) reduced cash flows from operations by that amount, but the reduction was more than offset by the other factors affecting cash flows cited above. The Job Creation and Worker Assistance Act of 2002 (the Act), enacted on March 9, 2002, allows an additional first-year tax deduction for depreciation equal to 30 percent of the adjusted basis of "qualified property." The extra 30 percent depreciation deduction in the first year is an acceleration of depreciation deductions that otherwise would have been taken in the later years of an asset's recovery period. Special rules apply as to the application of this new provision. However, in general, the extra 30 percent depreciation deduction is available for most personal property acquired after Sept. 10, 2001, and before Sept. 11, 2004. The Company elected to apply the first-year 30 percent depreciation deduction effective with the filing of its 2001 federal income tax return in September 2002. The Company anticipates enhanced cash flow from reduced income taxes, totaling an estimated $25 million to $30 million, during the effective period of the Act, based on actual or projected plant investments between Sept. 11, 2001 and Sept. 10, 2004. The Company has lease and purchase commitments relating to its operating activities that are financed with cash flows from operations (see "Liquidity and Capital Resources," above, and Part II, Item 8., Note 12, "Notes to Consolidated Financial Statements," in the 2001 Form 10-K). Investing Activities Cash requirements for investing activities in the first nine months of 2002 totaled $57.9 million, up from $56.7 million in the same period of 2001. The increase was primarily due to $4.1 million in such costs relating to the proposed acquisition of PGE, compared to $1.2 million in such costs during the first nine months of 2001. Cash requirements for utility construction totaled $53.3 million, down $2.6 million from $55.8 million in the first nine months of 2001. 23 NW Natural's utility construction expenditures are estimated to total $84 million for 2002. Over the five-year period 2002 through 2006, these expenditures are estimated at between $500 million and $600 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. The Company entered into a stipulation with the OPUC in 2001 for an enhanced pipeline safety program that includes an accelerated bare steel replacement program and a geo-hazard safety program. The bare steel replacement program accelerates the replacement of the Company's bare steel piping over 20 years instead of 40 years. The geo-hazard safety program includes the identification, assessment and remediation of risks to the Company's piping infrastructure created by landslides, washouts, earthquakes or similar occurrences. The stipulation allowed the Company to receive deferred accounting rate treatment commencing Oct. 1, 2002, for costs associated with the programs. Investments in non-utility property during the first nine months of 2002 totaled $2.6 million, up from a negligible amount in the same period of 2001. The increase was due to greater investments in facilities used for underground gas storage, a business segment treated for accounting purposes as separate from the Company's utility operations (see Note 5, "Notes to Consolidated Financial Statements," above, and Part II, Item 8., Note 2, "Notes to Consolidated Financial Statements," in the 2001 Form 10-K). The $4.1 million in costs relating to the proposed acquisition of PGE included financial advisory and legal fees, loan arrangement fees and other costs. In June 2002, the Company recorded a non-recurring charge to a loss reserve ($13.7 million) for all of NW Natural's costs incurred and deferred through June 30, 2002 in its efforts to acquire PGE from Enron. (See "Application of Critical Accounting Policies - Contingencies," above.) Financing Activities Cash used in financing activities in the first nine months of 2002 totaled $60.2 million, an increase of $52.7 million from the first nine months of 2001. The increase was primarily due to a larger use of funds to pay down long-term and short-term debt, partially offset by a larger amount of new long-term debt issued. NW Natural sold $60 million of its secured Medium-Term Notes, Series B (MTNs), in March 2002 and another $30 million in September 2002 and used the proceeds, together with internally generated cash in the first nine months of 2002, to reduce short-term debt ($108.3 million), retire long-term debt ($10 million) and provide cash for investments in utility plant. Proceeds from the sale of $18 million of Medium-Term Notes, Series B, in June 2001, together with a $22.6 million increase in short-term borrowings in the first nine months of 2001, were used to reduce long-term debt ($20 million) and provide cash for investments in utility plant. 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 during the first six months of 2001. No shares were repurchased during the six months ended Dec. 31, 2001, while the Company was negotiating the purchase of PGE, or during the nine months ended Sept. 30, 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. 