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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Check One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to____________
Commission file number 0-994
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 Number)
220 N.W. Second Avenue, Portland, Oregon 97209
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (503) 226-4211
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Shares outstanding on February 28, 1998
- ------------------- ---------------------------------------
Common Stock, $3 1/6 par value,
and Common Share Purchase Rights 22,922,546
Preference Stock, without par value 250,000
Preferred Stock, without par value 124,285
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
The aggregate market value of the shares of voting stock (common stock) held by
non-affiliates of the registrant at February 28, 1998 was: $640,982,000.
DOCUMENTS INCORPORATED BY REFERENCE
List documents incorporated by reference and the Part of the Form 10-K into
which the document is incorporated.
Portions of the Proxy Statement of Company, dated April 17, 1998, are
incorporated by reference in Part III.
NORTHWEST NATURAL GAS COMPANY
Annual Report to Securities and Exchange Commission
on Form 10-K
for the year 1997
TABLE OF CONTENTS
PART I Page
- ------ ----
Item 1. Business
General............................................. 3
Gas Supply.......................................... 4
Regulation and Rates................................ 7
Competition and Marketing........................... 9
Environment......................................... 11
Employees........................................... 11
Item 2. Properties............................................... 11
Item 3. Legal Proceedings........................................ 12
Item 4. Submission of Matters to a Vote of Security Holders...... 12
Additional Item
Executive Officers of the Registrant..................... 13
PART II
- -------
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters............................. 14
Item 6. Selected Financial Data.................................. 16
Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition................... 18
Item 8. Financial Statements and Supplementary Data.............. 31
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 63
PART III
- --------
Items 10.
- 13. Incorporated by Reference to Proxy Statement............. 63
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................ 63
SIGNATURES ........................................................ 67
NORTHWEST NATURAL GAS COMPANY
PART I
ITEM 1. BUSINESS
General
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Northwest Natural Gas Company (NW Natural or the Company) was
incorporated under the laws of Oregon in 1910. The Company and its predecessors
have supplied gas service to the public since 1859. Since September 1997, it has
been doing business as NW Natural.
NW Natural is principally engaged in the distribution of natural gas.
The Oregon Public Utility Commission (OPUC) has allocated to NW Natural as its
exclusive service area a major portion of western Oregon, including the Portland
metropolitan area, most of the fertile Willamette Valley and the coastal area
from Astoria to Coos Bay. NW Natural also holds certificates from the Washington
Utilities and Transportation Commission (WUTC) granting it exclusive rights to
serve portions of three Washington counties bordering the Columbia River. Gas
service is provided in 95 cities, together with neighboring communities, in 16
Oregon counties, and in nine cities, together with neighboring communities, in
three Washington counties. Based on U.S. Census Bureau statistics for 1995, NW
Natural's service areas had a population of about 2,735,000, including about 78
percent of the population of the State of Oregon and 6 percent of the population
of the State of Washington. The City of Portland, Oregon is the principal retail
and manufacturing center in the Columbia River Basin. It is a major port and
growing nucleus for trade with Pacific Rim nations such as Japan, Taiwan and
Korea.
At year-end 1997, NW Natural had about 407,100 residential customers,
50,300 commercial customers and 600 industrial customers. Industries served
include pulp, paper and other forest products; the manufacture of electronic,
electrochemical and electrometallurgical products; the processing of farm and
food products; the production of various mineral products; metal fabrication and
casting; and the production of machine tools, machinery and textiles.
The Company has two active wholly-owned subsidiaries. NNG Financial
Corporation (Financial Corporation) is incorporated in Oregon. Canor Energy
Ltd. (Canor) is incorporated in Alberta, Canada.
Financial Corporation arranges short-term financing for Canor and holds
financial investments as a limited partner in three solar electric generating
plants, four windpower electric generation projects and a hydroelectric project,
all located in California, and in two low-income housing projects in Portland.
Financial Corporation also holds interests in certain gas producing properties
in the western United States (See Item 2, Properties, below).
Canor is engaged in natural gas and oil exploration, development and
production in Alberta and Saskatchewan, Canada. Since 1995, Canor has managed a
joint venture with a wholly-owned subsidiary of NIPSCO Industries, Inc.
(NIPSCO), to develop gas and oil properties in western Canada. Canor and NIPSCO
plan to amalgamate their respective operations into a new company during 1998.
Gas Supply - General
- --------------------
NW Natural meets the needs of its core market (residential, commercial
and firm industrial) customers through natural gas purchases from a variety of
suppliers. NW Natural has a diverse portfolio of short-, medium- and long-term
firm gas supply contracts. During periods of peak demand, supplies under these
contracts are supplemented with gas from storage facilities either owned by or
contractually committed to NW Natural.
Natural gas for NW Natural's core market is transported by Northwest
Pipeline Corporation (NPC), primarily under three firm transportation
agreements. NPC's rates for service under these agreements are established by
the Federal Energy Regulatory Commission (FERC) under NPC's primary firm
transportation rate schedule, as amended or superseded from time to time.
The largest of the contracts with NPC expires September 30, 2013 and
provides for firm transportation capacity of up to 2,160,440 therms(1) per day.
This agreement provides access to natural gas supplies in British Columbia and
the U.S. Rocky Mountains.
NW Natural also has a contract with NPC expiring September 30, 2009 for
340,000 therms per day of firm transportation capacity for the Company's core
market. This agreement also accesses gas supplies in the U.S. Rocky Mountain
region.
The third transportation contract with NPC, under which service
commenced on December 1, 1995 and expires November 30, 2011, provides 1,020,000
therms per day of firm transportation capacity from the point of interconnection
of the NPC and PG&E Gas Transmission Northwest (PG&E GT-NW, formerly Pacific Gas
Transmission) systems in eastern Oregon to NW Natural's service territory. PG&E
GT-NW's pipeline runs from the U.S./Canadian border through northern Idaho,
southeastern Washington and central Oregon to the California/Oregon border. NW
Natural's total capacity on PG&E GT-NW and two other upstream pipelines (Alberta
Natural Gas Company and NOVA Corporation of Alberta) substantially matches this
amount of NPC capacity northward into Alberta, Canada.
The cost to NW Natural of gas to supply its core market consists of the
purchase price paid to suppliers plus charges paid to pipelines to transport
such gas to NW Natural's distribution system. While the rates for pipeline
transportation and peaking services are subject to federal regulation, the
purchase price of gas is not. Although pipeline rates increased significantly in
1993 due to system expansion and rate design changes, the effect of such
increases on core market customers has been more than offset by lower gas
commodity prices. In addition, NW Natural has been able to offset firm
transportation charges, in part, by making off-system sales and releasing
capacity in periods when core market customers do not fully utilize firm
pipeline capacity.
NW Natural supplies many of its non-core customers (larger industrial
interruptible customers with full or partial dual fuel capabilities) through gas
transportation service, delivering gas purchased by these customers directly
from suppliers. (See "Transportation".)
- -------------------------
(1) One therm is equivalent to 100 cubic feet of natural gas at an assumed
heat content of 1,000 British Thermal Units (Btu's) per cubic foot.
Gas Supply -- Core Market Basic Supply
- --------------------------------------
NW Natural purchases gas for its core market from a variety of
suppliers located in the western United States and Canada. At January 1, 1998,
NW Natural had 21 firm contracts with 20 suppliers with original terms of from
four months to 15 years which provided for a maximum of 2,757,090 therms of firm
gas per day during the peak winter season and 1,418,300 therms per day during
the remainder of the year. About 80 percent of the annual supply comes from
Canada.
The terms of NW Natural's principal purchase agreements are summarized
as follows:
An agreement expiring November 1, 2003, with CanWest Gas Supply, Inc.
(CanWest), an aggregator for gas producers in British Columbia, Canada, entitles
NW Natural to purchase up to 960,000 therms of firm gas per day. This agreement
contains a demand and commodity pricing structure and a provision for annual
renegotiations of the commodity price to reflect then-prevailing market prices.
The demand charges reflect the reservation of firm transportation space on the
Westcoast Energy, Inc. pipeline system in British Columbia. These demand charges
are subject to change as approved by the Canadian National Energy Board (NEB) in
rate proceedings similar to those conducted in the United States by the FERC.
This contract contains minimum purchase obligations.
An agreement also expiring November 1, 2003, with Amoco Canada
Petroleum Company, Ltd., on terms similar to the CanWest agreement, entitles NW
Natural to purchase up to 83,300 therms of firm gas per day. This gas is
aggregated from production in the Canadian province of Alberta and the Yukon and
Northwest Territories. This contract contains minimum purchase obligations.
An agreement with Poco Petroleums, Ltd., a Canadian producer, expiring
September 30, 2003, entitles NW Natural to purchase up to 155,160 therms per day
during the winter and up to 110,000 therms per day during the summer of gas
produced in Alberta.
Two agreements expiring September 30, 2003 with Westcoast Gas Services
entitle NW Natural to purchase up to 140,000 therms per day year-round, plus up
to 92,750 therms per day as winter season supply, of gas produced in Alberta.
Pricing for supplies under these agreements can be renegotiated annually. The
current pricing arrangement includes demand charges for upstream capacity on the
Canadian pipeline systems and a monthly reservation charge. The commodity
pricing consists of a portion of the daily contract quantity at a fixed price
and the remaining daily contract quantity tied to a monthly Canadian index.
An agreement expiring October 31, 2000, with Summit Resources Ltd.,
entitles NW Natural to purchase up to 77,580 therms per day during the winter
and up to 50,000 therms per day during the summer of gas produced in Alberta.
Pricing for supplies under this agreement can be renegotiated annually. The
current pricing arrangement includes demand charges for upstream capacity on
NOVA Corporation of Alberta's system and commodity charges that are fixed in
three volumetrically based tiers.
During 1997, new short-term (4 or 5 month) purchase agreements for firm
gas were entered into with 14 suppliers which provide for a total of 1,181,130
therms per day during the 1997-98 heating season. These contracts have a variety
of pricing structures and purchase obligations. NW Natural intends to enter into
new short-term purchase agreements in 1998 for equivalent volumes of gas with
these or other similar suppliers to be available during the 1998-99 winter
season.
NW Natural continues to purchase gas under agreements with two
producers (one of which is Financial Corporation), for gas produced from the
Mist gas field, located about 60 miles northwest of Portland, Oregon. The
production areas are situated near NW Natural's existing underground gas storage
facility. These agreements have primary terms of 10 years and prices that are
tied to NW Natural's weighted average cost of gas. Current production is
approximately 25,000 therms per day from about 17 wells, supplying about 1
percent of NW Natural's total annual requirements. Production from these wells
varies as existing wells are depleted and new wells are drilled.
During 1997, approximately 23 percent of NW Natural's purchases for its
core market was from the spot market (30 days or less), a significant increase
from the prior year. This reflects the increased flexibility provided under the
terms of NW Natural's firm supply contracts which permit the purchase of spot
gas under certain conditions and allowed NW Natural to take advantage of
generally depressed spot market prices in the western United States and Canada.
NW Natural's goal in purchasing gas for its core market is to meet
customers' needs at reasonable prices. NW Natural believes that gas supplies
available from suppliers in the western United States and Canada are adequate to
serve its core market customers for the foreseeable future, and that the cost of
such gas generally will track market prices.
Gas Supply -- Core Market Peaking Supply
- ----------------------------------------
NW Natural supplements its firm gas supplies with gas from
Company-owned or contracted peaking facilities in which gas is stored during
periods of low demand for use during periods of peak demand. In addition to
enabling NW Natural to meet its peak demand, these facilities make it possible
to lower the annual average cost of gas by allowing NW Natural both to reduce
its pipeline transportation contract demand and to purchase gas for storage
during the summer months when prices are generally at their lowest.
NW Natural has contracts with NPC which expire in 2004 for firm storage
services from the underground gas storage field at Jackson Prairie near
Centralia, Washington, and the liquefied natural gas (LNG) facility at Plymouth,
Washington. Together, these facilities provide NW Natural with daily firm
deliverability of 923,470 therms and total seasonal capacity of 13,082,647
therms. In addition, NW Natural has a contract with NPC which continues from
year-to-year, at NW Natural's sole option, for additional daily deliverability
of 132,510 therms and additional seasonal capacity of 2,779,970 therms from the
Jackson Prairie storage field. Separate contracts with NPC provide for the
transportation of these storage supplies to NW Natural's service territory.
NW Natural owns and operates two LNG plants which liquefy gas during
the summer months for use during the peak winter season. These two plants, one
located in Portland and the other near Newport, Oregon, provide a maximum daily
deliverability of 1.8 million therms and a total seasonal capacity of 17 million
therms. NW Natural also owns and operates an underground gas storage facility at
Mist, Oregon. This facility has a maximum daily deliverability of 1 million
therms and a total seasonal working gas capacity of 70 million therms. NW
Natural is engaged in a multi-year, major expansion of the Mist storage
facility.
NW Natural has a contract with Portland General Electric Company (PGE)
which expires in 2010 that provides NW Natural with additional winter peaking
supply. With certain limitations, NW Natural may interrupt gas deliveries to
PGE, use that gas for its core customers, and compensate PGE for its cost of
replacement fuel oil. The daily deliverability under this contract is 300,000
therms.
NW Natural also has contracts with two industrial customers, one gas
marketing company and another local gas distribution company on terms similar to
those under the contract with PGE which provide a total of 137,000 therms per
day of year-round capacity, plus 150,000 therms per day of recallable capacity
and supply. These contracts have original terms ranging from five to ten years.
Gas Supply -- Transportation
- ----------------------------
Between 1988 and early 1992, most of NW Natural's large industrial
interruptible customers switched from sales service to transportation service,
whereby they purchased gas directly from suppliers and shipped the gas on the
Company's system and those of its pipeline suppliers for a fee. Since 1992, many
of these customers have returned to sales service, primarily because NW
Natural's industrial sales rates were lower than those customers' costs of
purchasing and shipping their own gas. The ability of industrial customers to
switch between sales service and transportation service has made it possible for
NW Natural to retain most of these customers. Because transportation charges
typically have been the same as the margin on an equivalent sale of gas,
switching between sales service and transportation service by industrial
interruptible customers has not had a material effect on NW Natural's results of
operations. (See "Competition and Marketing".)
Regulation and Rates
- --------------------
NW Natural is subject to regulation with respect to, among other
matters, rates, systems of accounts and issuance of securities by the OPUC and
the WUTC. In 1997, 94 percent of both NW Natural's gas deliveries and its
utility operating revenues were derived from Oregon customers and the balance
from Washington customers. The Company is exempt from the provisions of the
Natural Gas Act by order of the Federal Power Commission (now the FERC).
