-----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, GVW6rfAMxKq2RVesX4OgpjVnLfhkmD640tmnqOD8Tr4V5KKrBjXzukU+9vVTGSfz JvsYv/rykXXOERkJsfRJHw== 0000950120-03-000482.txt : 20030812 0000950120-03-000482.hdr.sgml : 20030812 20030812111117 ACCESSION NUMBER: 0000950120-03-000482 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030812 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: 03836368 BUSINESS ADDRESS: STREET 1: 220 NW SECOND AVE CITY: PORTLAND STATE: OR ZIP: 97209 BUSINESS PHONE: 5032264211 10-Q 1 form10q.txt QUARTERLY ANNUAL 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 JUNE 30, 2003 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][GRAPHIC OMITTED] 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 [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [x] No [ ] At August 8, 2003, 25,738,408 shares of the registrant's Common Stock, $3-1/6 par value (the only class of Common Stock) were outstanding. NORTHWEST NATURAL GAS COMPANY June 30, 2003 Summary of Information Reported The registrant submits herewith the following information: PART I. FINANCIAL INFORMATION Page Item 1. Consolidated Financial Statements Number Consolidated Statements of Income for the three-month and six-month periods ended June 30, 2003 and 2002 3 Consolidated Statements of Earnings Invested in the Business for the six-month periods ended June 30, 2003 and 2002 4 Consolidated Balance Sheets at June 30, 2003 and 2002 and Dec. 31, 2002 5 Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2003 and 2002 7 Consolidated Statements of Capitalization at June 30, 2003 and 2002 and Dec. 31, 2002 8 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 Item 4. Controls and Procedures 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings 31 Item 4. Submission of Matters to a Vote of Security Holders 32 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 33 Signature 33 2 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended Thousands, except per share amounts June 30, June 30, - ----------------------------------------------------------------------------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Operating revenues: Gross operating revenues $ 117,489 $ 101,873 $ 324,028 $ 380,436 Cost of sales 58,940 45,309 166,891 213,206 --------- --------- --------- ---------- Net operating revenues 58,549 56,564 157,137 167,230 Operating expenses: Operations and maintenance 23,331 20,233 47,402 42,402 Taxes other than income taxes 7,350 6,852 18,167 18,854 Depreciation and amortization 13,338 12,784 26,504 25,598 --------- --------- --------- ---------- Total operating expenses 44,019 39,869 92,073 86,854 --------- --------- --------- ---------- Income from operations 14,530 16,695 65,064 80,376 Other income (expense) 1,348 (13,557) 764 (14,427) Interest charges - net 9,126 8,577 18,072 16,726 --------- --------- --------- ---------- Income (loss) before income taxes 6,752 (5,439) 47,756 49,223 Income tax expense (benefit) 2,290 (2,447) 16,890 17,768 --------- --------- --------- ---------- Net income (loss) 4,462 (2,992) 30,866 31,455 Redeemable preferred and preference stock dividend requirements 147 590 294 1,185 --------- --------- --------- ---------- Earnings (loss) applicable to common stock $ 4,315 $ (3,582) $ 30,572 $ 30,270 ========= ========= ========= ========== Average common shares outstanding 25,682 25,410 25,649 25,338 Basic earnings (loss) per share of common stock $ 0.17 $ (0.14) $ 1.19 $ 1.19 Diluted earnings (loss) per share of common stock $ 0.17 $ (0.14) $ 1.18 $ 1.18 Dividends per share of common stock $ 0.315 $ 0.315 $ 0.63 $ 0.63
-------------------------------------------------- See Notes to Consolidated Financial Statements 3 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION Consolidated Statements of Earnings Invested in the Business (Unaudited)
Six Months Ended June 30, --------------------------------------------------------- Thousands 2003 2002 - --------------------------------------------------------------------------------------------------------------------- Earnings invested in the business: Balance at beginning of period $ 157,136 $ 147,950 Net income 30,866 $ 30,866 31,455 $ 31,455 Cash dividends paid: Redeemable preferred and preference stock (299) (1,194) Common stock (16,144) (15,957) ------------ ------------ Balance at end of period $ 171,559 $ 162,254 ============ ============ Accumulated other comprehensive income (loss): Balance at beginning of period $ (3,084) $ (375) Other comprehensive income - net of tax: Change in unrealized gain from price risk management activities - - 95 95 --------------------------------------------------------- Comprehensive income $ 30,866 $ 31,550 ========== ========= Balance at end of period $ (3,084) $ (280) ============= ============
-------------------------------------------------- See Notes to Consolidated Financial Statements 4 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION Consolidated Balance Sheets
June 30, June 30, 2003 2002 Dec. 31, Thousands (Unaudited) (Unaudited) 2002 --------------------------------------------------------------------------------------------------------------- Assets: Plant and property: Utility plant $ 1,592,613 $ 1,494,819 $ 1,539,965 Less accumulated depreciation 584,636 537,152 560,798 ------------ ------------ ----------- Utility plant - net 1,007,977 957,667 979,167 ------------ ------------ ----------- Non-utility property 23,008 20,793 20,832 Less accumulated depreciation and amortization 4,631 3,863 4,404 ------------ ------------ ----------- Non-utility property - net 18,377 16,930 16,428 ------------ ------------ ----------- Total plant and property 1,026,354 974,597 995,595 ------------ ------------ ----------- Other investments 12,833 13,290 12,703 ------------ ------------ ----------- Current assets: Cash and cash equivalents 24,059 34,519 7,328 Accounts receivable 34,137 31,320 48,751 Allowance for uncollectible accounts (2,315) (2,731) (1,815) Accrued unbilled revenue 14,579 13,133 44,069 Inventories of gas, materials and supplies 35,405 30,793 58,030 Prepayments and other current assets 22,559 22,281 37,645 ------------ ------------ ----------- Total current assets 128,424 129,315 194,008 ------------ ------------ ----------- Regulatory assets: Income tax asset 47,975 48,469 47,975 Unrealized loss on non-trading derivatives -- 41,408 -- Unamortized costs on debt redemptions 6,277 6,739 6,508 Other 6,661 4,430 7,040 ------------ ------------ ----------- Total regulatory assets 60,913 101,046 61,523 ------------ ------------ ----------- Other assets: Investment in life insurance 57,660 54,140 54,916 Fair value of non-trading derivatives 22,842 -- 12,426 Other 16,841 12,266 11,620 ------------ ------------ ----------- Total other assets 97,343 66,406 78,962 ------------ ------------ ----------- Total assets $ 1,325,867 $ 1,284,654 $ 1,342,791 ============ ============ ===========
-------------------------------------------------- See Notes To Consolidated Financial Statements 5 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION Consolidated Balance Sheets
June 30, June 30, 2003 2002 Dec. 31, Thousands (Unaudited) (Unaudited) 2002 --------------------------------------------------------------------------------------------------------------- Capitalization and liabilities: Common stock $ 81,467 $ 80,638 $ 81,023 Premium on common stock 251,129 245,324 248,028 Earnings invested in the business 171,559 162,254 157,136 Accumulated other comprehensive income (loss) (3,084) (280) (3,084) ------------ ------------ ----------- Total common stock equity 501,071 487,936 483,103 Redeemable preference stock - 25,000 - Redeemable preferred stock 7,500 8,250 8,250 Long-term debt 450,858 416,183 445,945 ------------ ------------ ----------- Total capitalization 959,429 937,369 937,298 ------------ ------------ ----------- Current liabilities: Notes payable 16,600 - 69,802 Accounts payable 55,284 48,590 74,436 Long-term debt due within one year 35,000 50,000 20,000 Taxes accrued 5,238 2,057 7,822 Interest accrued 2,950 2,887 2,902 Other current and accrued liabilities 29,716 25,497 30,045 ------------ ------------ ----------- Total current liabilities 144,788 129,031 205,007 ------------ ------------ ----------- Regulatory liabilities: Customer advances 1,770 1,879 1,791 Deferred gas costs payable 13,510 10,315 10,635 Unrealized gain on non-trading derivatives 22,842 - 12,426 ------------ ------------ ----------- Total regulatory liabilities 38,122 12,194 24,852 ------------ ------------ ----------- Other liabilities: Deferred income taxes 144,769 137,965 141,732 Deferred investment tax credits 7,255 8,070 7,824 Fair value of non-trading derivatives - 41,540 - Other 31,504 18,485 26,078 ------------ ------------ ----------- Total other liabilities 183,528 206,060 175,634 ------------ ------------ ----------- Commitments and Contingencies (see Note 7) - - - ------------ ------------ ----------- Total capitalization and liabilities $ 1,325,867 $ 1,284,654 $ 1,342,791 ============ ============ ===========
-------------------------------------------------- See Notes To Consolidated Financial Statements 6 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, ------------------------------ Thousands 2003 2002 - --------------------------------------------------------------------------------------------------------------- Operating activities: Net income from operations $ 30,866 $ 31,455 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization 26,504 25,598 Gain on sale of assets -- (221) Loss for PGE acquisition costs -- 13,699 Unrealized gain from price risk management activities -- 95 Deferred income taxes and investment tax credits 2,468 6,929 Equity in (earnings) losses of investments (245) (615) Allowance for funds used during construction (358) (273) Deferred gas costs - net 2,875 226 Other (1,950) (776) --------- --------- Cash from operations before working capital changes 60,160 76,117 Changes in operating assets and liabilities: Accounts receivable - net of uncollectible accounts 15,114 36,133 Accrued unbilled revenue 29,490 44,616 Inventories of gas, materials and supplies 22,625 18,544 Accounts payable (19,152) (22,108) Accrued interest and taxes 4,145 (21,253) Other current assets and liabilities 8,076 2,740 --------- --------- Cash provided by operating activities 120,458 134,789 --------- --------- Investing activities: Acquisition and construction of utility plant assets (56,089) (32,356) Investment in non-utility property (816) (2,590) PGE acquisition costs -- (4,142) Proceeds from sale of assets -- 500 Other investments 115 888 --------- --------- Cash used in investing activities (56,790) (37,700) --------- --------- Financing activities: Common stock issued 3,458 3,682 Redeemable preferred stock retired (750) (750) Long-term debt issued 40,000 60,000 Long-term debt retired (20,000) (10,500) Change in short-term debt (53,202) (108,291) Cash dividend payments: Redeemable preferred and preference stock (299) (1,194) Common stock (16,144) (15,957) --------- --------- Cash used in financing activities (46,937) (73,010) --------- --------- Increase in cash and cash equivalents 16,731 24,079 Cash and cash equivalents - beginning of period 7,328 10,440 --------- --------- Cash and cash equivalents - end of period $ 24,059 $ 34,519 ========= ========= - --------------------------------------------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 18,009 $ 17,357 Income taxes $ 9,200 $ 27,912 - --------------------------------------------------------------------------------------------------------------- Supplemental disclosure of non-cash financing activities: Conversion to common stock: 7-1/4 % Series of Convertible Debentures $ 87 $ 1,694
-------------------------------------------------- See Notes to Consolidated Financial Statements 7 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION Consolidated Statements of Capitalization
June 30, 2003 June 30, 2002 Thousands, except share amounts (Unaudited) (Unaudited) Dec. 31, 2002 - -------------------------------------------------------------------------------------------------------------------- Common Stock Equity: Common stock - par value $3-1/6 per share $ 81,467 $ 80,638 $ 81,023 Premium on common stock 251,129 245,324 248,028 Earnings invested in the business 171,559 162,254 157,136 Accumulated other comprehensive income (loss) (3,084) (280) (3,084) ----------- ----------- ----------- Total common stock equity 501,071 52% 487,936 52% 483,103 51% Redeemable Preference Stock: $6.95 Series, stated value $100 per share - - 25,000 3% - - Redeemable Preferred Stock: $7.125 Series, stated value $100 per share 7,500 1% 8,250 1% 8,250 1% Long-Term Debt: Medium-Term Notes First Mortgage Bonds: 6.750% Series B due 2002 - 10,000 - 5.550% Series B due 2002 - 20,000 - 6.400% Series B due 2003 - 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 20,000 20,000 6.800% Series B due 2007 9,500 9,500 9,500 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 40,000 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 - 30,000 5.660% Series B due 2033 40,000 - - Convertible Debentures 7-1/4% Series due 2012 6,358 6,683 6,445 ----------- ----------- ----------- 485,858 466,183 465,945 Less long-term debt due within one year 35,000* 50,000 20,000 ----------- ----------- ----------- Total long-term debt 450,858 47% 416,183 44% 445,945 48% ----------- --- ----------- --- ----------- --- Total Capitalization $ 959,429 100% $ 937,369 100% $ 937,298 100% =========== === =========== === =========== === * To be redeemed in the third quarter of 2003