24 Ratios of Earnings to Fixed Charges For the nine months and 12 months ended Sept. 30, 2002, and the 12 months ended Dec. 31, 2001, the Company's ratios of earnings to fixed charges, computed using the Securities and Exchange Commission method, were 2.46, 3.09 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, the maintenance of pipeline integrity, present or prospective wholesale and retail competition, changes in tax laws and policies and changes in and compliance with environmental and safety laws and policies; (ii) weather conditions and other natural phenomena; (iii) unanticipated population growth or decline, and changes in market demand and demographic patterns; (iv) competition for retail and wholesale customers; (v) pricing of natural gas relative to other energy sources; (vi) risks resulting from uninsured property damage to Company property, intentional or otherwise; (vii) unanticipated changes in interest or foreign currency exchange rates or in rates of inflation; (viii) economic factors that could cause a severe downturn in certain key industries, thus affecting demand for natural gas; (ix) unanticipated changes in operating expenses and capital expenditures; (x) unanticipated changes in future liabilities relating to employee benefit plans; (xi) capital market conditions, including its effect on pension costs; (xii) competition for new energy development opportunities; (xiii) legal and administrative proceedings and settlements; and (xiv) risks relating to the potential negotiation of a new agreement for the acquisition of PGE, including risks and uncertainties relating to the impact of Enron's bankruptcy on PGE, obtaining regulatory approvals, securing financing at reasonable interest rates and realizing expected synergies and other benefits from the acquisition, if completed. 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. 25 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. Item 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Within the 90 days prior to the date of the filing of this report, the Company evaluated, under the supervision and with the participation of the Company's management, including the Company's Chairman and Chief Executive Officer, and the Company's Senior Vice President, Finance, and Chief Financial Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chairman and Chief Executive Officer, together with the Company's Senior Vice President, Finance, and Chief Financial Officer, concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic filings with the Securities and Exchange Commission. (b) Changes in Internal Controls. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation. PART II. OTHER INFORMATION Item 5. OTHER INFORMATION On Sept. 24, 2002, the Audit Committee of the Board of Directors pre-approved certain ongoing non-audit related services performed by the Company's independent auditor, PricewaterhouseCoopers LLP, and established a procedure for the pre-approval of any future non-audit related services performed by its auditor. The non-audit services approved included: o Audits of the Company's Retirement Plans, its Retirement K Savings Plan and its Cafeteria Plan (Plan No. 507) that are required under provisions of the Employee Retirement Income Security Act of 1974, as amended, and audits of the Company's transfer agent and registrar functions that are required by the New York Stock Exchange; o Tax compliance and other tax services, including technical tax guidance, assistance and technical support, in an amount not to exceed $25,000 in any calendar year; and o Services related to the Company's issuance of securities, including the issuance of comfort letters and consents relating to the issuance of its Medium-Term Notes; and o Such other non-audit services, in an amount not to exceed $5,000 for each such service, as may be deemed necessary by management to support normal business operations. The Committee determined that the ongoing non-audit services would be reviewed annually concurrently with the engagement of the auditor. 26 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 10(a) - Northwest Natural Gas Company Restated Stock Option Plan, as amended May 23, 2002 Exhibit 10(b) - Northwest Natural Gas Company Non-Employee Directors Stock Compensation Plan, as amended September 26, 2002, effective October 1, 2002 Exhibit 11 - Statement re: Computation of Per Share Earnings Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges Exhibit 99 - Certificate Pursuant to Section 906 of Sarbanes - Oxley Act of 2002 (b) Reports on Form 8-K No Current Reports on Form 8-K were filed during the third quarter of 2002. However, on Oct. 9, 2002, the Company filed its Current Report on Form 8-K, dated Sept. 12, 2002, relating to (1) the appointment of a new chief executive officer and election of a director, (2) the renewal of lines of credit and (3) the approval by the Oregon Public Utility Commission of a settlement in the Company's conservation tariff proceeding. 