NW Natural's most recent general rate case in Oregon, which was
effective in 1989, authorized rates designed to produce a return on common
equity of 13.25 percent. The most recent general rate increase in Washington,
which was effective in 1997, authorized rates designed to produce a return on
common equity of 11.25 percent. Actual revenues resulting from the OPUC's and
WUTC's general rate orders are dependent on weather, economic conditions,
customer growth, competition and other factors affecting gas usage in NW
Natural's service area. NW Natural's returns on average common equity from
utility operations were 13.7 percent in 1996 and 12.0 percent in 1997. The
Company's returns from consolidated operations, including subsidiary results,
were 13.0 percent in 1996 and 11.3 percent in 1997.
NW Natural tentatively plans to file for a general rate increase in
Oregon in the fourth quarter of 1998.
In Oregon, NW Natural has a Purchased Gas Cost Adjustment (PGA) tariff
under which net income derived from Oregon operations is affected only within
defined limits by changes in purchased gas costs. The PGA tariff provides for
periodic revisions in rates due to changes in the Company's cost of purchased
gas. Costs included in the PGA adjustments are based on NW Natural's gas
requirements for the 12-month period ended each June 30. Any resulting rate
adjustments, derived from gas prices negotiated for the gas supply contract year
commencing on the following November 1, are made effective on the following
December 1.
Effective January 1, 1998, the PGA tariff provides that 67 percent of
any difference between actual purchased gas costs and estimated purchased gas
costs incorporated into rates will be deferred for amortization in subsequent
periods. If actual gas commodity costs exceed those incorporated in rates, NW
Natural subsequently will adjust its rates upward to recover 67 percent of the
deficiency from core market customers. Similarly, if actual gas commodity costs
are lower than those reflected in rates, rates will be adjusted downward to
distribute to core market customers 67 percent of such gas commodity cost
savings.
In Washington, NW Natural is permitted to track increases and decreases
in gas commodity costs coincidental with their incurrence, with the result that
net income is not directly affected by changes in gas commodity costs.
In both Oregon and Washington, the PGA permits NW Natural to recover
100 percent of FERC-approved pipeline transportation cost increases.
In October 1997, NW Natural filed under its Oregon PGA tariff to
increase rates for Oregon customers by an average of 11.4 percent. The OPUC
approved the filing effective January 1, 1998, along with a settlement between
NW Natural and the OPUC Staff. The settlement modified the incentive formula for
future deferrals of variations in gas costs, from 80 percent to 67 percent, and
provided for a revenue reduction not relating to gas costs amounting to $2.5
million per year, effective on a deferred basis as of January 1, 1998. In
February 1998, NW Natural filed a further rate increase averaging 6.1 percent
under the PGA tariff, proposing as of April 1, 1998, to remove a temporary rate
discount in effect since December 1996.
In October 1997, NW Natural filed under its Washington PGA tariff to
increase rates for Washington customers by 11.4 percent. The WUTC approved a
substitute filing increasing rates by 10.5 percent effective December 1, 1997.
The OPUC and WUTC have approved transportation tariffs under which NW
Natural may contract with customers to deliver customer-owned gas. Under these
tariffs, revenues from the transportation of customer-owned gas, except that of
large industrial customers having the capability of bypassing NW Natural's
system, generally are equivalent to the margins that would have been realized
from sales of Company-owned gas. (See "Gas Supply -- Transportation" and
"Competition and Marketing".)
The OPUC and WUTC have implemented "integrated resource planning"
processes under which utilities develop plans defining alternative growth
scenarios and resource acquisition strategies. In 1996, the OPUC acknowledged
and accepted NW Natural's submission of its third Integrated Resource Plan. The
WUTC acknowledged and accepted NW Natural's third plan in 1997. Elements of the
Plan included an evaluation of supply and demand resources; the consideration of
uncertainties in the planning process and the need for flexibility to respond to
changes; a primary goal of "least cost" service; and consistency with state
energy policy. Although the OPUC's order acknowledging the Integrated Resource
Plan does not constitute ratemaking approval of any specific resource
acquisition or expenditure, the OPUC indicated that it would give considerable
weight in prudency reviews to utility actions that are consistent with
acknowledged plans. NW Natural will file its fourth Integrated Resource Plan for
acknowledgment by the OPUC and WUTC in 1998.
Competition and Marketing
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NW Natural has no direct competition in its service area from other
natural gas distributors. For residential customers' heating needs, however, NW
Natural competes with electricity, fuel oil, and, to a lesser extent, wood. It
also competes with electricity and fuel oil for commercial applications.
Competition among these forms of energy is based on price, reliability,
efficiency and performance. In 1997, NW Natural maintained its competitive price
advantage over electricity and approximate price parity with fuel oil in both
the residential and commercial markets. Throughout 1997, natural gas rates
continued to be substantially lower than rates for electricity provided by the
investor-owned utilities which serve approximately 75 percent of the homes in NW
Natural's Oregon service area. NW Natural believes that this rate advantage will
continue for the foreseeable future.
The relatively low saturation of natural gas in residential
single-family and attached dwellings in NW Natural's service territory,
estimated at between 33 and 40 percent, together with the price advantage of
natural gas compared with electricity and its operating convenience over fuel
oil, provides the potential for continuing growth in the residential conversion
market. In 1997, 21,848 net residential customers (after subtracting
disconnected or terminated services) were added, including 8,718 units of
existing residential housing which were reconnected to the system or were
converted from oil or electric appliances to natural gas. Of the new heating
conversions from other fuels, at least 60 percent converted to gas for water
heating. In addition, 3,006 net commercial customers were connected in 1997. The
net total of all new customers added in 1997, including industrial sales and
transportation customers, was 24,852. This constituted a growth rate of 5.7
percent, more than three times the national average for local distribution
companies as reported by the American Gas Association.
Despite warmer weather, natural gas sales volumes to residential and
commercial customers in 1997 were about the same as in 1996, largely due to new
customer acquisitions. For the year 1997, temperatures in NW Natural's service
territory, based on heating degree days, were 8 percent warmer than in 1996 and
4 percent warmer than the 20-year average.
The Pacific Northwest has historically enjoyed some of the lowest
electric rates in the nation, primarily due to the proximity of federal
hydropower facilities. With further deregulation in the energy business, the
region is unlikely to experience the large drop in electric rates expected in
other, high-cost areas of the country.
While the natural gas industry, including producers, interstate
pipelines and local distribution companies (LDCs), has undergone many changes in
its long history, perhaps no era has brought greater change than the past 10
years. These changes, brought about by the deregulation or restructuring of the
energy markets, are intended to promote competition where it is economically
beneficial to consumers. The changes are continuing, though at different rates
among the various regulatory jurisdictions around the country.
Traditionally, LDCs have sold a "bundled" product which included the
natural gas itself as well as delivery to the meter. Since the late 1980s,
however, large customers have sought savings by procuring their own supplies of
natural gas from producers and contracting with pipelines and LDCs for
transportation. Since the cost of the gas commodity is passed through directly
to LDC customers without markup, the impact to net income when a customer
chooses transportation service has been negligible. While NW Natural's ability
to obtain competitively-priced gas commodity has enabled it to retain sales
customers, further deregulation of the industry may bring an unbundled product
offering to a greater number of customers, such that an increasing number of
suppliers will actively compete for customers' gas commodity business. However,
since the final delivery of customer-owned gas will continue to be through
regulated distribution systems, no material impact to NW Natural's profitability
is anticipated. Bypass of NW Natural's facilities by other potential providers
of delivery service is not considered a widespread, significant threat because
of the nature of NW Natural's customer base and proximity to interstate
pipelines.
Total industrial throughput, including both sales and transportation of
firm and interruptible gas, was 579 million therms in 1997, up 2.7 percent from
564 million therms in 1996. This growth in industrial throughput is an indicator
of the economic health of the region served by NW Natural. The basic industries
such as forest products and metals continue to consolidate and experience only
slow growth. But a new manufacturing base, notably high-technology, is emerging
and has expanded and diversified the region's economic base. This economic
growth has contributed to an increase in industrial gas volumes averaging 2
percent per year over the past four years.
Industrial firm gas sales and transportation deliveries during 1997
totaled 194 million therms, up 41 percent from 1996. This increase reflects
mid-year transfers of several large customers previously served under
interruptible rates (52 million therms) and the effects of a strong local
economy. In 1997, 9 percent of total utility operating revenues and 17 percent
of total therms delivered were derived from sales and transportation deliveries
to industrial firm customers.
Industrial interruptible gas sales and transportation deliveries during
1997 totaled 385 million therms, down 10 percent from 1996. While economic
expansion strengthened interruptible deliveries, a number of larger customers
migrated from tariff-based interruptible transportation or sales rates to
individually negotiated transportation agreements based upon bypass economics
(the customers' costs of a direct connection to an interstate pipeline). In
1997, 9 percent of total utility operating revenues and 35 percent of total
therms delivered were derived from sales and transportation deliveries to
industrial interruptible customers.
As described above, NW Natural and many of its largest industrial
customers have entered into negotiated transportation service agreements. These
agreements are designed to provide rates that are either: 1) competitive with
the costs of alternative fuels, such as heavy oil, or 2) competitive with the
customer's bypass alternatives. These agreements generally prohibit bypass
during their terms. NW Natural currently has a proposed contract before the OPUC
which, if not approved, may expose NW Natural to a bypass risk of up to 6
million therms of deliveries per year to a single customer. Other than this
possibility, NW Natural does not expect significant bypass to occur in the
foreseeable future.
Since 1994, NW Natural has been authorized by the OPUC to make
off-system commodity sales and to release portions of its firm interstate
pipeline capacity at discounted rates when seasonal demand is low. This
authorization allows NW Natural to compete effectively with independent gas
marketers. Eighty percent of all positive net revenues (gross revenues less the
actual cost of gas or pipeline capacity) generated from these sales and capacity
releases ($3.5 million in 1997) have been credited to Oregon core market
customer gas costs. Effective March 2, 1998, the crediting factor for off-system
commodity sales changed from 80 percent to 67 percent.
During 1997, NW Natural entered into a marketing alliance with
PacifiCorp, the purpose of which is to provide electric and gas commodity
services to industrial and commercial customers in the states of Oregon and
Washington. In addition, the alliance will provide other energy-related services
and products. NW Natural does not expect the alliance to have a material impact
on its earnings. The primary value of the alliance is to provide convenience and
extra value to end-use customers, creating a more loyal customer base for both
NW Natural and PacifiCorp. PacifiCorp provides wholesale power throughout the
U.S. and electricity and energy-related services to over 1.4 million retail
customers in seven western states through its divisions, Pacific Power and Utah
Power.
Environment
- -----------
NW Natural is subject to air, water, hazardous waste and other
environmental regulation by state and federal authorities and has complied in
all material respects with applicable regulations. Compliance with these
regulations has not had a material effect on the Company's capital expenditures,
earnings or competitive position.
NW Natural owns property in Linnton, Oregon and previously owned
property in Salem and Eugene, Oregon that were sites of former gas manufacturing
plants. The Linnton site is currently under investigation for potential
remediation. The Company received a release from further liability for the Salem
property in 1996. (See Part II, Item 7., "Environmental Matters.")
Employees
- ---------
At year-end 1997, NW Natural had 1,337 employees, of which 900 were
members of the Office and Professional Employees International Union, Local No.
11. These union employees are working under a seven-year Joint Accord covering
wages, benefits and working conditions which will expire March 31, 2004.
ITEM 2. PROPERTIES
NW Natural's natural gas distribution system consists of approximately
10,500 miles of mains, as well as service pipes, meters and regulators, and gas
regulating and metering stations. The mains and feeder lines are located in
municipal streets or alleys pursuant to valid franchise or occupation
ordinances, in county roads or state highways pursuant to valid agreements or
permits granted pursuant to statute, or on lands of others pursuant to valid
easements obtained from the owners of such lands. NW Natural also holds all
necessary permits for the crossing of the Willamette River and a number of
smaller rivers by its mains.
NW Natural owns service facilities in Portland, as well as various
satellite service centers, garages, warehouses, and other buildings necessary
and useful in the conduct of its business. It leases office space in Portland
for its corporate headquarters. District offices are maintained on owned or
leased premises at convenient points in the distribution system. NW Natural owns
LNG facilities in Portland and near Newport, Oregon, and also owns two
underground natural gas reservoirs at Mist, Oregon.
NW Natural considers all of its properties currently used in its
operations, both owned and leased, to be well maintained, in good operating
condition, and adequate for its present and foreseeable future needs.
NW Natural 's Mortgage and Deed of Trust constitutes a first mortgage
lien on substantially all of the real property constituting its utility plant.
NW Natural holds interests in 8,915 net acres of underground natural
gas storage in Oregon. Financial Corporation holds interests in United States
oil and gas leases covering 8,558 net acres located in Oregon, California,
Wyoming, and Colorado. Canor holds interests in Canadian gas and oil leases
covering 149,211 net acres in Alberta and Saskatchewan. Most Canadian gas
production is sold under long-term contracts to markets in both Canada and the
United States. NW Natural owns four depleted gas reservoirs near Mist, Oregon,
that will be developed as underground gas storage facilities. It also holds an
option to purchase future storage rights in certain other areas of the Mist gas
field. The Company also holds an equity investment in a Boeing 737-300 aircraft.
ITEM 3. LEGAL PROCEEDINGS
In July 1995, a jury in an Oregon state court returned a verdict
against NW Natural in the case of Northwest Natural Gas Company v. Chase
--------------------------------------
Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370). The Oregon
- -------------
Court of Appeals (Oregon Court of Appeals Case No. CA A90481) affirmed the trial
court decision in February 1997. The Oregon Supreme Court agreed to hear the
case on appeal and is expected to render a final ruling during 1998. NW Natural
recorded a charge of $5.6 million in the fourth quarter of 1996, equivalent to
15 cents a share, as a reserve against payment of the judgment, costs and
post-judgment interest from the case.
The Company is party to certain other legal proceedings in which
claimants seek material amounts. Although it is not possible to predict the
outcome with certainty, based upon the opinions of legal counsel, management
does not expect disposition of these matters to have a materially adverse effect
on the Company's financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through
the solicitation of proxies or otherwise, during the fourth quarter of the year
ended December 31, 1997.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Age at
Name December 31, 1997 Positions held during last five years
---- ----------------- -------------------------------------
Richard G. Reiten 58 President (1996 - ); Chief Executive
Officer (1997- );
Chief Operating Officer (1996);
President and Chief Operating
Officer, Portland General Electric
Company (1992-95); President,
Portland General Corporation
(1989-92).