---------------------------------------------------- See Notes to Consolidated Financial Statements 8 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION 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 for each period reported. These consolidated financial statements should be read in conjunction with the financial statements and related notes included in the Company's 2002 Annual Report on Form 10-K (2002 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 in this report, the Company consists of Northwest Natural Gas Company (NW Natural), a regulated utility, and non-regulated wholly-owned subsidiary businesses NNG Financial Corporation (Financial Corporation) and Northwest Energy Corporation (Northwest Energy). Northwest Energy 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. Certain amounts from prior periods have been reclassified to conform, for comparison purposes, with the current financial statement presentation. These reclassifications had no impact on prior period results of operations. 2. New Accounting Standards Adopted Standards Effective Jan. 1, 2003, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires the recognition of an Asset Retirement Obligation (ARO) for legal obligations associated with the retirement of tangible long-lived assets, including the recording of fair value of the liability, if reasonably estimable, for an ARO in the period in which it is incurred. The ARO liability 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. In the Company's judgment, it does not have any material legal obligations associated with the retirement of its tangible long-lived assets, except for certain assets with indefinite system lives for which the Company cannot estimate the ARO because the settlement date is indeterminable. In addition, NW Natural's accounting records conform to certain regulatory requirements in accordance with SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." Accordingly, NW Natural recognizes estimated asset retirement costs (removal costs) on many regulated, long-lived assets through a charge to depreciation expense allowed in rates, with a corresponding accrual to accumulated depreciation. As of June 30, 2003, the Company had $130 million of estimated removal costs in excess of normal depreciation costs included in accumulated depreciation in the consolidated balance sheets. The adoption of SFAS No. 143 did not have a material impact on the Company's financial condition or results of operations. Effective Jan. 1, 2003, the Company also adopted SFAS No. 145, "Rescission of FASB Statement Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections," and 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 9 Costs Incurred in a Restructuring)." 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. 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 was effective for all exit or disposal activities initiated after Dec. 31, 2002, is on the timing of recognition of costs associated with exit or disposal activities. The adoption of SFAS Nos. 145 and 146 did not have a material impact on the Company's financial condition or results of operations. In November 2002, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements of FASB Statement No. 5, "Accounting for Contingencies," relating to the guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. A guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also provides for additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after Dec. 31, 2002. In connection with the settlement of litigation involving leases in the Mist gas storage field (see Part II., Item 1., "Legal Proceedings"), NW Natural agreed to defend and indemnify a party against claims relating to the validity and enforceability of certain transferred leases. However, NW Natural will have no obligation to defend or indemnify the party from any claims for recovery of punitive or other exemplary damages. After analyzing the likelihood of obligations arising under the indemnity, NW Natural determined that no accrual is required under FIN 45. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 provides guidance on the identification of, and the financial reporting for, entities over which control is achieved through means other than voting rights, known as variable interest entities. FIN 46 provides guidance for determining whether consolidation is required under the controlling financial interest model of Accounting Bulletin No. 51. Certain variable interest entities must be consolidated by the primary beneficiary if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for all new variable interest entities created or acquired after Jan. 31, 2003. For variable interest entities created or acquired prior to Feb. 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company did not have interests in any variable interest entities during any of the current reporting periods, such that the application of FIN 46 did not have a material impact on the Company's financial condition or results of operations. Recent Accounting Pronouncements In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 primarily amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to clarify the definition of a derivative and to require derivative instruments that include up-front cash payments to be classified as financing activity in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a material impact on the Company's financial condition or results of operations. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures in its financial statements certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires an issuer to classify a financial instrument that is within the scope of the Statement as a liability if that financial instrument embodies an obligation of the issuer. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim periods beginning after June 15, 2003, except for mandatory redeemable financial 10 instruments of nonpublic entities. The adoption of SFAS No. 150 will result in the Company reclassifying dividends on its redeemable preferred stock as interest expense, but such reclassification will not have a material impact on the Company's financial condition or results of operations. 3. Stock-Based Compensation NW Natural has stock-based compensation plans including the Long-Term Incentive Plan (LTIP), the Restated Stock Option Plan (Restated SOP), the Employee Stock Purchase Plan and the Non-Employee Directors Stock Compensation Plan (see Part II, Item 8., Note 4, in the 2002 Form 10-K). These plans are designed to promote stock ownership in NW Natural by employees, officers and directors. During the first quarter of 2003, NW Natural granted LTIP awards covering a new three-year performance period (2003-05). The aggregate target award and maximum award were 28,000 and 56,000 shares, respectively. Following the end of the performance period, actual awards are distributed based on the attainment of certain return on equity performance goals. During the performance period, the Company recognizes compensation expense and liability for the LTIP awards based on performance levels achieved or expected to be achieved and the estimated market value of the common stock as of the distribution date. At June 30, 2003, no compensation expense or liability had been accrued for the new LTIP grant. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an amendment of FASB Statement No. 123," which amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 123 encourages, but does not require, companies to record compensation expense for stock-based compensation plans at fair value. The Company adopted the SFAS No. 148 disclosure requirements but has continued to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for its stock-based employee compensation. Under the Restated SOP, NW Natural grants employee stock options for a fixed number of shares to officers and certain key employees with an exercise price equal to or greater than the market value of the shares at the date of grant. Inasmuch as NW Natural grants stock options at market value, no compensation expense was recognized in the results of operations for the six months ended June 30, 2003. As of June 30, 2003, options on 1,429,500 shares were available for grant and options to purchase 426,764 shares were outstanding. Options granted generally have 10-year terms and vest ratably over a three-year period following the date of grant. The Company did not grant any options to purchase shares during the six months ended June 30, 2003. 11 If compensation expense for these plans had been determined consistent with the method prescribed by SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts shown below:
Three Months Ended Six Months Ended June 30, June 30, ---------------------- -------------------- Thousands, except per share amounts 2003 2002 2003 2002 - ------------------------------------------------------------------------------------------------------------------------- Earnings (loss) applicable to common stock: As reported $ 4,315 $ (3,582) $ 30,572 $ 30,270 Deduct: additional stock-based compensation expense as determined under fair value based method for all awards - net of tax (71) (110) (132) (223) --------- ---------- -------- -------- Pro forma $ 4,244 $ (3,692) $ 30,440 $ 30,047 ========= ========== ======== ======== Basic earnings (loss) per share: As reported $ 0.17 $ (0.14) $ 1.19 $ 1.19 Pro forma $ 0.17 $ (0.15) $ 1.19 $ 1.19 Diluted earnings (loss) per share: As reported $ 0.17 $ (0.14) $ 1.18 $ 1.18 Pro forma $ 0.17 $ (0.15) $ 1.18 $ 1.18
The effects of applying SFAS No. 123 to pro forma disclosures may not be representative of the effects on reported net income for future periods until all options outstanding are included in the pro forma disclosures. For purposes of pro forma disclosures, the estimated market value of stock options is amortized to expense over the vesting period. 4. Use of Financial Derivatives NW Natural utilizes derivative instruments to manage commodity prices related to natural gas purchases, foreign currency prices related to gas purchase commitments from Canada and interest rate risks related to long-term debt maturing in less than five years or expected to be issued in future periods. Use of derivatives is permitted only after the commodity price, exchange rate, and interest rate exposures have been identified, are determined to exceed defined tolerance levels and are considered to be unavoidable because they are necessary to support normal business activities. NW Natural does not enter into derivative instruments for trading purposes and believes that any increase in market risk created by holding derivatives should be offset by the exposures they modify. See Part II, Item 7., "Accounting for Derivative Instruments and Hedging Activities," and Part II, Item 8., Notes 1 and 11, in the 2002 Form 10-K. At June 30, 2003, NW Natural had 21 natural gas price swap contracts and 77 foreign currency forward contracts covering its exposures to natural gas commodity prices and foreign currency exchange rates, respectively. Each of these contracts was designated as a cash flow hedge. The estimated fair values and the notional amounts of derivative instruments outstanding were as follows:
June 30, 2003 Dec. 31, 2002 -------------------------------------------------- Fair Value Notional Fair Value Notional Thousands Gain (Loss) Amount Gain (Loss) Amount - ---------------------------------------------------------------------------------------------------------------------------- Fixed-price natural gas commodity swap contracts $ 22,587 $ 199,426 $ 11,422 $ 159,724 Fixed-price natural gas call option contracts - - 717 18,084 Physical natural gas supply contract with embedded derivative - - 448 2,754 Foreign currency forward purchase contracts 255 15,946 (161) 15,525 ---------------------- ----------------------- Total $ 22,842 $ 215,372 $ 12,426 $ 196,087 ====================== =======================
12 5. Long Term Debt NW Natural has exercised optional redemption provisions applicable to certain of its long-term debt, including all $4 million of the 7.50% Series B Medium-Term Notes (MTN) due 2023, all $11 million of the 7.52% Series B MTNs due 2023, and all $20 million of the 7.25% Series B MTNs due 2023. These MTNs are redeemable in the third quarter of 2003 at 103.75 percent, 103.76 percent and 103.65 percent of their respective principal amounts. The Company redeemed the 7.50% and 7.52% Series on July 1 and will redeem the 7.25% Series on Aug. 18, in each case with the proceeds from sales of commercial paper. NW Natural intends to refinance this debt through the sale of new long-term debt in the third or fourth quarter of 2003. Including the optional redemption of the MTNs discussed above, the maturities for each of the 12-month periods ending June 30 for the five years ending June 30, 2008 on the long-term debt outstanding amount to: $35.0 million in 2004; no maturity in 2005; $23.0 million in 2006; $29.5 million in 2007; and no maturity in 2008. Holders of certain MTNs have put options that, if exercised, would accelerate the maturity of long-term debt by $10.0 million and $20.0 million in the 12-month periods ending June 30, 2006 and 2007, respectively. 6. 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 interstate customers and asset optimization services under a contract with an independent energy trading company. 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 includes costs relating to the terminated acquisition of PGE. The following table presents information about the reportable segments for the three- and six-month periods ended June 30, 2003 and 2002. Inter-segment transactions are insignificant.