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: November 12, 2002 /s/ Stephen P. Feltz ----------------------------------- Stephen P. Feltz Principal Accounting Officer Treasurer and Controller 27 CERTIFICATIONS I, Richard G. Reiten, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Northwest Natural Gas Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Richard G. Reiten ------------------------------------- Richard G. Reiten Chairman of the Board and Chief Executive Officer 28 I, Bruce R. DeBolt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Northwest Natural Gas Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Bruce R. DeBolt -------------------------------- Bruce R. DeBolt Senior Vice President, Finance, and Chief Financial Officer 29 NORTHWEST NATURAL GAS COMPANY EXHIBIT INDEX To Quarterly Report on Form 10-Q For Quarter Ended September 30, 2002 Exhibit Document Number Northwest Natural Gas Company Restated Stock Option Plan, as amended May 23, 2002 10(a) Northwest Natural Gas Company Non-Employee Directors Stock Compensation Plan, as amended September 26, 2002, effective October 1, 2002 10(b) Statement re: Computation of Per Share Earnings 11 Computation of Ratios of Earnings to Fixed Charges 12 Certificate Pursuant to Section 906 of Sarbanes - Oxley Act of 2002 99 EX-10 3 ex10a.txt EXHIBIT 10(A) - RESTATED STOCK OPTION PLAN EXHIBIT 10(a) NORTHWEST NATURAL GAS COMPANY RESTATED STOCK OPTION PLAN (as amended as of May 23, 2002) 1. PURPOSE. The purpose of this Restated Stock Option Plan, formerly referred to as the 1985 Stock Option Plan (the "Plan"), is to enable Northwest Natural Gas Company (the "Company") to attract and retain experienced and able employees and to provide additional incentive to these employees to exert their best efforts for the Company and its shareholders. 2. SHARES SUBJECT TO THE PLAN. Except as provided in paragraph 10, the total number of shares of the Company's Common Stock, $3-1/6 par value per share ("Common Stock"), covered by all options granted under the Plan shall not exceed 2,400,000 authorized but unissued or reacquired shares. If any option under the Plan expires or is cancelled or terminated and is unexercised in whole or in part, the shares allocable to the unexercised portion shall again become available for options under the Plan. 3. DURATION OF THE PLAN. The Plan shall continue until options have been granted and exercised with respect to all of the shares available for the Plan under paragraph 2 (subject to any adjustments under paragraph 10), unless sooner terminated by action of the Board of Directors. The Board of Directors has the right to suspend or terminate the Plan at any time except with respect to then outstanding options. 4. ADMINISTRATION. 4.1 BOARD OF DIRECTORS. The Plan shall be administered by the Board of Directors, which shall determine and designate from time to time the employees to whom options shall be granted and the number of shares, option price, the period of each option, the time or times at which options may be exercised, and any other term of the grant, all of which shall be set forth in an option agreement between the Company and the optionee. Subject to the provisions of the Plan, the Board of Directors may from time to time adopt rules and regulations relating to administration of the Plan, and the interpretation and construction of the provisions of the Plan by the Board of Directors shall be final and conclusive. 4.2 COMMITTEE. The Board of Directors may delegate to any committee of the Board of Directors (the "Committee") any or all authority for administration of the Plan. Members of the Committee are not eligible to receive an option pursuant to the Plan while on the Committee. If a Committee is appointed, all references to the Board of Directors in the Plan shall mean and relate to the Committee except (i) as otherwise provided by the Board of Directors and (ii) that only the Board of Directors may terminate or amend the Plan as provided in paragraphs 3 and 11. 5. ELIGIBILITY; GRANTS. 5.1 ELIGIBILITY. Options may be granted under the Plan only to officers and other employees (including employees who are directors) of the Company or any parent or subsidiary of the Company. 5.2 GRANTS. Options granted under the Plan may be Incentive Stock Options as defined in ss.422 of the Internal Revenue Code of 1986, as amended ("IRC"), or Non-Statutory Stock Options. A Non-Statutory Stock Option means an option other than an Incentive Stock Option. The Board of Directors has the sole discretion to determine which options shall be Incentive Stock Options and which options shall be Non-Statutory Stock Options, and, at the time of grant, it shall specifically designate each option granted under the Plan as an Incentive Stock Option or a Non-Statutory Stock Option. In the case of Incentive Stock Options, all terms shall be consistent with the requirements of the IRC and applicable regulations. No Incentive Stock Option may be granted under the Plan on or after the tenth anniversary of the last action by the Board of Directors approving an increase in the number of shares available for issuance under the Plan, which action was subsequently approved within 12 months by the shareholders. 