Bruce R. DeBolt 50 Senior Vice President, Finance, and
Chief Financial Officer (1990- ).
Mark S. Dodson 52 Senior Vice President, Public Affairs
and General Counsel (1998 - );
Senior Vice President (1997);
Partner, Ater Wynne Hewitt Dodson
& Skerritt LLP (1981 - 97).
Dwayne L. Foley 52 Senior Vice President, Operations
Support, and Chief Engineer (1997
- );
Senior Vice President, Operations
and Information Services (1992-97);
Senior Vice President, Gas
Operations and Information Services
(1990-92).
Michael S. McCoy 54 Senior Vice President, Customer
Services (1992- ).
Bruce B. Samson 62 Senior Vice President (1998);
(retired March 1, 1998) Senior Vice President, Public
Affairs and General Counsel
(1990-97).
W. Richard Harper, Jr. 44 Vice President, Energy Marketing and
Supply 1997- );
Vice President, Industrial and
District Operations (1995-97);
General Manager, Industrial and
Business Development (1992-95).
Diana J. Johnston 53 Vice President, Human Resources and
Administrative Services (1996- );
Vice President, Human Resources
(1992-96).
Gregg S. Kantor 40 Vice President, Public Affairs and
Communications (1998- );
Director, Public Affairs and
Communications (1996-97);
Principal, Kantor & Associates
(1994-96); Manager, Economic
Development, Portland General
Electric Company (1991-94).
C. J. Rue 52 Secretary (1982- ); Assistant
Treasurer (1987- ).
D. James Wilson 58 Treasurer and Controller (1987- ).
Each executive officer serves successive annual terms; present terms end
May 28, 1998.
There are no family relationships among the Company's executive officers.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(A) NW Natural's common stock is traded on the Nasdaq National Market
tier of the Nasdaq Stock Market, which reports the daily high, low and closing
transaction prices, as well as volume data, under the symbol "NWNG".
NW Natural's common stock is included on the Federal Reserve Board's
list of over-the-counter securities determined to be subject to margin
requirements under the Board's regulations.
NW Natural's common stock was split three-for-two effective September 6,
1996, in the form of a 50% stock dividend, to shareholders of record August 23,
1996. Share prices and dividends paid on shares of NW Natural's common stock for
periods prior to the effective date of the stock split, have been adjusted for
the stock split.
The quarterly high and low closing trades for NW Natural's common
stock, as quoted on the Nasdaq National Market and published in the Wall Street
Journal and on Nasdaq's World Wide Web site, were as follows:
1997 1996
------------------ -------------------
Quarter Ended High Low High Low
March 31 ........ $25.38 $23.25 $22.67 $20.83
June 30 ......... 26.88 23.13 23.58 21.17
September 30 .... 27.75 24.25 24.25 22.54
December 31 ..... 31.25 24.38 25.75 23.25
The closing quotation for the common stock on December 31, 1997 was
$31.00. On December 31, 1996 the closing quotation was $24.00.
(B) As of December 31, 1997 there were 10,097 holders of record of the
Company's common stock.
(C) NW Natural has paid quarterly dividends on its common stock in each
year since the stock first was issued to the public in 1951. Annual common
dividend payments have increased each year since 1956. Dividends per share paid
during the past two years were as follows:
Payment Date: 1997 1996
------------- ---- ----
February 15 $0.30 $0.30
May 15 $0.30 $0.30
August 15 $0.30 $0.30
November 15 $0.305 $0.30
------ -----
Total per share $1.205 $1.20
It is the intention of the Board of Directors to continue to pay cash
dividends on the Company's common stock on a quarterly basis. However, future
dividends will be dependent upon NW Natural's earnings, its financial condition
and other factors.
NW Natural's Dividend Reinvestment and Stock Purchase Plan permits
registered owners of common stock to reinvest all or a portion of their
quarterly dividends in additional shares of NW Natural's common stock at the
current market price. Shareholders also may invest cash on a monthly basis, up
to $50,000 per calendar year, in additional shares at the current market price.
During 1997, dividend reinvestments and optional cash investments under the Plan
aggregated $5.2 million and resulted in the issuance of 211,532 shares of common
stock. During the 20 years the Plan has been available the Company has issued
and sold 3,400,110 shares of common stock which produced $70.1 million in
additional capital.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data concerning the Company's
operations and financial condition.
Operating revenues and cost of
sales ($000): 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Sales revenues:
Residential $ 177,835 $183,802 $165,662 $176,510 $168,217
Commercial 100,677 104,582 99,079 108,452 103,476
Industrial - firm 27,025 30,672 31,268 34,443 31,340
Industrial - interruptible 13,944 17,097 24,113 27,361 18,884
Unbilled revenues 1,647 1,627 1,173 (5,571) 5,153
-------------------------------------------------------
Total gas sales revenues 321,128 337,780 321,295 341,195 327,070
Transportation 22,029 22,533 16,650 14,702 17,892
Other 8,513 9,943 10,060 829 2,890
-------------------------------------------------------
Total utility operating
revenues 351,670 370,256 348,005 356,726 347,852
Cost of gas 129,094 142,752 144,051 163,026 138,833
--------------------------------------------------------
Net utility operating
revenues 222,576 227,504 203,954 193,700 209,019
Non-utility net operating
revenues 9,868 10,009 8,271 11,773 10,865
--------------------------------------------------------
Net operating revenues $ 232,444 $237,513 $212,225 $205,473 $219,884
========================================================
Net income $ 43,059 $ 46,793 $ 38,065 $ 35,461 $ 37,647
========================================================
Preferred and preference
stock dividend
requirements 2,646 2,723 2,806 2,983 3,488
--------------------------------------------------------
Earnings applicable to common
stock $ 40,413 $ 44,070 $ 35,259 $ 32,478 $ 34,159
========================================================
Average common shares
outstanding (000)* 22,698 22,391 21,817 19,943 19,612
========================================================
Basic earnings per share
of common stock* $1.78 $1.97 $1.62 $1.64 $1.74
========================================================
Diluted earnings per share
of common stock* $1.76 $1.94 $1.60 $1.61 $1.72
========================================================
Dividends per share of
common stock* $1.205 $1.20 $1.18 $1.173 $1.167
========================================================
Total assets - at end of
period ($000) $1,111,617 $988,869 $929,277 $889,304 $849,036
========================================================
Ratio of Earnings to Fixed
Charges** 2.99 3.53 3.15 3.08 3.22
========================================================
* Prior years have been restated to give effect to three-for-two stock
split in September 1996.
** Computed using the Securities and Exchange Commission method. 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.
SELECTED FINANCIAL DATA (continued)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Capitalization - at end of period
($000):
Common stock equity $366,265 $346,778 $323,552 $274,408 $258,565
Redeemable preference stock 25,000 25,000 25,000 26,252 26,633
Redeemable preferred stock 12,429 13,749 14,840 15,950 17,041
Long-term debt 344,303 271,838 279,945 291,076 272,931
------------------------------------------------------
Total capitalization $747,997 $657,365 $643,337 $607,686 $575,170
======================================================
Gas sales and transportation deliveries (000 therms):
Residential 306,356 306,310 256,462 260,218 267,818
Commercial 225,249 225,115 196,723 201,925 209,642
Industrial - firm 84,523 91,122 82,958 81,348 80,588
Industrial - interruptible 53,929 63,261 84,173 89,899 66,370
Unbilled therms 3,615 3,759 4,946 (7,519) 3,844
------------------------------------------------------
Total gas sales 673,672 689,567 625,262 625,871 628,262
Transportation 440,452 410,062 379,116 364,461 415,367
------------------------------------------------------
Total volumes delivered 1,114,124 1,099,629 1,004,378 990,332 1,043,629
======================================================
Customers (average for period):
Residential 394,415 374,558 355,427 338,053 320,186
Commercial 48,232 46,355 44,740 43,367 41,906
Industrial - firm 411 409 405 398 388
Industrial - interruptible 119 131 143 148 122
Transportation 120 106 79 66 100
------------------------------------------------------
Total customers 443,297 421,559 400,794 382,032 362,702
======================================================
Customer statistics:
Heat requirements***
Actual degree days 4,092 4,427 3,779 4,020 4,452
20-year average degree days 4,264 4,273 4,306 4,324 4,313
Average annual use per customer
in therms:
Residential 777 823 726 776 844
Commercial 4,670 4,874 4,420 4,680 5,029
Gas purchased cost per therm
- net (cents) 24.05 22.25 20.67 23.44 23.11
======================================================
*** A degree day is the measure of the coldness of the weather experienced
based on the extent to which the average of the high and low temperatures for a
day falls below 65 degrees Fahrenheit.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The consolidated financial statements include:
Regulated utility:
Northwest Natural Gas Company (NW Natural)
Non-regulated wholly-owned subsidiaries:
NNG Financial Corporation (Financial Corporation)
Canor Energy, Ltd. (Canor)
Oregon Natural Gas Development Corporation (Oregon
Natural)-merged with and into NW Natural during the
second quarter of 1996
Together these businesses are referred to herein as the "Company" (see
"Subsidiary Operations" below and Note 2 to the Consolidated Financial
Statements).
The following is management's assessment of the Company's financial
condition including the principal factors that affect results of operations. The
discussion refers to the consolidated activities of the Company for the three
years ended December 31, 1997.
Earnings and Dividends
- ----------------------
In 1997, the Company's earnings applicable to common stock were $40.4
million, the second highest in the Company's history. Earnings in 1996 were a
record $44.1 million, up 25 percent from $35.3 million in 1995. The higher 1996
earnings reflect both colder weather and customer growth. Earnings for both 1997
and 1995 were lower due to warmer than normal weather, the effect of which was
partially offset by additional sales from customer growth.
The Company's basic earnings from consolidated operations were $1.78 a
share in 1997, down from $1.97 a share in 1996 and up from $1.62 a share in
1995.
NW Natural earned $1.70 a share from gas utility operations in 1997,
compared to $1.87 in 1996 and $1.43 in 1995. Weather conditions in NW Natural's
service territory in 1997 were 8 percent warmer than in 1996 and 4 percent
warmer than the 20-year average. Weather in 1996 was 17 percent colder than 1995
and 4 percent colder than the 20-year average. The estimated weather-related
decrease in net operating revenues (margin) during 1997 was equivalent to about
24 cents a share compared to actual conditions during 1996. The colder weather
in 1996 resulted in increased gas deliveries to, and related margin from,
weather-sensitive customers. The weather-related increase in 1996 was equivalent
to about 55 cents a share compared to actual conditions in 1995.
Customer growth of 5.7 percent during both 1997 and 1996 contributed
an estimated $12.6 million to 1997 margin and $10.9 million to 1996 margin.
Customer growth of 4.7 percent during 1995 contributed an estimated $9.7 million
to margin.
The estimated impact on margin of weather and customer growth are
derived from NW Natural's internal planning model. The model calculates expected
sales to, and revenues from, residential and commercial customers for "base
usage," representing gas use for water heaters, ranges, and other appliances not
sensitive to outside temperatures. The model also calculates expected sales to,
and revenues from, these customers for "heat sensitive" usage, primarily
furnaces, as a function of heating degree days (the difference between 65
degrees Fahrenheit and the average of a day's high and low temperatures). The
model then estimates the earnings effect of the difference between expected
sales and revenues under actual temperature conditions, and expected sales and
revenues under average temperature conditions.
Subsidiary earnings for 1997 were equivalent to 8 cents a share,
compared to 10 cents in 1996 and 19 cents in 1995. The decrease in 1997 from
1996 was primarily due to a one-time $2.9 million gain in 1996 from Oregon
Natural's sale of its underground storage assets to NW Natural which was offset
in part by an impairment loss of $1.3 million on producing wells and a $1.0
million write-down of unproven properties. The decrease in 1996 from 1995 was
primarily due to a one-time $3.8 million gain in 1995 from Oregon Natural's sale
of production and related gathering system assets.
1997 was the 42nd consecutive year in which the Company's dividends
paid have increased. Dividends paid on common stock were $1.205 a share in 1997
compared with $1.20 in 1996 and $1.18 in 1995.
Results of Operations
- ---------------------
Regulatory Matters
------------------
NW Natural provides gas utility service in Oregon and Washington, with
Oregon representing approximately 94 percent of its revenues. Future earnings
and cash flows from utility operations will be determined for the most part by
continued growth in the residential and commercial markets, and by NW Natural's
ability to remain price competitive in the large industrial market, to control
expenses, and to obtain timely regulatory approval for rate changes reflecting
investments in new utility plant.
NW Natural currently has no competition from other gas utility
distributors in the territory it serves. However, it competes with Northwest
Pipeline Corporation (NPC) to serve large industrial customers, with oil and
electricity for industrial and commercial uses, and with oil, electricity, and
wood for residential use. The Pacific Northwest has historically enjoyed some of
the lowest electric rates in the nation, primarily due to the proximity of
federal hydropower facilities. With further deregulation of the energy business,
the market for energy will become more competitive, but the Pacific Northwest is
unlikely to experience the large drop in electric rates that other, high-cost
areas of the country are anticipating. In 1997, NW Natural maintained its
competitive advantage over electricity and approximate price parity with fuel
oil in the residential and commercial markets.
In October 1997, the Washington Utilities and Transportation
Commission (WUTC) approved a general rate increase averaging 3 percent for NW
Natural's customers in Washington. Revenue from Washington operations will
increase by approximately $0.6 million annually due to the combined effects of
the general rate increase of about $0.5 million and a temporary surcharge to
recover over five years the balance of deferred expense related to retiree
health care and life insurance benefits attributable to Washington operations.
The WUTC authorized a return on common equity of 11.25 percent. Effective
December 1, 1997, the WUTC approved a rate increase averaging 10.5 percent to
pass through to Washington customers increases in purchased gas costs and to
remove temporary rate increments to amortize balances in deferred accounts. The
WUTC approved rate decreases averaging 4.9 percent and 8.0 percent,
respectively, effective December 1, 1996 and 1995.
Effective January 1, 1998, the Oregon Public Utility Commission (OPUC)
approved rate increases averaging 11.4 percent for NW Natural's customers in
Oregon. The OPUC also approved a settlement modifying the incentive formula for
deferrals of variations in gas costs, from 80 percent to 67 percent. The OPUC
approved rate decreases averaging 3.6 percent and 6.7 percent effective December
1, 1996 and 1995, respectively. The rate increases in Oregon in 1998 and the
rate decreases in 1996 and 1995 reflected changes in NW Natural's purchased gas
costs, the application of temporary rate adjustments to amortize regulatory
balancing accounts and the removal of temporary rate adjustments effective the
previous year.