Three Months Ended June 30, Six Months Ended June 30, -------------------------------------------- ------------------------------------------------ Thousands Utility Gas Storage Other Total Utility Gas Storage Other Total - ------------------------------------------------------------------------ ------------------------------------------------ 2003 Net operating revenues $ 56,112 $ 2,387 $ 50 $ 58,549 $ 152,117 $ 4,931 $ 89 $ 157,137 Depreciation and amortiza- tion 13,225 113 - 13,338 26,277 227 - 26,504 Other operating expenses 30,489 162 30 30,681 65,172 345 52 65,569 Income from operations 12,398 2,112 20 14,530 60,668 4,359 37 65,064 Income from financial investments - - 505 505 - - 245 245 Net income 2,869 1,177 416 4,462 28,028 2,452 386 30,866 Total assets at June 30, 2003 1,287,283 20,495 18,089 1,325,867 1,287,283 20,495 18,089 1,325,867 2002 Net operating revenues $ 54,077 $ 2,444 $ 43 $ 56,564 $ 162,915 $ 4,218 $ 97 $ 167,230 Depreciation and amortiza- tion 12,685 99 - 12,784 25,408 190 - 25,598 Other operating expenses 26,785 248 52 27,085 60,685 497 74 61,256 Income (loss) from operations 14,607 2,097 (9) 16,695 76,822 3,531 23 80,376 Income from financial investments - - 477 477 - - 615 615 Loss for PGE acquisition costs - - (8,347) (8,347) - - (8,347) (8,347) Net income (loss) 3,616 1,192 (7,800) (2,992) 37,050 1,978 (7,573) 31,455 Total assets at June 30, 2002 1,250,435 16,572 17,647 1,284,654 1,250,435 16,572 17,647 1,284,654
13 7. Commitments and Contingencies Environmental Matters On June 30, 2003, the Company filed a Feasibility Scoping Plan and an Ecological and Human Health Risk Assessment with the Oregon Department of Environmental Quality (ODEQ), which outlined a range of remedial alternatives for the most contaminated portion of the Gasco site. See Part II, Item 8., Note 12, in the 2002 Form 10-K. NW Natural will work with the ODEQ to determine the appropriate remedial action from among the alternatives. Based upon the proposed actions in the draft plan, the Company estimates its range of liability, including the cost of investigation, from feasible alternatives at between $1.7 million and $7 million. NW Natural has a recorded liability of $1.7 million, as of June 30, 2003, for its estimated costs of investigation and remediation related to the Gasco site. See Item 2., "Management's Discussion and Analysis of Results of Operations and Financial Condition - Application of Critical Accounting Policies - Critical Estimates." NW Natural has accrued all material loss contingencies relating to environmental matters that it believes to be probable of assertion and reasonably estimable. See Part II, Item 8., Note 12, in the 2002 Form 10-K. Due to the preliminary nature of these environmental investigations, the range of any additional possible loss contingency cannot be currently estimated. On May 27, 2003, the OPUC approved NW Natural's request for deferral of environmental costs associated with five specific sites, including the Gasco, Wacker, Portland Gas and Portland Harbor sites. See Part II, Item 8., Note 12, in the 2002 Form 10-K. The authorization, effective for a 12-month period beginning April 7, 2003, allows NW Natural to defer and seek recovery of unreimbursed environmental costs in a future general rate case. As of June 30, 2003, NW Natural has recorded $0.6 million of these costs in a deferred regulatory account. Additionally, on a cumulative basis through June 30, 2003, the Company has accrued environmental costs totaling $7.9 million relating to the five sites, including $5.5 million that has already been disbursed. In addition, the Company currently estimates insurance recoveries related to these sites of $3.6 million and has recorded this amount as a receivable. NW Natural expects that the costs of further investigation and remediation for which it may be responsible with respect to the Gasco site, the Wacker site, the Portland Harbor site and the Portland Gas 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 In April 2003, NW Natural settled and agreed with Cascade Resources Corporation and Al Curry (collectively, Cascade) to dismiss their respective claims in Northwest Natural Gas Company v. Cascade Resources Corporation and Curry, et al. (United States District Court for the District of Oregon, Case No. CV 01-1620 HU) (the Action). See Part I, Item 3., "Legal Proceedings," in the 2002 Form 10-K and Part II, Item 1., "Legal Proceedings," in the Company's Form 10-Q for the quarter ended March 31, 2003. In the settlement, Cascade transferred all of its records, rights and interests in certain leases, including gas storage leases, in Columbia County, Oregon to NW Natural and agreed to refrain from certain competitive activities in the area. The counterclaims against NW Natural described in the 2002 Form 10-K have been dismissed and Enerfin Resources Northwest Limited Partnership (Enerfin) is the remaining defendant in the Action. NW Natural paid Cascade $0.5 million and agreed to defend and indemnify Cascade against claims by Enerfin relating to the validity and enforceability of the transferred leases. However, NW Natural will have no obligation to defend or indemnify Cascade from any claims for recovery of punitive or other exemplary damages. In June 2003, the court denied Enerfin's motion seeking to allow it to make cross-claims against Cascade in the case. In July, Enerfin filed a Motion for Summary Judgment seeking dismissal of claims made by NW Natural against it. The Company expects to oppose the motion. On March 13, 2003, the Oregon Energy Facility Siting Council (EFSC) issued a Final Order and Site Certificate (Site Certificate) pursuant to which the EFSC approved construction of the Company's proposed South Mist Pipeline Extension (SMPE) along a designated route. See Part II, Item 7., "Financial 14 Condition - Investing Activities," in the 2002 Form 10-K. In May, two parties in the contested case before EFSC separately appealed the issuance of the Site Certificate to the Oregon Supreme Court. (Supreme Court Nos. 550428 and 550434 (consolidated)). The appeals were argued before the Supreme Court on July 22, 2003 and a final decision is pending. On July 30, 2003, the Supreme Court denied a motion filed by one of the appellants to stay construction of the SMPE. From time to time the Company is subject to other claims and litigation arising in the ordinary course of business. Although the final outcome of any such legal proceeding cannot be predicted with certainty, the Company does not expect disposition of these matters to have a materially adverse effect on the Company's financial position, results of operation or cash flows. 15 NORTHWEST NATURAL GAS COMPANY PART I. FINANCIAL INFORMATION Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is management's assessment of Northwest Natural Gas Company's financial condition including the principal factors that affect results of operations. The discussion refers to the consolidated activities of the Company for the three and six months ended June 30, 2003 and 2002. Unless otherwise indicated, references in the discussion to Notes are to the notes to the consolidated financial statements in the Company's 2002 Annual Report on Form 10-K (2002 Form 10-K). 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, in the 2002 Form 10-K). In addition to presenting results of operations and earnings amounts in total, certain measures are expressed in cents per share on a diluted basis (see Part II, Item 8., Note 1, in the 2002 Form 10-K). These amounts reflect factors that directly impact the Company's earnings. The Company believes this per share information is useful because it enables readers to better understand the impact of these factors on the Company's earnings. Application of Critical Accounting Policies Management's discussion and analysis of the Company's results of operations and financial condition are based upon the consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. 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 that could result in materially different amounts if the Company reported under different conditions or using different assumptions. These critical accounting policies are described in the 2002 Form 10-K (see Part II, Item 7., "Application of Critical Accounting Policies - Regulatory Accounting, Revenue Recognition, Accounting for Derivative Instruments and Hedging Activities, Accounting for Pensions, and Contingencies," in the 2002 Form 10-K). Because of the uncertainty inherent in these matters, actual results could differ materially from the estimates developed from applying these critical accounting policies. Critical Estimates Within the context of the Company's critical accounting policies, management is not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. 16 In addition to critical accounting estimates described in the 2002 Form 10-K, NW Natural recorded an additional loss contingency totaling $1.7 million in the second quarter of 2003 for an estimate of environmental remediation costs at its Gasco site (see Note 7 to the accompanying Consolidated Financial Statements). The amount of NW Natural's current accrual is based on estimates at the lower end of the range of probable liability for the costs of remedial alternatives outlined in the Feasibility Scoping Plan and the Ecological and Human Health Risk Assessment. If the costs of remedial activity were assumed at the higher end of the range, then the Company would have accrued an additional $5.3 million liability. However, the Company does not believe that a change in the estimate would have a material impact on the Company's financial condition or results of operations, because NW Natural expects to recover these additional costs from insurance. In addition, the Company is authorized by the Oregon Public Utility Commission (OPUC) to defer these costs as a regulatory asset and, in the event these costs are not recovered from insurance, would seek to recover them through future utility rates. Earnings and Dividends The Company's earnings applicable to common stock were $4.3 million in the quarter ended June 30, 2003, compared to a loss of $3.6 million in the quarter ended June 30, 2002. Earnings per share from consolidated operations were 17 cents a diluted share in the second quarter of 2003, compared to a loss of 14 cents a share in last year's second quarter. The results for the second quarter of 2002 included a charge of $13.7 million before tax, equivalent to 32 cents a diluted share, for NW Natural's transaction costs incurred through June 30, 2002 in its efforts to acquire Portland General Electric Company (PGE) from Enron Corp. NW Natural earned $2.7 million or 11 cents a diluted share from gas utility operations in the second quarter of 2003, compared to $2.9 million or 12 cents a share in the second quarter of 2002. The Company earned $1.2 million or 5 cents a diluted share from its gas storage business segment in this year's second quarter, about the same as its results from the gas storage business in the second quarter of 2002. The Company also earned $0.4 million or about 1 cent a diluted share from its subsidiary and other non-utility operations in the second quarter of 2003, compared to a loss of $7.7 million or 31 cents a share in the second quarter of 2002 which included the $13.7 million charge for PGE transaction costs. For the six months ended June 30, 2003, NW Natural's earnings applicable to common stock were $30.6 million, or $1.18 a diluted share, compared to earnings of $30.3 million, also equivalent to $1.18 a diluted share, in the first six months of 2002. The results for the first six months of 2002 included the charge equivalent to 32 cents a diluted share for the PGE transaction costs, as reported above. NW Natural earned $27.7 million or $1.07 a diluted share from gas utility operations in the first six months of 2003, compared to $35.9 million or $1.40 a share in the first six months of 2002. Weather conditions in NW Natural's service territory in the first half of the year were 4 percent warmer than average and 9 percent warmer than last year. The Company earned $2.5 million or 10 cents a diluted share from its gas storage business segment in the first six months of 2003, compared to $2.0 million or 8 cents a share in the first six months of 2002; and $0.4 million or about 1 cent a diluted share from its subsidiary and other non-utility operations in the first half of this year, compared to a loss of $7.6 million or 30 cents a share in the first half of last year. Dividends paid on common stock were 31.5 cents a share for each of the three-month periods ended June 30, 2003 and 2002. In July 2003, the Company's Board of Directors declared a quarterly dividend of 31.5 cents a share on the common stock, payable Aug.15, 2003, to shareholders of record on July 31, 2003. The current indicated annual dividend rate is $1.26 a share. Results of Operations Regulatory Developments In November 2002, NW Natural filed a general rate case with the OPUC, proposing a revenue increase of $38 million per year from Oregon operations through rate increases averaging 6.8 percent (see Part II, Item 7., "Results of Operations - Regulatory Matters," in the 2002 Form 10-K). 17 In April 2003, NW Natural filed stipulations in the case representing a partial settlement between the Company and the OPUC Staff (Staff). The stipulations included agreements with the Staff with respect to many elements of NW Natural's cost of service, including all operations and maintenance expenses and rate base investments for the prospective test year. On Aug. 5, 2003, NW Natural filed additional stipulations with the Staff and the other active parties covering the remaining issues in the case. The proposed settlement embodying all of the stipulations would authorize a revenue increase of $13.9 million per year. The settlement incorporates a capital structure including 49.5 percent common equity, a return on equity of 10.2 percent, and the adoption of a weather normalization mechanism in substantially the form proposed by NW Natural. If approved by the OPUC, approximately $6.2 million of the $13.9 million total revenue increase would go into effect on Sept. 1, 2003, and the remainder would go into effect as all or portions of NW Natural's South Mist Pipeline Extension (SMPE) project and its Coos County distribution system project are completed and go into service between Dec. 1, 2003 and Dec. 1, 2004. The Company is unable to determine the extent to which the settlement among NW Natural, the Staff and the other parties in the case will be accepted by the OPUC. Comparison of Gas Operations The following table summarizes the composition of gas utility volumes and revenues for the three and six months ended June 30, 2003. Separate schedules have been presented for "Utility Operating Revenues - Dollars" to reflect the impact with and without billing credits in June 2002 relating to deferred gas costs savings, as discussed below:
Three Months Ended Six Months Ended June 30, June 30, -------------------------------------------------- (Thousands) 2003 2002 2003 2002 - ---------------------------------------------------------------------------------------------------------------------- Utility Gas Sales and Transportation Volumes - Therms: Residential and commercial sales 130,051 130,355 366,374 393,292 Unbilled volumes (19,593) (27,907) (36,155) (46,529) --------- --------- --------- --------- Weather-sensitive volumes 110,458 102,448 330,219 346,763 Industrial firm sales 11,967 15,675 26,521 39,430 Industrial interruptible sales 8,303 5,905 11,988 20,280 --------- --------- --------- --------- Total gas sales 130,728 124,028 368,728 406,473 Transportation deliveries 98,916 106,616 208,076 217,348 --------- --------- --------- --------- Total volumes sold and delivered 229,644 230,644 576,804 623,821 ========= ========= ========= =========
18