6. LIMITATION ON AMOUNT OF GRANTS. No employee may be granted options under the Plan for more than 200,000 shares of Common Stock in any fiscal year. 7. OPTION PRICE. The option price per share under each option granted under the Plan shall be determined by the Board of Directors, but the option price for an Incentive Stock Option and a Non-Statutory Stock Option shall be not less than 100 percent of the fair market value of the shares covered by the option on the date the option is granted. Except as otherwise expressly provided, for purposes of the Plan, the fair market value shall be deemed to be the closing sales price for the Common Stock as reported by the New York Stock Exchange and published in the Wall Street Journal for the day preceding the date of grant, or such other fair market value of the Common Stock as determined by the Board of Directors of the Company. 8. DURATION OF OPTIONS. Each option granted under the Plan shall continue in effect for the period fixed by the Board of Directors, except that no Incentive Stock Option shall be exercisable after the expiration of 10 years from the date it is granted and no Non-Statutory Stock Option shall be exercisable after the expiration of 10 years plus seven days from the date it is granted. 9. NONASSIGNABILITY. Except as otherwise provided by the Board of Directors, each option granted under the Plan by its terms shall be nonassignable and nontransferable by the optionee except by will or by the laws of descent and distribution of the state or country of the optionee's domicile at the time of death, and each option by its terms shall be exercisable during the optionee's lifetime only by the optionee. 10. CHANGES IN CAPITAL STRUCTURE. If the outstanding shares of Common Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation, by reason of any reorganization, merger, consolidation, plan of exchange, recapitalization, reclassification, stock split-up, combination of shares, or dividend payable in shares, appropriate adjustment shall be made by the Board of Directors in the number and kind of shares for the purchase of which options may be granted under the Plan and in all other share amounts set forth in the Plan. Any such adjustment made by the Board of Directors shall be conclusive. 11. AMENDMENT OF PLAN. The Board of Directors may at any time and from time to time modify or amend the Plan in such respects as it deems advisable because of changes in the law while the Plan is in effect or for any other reason. After the Plan has been approved by the shareholders and except as 2 provided in the applicable option agreement, however, no change in an option already granted to an employee shall be made without the written consent of such employee. Furthermore, unless approved at an annual meeting or a special meeting by a vote of shareholders in accordance with Oregon law, no amendment or change shall be made in the Plan (a) increasing the total number of shares which may be purchased under the Plan, (b) changing the minimum purchase price specified in the Plan, (c) increasing the maximum option period, or (d) materially modifying the requirements for eligibility for participation in the Plan. 12. APPROVALS. The obligations of the Company under the Plan are subject to the approval of the Oregon Public Utility Commission, the Washington Utilities and Transportation Commission, and such other state and federal authorities or agencies with jurisdiction in the matter. The Company will use its best efforts to take steps required by state or federal law or applicable regulations, including rules and regulations of the Securities and Exchange Commission and any stock exchange on which the Company's shares may then be listed, in connection with the granting of any option under the Plan, the issuance or sale of any shares purchased on exercise of any option under the Plan, or the listing of such shares on said exchange. The foregoing notwithstanding, the Company shall not be obligated to issue or deliver shares of Common Stock under the Plan if the Company is advised by its legal counsel that such issuance or delivery would violate applicable state or federal laws. The Company shall not be obligated to register shares issuable on exercise of options under the Securities Act of 1933. 13. EMPLOYMENT RIGHTS. Nothing in the Plan or any option granted pursuant to the Plan shall confer on any optionee any right to be continued in the employment of the Company or to interfere in any way with the right of the Company by whom such optionee is employed to terminate such optionee's employment at any time, with or without cause. 