None of the rate increases and decreases discussed above had a
material effect on net income.
Comparison of Gas Operations
----------------------------
The following table summarizes the composition of gas utility volumes
and revenues for the three years ended December 31:
Thousands
(Except customers and degree days) 1997 1996 1995
- -------------------------------------------------------------------------------------------------
Gas Sales and Transportation
Volumes (Therms):
- ----------------------------
Residential and commercial sales 531,605 531,425 453,185
Unbilled volumes 3,615 3,759 4,946
--------- ---------- ---------
Weather-sensitive volumes 535,220 48% 535,184 49% 458,131 46%
Industrial firm sales 84,523 7% 91,122 8% 82,958 8%
Industrial interruptible sales 53,929 5% 63,261 6% 84,173 8%
--------- ---------- ---------
Total gas sales 673,672 689,567 625,262
Transportation deliveries 440,452 40% 410,062 37% 379,116 38%
--------- ---- --------- ---- --------- ----
Total volumes sold and delivered 1,114,124 100% 1,099,629 100% 1,004,378 100%
========= ==== ========= ==== ========= ====
Utility Operating Revenues:
- ---------------------------
Residential and commercial
revenues $278,512 $288,384 $264,741
Unbilled revenues 1,647 1,627 1,173
-------- -------- --------
Weather-sensitive revenues 280,159 80% 290,011 78% 265,914 76%
Industrial firm sales revenues 27,025 8% 30,672 8% 31,268 9%
Industrial interruptible sales
revenues 13,944 4% 17,097 5% 24,113 7%
-------- -------- --------
Total gas sales revenues 321,128 337,780 321,295
Transportation revenues 22,029 6% 22,533 6% 16,650 5%
Other revenues 8,513 2% 9,943 3% 10,060 3%
-------- ---- -------- ---- -------- ----
Total utility operating revenues $351,670 100% $370,256 100% $348,005 100%
======== ==== ======== ==== ======== ====
Cost of gas sold $129,094 $142,752 $144,051
======== ======== ========
Total number of customers
(end of period) 458,021 433,169 409,949
======= ======= =======
Actual degree days 4,092 4,427 3,779
======== ======== ========
20-year average degree days 4,264 4,273 4,306
======== ======== ========
Residential and Commercial
--------------------------
NW Natural continues to experience a rapid customer growth rate
relative to others in the industry. The 24,852 customers added during 1997
represent a growth rate of 5.7 percent, repeating the record growth rate
achieved in 1996. In the three years ended December 31, 1997, more than 66,000
customers were added to the system, representing an average annual growth rate
of 5.4 percent.
Weather conditions were 4 percent warmer than average in 1997, 4
percent colder than average in 1996, and 12 percent warmer than average in 1995.
Average weather conditions are calculated from the most recent 20 years of
temperature data measured by heating degree days. Weather in 1997 was 8 percent
warmer than in 1996 while 1996 was 17 percent colder than 1995.
Typically, 75 percent or more of NW Natural's annual operating
revenues are derived from gas sales to weather-sensitive residential and
commercial customers. Accordingly, variations in temperatures between periods
will affect volumes of gas sold to, and revenues derived from, these customers.
The volumes of gas sold to residential and commercial customers during
1997 were comparable to 1996, reflecting the combined effects of residential and
commercial volumes added from customer growth, offset by reduced gas use due to
warmer weather. Related revenues decreased 3 percent primarily due to rate
decreases effective December 1, 1996. The addition of 23,220 customers and 17
percent colder weather in 1996 compared to 1995 resulted in a 9 percent increase
in related revenues over 1995.
In order to match revenues with related purchased gas costs, NW
Natural records unbilled revenues for gas delivered but not yet billed to
customers through the end of the period.
Industrial Sales, Transportation and Other Revenues
---------------------------------------------------
The combined margin from industrial sales and transportation decreased
5 percent in 1997, from $53.9 million in 1996 to $51.3 million in 1997, and
increased 9 percent from $49.6 million in 1995 to $53.9 million in 1996. Total
volumes delivered to industrial customers were 15.3 million therms, or 3
percent, higher in 1997 than in 1996. The decrease in margin despite increased
volumes in 1997 reflects the migration by some customers to lower rates under
special anti-bypass contracts. Total volumes delivered to industrial customers
were 16.7 million therms, or 3 percent, higher in 1996 than in 1995. In addition
to higher volumes, margin improved in 1996 due to higher prices under industrial
incentive rate schedules which are designed to track changes in oil prices.
NW Natural did not experience margin losses from new bypasses of its
system in 1997, 1996 or 1995. Although NW Natural does not expect a significant
number of its large customers to bypass its system in the foreseeable future, it
may experience further deterioration of margin associated with customers'
transfers to contracts with pricing designed to be competitive with the capital
and operating costs of direct connections to NPC's system.
Other revenues primarily relate to adjustments in regulatory accounts
(see Note 1 to the Consolidated Financial Statements). Other revenues for 1997
included $6.1 million from the amortization of property tax savings and $1.2
million from the amortization of Oregon income tax savings.
In 1996, other revenues included $4.0 million from the amortization of
property tax savings, $1.6 million from regulatory amortizations, and two
non-recurring gains. Specifically, NW Natural recorded a gain of $0.7 million
for the recovery of costs and lost revenues related to energy conservation
programs approved by the OPUC. NW Natural also recorded a gain of $0.9 million
as the result of a settlement with the OPUC concerning amounts to be refunded to
Oregon customers from prior-year savings in property taxes and Oregon income
taxes.
In 1995, other revenues included a one-time, $3.0 million payment
under a contract with Portland General Electric Company (PGE), an electric
utility based in Portland. This contract gave PGE the option to request gas
transportation service for electric generation at one or more sites in NW
Natural's service territory. Additionally, other revenues in 1995 included $2.3
million from amortization of the Interruptible Sales Adjustment account and $3.1
million from other regulatory amortizations.
Cost of Gas
-----------
The cost per therm of gas sold during 1997 was 7 percent lower than in
1996, while such cost in 1996 was 10 percent lower than in 1995. The cost per
therm of gas sold includes current gas purchases, gas drawn from storage, demand
cost equalization, regulatory deferrals, and company use. For the years 1997,
1996 and 1995, the cost of gas sold was reduced by non-regulated gas sales of
$2.3 million, $1.2 million, and $0.3 million, respectively. Under an agreement
with the OPUC, these sales are treated as a reduction of gas costs.
The average cost per therm of gas purchased was 8 percent higher in
1997 than in 1996, due to fluctuations in prices NW Natural paid for the portion
of its gas supplies tied to monthly market price indexes. NW Natural has a
Purchased Gas Cost Adjustment (PGA) tariff under which its net income from
Oregon operations is affected only within defined limits by changes in purchased
gas costs. In 1997, NW Natural absorbed 20 percent of the higher cost of gas
purchased, as compared to projections, under its Oregon PGA tariff. The
remaining 80 percent of the higher gas costs was recorded as deferred debits
(regulatory assets). Effective January 1, 1998, the incentive formula for
deferred gas costs was modified so that NW Natural will absorb 33 percent of the
difference between actual and projected gas costs and the remaining 67 percent
will be deferred for recovery or refund to customers in future rates.
Subsidiary Operations
---------------------
Consolidated subsidiary earnings for 1997 were $1.8 million,
equivalent to 8 cents a share, compared to $2.2 million, or 10 cents a share, in
1996, and $4.1 million, or 19 cents a share, in 1995 (see Note 2 to the
Consolidated Financial Statements).
In 1997, Financial Corporation earned $1.6 million, compared to $1.0
million in 1996 and $1.3 million in 1995. 1997 results included a $1.1 million
gain from the sale of Financial Corporation's interest in a California solar
electric generation partnership during the fourth quarter. The decreases in
Financial Corporation's on-going operating results from 1996 to 1997 and from
1995 to 1996 were primarily due to weaker operating results attributable to its
investments in windpower energy facilities in California.
Canor earned $0.2 million in 1997, compared to $0.5 million in 1996.
Canor's 1997 results included a $0.9 million write-down of unproven properties
in the fourth quarter, while 1996 results include $0.9 million in impairment
losses resulting from the application of Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." Oregon Natural was merged into NW
Natural during 1996, thereby effecting the transfer of certain assets, including
the stock of Canor, to NW Natural. As a result of this merger, Canor became a
wholly-owned subsidiary of NW Natural. Earnings from Canor's operations in 1995,
prior to the merger, are included in Oregon Natural's results of operations.
Oregon Natural earned $0.7 million in 1996 compared to $1.8 million in
1995. Oregon Natural's earnings in 1996 and 1995 included one-time gains from
asset sales, including a $2.9 million gain from the sale of underground storage
assets to NW Natural in 1996, and a $3.8 million gain from the sale of its
gathering system and gas producing properties in 1995. The 1996 gain was
partially offset by a $1.3 million impairment loss on producing wells and a $1.0
million write-down of unproven properties.
Operating Expenses
------------------
Operations and Maintenance
--------------------------
Consolidated operations and maintenance expenses were $2.3 million, or
3 percent, lower in 1997 than in 1996. NW Natural's operations and maintenance
expenses in 1997 decreased $2.1 million, or 3 percent, compared to 1996
primarily due to a one-time charge of $4.9 million in 1996 for 1995 litigation
(see "Chase Gardens Litigation", below), offset by increases in customer service
and market development expense ($2.9 million); electronic and network services
($0.6 million); and environmental investigation and remediation charges ($0.6
million). Included in 1997 operations and maintenance expense was a $4 million
increase in payroll due to salary increases as well as wage increases resulting
from NW Natural's new seven-year labor agreement effective April 1, 1997.
Subsidiary expenses decreased $0.2 million, or 6 percent, in 1997 compared to
1996 primarily due to a decline in oil and gas production costs.
NW Natural's operations and maintenance expenses in 1996 were $9.3
million higher than in 1995, while subsidiary expenses decreased $1.1 million.
The increase in utility operations and maintenance expenses was primarily due to
the $4.9 million judgment against NW Natural in the Chase Gardens litigation
-------------
(see below); expenses related to cold weather and floods ($0.6 million); higher
bonus accruals ($1.9 million); environmental investigation costs ($0.4 million);
service costs tied to customer growth ($0.8 million); and market development
costs ($0.7 million). Lower subsidiary operations and maintenance expenses were
primarily due to a decline in oil and gas production expenses.
Chase Gardens Litigation
------------------------
In July 1995, a jury in an Oregon state court returned a verdict
against NW Natural in the case of Northwest Natural Gas Company v. Chase
--------------------------------------
Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370). The Oregon
- -------------
Court of Appeals (Oregon Court of Appeals Case No. CA A90481) affirmed the trial
court decision in February 1997. The Oregon Supreme Court agreed to hear the
case on appeal and is expected to render a final ruling during 1998. NW Natural
recorded charges of $5.6 million in the fourth quarter of 1996, equivalent to 15
cents a share, as a reserve against payment of the $4.9 million judgment plus
related costs and post-judgment interest.
Taxes Other Than Income
-----------------------
Taxes other than income, which are comprised of property, franchise,
payroll and other taxes, declined $1.6 million, or 8 percent, in 1997. Property
tax expense was $1.6 million, or 17 percent, lower than in 1996, due to
settlements reached in 1996 relating to property valuations and regulatory
treatment of reduced property taxes.
NW Natural's franchise taxes, which are incurred as a percentage of
revenue, decreased 4 percent, from $8.2 million in 1996 to $7.9 million in 1997,
paralleling the percentage decrease in gas sales revenues from 1996 to 1997. The
decrease in franchise taxes was offset by increased payroll taxes and regulatory
fees.
Depreciation, Depletion and Amortization
----------------------------------------
Depreciation, depletion and amortization expense increased $1.6
million, or 4 percent, in 1997 compared to 1996, and $2.5 million, or 6 percent,
in 1996 compared to 1995. NW Natural's depreciation expense increased $3.1
million from 1996 to 1997 due to an additional $111.1 million of utility plant
placed in service. The new Customer Information System (CIS), placed in service
in the fourth quarter of 1997, increased depreciation expense by $0.2 million
compared to 1996. NW Natural's depreciation expense decreased $0.7 million, or 2
percent, in 1996 compared to 1995 primarily due to lower depreciation rates
approved by the OPUC and WUTC effective January 1, 1996.
Depreciation, depletion and amortization expense for subsidiaries
decreased $1.5 million in 1997. Depreciation expense for 1997 included expenses
of $1.7 million recorded by Canor for the write-down of unproven properties and
the abandonment of dry wells. Subsidiary depreciation, depletion and
amortization expense increased $3.2 million, or 79 percent, in 1996 compared to
1995 primarily due to impairment and abandonment expenses totaling $2.3 million
which were recorded by Oregon Natural pursuant to SFAS No. 121 and the
write-down of unproven properties. Canor also recorded a $0.9 million expense
during 1996 pursuant to SFAS No. 121.
Other Income
------------
The variations in other income during the past three years resulted
primarily from non-recurring items and a $1.4 million decline in interest income
in 1997 from 1996. Oregon Natural recorded a gain in 1996 on the sale of its
underground storage facilities, and recorded a gain in 1995 on the sale of its
gathering system and interests in production assets in Oregon. NNG Energy
Systems, Inc., a wholly-owned subsidiary of the Company that was dissolved in
1995, recorded a gain in 1995 resulting from the reorganization of its
California cogeneration subsidiary.
Interest Charges
----------------
NW Natural's interest charges increased $2.7 million, or 10 percent,
in 1997 compared to 1996 due to the issuance of $90 million of Medium-Term Notes
during 1997 and higher commercial paper balances outstanding. The average
commercial paper balances increased from $14.0 million in 1996 to $45.8 million
in 1997. The increases in NW Natural's long-term and short-term debt balances
were primarily due to the financing of its $117 million utility construction
program and $28.6 million in deferred gas costs.
Interest charges in 1996 increased $1.2 million, or 5 percent,
compared to 1995, also due to higher long-term and short-term debt balances
outstanding related to the financing of NW Natural's utility construction
expenditures, and to accrued interest charges of $0.7 million for post-judgment
interest for the Chase Gardens litigation.
Allowance for Funds Used During Construction (AFUDC) represents the
cost of funds used during the construction of utility plant (see Note 1 to the
Consolidated Financial Statements). In 1997, 1996 and 1995, AFUDC reduced
interest expense by $1.7 million , $0.8 million and $0.6 million, respectively.