Three Months Ended Six Months Ended June 30, June 30, -------------------------------------------------- (Thousands, except customers and degree-days) 2003 2002 2003 2002 - ---------------------------------------------------------------------------------------------------------------------- Utility Operating Revenues - Dollars (with cost of gas adjustments): Residential and commercial sales $ 110,964 $ 105,064 $ 311,477 $ 364,555 Unbilled revenues (16,280) (26,731) (30,220) (44,626) ---------- ----------- ---------- ---------- Weather-sensitive revenues 94,684 78,333 281,257 319,929 Industrial firm sales 7,019 9,026 15,685 26,891 Industrial interruptible sales 4,099 2,675 5,943 12,571 ---------- ----------- ---------- ---------- Total gas sales 105,802 90,034 302,885 359,391 Transportation revenues 5,048 7,431 10,853 13,883 Other revenues 4,196 1,906 5,247 2,079 ---------- ----------- ---------- ---------- Total utility operating revenues 115,046 99,371 318,985 375,353 Cost of gas sold 58,934 45,294 166,868 212,438 ---------- ----------- ---------- ---------- Net utility operating revenues (margin) $ 56,112 $ 54,077 $ 152,117 $ 162,915 ========== =========== ========== ========== Total number of customers (end of period) 566,955 548,589 566,955 548,589 ========== =========== ========== ========== Actual degree-days 730 729 2,413 2,649 ========== =========== ========== ========== 20-year average degree-days 672 674 2,510 2,510 ========== =========== ========== ==========
NW Natural refunded approximately $29.9 million of 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 and had been deferred, with interest, pursuant to NW Natural's Purchased Gas Adjustment (PGA) tariff in Oregon (see "Cost of Gas," below). The refunds reduced gross operating revenues for the first six months of 2002 by $29.9 million, and reduced both cost of gas and deferred gas costs payable by $29.0 million. The refunds also reduced margin by about $0.9 million, but this amount was almost entirely offset by corresponding reductions in franchise tax expense and uncollectible accounts expense such that the effect of the refunds on net income was negligible. 19 For comparison purposes, the following table illustrates the pro forma results without the revenue effect of the billing credits in June 2002:
Three Months Ended Six Months Ended June 30, June 30, -------------------------------------------------- (Thousands) 2003 2002 2003 2002 - ---------------------------------------------------------------------------------------------------------------------- Utility Operating Revenues - Dollars (without cost of gas adjustments): Residential and commercial sales $ 110,964 $ 130,996 $ 311,477 $ 390,487 Unbilled revenues (16,280) (26,731) (30,220) (44,626) ---------- ----------- ---------- ---------- Weather-sensitive revenues 94,684 104,265 281,257 345,861 Industrial firm sales 7,019 11,956 15,685 29,821 Industrial interruptible sales 4,099 3,669 5,943 13,565 ---------- ----------- ---------- ---------- Total gas sales 105,802 119,890 302,885 389,247 Transportation revenues 5,048 7,431 10,853 13,883 Other revenues 4,196 1,906 5,247 2,079 ---------- ----------- ---------- ---------- Total utility operating revenues 115,046 129,227 318,985 405,209 Cost of gas sold 58,934 74,248 166,868 241,392 ---------- ----------- ---------- ---------- Net utility operating revenues (margin) $ 56,112 $ 54,979 $ 152,117 $ 163,817 ========== =========== ========== ==========
NW Natural issued billing credits totaling approximately $3.1 million to Oregon customers in the second quarter of 2003, representing the customers' share of net income from interstate storage operations and margin from an asset optimization contract in 2002 (see Part II, Item 7., "Results of Operations - Non-utility Operations - Gas Storage," in the 2002 Form 10-K). Similarly, NW Natural issued billing credits totaling approximately $1.2 million to Oregon customers in the second quarter of 2002, representing the customers' share of income and margin from these sources in 2001. The billing credits reduced utility operating revenues for the first six months of 2003 and 2002 by $3.1 million and $1.2 million, respectively. Residential and Commercial NW Natural continues to experience rapid customer growth, with 18,366 customers added since June 30, 2002, for a growth rate of 3.3 percent. In the three years ended Dec. 31, 2002, more than 58,000 customers were added to the system, representing an average annual growth rate of 3.9 percent. Typically, 80 percent or more of NW Natural's annual operating revenues are derived from gas sales to weather-sensitive residential and commercial customers. Accordingly, variations in temperatures between periods will affect volumes of gas sold to these customers. Weather conditions in the second quarter of 2003 were 9 percent cooler than average, compared to 8 percent cooler than average in the second quarter of 2002. Weather in the first six months of 2003 was 4 percent warmer than average and 9 percent warmer than the first six months of 2002. Average weather conditions are calculated from the most recent 20 years of temperature data measured by heating degree-days. Volumes of gas sold to residential and commercial customers in the second quarter of 2003 were 8.0 million therms, or 8 percent, higher than in the second quarter of 2002, reflecting slightly cooler weather, lower rates and customer growth. Related revenues, excluding the impact of $29.9 million refunded to Oregon customers in June 2002, decreased $9.6 million, or 9 percent, primarily due to net rate decreases effective Oct. 1, 2002. Customer growth in the residential and commercial segments since June 30, 2002, contributed an estimated 2.8 million therms in sales volumes and $1.3 million in additional margin. 20 Gas sales to residential and commercial customers in the first six months of 2003 were 16.5 million therms, or 5 percent, lower than in the first half of 2002, reflecting warmer weather that was partially offset by the impact of lower rates and customer growth. Related revenues, again excluding the impact of refunds to Oregon customers in June 2002, decreased $64.6 million, or 19 percent, primarily due to the net rate decreases effective Oct. 1, 2002. Customer growth in the residential and commercial segments since June 30, 2002, contributed an estimated 9.6 million therms in sales volumes and $4.0 million in additional margin. NW Natural's rate decreases in October 2002 were primarily related to substantial reductions in gas commodity costs and were applied through the Company's PGA mechanisms in Oregon and Washington (see Part II, Item 7., "Results of Operations - Regulatory Matters," in the 2002 Form 10-K). At the same time, NW Natural also applied small, partially offsetting rate increases in Oregon designed to recover the margin lost due to changes in residential and commercial consumption patterns in recent years. These rate increases contributed an estimated $2.0 million of margin in the second quarter of 2003 and $6.0 million of margin in the first half of 2003, equivalent to about 5 cents a diluted share of earnings in the second quarter and 14 cents a share in the six-month period. Industrial Sales and Transportation Revenues The following table summarizes the delivered volumes and margin in the industrial and electric generation markets:
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- (Thousands) 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------ Delivered volumes - therms: Industrial sales and transportation 119,186 128,093 244,918 273,729 Electric generation - 103 1,667 3,329 ------- ------- ------- ------- Total volumes 119,186 128,196 246,585 277,058 ======= ======= ======= ======= Margin - dollars: Industrial sales and transportation $ 9,131 $ 9,452 $ 18,877 $ 21,859 Electric generation - 2,239 6 4,573 ------- ------- ------- ------- Total margin $ 9,131 $ 11,691 $ 18,883 $ 26,432 ======= ======== ======== ========
Total volumes delivered to industrial and electric generation customers were 9 million therms, or 7 percent, lower in the second quarter of 2003 than in the same period of 2002. Combined margins from these customers were $2.6 million, or 22 percent, lower in the second quarter of 2003 compared to the same period of 2002. In the six months ended June 30, 2003, volumes were 30 million therms, or 11 percent, lower than in the same period in 2002. Combined margins were $7.5 million, or 29 percent, lower in the six months ended June 30, 2003 than in the same period in 2002. Volumes delivered to end-use industrial sales and transportation customers, excluding electric generation customers, in the six months ended June 30, 2003 were 11 percent lower than in the same period in 2002. Margin from these customers in the six months ended June 30, 2003 was 14 percent lower than in the same period in 2002. The decline in volumes was due to a combination of warmer weather and weaker economic conditions, while the greater percentage decline in margin was due to shifts by some customers during 2002 from higher-margin sales or transportation schedules to lower-margin transportation schedules. In the electric generation market, margin in the six months ended June 30, 2003 was negligible, compared to $4.6 million from this market in the same period in 2002. The difference is equivalent to an earnings reduction of 11 cents a share. One-year contracts for service to two customers in this market expired on June 30, 2002 and were not renewed; spot market electricity prices by then had gone down and wholesale power supplies were more readily available. 21 Other Revenues Other revenues include revenues recognized from a variety of sources other than the sale and transportation of gas (see Part II, Item 8., Note 1, in the 2002 Form 10-K), including deferrals to and amortizations from regulatory accounts and miscellaneous customer fees. Other revenues contributed $4.2 million to utility operating revenues in the second quarter of 2003, compared to $1.9 million in the second quarter of 2002. The $2.3 million increase in other revenues in the first quarter of 2003 came primarily from higher amortizations of interstate storage credits ($1.8 million) and revenue deferrals under NW Natural's partial decoupling mechanism ($0.9 million)(see Part II, Item 7., "Results of Operations - Regulatory Matters," in the 2002 Form 10-K), partially offset by lower amounts of revenue deferrals for lost margin under a high-efficiency furnace program ($0.2 million) and a decrease in customer late payment charges ($0.1 million). Other revenues contributed $5.3 million to utility operating revenues in the first six months of 2003, compared to $2.1 million in the first six months of 2002. The $3.2 million increase was primarily due to higher amortizations of interstate storage credits ($1.8 million) and revenue deferrals under the partial decoupling mechanism ($1.4 million). Cost of Gas Natural gas commodity prices have fluctuated dramatically in recent years. NW Natural has sought to mitigate the effect of price volatility on core utility customers through the use of its underground storage facilities, by entering into gas commodity-based financial hedge contracts, and by crediting gas costs with margin revenues derived from sales of commodity and released transportation capacity to on-system or off-system customers through negotiated short-term transactions (upstream sales) in periods when core utility customers do not fully utilize firm pipeline capacity and gas supplies. As of June 30, 2003, the Company had replaced all of its expiring long-term contracts with supply contracts for gas purchases of similar aggregate volume levels. All of the replacement contracts have terms of five years or less and contain commodity price provisions that are tied directly to monthly market index prices for the term of the contract. The Company intends to engage in financial swaps that are intended to have the effect of converting these monthly market index prices into fixed prices for most of its gas purchases under these contracts. The cost per therm of gas sold was 23 percent higher during the second quarter of 2003 than in the second quarter of 2002. Results for the three months ended June 30, 2002 included an adjustment reducing cost of gas by $29.0 million (see "Comparison of Gas Operations," above). Excluding the impact of this adjustment, the cost per therm of gas sold decreased 25 percent in the second quarter of 2003 compared to the second quarter of 2002. In the first six months of 2003, the cost per therm of gas sold was 13 percent lower than in the first six months of 2002, and was 24 percent lower than the first six months of 2002 excluding the cost of gas adjustment. The cost per therm of gas sold includes current gas purchases, gas drawn from storage inventory, gains or losses from commodity hedges, margin from upstream gas sales, demand cost equalization, regulatory deferrals and company use. Results for the three months ended June 30, 2002 also included adjustments reducing cost of gas relating to corrections in the amounts of deferred expenses for the recovery of pipeline demand charges under NW Natural's PGA mechanism. These adjustments totaled $2.9 million, contributing 7 cents a share to earnings in the second quarter of 2002, of which $2.6 million or 6 cents a share applied to periods prior to 2002. The methodology represented in the corrections continues to be applied in the Company's accounting for pipeline demand charges. 22 NW Natural's recorded amount of unaccounted-for gas for the six months ended June 30, 2003 was negligible, compared to 0.73 percent of gas receipts for the six months ended June 30, 2002. Unaccounted-for gas is the difference between the amount of gas the Company receives from all sources, including pipeline deliveries and withdrawals from storage, and the amount of gas it delivers to customers or other delivery points. Unaccounted-for gas may be caused in part by physical gas leakage, but it also may be due to cumulative inaccuracies in gas measurements or other causes. The Company considers a normal amount of unaccounted-for gas to be 0.5 percent of its total gas receipts during a period, but the amount may vary within a range around this level. The lower estimated amount of unaccounted-for gas in the first six months of 2003 had the effect of reducing cost of gas and increasing margin by $2.1 million as compared to the equivalent six-month period a year earlier. NW Natural uses a natural gas commodity-price hedge program under the terms of its Derivatives Policy to help manage its variable price gas commodity contracts (see Part II, Item 7., "Critical Accounting Policies - Accounting for Derivative Instruments and Hedging Activities," in the 2002 Form 10-K). NW Natural recorded net gains of $8 million and $31 million from commodity swap and call option contracts during the three- and six-month periods ended June 30, 2003, respectively, compared to net losses of $18 million and $45 million in the same periods in 2002. Gains and losses from commodity hedges are included in cost of gas, and the majority of such gains and losses are reflected 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 regulatory assets or liabilities for recovery from or refund to customers in future rates. NW Natural's gas costs in the second quarter of 2003 were slightly higher than the gas costs embedded in rates, with the effect that NW Natural's share of the higher costs decreased margin by $0.3 million, equivalent to a loss of about 1 cent a share. For the second quarter of 2002, NW Natural's gas costs were much lower than the projected costs built into rates and the Company's share of the savings realized from gas commodity purchases contributed $1.6 million of margin, equivalent to 3 cents a share of earnings. In the first six months of 2003, NW Natural's gas costs were slightly lower than the gas costs embedded in rates, despite rising gas prices in the spot market, with the effect that NW Natural's share of savings realized from gas commodity purchases contributed $0.3 million of margin, equivalent to 1 cent a share of earnings. The equivalent result in the first half of 2002 was net savings of $10.3 million, equivalent to 24 cents a share of earnings. Due to the warm weather and the reduced gas requirements of its industrial sales customers during the first six months of 2003, NW Natural was able to use gas supplies that were under contract for the winter season, but were not required for delivery to core market customers, to make upstream gas sales. The Company's purchase prices for this gas had been locked in through commodity swap and call option agreements entered into last year at levels lower than current market prices. Under the PGA tariff, the margin from these sales is treated as a reduction to the cost of gas, with the effect that 67 percent is deferred for refund to NW Natural's customers and the remaining 33 percent is retained by the Company. NW Natural's share of the margin from upstream gas sales in the second quarter of 2003 was $0.6 million, equivalent to 2 cents a share of earnings, compared to a loss of $0.1 million or less than 1 cent a share loss in the second quarter of 2002. In the first six months of 2003, NW Natural's share of the margin from upstream gas sales contributed $4.6 million of margin, equivalent to 10 cents a share of earnings. The equivalent result in the first half of 2002 was margin of $0.1 million, less than 1 cent a share of earnings. Non-utility Operations At June 30, 2003 and 2002, the Company's non-utility operations consisted of gas storage operations and two wholly-owned subsidiaries, Financial Corporation and Northwest Energy. Gas Storage NW Natural realized net income from its non-utility gas storage business segment, after regulatory sharing and income taxes, of $1.2 million or 5 cents a share in the three months ended June 30, 2003 and 2002. For the first 23 six months of 2003, operating results were net income of $2.5 million, compared to net income of $2.0 million for the comparable period in 2002. 