3 EX-10 4 ex10b.txt EXT 10(B) - NON EMPLOYEE DIR STOCK COMP PLAN EXHIBIT 10(b) NORTHWEST NATURAL GAS COMPANY NON-EMPLOYEE DIRECTORS STOCK COMPENSATION PLAN January 1, 1989 Northwest Natural Gas Company an Oregon corporation 220 NW Second Avenue Portland, OR 97209 the Company The Company believes it desirable that members of its board of directors, who represent the Company's shareholders, be themselves shareholders. To supplement the efforts of the directors towards this end, the Company wishes to increase the ownership interest of non-employee directors through awards of Company Common Stock. The Company expects by this means to increase the community of interest of its shareholders at large and the Company's directors and to make stock ownership a dynamic influence on the attitudes of its board of directors. The following plan is therefore adopted: 1. Administration. --------------- Unless otherwise determined pursuant to this section, this plan shall be administered by the corporate secretary of the Company (the Administrator), who may delegate all or part of that authority and responsibility. The Administrator shall interpret the plan, arrange for the purchase and delivery of shares, determine forfeitures, and otherwise assume general responsibility for administration of the plan. Any decision by the Administrator shall be final and bind all parties. The Administrator may be replaced from time to time in the discretion of the chief executive officer of the Company. 2. Awards. ------- 2.1 Each non-employee director of the Company, including those directors who have been employees of the Company in the past but are not employees at the time of any award under this plan, shall be awarded Common Stock of the Company as of the following award dates: (a) January 1, 1989; or (b) In the case of (i) directors elected after January 1, 1989 and (ii) persons who become non-employee directors after January 1, 1989 by ceasing to be employees of the Company, the date on which such director is first elected, whether by the shareholders or board of directors of the Company, or ceases to be an employee of the Company, as the case may be; and (c) On January 1 of each year thereafter, commencing with January 1, 1998. 2.2 As of each award date, a participant shall receive an award calculated in the following manner. The "Number of Award Months" shall be determined by subtracting the number of full or partial calendar months remaining until all, if any, previous awards to the participant under this plan will be vested from the number of full or partial calendar months remaining until the fifth year end after the award date; provided, however, that if, assuming the participant were reelected, a participant's term as a director would end because of age before the fifth year end after the award date, the "Number of Award Months" shall be determined by subtracting the number of full or partial calendar months remaining until all, if any, previous awards to the participant under this plan will be vested from the number of full or partial calendar months remaining until the participant's term will end because of age. The amount awarded shall then be calculated by multiplying the Number of Award Months by an amount that, effective as of October 1, 2002, shall be $1,666.67. For purposes of this plan, "full or partial calendar months remaining" for any period includes the calendar month in which the award date falls and the calendar month in which the last day of the period falls and all calendar months in between. 2.3 As of each award date, the dollar amount calculated under 2.2 shall be awarded to the participant in Common Stock as follows: (a) As soon as practicable after the award date, the Administrator shall deliver cash in the amount of the award and applicable commissions to one or more brokers or other persons with instructions to purchase Company Common Stock in the open market. It is understood that market conditions or regulations affecting the purchases by a corporation of its own shares may extend the period of purchase over several days or weeks. (b) When several participants have the same award date, all of the stock shall be purchased and then divided among the participants in proportion to their respective awards, regardless of any changes in price that occur while purchases are being carried out. (c) When all of the stock has been purchased with respect to any award date, certificates in the names of the participants for their respective shares shall be delivered to the Administrator. Each participant shall deliver to the Administrator a blank stock power duly executed in a form satisfactory to the Administrator for each certificate for shares issued in the participant's name. (d) The Administrator shall hold the certificates and stock powers until the shares are vested and released as provided in 3.4. 2.4 Upon any amendment of this plan to increase the dollar amount of awards set forth in 2.2, each participant shall receive an additional award in accordance with the procedures set forth in 2.3. The amount of the 2 additional award for each participant shall be determined by multiplying the amount of the increase in the award amount by the number of full or partial calendar months remaining until the participant's most recent prior award under this plan will be fully vested. The resulting dollar amount shall then be used to purchase Common Stock for the participant as set forth in 2.3. 3. Vesting; Delivery of Shares; Forfeitures. ----------------------------------------- 3.1 For each award under 2.2 and 2.3, the number of awarded shares that will vest per month shall be determined by dividing the number of awarded shares by the Number of Award Months. This monthly amount shall vest as of the first day of each calendar month commencing with the later of the month in which the award is made or the first month after all previous awards to the participant under this plan shall have vested. If an award is made other than on the first day of a month, the award date shall be considered the first day of that month for purposes of 3.1 and 3.2. 