The weighted average AFUDC rates were 5.8 percent in 1997, 8.9 percent in 1996
and 5.3 percent in 1995 (See "Financing Activities" below).
Income Taxes
------------
The effective corporate income tax rate for the years ended December
31, was 33 percent for 1997 and 37 percent for both 1996 and 1995. The lower
1997 tax rate was primarily due to permanent tax savings from the change in book
depreciation rates, an increase in tax credits, and a reversal of amounts
previously recorded for a California solar energy investment that was sold by
Financial Corporation (see Note 7 to the Consolidated Financial Statements).
The significant increase in 1996 income tax expense was due to the $14
million, or 23 percent, increase in income before income taxes compared to 1995.
In 1996, NW Natural recorded an adjustment reducing tax expense for the year by
$1.9 million, or 8 cents a share, for reversal of deferred tax amounts provided
in prior years.
Redeemable Preferred and Preference Stock Dividend Requirements
---------------------------------------------------------------
Redeemable preferred and preference stock dividend requirements for
1997 were lower by $0.1 million, or 3 percent, compared to 1996, due to sinking
fund redemptions and the redemption of all the outstanding shares of the $4.68
series of preferred stock in June 1997. 1996 requirements were $0.1 million, or
3 percent, lower than 1995 due to sinking fund redemptions and the conversion or
redemption of the remaining shares of the Convertible Preference Stock, $2.375
Series, in May 1995.
Financial Condition
- -------------------
Capital Structure
-----------------
NW Natural's capital expenditures are incurred primarily for utility
construction resulting from customer growth and system improvements. NW Natural
finances these expenditures from cash provided by operations and from short-term
borrowings which are periodically refinanced through the sale of long-term debt
or equity securities. In addition to its capital expenditures, the
weather-sensitive nature of gas usage by NW Natural's residential and commercial
customers influences the Company's financing requirements. Short-term liquidity
requirements are satisfied primarily through the sale of commercial paper, which
is supported by commercial bank lines of credit (see Note 6 to the Consolidated
Financial Statements).
The Company's long-term goal is to maintain a capital structure
comprised of 45 to 50 percent common stock equity, 5 to 10 percent preferred and
preference stock and 45 to 50 percent short-term and long-term debt. When
additional capital is required, the Company issues debt or equity securities
depending upon both the target capital structure and market conditions. The
Company also uses these sources to meet long-term debt and preferred and
preference stock redemption requirements (see Notes 3 and 5 to the Consolidated
Financial Statements).
Cash Flows
----------
Operating Activities
--------------------
Cash provided by operating activities in 1997 was $44.1 million, or 49
percent, lower than in 1996. The decrease was primarily due to an increase in
deferred gas costs ($36.7 million) and a decrease in accounts payable ($6.0
million).
In 1996, cash provided by operating activities was $6.1 million, or 7
percent, higher than in 1995, primarily due to increased gas deliveries and the
related margin from weather-sensitive customers resulting from colder weather
and customer growth. The increase in margin in 1996 was partially offset by the
continuing effects of rate reductions effective in December 1994 and 1995 to
amortize credit balances in regulatory accounts.
The Company has lease and purchase commitments related to its
operating activities which are financed with cash flows from operations (see
Note 13 to the Consolidated Financial Statements).
Investing Activities
--------------------
Cash requirements for NW Natural's capital expenditures in 1997
totaled $115.9 million, up $32.5 million, or 39 percent, from 1996. The increase
included expenditures for expansion of the Mist underground storage facility
($10.8 million); completion of the new customer information system (CIS)
software development ($7.9 million); transportation equipment ($2.2 million);
expansion and reinforcement of the gas distribution system to accommodate
customer growth ($3.2 million); land purchases for a new service center ($1.6
million); and the upgrading of other computer system hardware and software ($1.5
million).
The $16.2 million increase in capital expenditures in 1996 compared to
1995 resulted largely from higher amounts expended for the gas distribution
system in order to serve significant customer growth ($8.8 million); the ongoing
development of the new CIS which had been delayed in 1995 ($3.7 million); and
the development of a remote data terminal system ($1.9 million).
NW Natural's construction expenditures are estimated at $90 million
for 1998. Over the five year period 1998 through 2002, these expenditures are
estimated to be $500 million to $550 million. The higher projected level of
capital expenditures over the next five years reflects continued high customer
growth, a major system reinforcement project and the development of additional
underground storage facilities. About half of the required funds are expected to
be internally generated, with the remainder to be funded through a combination
of long-term debt and equity securities with short-term debt providing liquidity
and bridge financing.
NW Natural invested $3.0 million in both 1996 and 1997 in Canor's
exploration and production program to supplement Canor's internally-generated
funds.
Financing Activities
--------------------
Cash provided by financing activities in 1997 totaled $76.8 million,
compared to cash used for financing of $6.5 million in 1996 and $7.2 million in
1995. The primary financing activities which accounted for the change from 1996
were NW Natural's sale of $90 million of its Medium-Term Notes in 1997 and the
net issuance of $39.3 million of commercial paper, partially offset by the
redemption of $27 million of long-term debt.
Significant financing activity in 1996 consisted of NW Natural's sale
of $20 million of Medium-Term Notes, the net issuance of $21.2 million of
commercial paper and the redemption of $22 million of long-term debt.
In 1995, financing activity consisted primarily of NW Natural's sales
of $33 million of common stock and $10 million of Medium-Term Notes, the
redemption of the remaining shares of the $2.375 series of Convertible
Preference Stock and a net decrease of $24.8 million of commercial paper.
Ratios of Earnings to Fixed Charges
-----------------------------------
For the years ended December 31, 1997, 1996 and 1995, the Company's
ratios of earnings to fixed charges, computed using the Securities and Exchange
Commission method, were 2.99, 3.53 and 3.15, 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.
Contingent Liabilities
- ----------------------
Like all companies with business application software programs, the
Company is affected by the "Year 2000" issue. Much of this software, which
includes NW Natural's customer service, operations, and financial systems, was
written using two digits to define the year, rather than four. Any of the
Company's software that is time-sensitive may recognize a date using "00" as the
year 1900 rather than 2000. This could result in the computer shutting down or
performing incorrect calculations.
NW Natural has identified and is in the process of correcting the
systems within its control that could be affected by the Year 2000 issue. In
1997, the consultant that performed an assessment of NW Natural's application
software estimated that the cost of making its application source code for these
systems Year 2000-compliant would be about $4.0 million. NW Natural believes
that with the appropriate modifications, it will be able to operate its
time-sensitive software programs beyond the turn of the century.
NW Natural has identified major vendors for which it depends on
products or services and is contacting such vendors to hear what plans they have
to correct problems they may face with Year 2000 compliance. The Company can
make no assurances regarding the Year 2000 compliance status of systems or
parties outside its control, and cannot assess the effect on it of any
non-compliance by such systems or parties.
In December 1997, the OPUC authorized NW Natural to defer and amortize
over five years, commencing January 1, 1998, its incremental costs for
assessment, planning and renovation of systems for Year 2000 compliance.
Environmental Matters
- ---------------------
NW Natural owns property in Linnton, Oregon, that is the site of a
former gas manufacturing plant that was closed in 1956. In 1993, pursuant to
Oregon Department of Environmental Quality (ODEQ) procedures, NW Natural
submitted a notice of intent to participate in the ODEQ's Voluntary Cleanup
Program and, in 1994, the site was listed on ODEQ's Confirmed Release List and
Inventory. During 1995, initial tests revealed environmental contamination, but
the extent or the estimated cost of remediation cannot yet be determined. NW
Natural continues to monitor this site.
NW Natural expects that its costs of investigation and any remediation
at the Linnton site for which it may be responsible should be recoverable, in
large part, from insurance or through future rates. During the period from 1993
through 1997, NW Natural recorded as expense a total of $1.6 million for the
estimated costs of consultants' fees, ODEQ oversight and the voluntary
investigation.
In 1996, the Eugene Water and Electric Board (EWEB) asked NW Natural
to participate in an investigation and the potential remediation of a 1.5 acre
site of a former manufactured gas plant in Eugene, Oregon. NW Natural purchased
the property in 1958, after the plant had been converted to a liquid propane gas
plant. It used the propane plant until 1960 when the system was converted to
natural gas, and continued to use the site as a service center until 1976 when
it was sold. To date, NW Natural has not agreed to participate in an
investigation of the site and has not obtained sufficient information to
determine the extent of its responsibility, if any, for remediation of the site.
Forward-Looking Statements
- --------------------------
This report and other presentations made by the Company from time to
time may contain forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and other statements which are other than statements of
historical facts. The Company's expectations, beliefs and projections are
expressed in good faith and are believed by the Company to have a reasonable
basis. However, each such forward-looking statement involves uncertainties and
is qualified in its entirety by reference to the following important factors
that could cause the actual results of the Company to differ materially from
those projected in such forward-looking statements: (i) prevailing governmental
policies and regulatory actions, including those of the Oregon Public Utility
Commission and the Washington Utilities and Transportation Commission, with
respect to allowed rates of return, industry and rate structure, purchased gas
and investment recovery, acquisitions and dispositions of assets and facilities,
operation and construction of plant facilities, present or prospective wholesale
and retail competition, changes in tax laws and policies and changes in and
compliance with environmental and safety laws and policies; (ii) weather
conditions and other natural phenomena; (iii) unanticipated population growth or
decline, and changes in market demand and demographic patterns; (iv) competition
for retail and wholesale customers; (v) pricing of natural gas relative to other
energy sources; (vi) unanticipated changes in interest rates or in rates of
inflation; (vii) unanticipated changes in operating expenses and capital
expenditures; (viii) capital market conditions; (ix) competition for new energy
development opportunities; and (x) legal and administrative proceedings and
settlements. All subsequent forward-looking statements, whether written or oral
and whether made by or on behalf of the Company, also are expressly qualified by
these cautionary statements.
Any forward-looking statement speaks only as of the date on which such
statement is made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for the
Company to predict all such factors, nor can it assess the impact of each such
factor or the extent to which any factor, or combination of factors, may cause
results to differ materially from those contained in any forward-looking
statement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
-----------------
Page
----
1. Management's Responsibility for Financial Statements............... 32
2. Independent Auditors' Reports...................................... 33
3. Consolidated Financial Statements:
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995................................... 35
Consolidated Statements of Earnings Invested in the Business for
the Years Ended December 31, 1997, 1996 and 1995.................. 36
Consolidated Balance Sheets, December 31, 1997 and 1996............ 37
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.................................. 39
Consolidated Statements of Capitalization, December 31, 1997
and 1996.......................................................... 40
Notes to Consolidated Financial Statements......................... 41
4. Quarterly Financial Information (unaudited)........................ 62
Supplemental Schedules Omitted
------------------------------
All other schedules are omitted because of the absence of the conditions under
which they are required or because the required information is included
elsewhere in the financial statements.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
----------------------------------------------------
The financial statements in this report were prepared by management,
which is responsible for their objectivity and integrity. The statements have
been prepared in conformity with generally accepted accounting principles and,
where appropriate, reflect informed estimates based on judgments of management.
The responsibility of the Company's independent auditors is to render an
independent report on the financial statements.
The Company's system of internal accounting controls is designed to
provide reasonable assurance that assets are safeguarded and transactions are
executed in accordance with management's authorizations, that transactions are
recorded to permit the preparation of financial statements in conformity with
orders of regulatory authorities and generally accepted accounting principles
and that accountability for assets is maintained. The Company's system of
internal controls has provided such reasonable assurances during the periods
reported herein. The system includes written policies, procedures and
guidelines, an organization structure that segregates duties and an established
program for monitoring the system by internal auditors. In addition, Northwest
Natural Gas Company has prepared and annually distributes to its employees a
Code of Ethics covering its policies for conducting business affairs in a lawful
and ethical manner. Ongoing review programs are carried out to ensure compliance
with these policies.
The Board of Directors, through its Audit Committee, oversees
management's financial reporting responsibilities. The committee meets regularly
with management, the internal auditors, and representatives of the Company's
independent auditors. Both internal and external auditors have free and
independent access to the committee and the Board of Directors. No member of the
committee is an employee of the Company. The committee reports the results of
its activities to the full Board of Directors. Annually, the Audit Committee
recommends the nomination of independent auditors to the Board of Directors for
shareholder approval.