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 gas storage services and credits the remaining 20 percent to a deferred regulatory account for distribution to its core utility customers. Results for the gas storage business segment also include revenues, net of amounts shared with core utility customers, from a contract with an independent energy trading company that seeks to optimize the use of NW Natural's assets by trading temporarily unused portions of its gas storage capacity and upstream pipeline transportation capacity. NW Natural retains 80 percent of the pre-tax income from the optimization of storage and pipeline transportation capacity when the costs of such capacity have not been included in core utility rates, or 33 percent of the pre-tax income from such capacity when the costs have been included in core utility rates. The remaining 20 percent and 67 percent, respectively, are credited to a deferred regulatory account for distribution to NW Natural's core utility customers. Financial Corporation Financial Corporation's operating results for the three months ended June 30, 2003 were net income of $0.4 million, compared to net income of $0.5 million for the comparable period in 2002. The results in the second quarters of both 2003 and 2002 were equivalent to 1 cent a share of earnings for the Company. For the first six months of 2003, operating results were net income of $0.4 million, compared to $0.7 million for the comparable period in 2002. The lower net income in the current six-month period was primarily due to lower income from miscellaneous receivables and a net decrease in operating results from Financial Corporation's investments in limited partnerships in wind and solar electric generation projects in California. These investments generate the majority of their operating revenues during the second and third quarters; therefore, results of operations for the first six months of the year are not necessarily indicative of the results for a full year. The Company's investment balances in Financial Corporation at June 30, 2003 and 2002 were $9.4 million and $8.6 million, respectively. 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. Northwest Energy recorded nominal expenses for corporate development activities in the second quarter of 2003. Operating Expenses Operations and Maintenance Consolidated operations and maintenance expenses increased $3.1 million, or 15 percent, and $5.0 million, or 12 percent, in the three- and six-month periods ended June 30, 2003, respectively, compared to the same periods in 2002. The six-month period includes increases of: $2.5 million primarily due to wage and salary increases and incentive bonus accruals; $1.5 million primarily due to higher pension and postretirement benefit costs, including the impact of changes in actuarial assumptions and lower returns on pension assets; $0.7 million primarily due to higher insurance premiums for health care and prescription drug coverage; and $0.5 million primarily due to higher business risk insurance renewal premiums. These cost increases were partially offset by a decrease in uncollectible accounts expense of $0.9 million primarily due to lower net write-offs of accounts receivable compared to last year when customer bills and subsequent write-offs were impacted by higher gas prices and colder weather. Taxes Other than Income Taxes Taxes other than income taxes, which are principally comprised of franchise, property and payroll taxes, were $0.7 million, or 4 percent, lower in the first six months of 2003 compared to the same period in 2002. Franchise 24 taxes, which are based on gross revenues, decreased $0.9 million, or 10 percent, reflecting lower gross revenues due to lower rates, warmer weather and other factors. Property taxes increased $0.3 million, or 4 percent, due to an increase in utility plant additions. Depreciation and Amortization Depreciation and amortization expense increased $0.9 million, or 4 percent, in the first six months of 2003 compared to the same period in 2002. Total depreciable plant and property in service at June 30, 2003 was up 5 percent from a year earlier. As a percentage of average plant and property, depreciation and amortization expense was approximately 2 percent for each of the six-month periods ended June 30, 2003 and 2002. Other Income (Expense) Other income (expense) improved by $14.9 million and $15.2 million in the three- and six-month periods ended June 30, 2003, respectively, compared to the same periods in 2002. Excluding the effect of the $13.7 million charge for costs incurred in the effort to acquire PGE, the Company's other income (expense) increased $1.2 million in the second quarter of 2003 and increased $1.5 million in the six months ended June 30, 2003, compared to the same periods in 2002, primarily due to reductions in interest charges on deferred regulatory account balances and an increase in gains from Company-owned life insurance. In the three- and six-month periods ended June 30, 2003, other income (expense) included interest expense on deferred regulatory account balances of $0.4 million and $0.7 million, respectively, compared to $1.0 million and $1.9 million in the same periods of 2002. These decreases reflect lower net credit balances outstanding in deferred regulatory accounts. Other income (expense) in the first six months of 2003 also included an increase in gains from Company-owned life insurance of $0.7 million, partially offset by a $0.4 million decrease in income from partnership investments. Interest Charges - net The Company's net interest expense increased by $0.5 million, or 6 percent, and $1.3 million, or 8 percent, in the three-month and six-month periods ended June 30, 2003, respectively, compared to the same periods in 2002. Interest expense on long-term debt was $0.5 million higher in each of the three- and six-month periods ended June 30, 2003 primarily due to higher balances outstanding during the period. Income Taxes The effective corporate income tax rates for the three months ended June 30, 2003 and 2002, were 33.9 percent and 45.0 percent, respectively. The higher rate in the three-month period ended June 30, 2002 was primarily due to the $13.7 million charge for costs incurred in the effort to acquire PGE. The effective corporate income tax rate for the six months ended June 30, 2003 was 35.4 percent, compared to 36.1 percent for the first six months of 2002. Excluding the effect of the $13.7 million PGE-related charge, the effective corporate income tax rates for the three- and six-month periods ended June 30, 2002 were 35.2 percent and 36.7 percent, respectively. Financial Condition Capital Structure The Company's goal is to maintain a capital structure comprised of 45 to 50 percent common stock equity, up to 10 percent preferred 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 stock redemption requirements (see "Liquidity and Capital Resources," below, and Part II, Item 8., Notes 3 and 5, in the 2002 Form 10-K). 25 Liquidity and Capital Resources At June 30, 2003, the Company had $24.1 million in cash and cash equivalents compared to $34.5 million at June 30, 2002. 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 "Lines of Credit," below, and Part II, Item 8., Note 6, in the 2002 Form 10-K). 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 contractual commitments under capital leases, operating leases and gas supply purchase contracts 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. Neither NW Natural's Mortgage and Deed of Trust nor the indentures under which other long-term debt is issued contain credit rating triggers or stock price provisions that require the acceleration of debt repayment. Also, there are no rating triggers or stock price provisions contained in contracts or other agreements with third parties, except for agreements with certain counter-parties under NW Natural's Derivatives Policy which require the affected party to provide substitute collateral such as cash, guaranty or letter of credit if credit ratings are lowered to non-investment grade, or in some cases if the mark-to-market value exceeds a certain threshold. Off-Balance Sheet Arrangements The Company has no material off-balance sheet financing arrangements. Contractual Obligations The following table shows NW Natural's long-term contractual obligations by maturity and type of obligation:
(Thousands) Payments Due in Years Commercial Preferred Long-term Capital Operating Gas Supply Ending June 30, Paper Stock Debt Leases Leases Commitments Total - ------------------------------------------------------------------------------------------------------------------------------ 2004 $ 16,600 $ 750 $ 35,000 $ 185 $ 2,982 $ 60,692 $ 116,209 2005 - 750 - 105 2,701 51,450 55,006 2006 - 750 23,000 97 2,193 49,511 75,551 2007 - 750 29,500 43 199 46,637 77,129 2008 - 750 - - 175 44,767 45,692 --------------------------------------------------------------------------------------------------- Total 2004 - 2008 16,600 3,750 87,500 430 8,250 253,057 369,587 Thereafter - 3,750 363,358 - 3,373 218,186 588,667 Less: imputed interest - - - (38) - (120,599) (120,637) --------------------------------------------------------------------------------------------------- Total $ 16,600 $ 7,500 $ 450,858 $ 392 $ 11,623 $ 350,644 $ 837,617 ===================================================================================================
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, in the 2002 Form 10-K). NW Natural had $16.6 million in commercial paper notes outstanding at June 30, 2003, compared to none outstanding at June 30, 2002 and $69.8 million outstanding at Dec. 31, 2002. Financial Corporation had no commercial paper notes outstanding at June 30, 2003 or 2002, or at Dec. 31, 2002. 26 Lines of Credit NW Natural has lines of credit with four commercial banks totaling $150 million. Half of the credit facility 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 at June 30, 2003 or 2002, or at Dec. 31, 2002. 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 the Company to maintain an indebtedness to total capitalization ratio of 65 percent or less and to maintain a consolidated net worth at least equal to 80 percent of its net worth at Sept. 30, 2002, plus 50 percent 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 June 30, 2003 and at Dec. 31, 2002, the Company was in compliance with both of these covenants. The banks have waived through Sept. 30, 2003, a requirement that NW Natural represent that the assets dedicated to its qualified pension plans exceed the unfunded liabilities of the plans before it may draw upon the lines of credit. NW Natural may be unable to draw upon the two-year portions of the credit lines, totaling $75 million, until its notes relating to the two-year commitments are approved by the OPUC or the Washington Utilities and Transportation Commission (WUTC), or both. NW Natural expects that it will be able to secure such approvals, if required. Optional Redemptions of Long-Term Debt NW Natural has exercised optional redemption provisions applicable to certain of its long-term debt, including all $4 million of the 7.50% Series B Medium-Term Notes (MTN) due 2023, all $11 million of the 7.52% Series B MTNs due 2023, and all $20 million of the 7.25% Series B MTNs due 2023. These MTNs are redeemable in the third quarter of 2003 at 103.75 percent, 103.76 percent and 103.65 percent of their respective principal amounts. The Company redeemed the 7.50% and 7.52% Series on July 1 and will redeem the 7.25% Series on Aug. 18, in each case with the proceeds from sales of commercial paper. NW Natural intends to refinance this debt through the sale of new long-term debt in the third or fourth quarter of 2003. Cash Flows Operating Activities Operations provided net cash of $120.5 million in the six months ended June 30, 2003, compared to $134.8 million in the first six months of 2002. The $14.3 million, or 11 percent, decrease was due to a decrease in cash from operations before working capital changes ($16.0 million), partially offset by an increase in working capital ($1.6 million). The decrease in cash from operations before working capital changes compared to the first six months of 2002 was primarily due to non-cash adjustments to net income in 2002, including the loss recorded for PGE costs ($13.7 million), plus a smaller increase in deferred income taxes and investment tax credits ($4.5 million), partially offset by a larger increase in deferred gas costs ($2.6 million). The increase in working capital for the six months ended June 30, 2003 over the same period 27 last year was due to smaller decreases in accounts receivable ($21.0 million) and accrued unbilled revenue ($15.1 million) caused primarily by lower customer rates and last year's $29.9 million gas cost refund, partially offset by an increase in accrued interest and taxes in 2003 compared to a decrease in 2002 ($25.4 million), an increase in cash provided from changes in other current assets and liabilities ($5.2 million), a larger decrease in inventories of gas, materials and supplies ($4.1 million) and a smaller decrease in accounts payable ($3.0 million). NW Natural's refunds to customers of approximately $29.9 million of deferred gas cost savings in June 2002 (see "Results of Operations - Comparison of Gas Operations," above) reduced cash flows from operations in the first six months of 2002 by that amount, but the reduction was more than offset by other factors affecting cash flows in that period. Investing Activities Cash requirements for investing activities in the first six months of 2003 totaled $56.8 million, up from $37.7 million in the same period of 2002. Cash requirements for utility construction totaled $56.1 million, up $23.7 million from the first six months of 2002. The increase in cash requirements for utility construction in the first six months of 2003 was primarily the result of capital expenditures relating to NW Natural's extension of the pipeline from its Mist gas storage field ($13.0 million) and other special projects to serve new customer load or new service areas ($5.7 million). Investments in non-utility property during the first six months of 2003 totaled $0.8 million, down from $2.6 million during the first six months of 2002. NW Natural's utility construction expenditures in 2003 currently are estimated to total $139 million, up from $85 million in 2002. Projected utility construction in 2003 includes $31 million for customer growth, up from $29 million in 2002; $41 million for system improvement and support, up from $25 million in 2002; $41 million for this year's portion of the SMPE project (see Note 7 to the accompanying Consolidated Financial Statements) and related gas storage facilities, up from $9 million in 2002; and $6 million for this year's portion of a project to construct a gas distribution system in Coos County, Oregon, up from $1 million in 2002. NW Natural is proceeding with construction of an initial segment of the SMPE project pending resolution of appeals from the order approving its site certificate for the project. During the five-year period 2003 through 2007, utility construction 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 improvement projects resulting in part from requirements under the Pipeline Safety Improvement Act of 2002, and the SMPE project to extend the pipeline that moves gas from NW Natural's Mist gas storage field into growing portions of its service area. See Part II, Item 8., "Financial Condition - Cash Flows - Investing Activities," in the 2002 Form 10-K. An estimated 60 percent of the required funds are expected to be internally generated over the five-year period; the remainder will be funded through a combination of long-term debt and equity securities with short-term debt providing liquidity and bridge financing. Financing Activities Cash used in financing activities in the first six months of 2003 totaled $46.9 million, down from $73.0 million in the same period of 2002. Factors contributing to the $26.1 million difference were a smaller reduction in short-term debt in the first six months of 2003 ($53.2 million), compared to a larger reduction in the first six months of 2002 ($108.3 million), partially offset by a $20 million decrease in long-term debt issued and a $9.5 million increase in long-term debt retired. In February 2003, NW Natural sold $40 million of its secured 5.66% Series B MTNs due 2033, and used the proceeds, together with internally generated cash, to reduce short-term debt by $69.8 million in the first quarter of 2003. 