3.2 For each award under 2.3 and 2.4, the number of awarded shares that will vest per month shall be determined by dividing the number of awarded shares by the number of full or partial calendar months remaining until the participant's most recent prior award under 2.2 and 2.3 will be fully vested. This monthly amount shall vest as of the first day of each calendar month commencing with the month in which the award is made. 3.3 Notwithstanding 3.1 and 3.2, all awarded shares shall vest upon a change in control of the Company. For purposes of this plan, a "change in control" of the Company shall mean the occurrence of any of the following events: (a) The approval by the shareholders of the Company of: (1) any consolidation, merger or plan of share exchange involving the Company (a "Merger") in which the Company is not the continuing or surviving corporation or pursuant to which shares of Common Stock would be converted into cash, securities or other property, other than a Merger involving shares of Common Stock in which the holders of shares of Common Stock immediately prior to the Merger have the same proportionate ownership of common stock of the surviving corporation immediately after the Merger; (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Company; or (3) the adoption of any plan or proposal for the liquidation or dissolution of the Company; (b) At any time during a period of two consecutive years, individuals who at the beginning of such period constituted the board of directors of the Company ("Incumbent Directors") shall cease for any reason to constitute at least a majority thereof; provided, however, that the term 3 "Incumbent Director" shall also include each new director elected during such two-year period whose nomination or election was approved by two-thirds of the Incumbent Directors then in office; or (c) Any person (as such term is used in Section 14(d) of the Securities Exchange Act of 1934, other than the Company or any employee benefit plan sponsored by the Company) shall, as a result of a tender or exchange offer, open market purchases or privately negotiated purchases from anyone other than the Company, have become the beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company ordinarily having the right to vote for the election of directors ("Voting Securities") representing twenty percent (20%) or more of the combined voting power of the then outstanding Voting Securities. 3.4 The certificate and stock power for vested shares shall be delivered to the participant or in accordance with 5.2 as soon as practicable after the participant ceases to be a director of the Company or, if earlier, as soon as practicable after a change in control of the Company. 3.5 If a participant ceases to be a director (other than pursuant to a simultaneous change in control of the Company), awarded shares remaining unvested shall be forfeited. The Administrator, acting for the participant pursuant to the executed stock power, shall transfer the unvested shares to the Company, and these shares shall be cancelled. The participant or the participant's representative shall execute any documents reasonably requested by the Administrator to facilitate the transfer. 4. Status Before Full Vesting; Transfer of Shares. ----------------------------------------------- 4.1 Each participant shall be a shareholder of record with respect to all shares awarded, whether or not vested, and shall be entitled to all of the rights of such a holder, except that a participant's share certificates shall be held by the Administrator until delivered in accordance with 3.4. 4.2 Any dividends or communications to shareholders received by the Administrator with respect to shares held by the Administrator shall promptly be transmitted to the participant. 4.3 No participant may transfer any interest in unvested shares to any person other than the Company. 4.4 No participant may transfer any interest in any shares awarded under this plan, whether vested or not, until he or she ceases to be a director of the Company. 4.5 Notwithstanding 2.3(d), 3.4, 4.1, 4.3 and 4.4, if a participant in the Company's Directors Deferred Compensation Plan (the "DDCP") elects under the DDCP to defer shares of Company Common Stock awarded to the participant under this plan, promptly after the deferral election becomes irrevocable the Administrator shall cause the Common Stock subject to such 4 irrevocable deferral to be transferred to the trustee of the Northwest Natural Gas Company Umbrella Trust(TM) For Directors. The Common Stock so transferred shall nevertheless remain subject to forfeiture under 3.5 if the participant ceases to be a director prior to vesting of the shares. 5. Death of a Participant. ----------------------- 5.1 Any vested shares held by the Administrator for a participant who has died shall be delivered as soon as practicable to the participant's death beneficiary under 5.2. 