/s/ Richard G. Reiten
-------------------------
Richard G. Reiten
President and
Chief Executive Officer
/s/ Bruce R. DeBolt
--------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
February 20, 1998
To the Board of Directors and
Stockholders of NW Natural
In our opinion, the accompanying consolidated balance sheets and statements of
capitalization and the related consolidated statements of income, of cash flows
and of changes in earnings invested in the business present fairly, in all
material respects, the financial position of Northwest Natural Gas Company
(doing business as NW Natural) and its subsidiaries at December 31, 1997, and
the results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Portland, Oregon
INDEPENDENT AUDITORS' REPORT
To the Directors and Shareholders of
Northwest Natural Gas Company
We have audited the accompanying consolidated balance sheet and statement of
capitalization of Northwest Natural Gas Company and subsidiaries, as of December
31, 1996, and the related consolidated statements of income, earnings invested
in the business, and cash flows for each of the two years in the period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Northwest Natural Gas
Company and subsidiaries at December 31, 1996, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Portland, Oregon
February 12, 1997
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Thousands, Except Per Share Amounts)
Year Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------
NET OPERATING REVENUES:
Operating revenues $361,756 $380,318 $356,276
Cost of sales 129,312 142,805 144,051
-------- -------- --------
Net operating revenues 232,444 237,513 212,225
OPERATING EXPENSES:
Operations and maintenance 77,879 80,218 72,018
Taxes other than income taxes 19,952 21,597 24,181
Depreciation, depletion and amortization 44,619 43,047 40,594
-------- -------- --------
Total operating expenses 142,450 144,862 136,793
-------- -------- --------
INCOME FROM OPERATIONS 89,994 92,651 75,432
-------- -------- --------
OTHER INCOME 2,654 8,196 10,432
-------- -------- --------
INTEREST CHARGES:
Interest on long-term debt 24,918 23,176 23,141
Other interest 4,500 3,448 2,252
Amortization of debt discount and expense 730 865 882
-------- -------- --------
Total interest charges 30,148 27,489 26,275
Allowance for funds used during
construction (1,665) (782) (596)
-------- -------- --------
Total interest charges-net 28,483 26,707 25,679
-------- -------- --------
INCOME BEFORE INCOME TAXES 64,165 74,140 60,185
INCOME TAXES 21,106 27,347 22,120
-------- ------- --------
NET INCOME 43,059 46,793 38,065
Redeemable preferred and preference stock
dividend requirements 2,646 2,723 2,806
-------- -------- --------
EARNINGS APPLICABLE TO COMMON STOCK $ 40,413 $ 44,070 $ 35,259
======== ======== ========
AVERAGE COMMON SHARES OUTSTANDING 22,698 22,391 21,817
====== ====== ======
BASIC EARNINGS PER SHARE OF COMMON STOCK $1.78 $1.97 $1.62
===== ===== =====
DILUTED EARNINGS PER SHARE OF COMMON STOCK $1.76 $1.94 $1.60
===== ===== =====
DIVIDENDS PER SHARE OF COMMON STOCK $1.205 $1.20 $1.18
====== ===== =====
-----------------------------------------------
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS INVESTED IN THE BUSINESS
(Thousands)
1997 1996 1995
- --------------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $ 98,376 $105,651 $ 97,275
Net Income 43,059 46,793 38,065
Cash dividends:
Redeemable preferred and preference
stock (2,660) (2,735) (2,836)
Common stock (27,321) (26,836) (25,517)
Stock Dividend:
Common stock -- (23,704) --
Foreign currency translation and
capital stock expense (591) (793) (1,336)
-------- ------- -------
BALANCE AT END OF YEAR $110,863 $ 98,376 $105,651
======== ======== ========
----------------------------------------------
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands)
December 31 1997 1996
- -------------------------------------------------------------------------------
ASSETS:
PLANT AND PROPERTY:
Utility plant $1,164,499 $1,055,112
Less accumulated depreciation 366,607 336,141
---------- -----------
Utility plant - net 797,892 718,971
Non-utility property 52,422 45,689
Less accumulated depreciation and depletion 22,843 19,388
---------- ----------
Non-utility property - net 29,579 26,301
---------- ----------
Total plant and property 827,471 745,272
---------- ---------
INVESTMENTS AND OTHER:
Investments 34,148 33,008
Long-term notes receivable 978 1,715
---------- ---------
Total investments and other 35,126 34,723
---------- ---------
CURRENT ASSETS:
Cash and cash equivalents 6,731 8,219
Accounts receivable - customers 40,673 41,890
Allowance for uncollectible accounts (1,253) (1,057)
Accrued unbilled revenue 23,911 22,340
Inventories of gas, materials and supplies 17,385 14,439
Prepayments and other current assets 17,226 12,483
---------- ---------
Total current assets 104,673 98,314
---------- ---------
REGULATORY TAX ASSETS 56,860 57,940
---------- ---------
DEFERRED GAS COSTS RECEIVABLE 28,628 --
---------- ----------
DEFERRED DEBITS AND OTHER 58,859 52,620
---------- ----------
TOTAL ASSETS $1,111,617 $ 988,869
========== ==========
-----------------------------------------------
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
(Thousands)
December 31 1997 1996
- --------------------------------------------------------------------------------
CAPITALIZATION AND LIABILITIES:
CAPITALIZATION (See Consolidated
Statements of Capitalization):
Common stock $ 72,404 $ 71,425
Premium on common stock 182,998 176,977
Earnings invested in the business 110,863 98,376
---------- --------
Total common stock equity 366,265 346,778
Redeemable preference stock 25,000 25,000
Redeemable preferred stock 12,429 13,749
Long-term debt 344,303 271,838
---------- --------
Total capitalization 747,997 657,365
---------- --------
CURRENT LIABILITIES:
Notes payable 89,317 50,058
Accounts payable 58,775 64,795
Long-term debt due within one year 16,000 26,000
Taxes accrued 4,656 3,196
Interest accrued 6,058 5,396
Other current and accrued liabilities 21,390 19,418
---------- --------
Total current liabilities 196,196 168,863
---------- --------
DEFERRED INVESTMENT TAX CREDITS 11,949 11,668
---------- --------
DEFERRED INCOME TAXES 139,953 123,625
---------- --------
DEFERRED GAS COSTS LIABILITY -- 8,058
---------- --------
REGULATORY ACCOUNTS AND OTHER 15,522 19,290
---------- --------
COMMITMENTS AND CONTINGENCIES (Note 13) -- --
---------- --------
TOTAL CAPITALIZATION AND
LIABILITIES $1,111,617 $988,869
========== ========
-----------------------------------------------
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
Year Ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income $ 43,059 $ 46,793 $ 38,065
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation, depletion and amortization 44,619 43,047 40,594
Gain on sale of assets (849) (2,897) (4,636)
Deferred income taxes and investment tax credits 16,609 4,108 5,222
Equity in (earnings) losses of investments (468) (773) (2,141)
Allowance for funds used during construction (1,868) (1,593) (620)
Deferred gas costs (36,686) (11,856) --
Regulatory accounts and other - net (5,159) (2,491) 3,974
--------- -------- --------
Cash from operations before working
capital changes 59,257 74,338 80,458
Changes in operating assets and liabilities:
Accounts receivable 1,413 (6,448) 7,767
Accrued unbilled revenue (1,571) (847) (1,173)
Inventories of gas, materials and supplies (2,946) (185) 704
Accounts payable (6,020) 23,011 (6,733)
Accrued interest and taxes 2,122 (6,306) 3,744
Other current assets and liabilities (6,439) 6,377 (908)
---------- -------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 45,816 89,940 83,859
---------- -------- --------
INVESTING ACTIVITIES:
Acquisition and construction of utility plant assets (115,886) (83,400) (67,163)
Investment in non-utility plant (9,229) (3,246) (18,964)
Proceeds from sale of non-utility assets 1,014 -- 7,862
Investments and other (35) 3,682 1,356
--------- -------- --------
CASH USED IN INVESTING ACTIVITIES (124,136) (82,964) (76,909)
--------- ------- --------
FINANCING ACTIVITIES:
Common stock issued 6,465 5,690 39,569
Redeemable preference stock retired -- -- (174)
Redeemable preferred stock retired (1,320) (1,091) (989)
Long-term debt:
Issued 90,000 20,000 10,000
Retired (27,000) (22,000) (1,131)
Change in short-term debt 39,259 21,226 (24,822)
Cash dividend payments:
Redeemable preferred and preference stock (2,660) (2,735) (2,836)
Common stock (27,321) (26,836) (25,517)
Foreign currency translation and capital stock expense (591) (793) (1,336)
--------- --------- ---------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 76,832 (6,539) (7,236)
--------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,488) 437 (286)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 8,219 7,782 8,068
--------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 6,731 $ 8,219 $ 7,782
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 28,756 $25,846 $ 25,346
Income taxes $ 7,288 $27,266 $ 15,819
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Conversion to common stock:
$2.375 Series of Convertible Preference Stock -- -- $ 1,078
7-1/4 percent Series of Convertible Debentures $ 535 $1,107 $ 121
-----------------------------------------------
See Notes to Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(Thousands, Except Share Amounts)
December 31 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
COMMON STOCK EQUITY:
Common stock - par value $3-1/6 per share; authorized 60,000,000 shares:
outstanding - 1997, 22,864,328 shares; 1996, 22,555,184 shares $ 72,404 $ 71,425
Premium on common stock 182,998 176,977
Earnings invested in the business 110,863 98,376
-------- --------
Total common stock equity 366,265 49% 346,778 53%
-------- ---- -------- ----
REDEEMABLE PREFERENCE STOCK, authorized
2,000,000 shares; $6.95 Series, stated value $100 per share;
outstanding - 1997, 250,000 shares; 1996, 250,000 shares 25,000 25,000
-------- --------
Total redeemable preference stock 25,000 3% 25,000 4%
-------- ---- -------- ----
REDEEMABLE PREFERRED STOCK, authorized 1,500,000 shares; all outstanding series
have a stated value of $100 per share:
$4.68 Series, outstanding -1997, 0 shares; 1996, 3,905 shares -- 391
$4.75 Series, outstanding -1997, 4,285 shares; 1996, 6,085 shares 429 608
$7.125 Series, outstanding -1997, 120,000 shares; 1996,
127,500 shares 12,000 12,750
-------- ---------
Total redeemable preferred stock 12,429 2% 13,749 2%
-------- ---- --------- ----
LONG-TERM DEBT:
First Mortgage Bonds
--------------------
9-3/4% Series due 2015 50,000 50,000
9-1/8% Series due 2019 20,000 22,000
Medium-Term Notes
-----------------
First Mortgage Bonds:
7.38% Series A due 1997 -- 20,000
7.69% Series A due 1999 10,000 10,000
5.96% Series B due 2000 5,000 5,000
5.98% Series B due 2000 5,000 5,000
8.05% Series A due 2002 10,000 10,000
6.40% Series B due 2003 20,000 20,000
6.34% Series B due 2005 5,000 5,000
6.38% Series B due 2005 5,000 5,000
6.45% Series B due 2005 5,000 5,000
6.80% Series B due 2007 10,000 --
6.50% Series B due 2008 5,000 5,000
8.26% Series B due 2014 10,000 10,000
7.00% Series B due 2017 40,000 --
8.31% Series B due 2019 10,000 10,000
9.05% Series A due 2021 10,000 10,000
7.25% Series B due 2023 20,000 20,000
7.50% Series B due 2023 4,000 4,000
7.52% Series B due 2023 11,000 11,000
6.52% Series B due 2025 10,000 10,000
7.05% Series B due 2026 20,000 20,000
7.00% Series B due 2027 20,000 --
6.65% Series B due 2027 20,000 --
Unsecured:
7.40% Series A due 1997 -- 5,000
8.93% Series A due 1998 5,000 5,000
8.95% Series A due 1998 10,000 10,000
8.47% Series A due 2001 10,000 10,000
Convertible Debentures
----------------------
7-1/4% Series due 2012 10,303 10,838
-------- --------
360,303 297,838
Less long-term debt due within one-year 16,000 26,000
-------- --------
Total long-term debt 344,303 46% 271,838 41%
-------- ---- -------- ----
TOTAL CAPITALIZATION $747,997 100% $657,365 100%
======== ==== ======== ====
-----------------------------------------------
See Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
- -----------------------------------------------------
Organization and Principles of Consolidation
- --------------------------------------------
The consolidated financial statements include:
Regulated utility:
--Northwest Natural Gas Company (doing business as NW Natural)
Non-regulated wholly-owned businesses:
--NNG Financial Corporation (Financial Corporation)
--Canor Energy, Ltd. (Canor)
--Oregon Natural Gas Development Corporation (Oregon Natural)
Oregon Natural was merged with and into NW Natural during the second
quarter of 1996.
Together these businesses are referred to herein as the "Company."
Intercompany accounts and transactions have been eliminated.
Investments in corporate joint ventures and partnerships in which the
Company's ownership is 50 percent or less are accounted for by the
equity method or the cost method (see Note 10).
Certain amounts from prior years have been reclassified to conform
with the 1997 presentation.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts in the consolidated
financial statements and accompanying notes. Changes in such estimates
may affect amounts reported in future periods.
Industry Regulation
- -------------------
The Company's principal business is the distribution of natural gas
which is regulated by the Oregon Public Utility Commission (OPUC) and
the Washington Utilities and Transportation Commission (WUTC).
Accounting records and practices conform to the requirements and
uniform system of accounts prescribed by these regulatory authorities
in accordance with Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation."
Utility Plant
- -------------
NW Natural's utility plant is stated at original cost (see table in
Note 10). When a depreciable unit of property is retired, the original
cost is removed from both utility plant and the accumulated provision
for depreciation together with the cost of removal, less any salvage.
No gain or loss is recognized upon normal retirement.
NW Natural's provision for depreciation of utility property, which is
computed under the straight-line, age-life method in accordance with
independent engineering studies and as approved by regulatory
authorities, approximated 3.8 percent of average depreciable plant in
both 1997 and 1996 and 4.2 percent in 1995. The rate of depreciation
approximates the economic life of the utility property.
Certain additions to utility plant include an allowance for funds used
during construction (AFUDC), a non-cash item. AFUDC represents the cost
of funds borrowed during construction and is calculated using actual
commercial paper interest rates. If commercial paper borrowings are
insufficient to finance the total work in progress, then a composite
rate of interest on all debt, shown as a reduction to interest charges,
and a return on equity funds, shown as other income, is used to compute
AFUDC. While cash is not realized currently from AFUDC, it is realized
in the ratemaking process over the service life of the related property
through increased revenues resulting from higher rate base and higher
depreciation expense. NW Natural's weighted average AFUDC rates were
5.8 percent for 1997, 8.9 percent for 1996, and 5.3 percent for 1995.
Regulatory Accounts
- -------------------
In applying SFAS No. 71, NW Natural has capitalized certain costs and
benefits as regulatory assets and liabilities pursuant to orders of the
state utility regulatory commissions, in general rate proceedings or
expense deferral proceedings, in order to provide for recovery of
revenues or expenses from, or refunds to, utility customers in future
periods. At December 31, 1997 and 1996, regulatory tax assets were
$56.9 million and $57.9 million, respectively, while other regulatory
assets and liabilities (net) were $36.9 million and $8.2 million,
respectively.
If, in the future, NW Natural determines that all or a portion of these
regulatory assets and liabilities no longer meets the criteria for
ccontinued application of SFAS No. 71, it would be required to write
off that portion which it could not recover or refund.
Cash and Cash Equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and highly liquid temporary investments with original
maturity dates of three months or less.
Unbilled Revenue
- ----------------
NW Natural accrues for gas deliveries not billed to customers from the
meter reading dates to month end.
Inventories
- -----------
NW Natural's inventories of gas in storage and materials and supplies
are stated at the lower of average cost or net realizable value.
Derivatives Policy
- ------------------
NW Natural has a "Derivatives Policy" which allows up to a 100 percent
hedge position in currency derivatives to match and lock-in prices on
individual Canadian natural gas purchase transactions; interest rate
derivatives to match specific outstanding debt instruments maturing in
less than five years; and natural gas commodity derivatives to lock-in
or cap prices on gas purchased for a future period under contracts with
market-indexed pricing. The policy requires derivatives to be used
within prescribed limitations and only in order to reduce price risk,
so as to qualify for hedge accounting treatment. Changes in market
values of foreign currency contracts, and gains or losses on commodity
swap contracts, are deferred and recognized as adjustments to gas
purchase costs upon concurrent settlement of these contracts (see Note
12).
Income Taxes
- ------------
NW Natural uses the liability method of accounting for deferred income
taxes. Deferred tax liabilities and assets reflect the expected future
tax consequences, based on enacted tax law, of temporary differences
between the tax basis of assets and liabilities and their financial
reporting amounts.