28 In March 2002, NW Natural sold $60 million of its secured Series B MTNs, and used the proceeds, together with internally generated cash, to reduce short-term debt by $108.1 million in the first quarter of 2002. In 2000, NW Natural 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 that has been extended through May 2004 (see Part II, Item 7., "Financial Condition - Cash Flows - Financing Activities," in the 2002 Form 10-K). No shares were repurchased in 2002 or in the first six months of 2003. Since the program's inception, the Company has repurchased 355,400 shares of common stock at a total cost of $8.2 million. Ratios of Earnings to Fixed Charges For the six months and 12 months ended June 30, 2003 and the 12 months ended Dec. 31, 2002, the Company's ratios of earnings to fixed charges, computed using the Securities and Exchange Commission method, were 3.48, 2.74 and 2.85, 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. 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. Contingent Liabilities Environmental Matters On June 30, 2003, the Company filed a Feasibility Scoping Plan and an Ecological and Human Health Risk Assessment with the Oregon Department of Environmental Quality (ODEQ), which outlined a range of remedial alternatives for the most contaminated portion of the Gasco site. See Part II, Item 8., Note 12, in the 2002 Form 10-K. NW Natural will work with the ODEQ to determine the appropriate remedial action from among the alternatives. Based upon the proposed actions in the draft plan, the Company estimates its range of liability, including the cost of investigation, from feasible alternatives at between $1.7 million and $7 million. NW Natural has a recorded liability of $1.7 million, as of June 30, 2003, for its estimated costs of investigation and remediation related to the Gasco site. See "Application of Critical Accounting Policies - Critical Estimates," above. NW Natural has accrued all material loss contingencies relating to environmental matters that it believes to be probable of assertion and reasonably estimable. See Part II, Item 8., Note 12, in the 2002 Form 10-K. Due to the preliminary nature of these environmental investigations, the range of any additional possible loss contingency cannot be currently estimated. On May 27, 2003, the OPUC approved NW Natural's request for deferral of environmental costs associated with five specific sites, including the Gasco, Wacker, Portland Gas and Portland Harbor sites. See Part II, Item 8., Note 12, in the 2002 Form 10-K. The authorization, effective for a 12-month period beginning April 7, 2003, allows NW Natural to defer and seek recovery of unreimbursed environmental costs in a future general rate case. As of June 30, 2003, NW Natural has recorded $0.6 million of these costs in a deferred regulatory account. Additionally, on a cumulative basis through June 30, 2003, the Company has accrued environmental costs totaling $7.9 million relating to the five sites, including $5.5 million that has already been disbursed. In addition, the Company currently estimates insurance recoveries related to these sites of $3.6 million and has recorded this amount as a receivable. NW Natural expects that the costs of further investigation and remediation for which it may be responsible with respect to the Gasco site, the Wacker site, the Portland Harbor site and the Portland Gas 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. 29 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, among others, that could cause the actual results of the Company to differ materially from those projected in such forward-looking statements: (i) prevailing state and federal 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, regulations 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 their effect on pension costs; (xii) competition for new energy development opportunities; (xiii) potential inability to obtain permits, rights of way, easements or other necessary authority to construct pipelines or other system expansions; and (xiv) legal and administrative proceedings and settlements. All subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, also are expressly qualified by these cautionary statements. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for the Company to predict all such factors, nor can it assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the information provided in Part II, Item 7A., "Quantitative and Qualitative Disclosures About Market Risk," in the 2002 Form 10-K. Item 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures As of June 30, 2003, the principal executive officer and principal financial officer of the Company have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act)). Based upon that evaluation, the principal executive officer and principal financial officer of the Company have concluded that such disclosure controls and procedures are effective in timely alerting them to any material information relating to the Company and its consolidated subsidiaries required to be included in the Company's reports filed or submitted with the Securities and Exchange Commission under the Exchange Act. 30 (b) Changes in Internal Control Over Financial Reporting There has been no significant change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Litigation In April 2003, NW Natural settled and agreed with Cascade Resources Corporation and Al Curry (collectively, Cascade) to dismiss their respective claims in Northwest Natural Gas Company v. Cascade Resources Corporation and Curry, et al. (United States District Court for the District of Oregon, Case No. CV 01-1620 HU) (the Action). See Part I, Item 3., "Legal Proceedings," in the 2002 Form 10-K and Part II, Item 1., "Legal Proceedings," in the Company's Form 10-Q for the quarter ended March 31, 2003. In the settlement, Cascade transferred all of its records, rights and interests in certain leases, including gas storage leases, in Columbia County, Oregon to NW Natural and agreed to refrain from certain competitive activities in the area. The counterclaims against NW Natural described in the 2002 Form 10-K have been dismissed and Enerfin Resources Northwest Limited Partnership (Enerfin) is the remaining defendant in the Action. NW Natural paid Cascade $0.5 million and agreed to defend and indemnify Cascade against claims by Enerfin relating to the validity and enforceability of the transferred leases. However, NW Natural will have no obligation to defend or indemnify Cascade from any claims for recovery of punitive or other exemplary damages. In June 2003, the court denied Enerfin's motion seeking to allow it to make cross-claims against Cascade in the case. In July, Enerfin filed a Motion for Summary Judgment seeking dismissal of claims made by NW Natural against it. The Company expects to oppose the motion. On March 13, 2003, the Oregon Energy Facility Siting Council (EFSC) issued a Final Order and Site Certificate (Site Certificate) pursuant to which the EFSC approved construction of the Company's proposed South Mist Pipeline Extension (SMPE) along a designated route. See Part II, Item 7., "Financial Condition - Investing Activities," in the 2002 Form 10-K. In May, two parties in the contested case before EFSC separately appealed the issuance of the Site Certificate to the Oregon Supreme Court. (Supreme Court Nos. 550428 and 550434 (consolidated)). The appeals were argued before the Supreme Court on July 22, 2003 and a final decision is pending. On July 30, 2003, the Supreme Court denied a motion filed by one of the appellants to stay construction of the SMPE. From time to time the Company is subject to other claims and litigation arising in the ordinary course of business. Although the final outcome of any such legal proceeding cannot be predicted with certainty, the Company does not expect disposition of these matters to have a materially adverse effect on the Company's financial position, results of operation or cash flows. 31 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NW Natural's Annual Meeting of Shareholders was held in Portland, Oregon on May 22, 2003. At the meeting, seven director-nominees were elected, as follows:
Term Director Class Expiring Votes For Votes Withheld -------- ----- -------- --------- -------------- Timothy P. Boyle I 2006 20,898,490 304,943 Mark S. Dodson I 2006 20,923,609 279,824 Randall C. Pape I 2006 20,916,638 286,795 Richard L. Woolworth I 2006 20,921,849 281,584 Robert L. Ridgley II 2004 20,903,246 300,187 John D. Carter III 2005 20,797,560 405,873 C. Scott Gibson III 2005 20,142,469 1,060,964
The other four directors whose terms of office as directors continued after the Annual Meeting are: Tod R. Hamachek, Melody C. Teppola, Russell F. Tromley and Richard G. Reiten. In accordance with the Company's Bylaws, Thomas E. Dewey, Jr., and Wayne D. Kuni, retired as directors at the conclusion of the meeting. Dwight A. Sangrey did not stand for election to another term. There were no broker non-votes on the election of directors. No other matters were voted upon at the meeting. Item 5. OTHER INFORMATION Regulatory Matters On Aug. 5, 2003, Oregon Governor Ted Kulongoski appointed two new Commissioners to serve on the three-member Oregon Public Utility Commission (OPUC). The appointments of Ray Baum, 47, a former Oregon legislator and attorney from La Grande, Oregon, and John Savage, 51, who most recently served as OPUC Utility Program Director and formerly was with the Oregon Department of Energy, are subject to confirmation by the Oregon Senate. Baum fills the vacancy created by the retirement on May 1, 2003 of Joan Smith, and Savage replaces OPUC Chairman Roy Hemmingway, who will retire Sept. 1, 2003. Lee Beyer continues to serve as a Commissioner. If Senate confirmation of the new commissioners is not obtained prior to Chairman Hemmingway's retirement, the OPUC will not have members constituting a quorum to conduct its business until such confirmations are obtained. 32 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit (3) - Bylaws of the Company, as amended July 24, 2003 Exhibit (11) - Statement re: Computation of Per Share Earnings Exhibit (12) - Computation of Ratio of Earnings to Fixed Charges Exhibit (31.1) - Rule 13a - 14(a)/15d-14(a) Certification of Principal Executive Officer (required by Section 302 of the Sarbanes-Oxley Act of 2002). Exhibit (31.2) - Rule 13a - 14(a)/15d-14(a) Certification of Principal Financial Officer (required by Section 302 of the Sarbanes-Oxley Act of 2002). Exhibit (32.1) - Section 1350 Certification of Principal Executive Officer and Principal Financial Officer (required by Section 906 of the Sarbanes-Oxley Act of 2002). (b) Reports on Form 8-K On April 2, 2003, May 1, 2003 and July 29, 2003, the Company filed or furnished its Current Reports on Form 8-K relating, respectively, to: (a) the lowering of its earnings guidance for the quarter ended March 31, 2003; (b) earnings for the quarter ended March 31, 2003 (unaudited) and the status of the Company's Oregon general rate case; and (c) earnings for the quarter ended June 30, 2003 (unaudited). SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTHWEST NATURAL GAS COMPANY (Registrant) Dated: August 12, 2003 /s/ Stephen P. Feltz -------------------------------- Stephen P. Feltz Principal Accounting Officer Treasurer and Controller 33 NORTHWEST NATURAL GAS COMPANY EXHIBIT INDEX To Quarterly Report on Form 10-Q For Quarter Ended June 30, 2003 Exhibit Document Number Bylaws of the Company, as amended July 24, 2003 (3) Statement re: Computation of Per Share Earnings (11) Computation of Ratio of Earnings to Fixed Charges (12) Certification of Principal Executive Officer Pursuant to (31.1) Rule 13a-14(a)/15d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Principal Financial Officer Pursuant to (31.2) Rule 13a-14(a)/15d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Principal Executive Officer and Principal (32.1) Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-3.(I) 3 exh3.txt EXHIBIT 3 - BYLAWS OF NW NATURAL GAS EXHIBIT (3) BYLAWS OF NORTHWEST NATURAL GAS COMPANY AS ADOPTED BY THE BOARD OF DIRECTORS JULY 17, 1975 AS AMENDED THROUGH JULY 24, 2003 CONTENTS ARTICLE I. OFFICES: Page Section 1. Office............................ 1 Section 2. Registered Office................. 1 ARTICLE II. MEETINGS OF SHAREHOLDERS: Section 1. Annual Meeting.................... 1 Section 2. Special Meetings.................. 1 Section 3. Notice............................ 1 Section 4. Fixing Record Date................ 1 Section 5. Record of Shareholders............ 2 Section 6. Quorum............................ 2 Section 7. Voting............................ 2 Section 8. Conduct of Meetings............... 2 Section 9. Proper Business for Meetings.......2 ARTICLE III. BOARD OF DIRECTORS: Section 1. Directors......................... 3 Section 2. Chairman of the Board............. 3 Section 3. Compensation...................... 3 ARTICLE IV. MEETINGS OF THE BOARD OF DIRECTORS: Section 1. Regular Meetings.................. 3 Section 2. Special Meetings.................. 4 Section 3. Waiver of Notice.................. 4 Section 4. Quorum............................ 4 Section 5. Manner of Acting.................. 4 Section 6. Action Without a Meeting.......... 4 ARTICLE V. COMMITTEES OF THE BOARD: Section 1. Governance Committee.............. 4 Section 2. Audit Committee................... 4 Section 3. Organization and Executive Compensation Committee.......... 4 Section 4. Strategic Planning Committee....................... 5 Section 5. Finance Committee................. 5 Section 6. Public Affairs and Environmental Policy Committee.................5 Section 7. Other Committees.................. 5 Section 8. Changes of Size and Function...... 5 Section 9. Conduct of Meetings............... 5 Section 10. Compensation...................... 5 ARTICLE VI. NOTICES: Section 1. Form and Manner................... 6 Section 2. Waiver............................ 6 ARTICLE VII. OFFICERS: Section 1. Election.......................... 6 Section 2. Compensation...................... 6 Section 3. Term.............................. 6 Section 4. Removal........................... 6 Section 5. President......................... 6 Section 6. Vice Presidents................... 6 Section 7. Secretary ........................ 6 Section 8. Treasurer......................... 7 ARTICLE VIII. CONTRACTS, LOANS, CHECKS AND DEPOSITS: Section 1. Contracts......................... 7 Section 2. Loans............................. 7 Section 3. Checks and Drafts................. 7 Section 4. Deposits.......................... 7 ARTICLE IX. CERTIFICATES FOR SHARES AND THEIR TRANSFER: Section 1. Certificates for Shares........... 