5.2 Any vested shares to be delivered on death of a participant under 5.1 shall go to a participant's beneficiary in the following order of priority: (a) To the surviving beneficiary designated by the participant in writing to the Administrator; (b) To the participant's surviving spouse; or (c) To the participant's estate. 6. Amendment or Termination; Miscellaneous. ---------------------------------------- 6.1 The board of directors of the Company may amend or terminate this plan at any time. No amendment or termination shall adversely affect any outstanding award. 6.2 Subject to the rights of amendment and termination in 6.1, this plan shall continue indefinitely and future awards will be made in accordance with 2.1. 6.3 Nothing in this plan shall create any obligation on the part of the board of directors of the Company to nominate any director for reelection by the shareholders or the board of directors. Adopted by the board of directors of Northwest Natural Gas Company on November 17, 1988, effective January 1, 1989. Amended by the board of directors of Northwest Natural Gas Company on May 23, 1991, effective July 1, 1991. Amended by the board of directors of Northwest Natural Gas Company on July 24, 1997, effective July 1, 1997. Amended by the board of directors of Northwest Natural Gas Company on December 18, 1997, effective January 1, 1998. Amended by the board of directors of Northwest Natural Gas Company on September 26, 2002, effective October 1, 2002. 5 EX-11 5 exh_11.txt STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 NORTHWEST NATURAL GAS COMPANY Statement re: Computation of Per Share Earnings (Thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended Sept. 30, Sept. 30, ----------------------- ----------------------- 2002 2001 2002 2001 ----------------------- ----------------------- Earnings (Loss) Applicable to Common Stock $ (6,590) $ (5,571) $ 23,680 $ 23,989 Debenture Interest Less Taxes 72 93 217 280 --------- --------- ---------- --------- Net Income (Loss) Available for Diluted Common Stock $ (6,518) $ (5,478) $ 23,897 $ 24,269 ========= ========= ========== ========= Average Common Shares Outstanding 25,492 25,133 25,389 25,148 Stock Options 66 40 60 33 Convertible Debentures 328 425 328 425 --------- --------- ---------- --------- Diluted Common Shares 25,886 25,598 25,777 25,606 ========= ========= ========== ========= Diluted Earnings (Loss) per Share of Common Stock $ (0.26) $ (0.22) $ 0.93 $ 0.95 ========= ========= ========== =========
EX-12 6 exh_12.txt COMPUTATION OF RATIOS OF EARNINGS EXHIBIT 12 NORTHWEST NATURAL GAS COMPANY Computation of Ratio of Earnings to Fixed Charges January 1, 1997 - September 30, 2002 (Thousands, except ratio of earnings to fixed charges) (Unaudited)
Nine 12 Months Months Ended Ended Year Ended December 31, Sept. 30, Sept. 30, 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 $ 31,367 $ 23,938 Other Interest 4,500 4,909 2,778 3,628 3,772 3,226 1,236 Amortization of Debt Discount and Expense 730 714 699 735 768 795 610 Interest Portion of Rentals 2,111 1,986 1,707 1,628 1,572 1,535 1,149 -------- -------- --------- --------- --------- --------- --------- Total Fixed Charges, as defined $ 32,245 $ 34,998 32,912 35,978 36,336 36,923 26,933 ======== ======== ========= ========= ========= ========= ========= Earnings, as Defined: Net Income $ 43,059 $ 27,301 45,296 50,224 50,187 49,838 25,447 Taxes on Income 21,034 14,604 24,591 26,829 27,553 27,472 13,930 Fixed Charges, as above 32,245 34,998 32,912 35,978 36,336 36,923 26,933 -------- -------- --------- --------- --------- --------- --------- Total Earnings, as defined $ 96,338 $ 76,903 $ 102,799 $ 113,031 $ 114,076 $ 114,233 $ 66,310 ======== ======== ========= ========= ========= ========= ========= Ratio of Earnings to Fixed Charges 2.99 2.20 3.12 3.14 3.14 3.09 2.46 ======== ======== ========= ========= ========= ========= =========
* A significant part of the business of the Company is of a seasonal nature; therefore, the ratio of earnings to fixed charges for the interim period is not necessarily indicative of the results for a full year. EX-99 7 exh_99.txt CERTIFICATE PURSUANT TO SECTION 906 OF SARBANES EXHIBIT 99 NORTHWEST NATURAL GAS COMPANY Certificate Pursuant to Section 906 of Sarbanes - Oxley Act of 2002 Each of the undersigned, RICHARD G. REITEN, the Chairman of the Board and Chief Executive Officer, and BRUCE R. DEBOLT, the Senior Vice President, Finance, and Chief Financial Officer of NORTHWEST NATURAL GAS COMPANY (the "Company"), DOES HEREBY CERTIFY that: 1. The Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the "Report") fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended; and 2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. IN WITNESS WHEREOF, each of the undersigned has caused this instrument to be executed this 12th day of November 2002. /s/ Richard G. Reiten --------------------------------------- Chairman of the Board and Chief Executive Officer /s/ Bruce R. DeBolt --------------------------------------- Senior Vice President, Finance, and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----