Consistent with rate and accounting instructions of regulatory
authorities, deferred income taxes are not currently collected for
those temporary income tax differences where the prescribed regulatory
accounting methods do not provide for current recovery in rates. NW
Natural has recorded a regulatory tax asset for such amounts pending
recovery from customers in future rates. These amounts are primarily
differences between the book and tax basis of net utility plant in
service. This asset balance was $56.9 million at December 31, 1997 and
$57.9 million at December 31, 1996 (see Note 7).
Investment tax credits on utility property additions and leveraged
leases, which reduce income taxes payable, are deferred for financial
statement purposes and amortized over the life of the related property
or lease. Investment and energy tax credits generated by non-regulated
subsidiaries are amortized over a period of one to five years.
Other Income
- ------------
Other income consists of interest income, gain on the sale of assets,
including non-recurring gains from the sale of Oregon Natural's
underground gas storage assets, gathering system and gas producing
properties to NW Natural in 1996 and 1995, investment income of
Financial Corporation, and other miscellaneous income from merchandise
sales, rent, the aircraft lease and other items.
Earnings Per Share
- ------------------
The Company adopted SFAS No. 128, "Earnings Per Share", for the year
ended December 31, 1997. SFAS No. 128 requires disclosure of basic and
diluted earnings per share. All prior years have been restated to
reflect the adoption of SFAS No. 128. Basic earnings per share are
computed based on the weighted average number of common shares
outstanding each year. Diluted earnings per share reflect the potential
effects of the conversion of any outstanding convertible debentures and
the exercise of outstanding stock options. Diluted earnings are
calculated as follows:
1997 1996 1995
-------------------------------------------------------------------------------
(Thousands, except per share amounts)
Earnings applicable to common stock $40,413 $44,070 $35,259
Debenture interest less taxes 455 479 528
------- ------- -------
Earnings applicable to diluted common stock $40,868 $44,549 $35,787
======= ======= =======
Average common shares outstanding 22,698 22,391 21,817
Stock options 32 27 11
Convertible debentures 518 545 600
------- ------- ------
Diluted average common shares outstanding 23,248 22,963 22,428
======= ====== ======
Diluted earnings per share of common stock $1.76 $1.94 $1.60
===== ===== =====
2. CONSOLIDATED SUBSIDIARY OPERATIONS:
- --------------------------------------------
At December 31, 1997, the Company had two active wholly-owned
subsidiaries, Financial Corporation and Canor. Another wholly-owned
subsidiary, Oregon Natural, was merged into NW Natural during 1996.
NNG Financial Corporation
- -------------------------
Financial Corporation provides short-term financing for Canor and has
several financial investments, including investments as a limited
partner in solar electric generating systems, windpower electric
generating projects, a hydroelectric facility and low-income housing
projects. It also holds interests in certain gas producing properties
in the western United States (see Note 10).
Canor Energy, Ltd.
- ------------------
Canor, an Alberta, Canada corporation, is engaged in natural gas and
oil exploration, development and production in Alberta and
Saskatchewan, Canada. Canor began operations in 1990 as a wholly-owned
subsidiary of Oregon Natural. When Oregon Natural was merged into NW
Natural during 1996, Canor became a wholly-owned subsidiary of NW
Natural.
Summarized financial information for the consolidated subsidiaries follows:
Thousands 1997 1996 1995
- -------------------------------------------------------------------------------
Statements of income for the year ended December 31:
Net operating revenues $ 9,868 $10,009 $ 8,271
Operating expenses 9,917 11,671 9,727
------- ------- -------
Income (loss) from operations (49) (1,662) (1,456)
Income from financial investments 468 773 2,063
Other income and interest charges 962 4,197 5,991
------- ------- -------
Income before income taxes 1,381 3,308 6,598
Income tax expense (benefit) (381) 1,076 2,497
------- ------- -------
Net income $ 1,762 $ 2,232 $ 4,101
======= ======= =======
Balance sheets as of December 31:
Assets:
Non-utility property - net $29,135 $25,704 $36,053
Investments and other 25,896 26,081 37,364
Current assets 19,012 20,898 20,750
------- ------- -------
Total assets $74,043 $72,683 $94,167
======= ======= =======
Capitalization and liabilities:
Equity $34,883 $30,706 $30,392
Current liabilities 13,668 13,590 37,459
Other liabilities 25,492 28,387 26,316
------- ------- -------
Total capitalization and liabilities $74,043 $72,683 $94,167
======= ======= =======
- -------------------------------------------------------------------------------
3. CAPITAL STOCK:
- -------------------
Common Stock
- ------------
At December 31, 1997, NW Natural had reserved 68,181 shares of common
stock for issuance under the Employee Stock Purchase Plan, 737,153
shares under its Dividend Reinvestment and Stock Purchase Plan, 833,858
shares under its 1985 Stock Option Plan (see Note 4), 578,033 shares
for future conversions of its 7-1/4 percent Convertible Debentures and
3,000,000 shares under the Shareholder Rights Plan.
During 1996, the Board of Directors adopted a Shareholder Rights Plan
and declared a dividend of one Right for each outstanding share of
common stock. Each Right entitles the shareholder to purchase one tenth
of a share of common stock for $6.67. In the event that any person
acquired more than 15 percent of the outstanding common stock, or
should the Company be acquired in a merger or other business
combination transaction, subject to the terms of the Rights Plan, the
Right would become exercisable, entitling each holder (other than the
acquiring person or group), for a purchase price equal to 10 times the
current purchase price of the Right, to purchase that number of shares
of common stock having a market value equal to 20 times the purchase
price of the Right. The Rights will expire on March 15, 2006.
Effective September 6, 1996, additional shares of common stock were
distributed to shareholders of record on August 23, 1996, in connection
with a three-for-two stock split. All share disclosures and per share
data related to the common stock included in these financial statements
are presented on a post-split basis. Amounts associated with common
stock for years prior to the effective date of the stock split have
been adjusted to reflect the split.
Redeemable Preference Stock
- ---------------------------
The $6.95 Series of Preference Stock is not redeemable prior to
December 31, 2002, but is subject to mandatory redemption on that date.
Redeemable Preferred Stock
- --------------------------
The mandatory preferred stock redemption requirements aggregate $1.0
million in both 1998 and 1999, and $0.8 million in each of the years
2000, 2001 and 2002. These requirements are noncumulative. At any time
NW Natural is in default on any of its obligations to make the
prescribed sinking fund payments, it may not pay cash dividends on
common stock or preference stock. Upon involuntary liquidation, all
series of redeemable preferred stock are entitled to their stated
value.
The remaining shares of the $4.68 Series redeemable preferred stock
were redeemed on June 2, 1997.
The redeemable preferred stock is callable at stipulated prices, plus
accrued dividends. At December 31, 1997, redemption prices were $100
per share for the $4.75 Series. Shares of the $7.125 Series are
redeemable on or after May 1, 1998 at a price of $104.75 per share
decreasing each year thereafter to $100 per share on or after May 1,
2008.
The following table shows the changes in the number of shares of NW Natural's
capital stock and the premium on common stock for the years 1997, 1996 and 1995:
Premium
------------Shares-------------- on
Common Preference Preferred Stock
Stock Stock Stock Thousands)
- -------------------------------------------------------------------------------------
Balance, December 31, 1994 20,128,028 300,079 159,504 $134,641
Sales to the public 1,725,000 -- -- 30,571
Sales to employees 21,046 -- -- 346
Sales to stockholders 237,985 -- -- 4,376
Exercise of stock options - net 18,359 -- -- 45
Conversion of preference
stock to common 106,755 (43,137) -- 853
Conversion of convertible
debentures to common 6,078 -- -- 108
Sinking fund purchases -- -- (11,100) --
Redemptions -- (6,942) -- --
Other -- -- -- 3
---------- ------- ------- --------
Balance, December 31, 1995 22,243,251 250,000 148,404 170,943
Sales to employees 15,043 -- -- 255
Sales to stockholders 235,878 -- -- 4,834
Exercise of stock options - net 5,400 -- -- (11)
Conversion of convertible
debentures to common 55,612 -- -- 956
Sinking fund purchases -- -- (10,914) --
---------- ------- ------- --------
Balance, December 31, 1996 22,555,184 250,000 137,490 176,977
Sales to employees 27,525 -- -- 514
Sales to stockholders 211,532 -- -- 4,561
Exercise of stock options - net 43,216 -- -- 496
Conversion of convertible
debentures to common 26,871 -- -- 450
Sinking fund purchases -- -- (9,300) --
Redemptions -- -- (3,905) --
---------- ------- ------- --------
Balance, December 31, 1997 22,864,328 250,000 124,285 $182,998
========== ======= ======= ========
- --------------------------------------------------------------------------------
4. STOCK OPTION AND PURCHASE PLANS:
- -------------------------------------
NW Natural's 1985 Stock Option Plan (Plan) authorizes an aggregate of
1,200,000 shares of common stock for issuance as incentive or
non-statutory stock options. These options may be granted only to
officers and key employees designated by a committee of NW Natural's
Board of Directors.
All options are granted at an option price not less than the market
value at the date of grant and may be exercised for a period not
exceeding 10 years from the date of grant. Option holders may exchange
shares they have owned for at least one year, at the current market
price, to purchase shares at the option price.
Since the Plan's inception in 1985, options on 649,173 shares of common
stock have been granted at prices ranging from $11.75 to $24.00 per
share, and options on 55,296 shares have expired. NW Natural applies
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations, in accounting for
its stock-based compensation plans. Accordingly, no compensation cost
has been recognized for either the Plan or the employee stock purchase
plan. Had compensation cost for NW Natural's two stock-based
compensation plans been determined based on the fair value at the grant
dates for awards under those plans in a manner consistent with the
method determined under SFAS No. 123, "Accounting for Stock-Based
Compensation," net income and earnings per share would have been
reduced to the pro forma amounts shown below:
1997 1996
---- ----
Earnings applicable to common stock ($000):
- -------------------------------------------
As reported $40,413 $44,070
Pro forma 40,302 43,480
Basic earnings per share
- ------------------------
As reported $1.78 $1.97
Pro forma 1.78 1.94
Diluted earnings per share
- --------------------------
As reported $1.76 $1.94
Pro forma 1.75 1.89
For purposes of the pro forma expense, the fair value of each option is
estimated on the grant date using the Black-Scholes option pricing
model with the following weighted-average assumptions used for grants
in 1996 and 1995, respectively: a dividend yield of 5 and 5.4 percent;
expected volatility of 22 and 21 percent; risk-free interest rates of 6
and 7 percent; and, for both of such years, expected lives of seven
years.
Information regarding the Plan is summarized as follows:
Options
-------------------------------
1997 1996 1995
---- ---- ----
Outstanding, beginning of year 308,663 167,846 208,506
$11.75 Options:
Exchanged by holders -- -- (10,284)
Exercised -- -- (14,310)
$16.59 Options:
Exchanged by holders (20,598) (12,933) (14,268)
Exercised (10,432) (5,400) (4,048)
$24.00 Options:
Exchanged by holders (7,184) -- --
Exercised (12,243) (8,250) (9,000)
Expired (4,773) -- --
$20.17 Options:
Granted -- -- 11,250
Exercised (500) -- --
$20.92 Options:
Granted -- 170,400 --
Exchanged by holders (5,159) -- --
Exercised (20,041) -- --
Expired -- (3,000) --
------- ------- ---------
Outstanding, end of year 227,733 308,663 167,846
======= ======= =======
Available for grant, end of year 606,125 601,352 760,500
- --------------------------------------------------------------------------------
NW Natural has an employee stock purchase plan whereby employees may
purchase common stock at 92 percent of the average bid and ask market
price on the subscription date. The subscription date is set annually,
and each employee may purchase up to 900 shares payable through payroll
deduction over a six to 12 month period.
5. LONG-TERM DEBT:
- ------------------
The issuance of first mortgage bonds under the Mortgage and Deed of
Trust is limited by property, earnings and other provisions of the
mortgage. NW Natural's Mortgage and Deed of Trust constitutes a first
mortgage lien on substantially all of its utility property.
The 7-1/4 percent Series of Convertible Debentures may be converted at
any time into 50-1/4 shares of common stock for each $1,000 face value
($19.90 per share).
The sinking fund requirements and maturities for the five years ending
December 31, 2002, on the long-term debt outstanding at December 31,
1997, amount to: $16.0 million in 1998; and $11.0 million in each of
the years 1999, 2000, 2001 and 2002.
6. NOTES PAYABLE AND LINES OF CREDIT:
- -------------------------------------------
NW Natural has available through September 30, 1998, committed lines of
credit with five commercial banks totaling $100 million, consisting of
a primary fixed amount of $50 million plus an excess amount of up to
$50 million available as needed, at NW Natural's option, on a monthly
basis. Financial Corporation has available through September 30, 1998,
committed lines of credit with two commercial banks totaling $20
million, consisting of a primary fixed amount of $15 million plus an
excess amount of up to $5 million available as needed, at Financial
Corporation's option, on a monthly basis. Financial Corporation's lines
are supported by the guaranty of NW Natural.
Under the terms of these lines of credit, which are used as backup
lines for commercial paper programs, NW Natural and Financial
Corporation pay commitment fees but are not required to maintain
compensating bank balances. The interest rates on borrowings under
these lines of credit are based on current market rates as negotiated.
There were no outstanding balances on either the NW Natural or the
Financial Corporation line of credit as of December 31, 1997 or 1996.