7 Section 2. Transfer.......................... 7 Section 3. Owner of Record................... 7 ARTICLE X. INDEMNIFICATION AND INSURANCE: Section 1. Indemnification.................. 7 Section 2. Insurance........................ 8 ARTICLE XI. SEAL............................................. 8 ARTICLE XII. AMENDMENTS....................................... 8 The following Bylaws were adopted by Northwest Natural Gas Company on July 17, 1975 superseding amended Bylaws originally adopted in conformity with an order of the District Court of the United States for the District of Oregon enforcing a plan for rearrangement of the Company's capital structure effective December 31, 1951, and subsequently amended by the stockholders on May 17, 1954, May 20, 1957, May 21, 1973, and May 20, 1974. BYLAWS OF NORTHWEST NATURAL GAS COMPANY ARTICLE I. OFFICES SECTION 1. OFFICE. The principal office of the company shall be located in the City of Portland, Oregon. The company also may have offices at such other places both within and without the State of Oregon as the board of directors from time to time may determine. SECTION 2. REGISTERED OFFICE. The registered office of the company required by law to be maintained in the state shall be at the same location as the principal office unless otherwise designated by resolution of the board of directors. ARTICLE II. MEETINGS OF SHAREHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of shareholders of the company for the election of directors and for the transaction of other business shall be held at the company's office in the City of Portland, Oregon, or such other place in that City as shall be determined by the board of directors, on the fourth Thursday of May in each year, unless such day shall be a legal holiday, in which event such meeting shall be held on the next business day. If such meeting shall not be held on such day in any year, it shall be held within 60 days thereafter on such day as shall be fixed by the board of directors and be specified in the notice of the meeting. Every such meeting shall be held at the hour of two o'clock p.m., or at such other hour as shall be fixed by the board and specified in such notice. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders of the company may be called by the board of directors or the holders of not less than one-tenth of all shares entitled to vote at the meeting. Each special meeting shall be held for such purposes, at such place in the City of Portland, Oregon, and at such time as shall be specified in the notice thereof. SECTION 3. NOTICE. Written or printed notice stating the place, day and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than 10 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the board of directors or the persons calling the meeting, to each shareholder of record entitled to vote at such meeting. SECTION 4. FIXING RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than 50 days and, in the case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the board declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof. 1 SECTION 5. RECORD OF SHAREHOLDERS. The officer or agent having charge of the transfer books for shares of the company shall make, at least 10 days before each meeting of shareholders, a complete record of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order with the address of and the number of shares held by each, which record, for a period of 10 days prior to such meeting, shall be kept on file at the registered office of the company and shall be subject to inspection by any shareholder at any time during usual business hours. Such record also shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original transfer books for shares shall be prima facie evidence as to who are the shareholders entitled to examine such record or transfer books or to vote at any meeting of the shareholders. SECTION 6. QUORUM. A majority of the shares of the company entitled to vote, represented in person or by proxy, shall constitute a quorum at all meetings of shareholders. If a quorum is present, in person or by proxy, the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number, or voting by classes, is required by law or the Restated Articles of Incorporation. If a quorum shall not be represented at any meeting of shareholders, the shareholders represented may adjourn the meeting from time to time without further notice. At such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. The shareholders represented at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. SECTION 7. VOTING. Each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders, except to the extent that the voting rights of the shares of any class or classes are limited or denied by law or the Restated Articles of Incorporation. At each election of directors holders of shares of common stock have the right to cumulative voting as provided for in the Restated Articles of Incorporation. A shareholder may vote either in person or by proxy. A shareholder may authorize a person or persons to act for the shareholder as proxy in any manner permitted by law. An authorization of a proxy is effective when received by the secretary of the company or other officer or agent authorized to tabulate votes. SECTION 8. CONDUCT OF MEETINGS. Every meeting of shareholders shall be presided over by the chairman of the board, in his or her absence by the president, in their absence by a vice president or, if none be present, by a chairman appointed by the shareholders present at the meeting. The minutes of such meeting shall be recorded by the secretary or an assistant secretary but, if neither be present, by a secretary appointed for that purpose by the chairman of the meeting. The board of directors may adopt by resolution such rules and regulations for the conduct of meetings of shareholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the board of directors, the chairman of any meeting of shareholders shall have the exclusive right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the board of directors or prescribed by the chairman of the meeting, may include, without limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) rules and procedures for maintaining order at the meeting and the safety of those present; (c) limitations on attendance at or participation in the meeting to shareholders of record of the company, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (d) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (e) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the board of directors or the chairman of the meeting, meetings of shareholders shall not be required to be held in accordance with the rules of parliamentary procedure. SECTION 9. PROPER BUSINESS FOR MEETINGS. (a) No business shall be conducted at any meeting of shareholders that has not been properly brought before the meeting. To be properly brought before a special meeting of shareholders, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors or the persons calling the meeting. To be properly brought before an annual meeting of shareholders, business must be either (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (ii) otherwise brought before the meeting by or at the direction of the board of directors or the chairman of the board, or (iii) otherwise properly brought 2 before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the company. To be timely, a shareholder's notice must be delivered to the secretary at the principal executive office of the company not less than 90 days prior to the first anniversary of the previous year's annual meeting of shareholders; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed (other than as a result of adjournment) by more than 30 days from the anniversary of the previous year's annual meeting, notice by a shareholder to be timely must be delivered not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. For purposes of this section, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the company with the Securities and Exchange Commission; (b) A shareholder's notice to the secretary shall set forth (i) one or more matters appropriate for shareholder action that the shareholder proposes to bring before the meeting, (ii) a brief description of the matters desired to be brought before the meeting and the reasons for conducting such business at the meeting, (iii) the name and record address of the shareholder, (iv) the class and number of shares of the company that the shareholder owns or is entitled to vote and (v) any material interest of the shareholder in such matters; and (c) The chairman of the meeting shall have the power and duty (i) to determine whether any proposed business was properly brought before the meeting in accordance with the procedures set forth in this Section 9, and (ii) if the chairman determines that any proposed business was not brought before the meeting in compliance with this Section 9, to declare that such proposed business shall not be transacted. ARTICLE III. BOARD OF DIRECTORS SECTION 1. DIRECTORS. The business and affairs of the company shall be managed by its board of directors. The number of members of the board, their classification and terms of office, and the manner of their election and removal shall be determined as provided by the Restated Articles of Incorporation. Directors need not be residents of the State of Oregon or shareholders of the company. Effective July 1, 2002, no person who has reached the age of 70 years shall be eligible to be elected a director, but a director may serve until the next annual meeting of shareholders after reaching that age. SECTION 2. CHAIRMAN OF THE BOARD. The board of directors may elect one of its members as chairman of the board. The chairman of the board, if that position be filled, shall preside at all meetings of the shareholders and the board of directors and shall have such other duties and responsibilities as may be prescribed by the board of directors. If there shall be no chairman of the board, or in his or her absence or disability, the president also shall exercise the duties and responsibilities of that position. SECTION 3. COMPENSATION. Directors shall receive such reasonable compensation for their services as may be fixed from time to time by resolution of the board of directors, and shall be reimbursed for their expenses properly incurred in the performance of their duties as directors. No such payment shall preclude any director from serving the company in any other capacity and receiving such reasonable compensation for such services as may be fixed by resolution of the board. ARTICLE IV. MEETINGS OF THE BOARD OF DIRECTORS SECTION 1. REGULAR MEETINGS. Regular meetings of the board of directors shall be held in the company's offices at two o'clock p.m., Pacific Time, on the fourth Thursday of February, April, May, July and September, and on the third Thursday of December, or on such other date or at such other hour and place as shall be specified in the notice of meeting. The date, time and place for holding regular meetings of the board of directors may be changed upon the giving of notice to all directors by or at the request of the chairman of the board or the president. The board may provide by resolution the time and place either within or without the State of Oregon for holding of meetings or may omit the holding of any meeting without other notice than such resolution. 3 SECTION 2. SPECIAL MEETINGS. Special meetings of the board of directors may be called by or at the request of the chairman of the board, the chairman of the governance committee, the president or any two directors. The person or persons authorized to call special meetings of the board may fix any place, either within or without the State of Oregon, as the place for holding any special meeting of the board called by them. Notice of the time and place of special meetings shall be given to each director at least one day in advance by the secretary or other officer performing his or her duties. SECTION 3. WAIVER OF NOTICE. Any director may waive notice of any meeting. The attendance of a director at any meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Except as otherwise provided by law or the Restated Articles of Incorporation, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. SECTION 4. QUORUM. A majority of the number of directors at any time fixed by resolution adopted by the affirmative vote of a majority of the entire board of directors shall constitute a quorum for the transaction of business. If a quorum shall not be present at any meeting of directors, the directors present may adjourn the meeting from time to time without further notice until a quorum shall be present. SECTION 5. MANNER OF ACTING. Except as otherwise provided by law or the Restated Articles of Incorporation, the act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. SECTION 6. ACTION WITHOUT A MEETING. Any action required or permitted to be taken at a meeting of the board of directors may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors entitled to vote with respect to the subject matter thereof. ARTICLE V. COMMITTEES OF THE BOARD SECTION 1. GOVERNANCE COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint a governance committee composed of three or more independent directors. The board shall designate one member of the committee as chairman. The committee shall have and may exercise all of the authority of the board of directors in the management of the company, except with respect to matters upon which by law only the board of directors may act. The committee's responsibilities shall include serving as the nominating committee of the board; making recommendations to the board on board and board committee composition and structure, including recommendations with respect to committee and committee chairmanship assignments; and conducting periodic board self-assessments, peer reviews of individual directors and evaluations of committee effectiveness. The committee shall also perform such other functions as the board by resolution from time to time may direct. SECTION 2. AUDIT COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint an audit committee composed of three or more independent directors. The board shall designate one member of the committee as chairman. The duties of the committee shall be to discuss and review with the company's independent auditors the annual audit of the company, including the scope of the audit, and report the results of this review to the board; to meet with the independent auditors at such other times as the committee shall deem to be advisable; and to perform such other functions as the board by resolution from time to time may direct. SECTION 3. ORGANIZATION AND EXECUTIVE COMPENSATION COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint an organization and executive compensation committee composed of three or more independent directors. The board shall designate one member of the committee as chairman. The duties of the committee shall be to discuss and review the management of the affairs of the company relating to its organization and to executive personnel and their compensation, and to perform 4 such other functions as the board by resolution from time to time may direct. SECTION 4. STRATEGIC PLANNING COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint from among its members a strategic planning committee composed of three or more directors, a majority of whom shall not be officers or retired officers of the company. Any action required or permitted to be taken by the committee must be approved by a majority of the committee members present at a meeting at which a quorum is present. The board shall designate one member of the committee who is not an officer or retired officer of the company as chairman. The duties of the committee shall be to review and make recommendations to the board with respect to the company's long-term strategic goals, objectives and plans. The committee shall also perform such other functions as the board by resolution from time to time may direct. SECTION 5. FINANCE COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint a finance committee composed of three or more directors, a majority of whom shall not be officers or retired officers of the company. Any action required or permitted to be taken by the committee must be approved by both (a) a majority of the committee members present at a meeting at which a quorum is present, and (b) a majority of the total number of committee members who are not officers or retired officers of the company. The board shall designate one member of the committee who is not an officer or retired officer of the company as chairman. The duties of the committee shall be to discuss and review the management of the affairs of the company relating to financing, including the development of long-range financial planning goals and financial policy, and to perform such other functions as the board by resolution from time to time may direct. SECTION 6. PUBLIC AFFAIRS AND ENVIRONMENTAL POLICY COMMITTEE. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint from among its members a public affairs and environmental policy committee composed of three or more directors, a majority of whom shall not be officers or retired officers of the company. Any action required or permitted to be taken by the committee must be approved by both (a) a majority of the committee members present at a meeting at which a quorum is present, and (b) a majority of the total number of committee members who are not officers or retired officers of the company. The board shall designate one member of the committee who is not an officer or retired officer of the company as chairman. The duties of the committee shall be (i) to monitor significant environmental issues affecting the company and to recommend to the board appropriate environmental policies, and (ii) to consider, review and monitor significant matters of public interest and societal trends, and the company's community affairs, charitable contributions, diversity and equal employment opportunity compliance programs. The committee shall also perform such other functions as the board by resolution from time to time may direct. SECTION 7. OTHER COMMITTEES. The board of directors at any time, by resolution adopted by a majority of the board of directors, may appoint from among its members such other committees and the chairmen thereof as it may deem to be advisable. Each such committee shall have such powers and authority as are set forth in the resolutions pertaining thereto from time to time adopted by the board. SECTION 8. CHANGES OF SIZE AND FUNCTION. Subject to the provisions of law, the board of directors shall have the power at any time to increase or decrease the number of members of any committee, to fill vacancies thereon, to change any members thereof and to change the functions and terminate the existence thereof. SECTION 9. CONDUCT OF MEETINGS. Each committee shall conduct its meetings in accordance with the applicable provisions of these bylaws relating to the conduct of meetings of the board of directors. Each committee shall adopt such further rules and regulations regarding its conduct, keep such minutes and other records and appoint such subcommittees and assistants as it shall deem to be appropriate. SECTION 10. COMPENSATION. Persons serving on any committee shall receive such reasonable compensation for their services on such committee as may be fixed by resolution of the board of directors, provided that no person shall receive compensation for his or her services on any committee while serving as an officer of the company. 5 ARTICLE VI. NOTICES SECTION 1. FORM AND MANNER. Whenever, under the provisions of law or the Restated Articles of Incorporation, notice is required to be given to any director or shareholder, unless otherwise specified, it shall be given in writing by mail addressed to such director or shareholder at his or her address as it appears on the stock transfer books or other records of the company, with postage thereon prepaid, and such notice shall be deemed to be delivered when deposited in the United States Mail. Notice to directors also may be given by telephone or in any other manner which is reasonably calculated to give adequate notice. SECTION 2. WAIVER. Whenever any notice whatever is required to be given under the provisions of law, the Restated Articles of Incorporation or these bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. ARTICLE VII. OFFICERS SECTION 1. ELECTION. The board of directors, at its first meeting following the annual meeting of shareholders each year, shall elect one of its members as president and shall elect a secretary. At such meeting, or at any other time it shall deem appropriate, the board may elect one or more vice presidents and a treasurer. The board also may elect or appoint such other officers and agents as it may deem necessary. Any two or more offices may be held by the same person, except the offices of president and secretary. SECTION 2. COMPENSATION. The officers of the company shall receive such reasonable compensation for their services as from time to time may be fixed by resolution of the board of directors. SECTION 3. TERM. The term of office of all officers shall commence upon their election or appointment and shall continue until the first meeting of the board of directors following the annual meeting of shareholders and thereafter until their successors shall be elected or until their resignation or removal. A vacancy occurring in any office of the company for whatever reason may be filled by the board. SECTION 4. REMOVAL. Any officer or agent elected or appointed by the board of directors may be removed by the board whenever in its judgment the best interests of the company will be served thereby but such removal shall be without prejudice to the contract rights, if any, of the officer or agent so removed. SECTION 5. PRESIDENT. Unless otherwise determined by the board of directors, the president shall be the chief executive officer of the company and, subject to the control of the board of directors, shall be responsible for the general administration and operation of the company. He shall have such other duties and responsibilities as may pertain to such office or be prescribed by the board of directors. In the absence or disability of the president, an officer designated by the board shall exercise the duties and responsibilities of the president. SECTION 6. VICE PRESIDENTS. Each vice president shall have such duties and responsibilities as may be prescribed by the board of directors and the president. The board or the president may confer a special title upon a vice president. SECTION 7. SECRETARY. The secretary shall record and keep the minutes of the shareholders in one or more books provided for that purpose; see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; and perform such other duties as may be prescribed by the board or the president. The secretary shall have custody of the corporate seal of the company and shall affix the seal to any instrument requiring it and attest the same by his or her signature. The assistant secretaries shall have such duties as may be prescribed from time to time by the board, the president or the secretary. In the absence or disability of the secretary, his or her duties shall be performed by an assistant secretary. 6 SECTION 8. TREASURER. The treasurer shall have charge and custody and be responsible for all funds and securities of the company; deposit all moneys and other valuable effects in the name and to the credit of the company in such depositories as may be designated by the board of directors; and disburse the funds of the company as may be authorized by the board and take proper vouchers for such disbursements. The treasurer shall have such other duties as may be prescribed from time to time by the board or the president. In the absence or disability of the treasurer, his or her duties shall be performed by an assistant treasurer. ARTICLE VIII. CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. CONTRACTS. The board of directors by resolution may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the company, and such authority may be general or confined to specific instances. SECTION 2. LOANS. No loans shall be contracted on behalf of the company and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors. Such authority may be general or confined to specific instances. SECTION 3. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the company shall be signed by such officer or officers, agent or agents of the company and in such manner as shall from time to time be determined by resolution of the board of directors. SECTION 4. DEPOSITS. All funds of the company not otherwise employed shall be deposited from time to time to the credit of the company in such banks, trust companies or other depositories as the board of directors or officers of the company designated by the board may select, or be invested as authorized by the board. ARTICLE IX. CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of the company shall be issued only for whole numbers of shares and shall be in such form as the board of directors may, from time to time, prescribe in accordance with the laws of the State of Oregon. Such certificates shall be signed by the president or a vice president and by the secretary or an assistant secretary and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles thereof. In case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the company as the board may authorize. SECTION 2. TRANSFER. Shares of stock of the company shall be transferable on the books of the company by the holder of record thereof, or by his or her legal representative who shall furnish proper evidence of authority to transfer, or by his or her attorney thereunto authorized by duly executed power of attorney, and on surrender for cancellation of the certificates for such shares. The board of directors may appoint one or more transfer agents and registrars of stock of the company. SECTION 3. OWNER OF RECORD. The company shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. ARTICLE X. INDEMNIFICATION AND INSURANCE SECTION 1. INDEMNIFICATION. The company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was a director, officer, employee or agent of the company, or is or was serving at the request of the company as a director, officer, employee, agent or fiduciary of another 7 corporation, partnership, joint venture, trust or other enterprise or any employee benefit plan, against expenses (including attorney's fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with the defense or settlement of such action, suit or proceeding to the fullest extent permissible under the Oregon Business Corporation Act or the indemnification provisions of any successor Act. The foregoing rights of indemnification shall not be exclusive of any other rights to which any such person so indemnified may be entitled, under any agreement, vote of shareholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office; shall continue as to a person who has ceased to be a director, officer, employee or agent; and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 2. INSURANCE. The company may purchase and maintain insurance (and pay the entire premium therefor) on behalf of any person who is or was a director, officer, employee or agent of the company, or is or was serving at the request of the company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity or arising out of his or her status as such, whether or not the company would have the power to indemnify him or her against such liability under the provisions of the Oregon Business Corporation Act or any successor Act; and on behalf of any person who is or was a fiduciary under the Employee Retirement Income Security Act of 1974 with regard to an employee benefit plan of the company against any liability asserted against him or her and incurred by him or her in his or her fiduciary capacity. ARTICLE XI. SEAL The corporate seal of the company shall be circular in form and shall bear an inscription containing the name of the company, the year of its organization, the state of its incorporation and the words "Corporate Seal." ARTICLE XII. AMENDMENTS These bylaws, or any of them, may be altered, amended or repealed, or new bylaws adopted, by resolution of a majority of the board of directors, subject to repeal or change by action of the shareholders. 8 EX-11 4 exh11.txt STATEMENT - COMPUTATION OF EARNINGS EXHIBIT (11)
NORTHWEST NATURAL GAS COMPANY Statement re: Computation of Per Share Earnings (Unaudited) Three Months Ended Six Months Ended Thousands, except per share amounts June 30, June 30, - ---------------------------------------------------------------------------------------------------------- 2003 2002 2003 2002 ---- ---- ---- ---- Earnings (Loss) Applicable to Common Stock $ 4,315 $ (3,582) $ 30,572 $ 30,270 Debenture Interest Less Taxes 70 74 141 148 ------- -------- -------- --------- Net Income (Loss) Available for Diluted Common Stock $ 4,385 $ (3,508) $ 30,713 $ 30,418 ======= ======== ======== ========= Average Common Shares Outstanding 25,682 25,410 25,649 25,338 Stock Options 39 73 33 61 Convertible Debentures 320 336 320 336 ------- -------- -------- --------- Diluted Common Shares 26,041 25,819 26,002 25,735 ======= ======== ======== ========= Diluted Earnings (Loss) per Share of Common Stock $ 0.17 $ (0.14) $ 1.18 $ 1.18 ======= ======== ======== =========
EX-12 5 exh12.txt STATEMENT - COMPUTATION OF RATIOS EXHIBIT (12)
NORTHWEST NATURAL GAS COMPANY Computation of Ratio of Earnings to Fixed Charges January 1, 1998 - June 30, 2003 (Thousands, except ratio of earnings to fixed charges) (Unaudited) 12 Months Six Months Year Ended December 31, Ended Ended ---------------------------------------------------------- June 30, June 30, 1998 1999 2000 2001 2002 2003 2003* ---------------------------------------------------------- ----------------------- Fixed Charges, as Defined: Interest on Long-Term Debt $ 27,389 $ 27,728 $ 29,987 $ 30,224 $ 32,264 $ 33,730 $ 17,187 Other Interest 4,909 2,778 3,628 3,772 1,620 1,625 870 Amortization of Debt Discount and Expense 714 699 735 768 799 759 373 Interest Portion of Rentals 1,986 1,707 1,628 1,572 1,578 1,652 828 -------- -------- --------- -------- -------- -------- -------- Total Fixed Charges, as defined $ 34,998 32,912 35,978 36,336 36,261 37,766 $ 19,258 ======== ======== ========= ======== ======== ======== ======== Earnings, as Defined: Net Income $ 27,301 $ 45,296 $ 50,224 $ 50,187 $ 43,792 $ 43,203 $ 30,866 Taxes on Income 14,604 24,591 26,829 27,553 23,444 22,566 16,890 Fixed Charges, as above 34,998 32,912 35,978 36,336 36,261 37,766 19,258 -------- -------- --------- -------- -------- -------- -------- Total Earnings, as defined $ 76,903 $102,799 $ 113,031 $114,076 $103,497 $103,535 $ 67,014 ======== ======== ========= ======== ======== ======== ======== Ratio of Earnings to Fixed Charges 2.20 3.12 3.14 3.14 2.85 2.74 3.48 ======== ======== ========= ======== ======== ======== ========
* 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-31 6 exh31_1.txt CERTIFICATION OF PRINCIPAL EXEC OFF EXHIBIT (31.1) CERTIFICATION I, Mark S. Dodson, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Northwest Natural Gas Company; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2003 /s/ Mark S. Dodson - ------------------------------------- Mark S. Dodson President and Chief Executive Officer EX-31 7 exh31_2.txt CERTIFICATION OF PRINCIPAL FINANCIAL OFF EXHIBIT (31.2) CERTIFICATION 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2003 /s/ Bruce R. DeBolt - ------------------------------------ Bruce R. DeBolt Senior Vice President, Finance and Chief Financial Officer EX-32 8 exh32_1.txt CERTIFICATION OF PRIN EXEC OFF & PRIN FIN OFF EXHIBIT (32.1) NORTHWEST NATURAL GAS COMPANY Certificate Pursuant to Section 906 of Sarbanes - Oxley Act of 2002 Each of the undersigned, MARK S. DODSON, the President 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 June 30, 2003 (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 August 2003. /s/ Mark S. Dodson --------------------------------------- President and Chief Executive Officer /s/ Bruce R. DeBolt --------------------------------------- Senior Vice President, Finance, and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Northwest Natural Gas Company and will be retained by Northwest Natural Gas Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----