NW Natural and Financial Corporation issue domestic commercial paper,
which is supported by the committed bank lines, under agency agreements
with a commercial bank. Additionally, Financial Corporation's
commercial paper is supported by the guaranty of NW Natural. The
amounts and average interest rates of commercial paper outstanding were
as follows at December 31:
1997 1996
-------------- --------------
Thousands Amount Rate Amount Rate
------------------------------------------------------------
NW Natural $82,634 5.5% $43,532 5.4%
Financial Corporation 6,683 5.6% 6,526 5.4%
------- -------
Total $89,317 $50,058
======= =======
7. INCOME TAXES:
- ----------------------
A reconciliation between income taxes calculated at the statutory
federal tax rate and the tax provision reflected in the financial
statements is as follows:
Thousands 1997 1996 1995
- ----------------------------------------------------------------------------------------
Computed income taxes based on statutory federal
income tax rate of 35% $22,457 $25,949 $21,065
Increase (reduction) in taxes resulting from:
Differences between book and tax depreciation 221 1,313 1,575
Current state income tax, net of federal tax benefit 1,944 3,235 2,051
Federal income tax credits (360) (228) (384)
Restoration of investment and energy tax credits (844) (849) (1,088)
Removal costs (544) (538) (552)
Reversal of amounts provided in prior years (1,455) (1,900) --
Unconsolidated foreign subsidiary income (loss) (13) 113 266
Gains on Company-Owned Life Insurance (470) (324) (260)
Other - net 170 576 (552)
------- ------- -------
Total provision for income taxes $21,106 $27,347 $22,121
======= ======= =======
- ------------------------------------------------------------------------------------------
The provision for income taxes consists of the following:
Thousands 1997 1996 1995
- -----------------------------------------------------------------------------------------
Income taxes currently payable:
Federal $ 5,852 $17,634 $16,104
State (1,644) 2,912 1,052
Foreign 62 126 284
------- ------- -------
Total 4,270 20,672 17,440
------- ------- -------
Deferred taxes - net:
Federal 13,032 5,451 4,086
State 4,635 1,889 1,683
Foreign 13 184 --
------- ------- ------
Total 17,680 7,524 5,769
------- ------- ------
Investment and energy tax credits restored:
From utility operations (800) (800) (800)
From subsidiary operations (44) (49) (288)
------ ------ -------
Total (844) (849) (1,088)
Total provision for income taxes $21,106 $27,347 $22,121
======= ======= =======
Percentage of pretax income 32.9% 36.9% 36.8%
===== ===== ======
- -----------------------------------------------------------------------------------------
Deferred tax assets and liabilities are comprised of the following:
Thousands 1997 1996
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $113,121 $112,210
Regulatory asset 22,177 22,597
-------- --------
Total 135,298 134,807
-------- --------
Deferred tax assets:
Regulatory liability (asset) $(13,971) $ 3,609
Other deferred assets 9,316 7,554
Alternative minimum tax credits -- 19
-------- --------
Total (4,655) 11,182
-------- --------
Net accumulated deferred income tax liability $139,953 $123,625
======== ========
- --------------------------------------------------------------------------------
8. EMPLOYEE RETIREMENT PLANS:
- -----------------------------------
NW Natural has two non-contributory defined benefit retirement plans
covering all regular employees with more than one year of service. The
benefits under the plans are based upon years of service and the
employee's average compensation during the final years of service. NW
Natural's funding policy is to make the annual contribution required by
applicable regulations and recommended by its actuary. Plan assets
consist primarily of marketable foreign and domestic equity securities,
corporate obligations, U.S. government obligations and cash
equivalents.
The following table sets forth the amounts recognized in the financial
statements and the combined funded status of the retirement plans:
Thousands 1997 1996 1995
-----------------------------------------------------------------------
Service cost $ 3,010 $ 3,082 $ 2,819
Interest cost 7,575 6,980 6,843
Return on assets (29,298) (14,935) (29,291)
Net amortization and deferral 17,900 4,110 19,927
-------- -------- --------
Annual pension cost $ (813) $ (763) $ 298
======== ======== ========
-----------------------------------------------------------------------
Vested benefit obligation $ 91,078 $ 84,502 $ 79,805
Total accumulated benefit obligation $ 96,364 $ 84,915 $ 80,079
-----------------------------------------------------------------------
Thousands 1997 1996 1995
-----------------------------------------------------------------------
Funded status as of December 31:
Plan assets at fair value $158,118 $134,376 $124,748
Projected benefit obligation for
service rendered to date 114,368 100,481 96,999
-------- -------- ---------
Funded status 43,750 33,895 27,749
Unrecognized net gain (45,820) (35,326) (30,185)
Unrecognized net asset at transition (727) (1,123) (1,518)
Unrecognized prior service costs 6,068 5,012 5,650
-------- -------- --------
Prepaid pension cost $ 3,271 $ 2,458 $ 1,696
======== ======== ========
Total cash contribution $ 0 $ 0 $ 0
======== ======== ========
-----------------------------------------------------------------------
Discount rate:
Funded status 7.25% 7.50% 7.50%
===== ===== =====
Pension cost 7.50% 7.50% 8.00%
===== ===== =====
Expected long-term rate of return on
plan assets 9.00% 9.00% 9.00%
===== ===== =====
Rate for compensation increases 4.50% 5.00% 5.00%
===== ===== =====
-----------------------------------------------------------------------
Effective December 31, 1997, NW Natural changed the assumed discount
rate used in determining the funded status of the plans from 7.50
percent to 7.25 percent. The 7.25 percent discount rate was used in
determining the funded status of the plans at year-end 1997 and 7.50
percent was used to determine annual pension cost in 1997 and 1996. The
7.25 percent discount rate will be used to determine funded status and
pension cost in 1998.
NW Natural has a qualified "Retirement K Savings Plan" under Internal
Revenue Code Section 401(k) and a non-qualified "Executive Deferred
Compensation Plan," for eligible employees. These plans are designed to
enhance the existing retirement program of employees and to assist them
in strengthening their financial security by providing an incentive to
save and invest regularly. NW Natural's contributions to these plans in
1997, 1996 and 1995 were $1.1 million, $1.0 million and $0.8 million,
respectively.
NW Natural has a non-qualified supplemental retirement plan for
eligible executive officers which it is funding with trust-owned life
insurance. The amount of coverage is designed to provide sufficient
returns to recover all costs of the plan if assumptions made as to
mortality experience, policy earnings, and other factors are realized.
Expenses related to the plan were $1.3 million in both 1997 and 1996
and $1.0 million in 1995.
9. POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS:
- ----------------------------------------------------------------
The Company provides continued health care and life insurance coverage
after retirement for exempt employees. These benefits and similar
benefits for active employees are provided by insurance companies, and
related premiums are based on the amount of benefits paid during the
year.
The accrued costs in excess of benefits paid relating to SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other than
Pensions," are not included in NW Natural's rates in Oregon. The staff
of the OPUC has recommended that NW Natural's portion of these costs
allocated to Oregon be authorized for recovery in rates only pursuant
to a general rate case filing, and has recommended against the use of
deferred accounting treatment for their recovery. NW Natural is
charging the Oregon portion of these costs to expense. In Washington,
the WUTC's order in NW Natural's 1997 general rate case authorized NW
Natural to begin amortizing the deferred SFAS No. 106 costs
attributable to Washington operations that had accrued since adoption
of SFAS No. 106 in 1993, to be collected from customers over a five
year period. Additionally, the ongoing annual SFAS No. 106 cost
relating to Washington operations was placed into rates and deferrals
were discontinued.
The following table sets forth the postretirement health care and life
insurance plan's status at December 31:
Thousands 1997 1996 1995
-------------------------------------------------------------------------
Retirees $ 5,903 $ 5,753 $ 5,983
Fully eligible active plan participants 1,418 1,232 1,254
Other active plan participants 5,011 3,878 4,236
------- ------- -------
Total accumulated postretirement
benefit obligation 12,332 10,863 11,473
Fair value of plan assets -- -- --
------- ------- -------
Accumulated postretirement benefit
obligation in excess of plan assets 12,332 10,863 11,473
Unrecognized transition obligation (8,460) (9,024) (9,588)
Unrecognized gain 1,230 2,273 1,262
------- ------- -------
Accrued postretirement benefit cost $ 5,102 $ 4,112 $ 3,147
======= ======= =======
Service cost - benefits earned during
the period $ 238 $ 262 $ 239
Interest cost on accumulated
postretirement benefit obligation 845 838 859
Amortization of transition obligation 477 556 503
------- ------- -------
Net postretirement benefit cost $ 1,560 $ 1,656 $ 1,601
======= ======= =======
The unrecognized transition obligation is being amortized over a period
of 20 years beginning January 1, 1993. The assumed health care cost
trend rate used in measuring the accumulated postretirement benefit
obligation for pre-Medicare eligibility is 8.5 percent for 1998; 8
percent for 1999; 7.5 percent for 2000; 7 percent for 2001; 6.5 percent
for 2002; then decreasing over the next five years to 4 percent. The
assumed rate for the HMO plan is 5 percent for 1998; 4.5 percent for
1999; and 4 percent for the next eight years. The assumed rate for
post-Medicare eligibility is 8 percent for 1998; 7.5 percent for 1999;
7 percent for 2000; 6.5 percent for 2001; 6 percent for 2002; then
decreasing over the next five years to 4 percent. A
one-percentage-point change in the assumed health care cost trend rate
for each year would adjust the accumulated postretirement benefit
obligation and net postretirement health care cost as of December 31,
1997 by approximately 14.8 percent and 16.1 percent, respectively. The
assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7.25 percent at December 31,
1997, 8.0 percent at December 31, 1996, and 7.5 percent at December 31,
1995.
10. PROPERTY AND INVESTMENTS:
- -------------------------------
The following table sets forth the major classifications of NW
Natural's utility plant and accumulated provision for depreciation at
December 31:
1997 1996
--------------------- -----------------------
Average Average
Depreciation Depreciation
Thousands Amount Rate Amount Rate
- -------------------------------------------------------------------------------
Transmission and distribution $ 938,760 3.5% $ 873,862 3.6%
Storage 66,827 2.6% 66,624 2.7%
General 76,518 7.1% 66,483 6.8%
Intangible and other 47,205 6.0% 11,287 12.5%
---------- ----------
Utility plant in service 1,129,310 3.8% 1,018,256 3.8%
Gas stored long-term 11,190 10,708
Work in progress 23,999 26,148
---------- ----------
Total utility plant 1,164,499 1,055,112
Less accumulated depreciation 366,607 336,141
---------- ---------
Utility plant-net $ 797,892 $ 718,971
========== =========
- --------------------------------------------------------------------------------
The following table summarizes the Company's investments in affiliated
entities accounted for under the equity and cost methods, and its
investment in a leveraged lease at December 31:
Thousands 1997 1996
-----------------------------------------------------------------------
Electric generation $23,060 $22,035
Aircraft leveraged lease 8,932 8,265
Gas pipeline and other 2,156 2,708
------- -------
Total investments and other $34,148 $33,008
======= =======
Financial Corporation has invested in solar electric generation plants
located near Barstow, California. Power generated by these plants is
sold to Southern California Edison Company under long-term contracts.
Financial Corporation's ownership interests in these projects range
from 4.0 percent to 5.3 percent.
Financial Corporation also has invested in U. S. Windpower Partners
electric generating projects, with facilities located near Livermore
and Palm Springs, California. The wind-generated power is sold to
Pacific Gas and Electric Company and Southern California Edison Company
under long-term contracts. Financial Corporation's ownership interests
in these projects range from 8.5 percent to 41 percent.
In 1987, Oregon Natural purchased a Boeing 737-300 aircraft which was
leased to Continental Airlines for 20 years under a leveraged lease
agreement. As part of Oregon Natural's merger with NW Natural in 1996,
ownership of the aircraft was transferred to NW Natural.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS:
- -----------------------------------------
The estimated fair values of NW Natural's financial instruments have
been determined using available market information and appropriate
valuation methodologies. The following is a list of financial
instruments whose carrying values are sensitive to market conditions:
December 31, 1997 December 31, 1996
----------------------- ----------------------
Carrying Estimated Carrying Estimated
Thousands Amount Fair Value Amount Fair Value
- -------------------------------------------------------------------------------------
Redeemable preference stock $ 25,000 $ 25,250 $ 25,000 $ 22,750
Redeemable preferred stock $ 12,429 $ 12,411 $ 13,749 $ 12,956
Long-term debt including amount
due within one year $360,303 $389,536 $297,838 $316,205
- ------------------------------------------------------------------------------------
Fair value of the redeemable preference stock and the redeemable
preferred stock was estimated using quoted market prices. Interest
rates that are currently available to the Company for issuance of debt
with similar terms and remaining maturities were used to estimate fair
value for debt issues.
The carrying amount of long-term notes receivable was stated at
estimated fair value at December 31, 1997 and 1996.
12. USE OF FINANCIAL DERIVATIVES:
- -----------------------------------
In connection with its Canadian gas purchase commitments, NW Natural
uses foreign currency forward contracts to hedge against fluctuations
in currency values. The forward contracts have terms ranging up to 12
months. Such contracts are purchased in an amount up to 100 percent but
not less than 80 percent of estimated daily requirements for commodity
gas purchased in Canadian currency from gas suppliers in Canada. The
notional amount of these contracts at December 31, 1997 totaled $5.6
million, and, if settled on that date, NW Natural would have realized a
negligible loss on these contracts.
As part of an overall strategy to maintain an acceptable level of
exposure to the risk of gas price fluctuations, NW Natural has
developed a targeted mix of fixed-rate and cap-protected natural gas
commodity contracts versus variable rate contracts. To efficiently
manage this mix, NW Natural uses natural gas commodity swap and cap
agreements to effectively convert the gas purchase commitments into an
acceptable fixed-rate and capped rate mix. NW Natural uses natural gas
commodity swap agreements to convert certain long-term gas purchase
contracts from floating prices to fixed prices. Under the commodity
swap agreements, NW Natural receives or makes payments based on the
differential between a specified price and the actual price of natural
gas as measured by price indices relating to the market area where it
purchases the gas. The swap agreements have terms ranging up to 12
months. At December 31, 1997 and 1996, NW Natural had cap and swap
agreements with broker-dealers to cover notional quantities of 131,635
and 30,000 million British Thermal Units (MMBtu) per day of gas,
respectively. Under the swap agreements in effect at December 31, 1997,
NW Natural pays fixed prices averaging $1.687 per MMBtu. In return, it
receives a price that varies from month to month with market
conditions. The notional amount of the swap agreements at December 31,
1997 was $23 million, and, if settled on that date, NW Natural would
have realized a loss on these swaps of $4.4 million. (See Note 1,
"Derivatives Policy," for a summary of accounting for gains and
losses.)
13. COMMITMENTS AND CONTINGENCIES:
- -----------------------------------
Lease Commitments
-----------------
Future lease commitments are: $5.3 million in 1998; $2.8 million in
1999; $2.5 million in 2000; $2.3 million in 2001; and $2.1 million in
2002. Thereafter, total commitments amount to $6.2 million. These
commitments principally relate to the lease of NW Natural's office
headquarters, vehicles and computer systems.
Total rental expense for 1997, 1996 and 1995 was $ 6.4 million, $5.4
million and $5.3 million, respectively.
Purchase Commitments
--------------------
NW Natural has signed agreements providing for the availability of firm
pipeline capacity under which it must make fixed monthly payments for
contracted capacity. The pricing component of the monthly payment is
established, subject to change, by U.S. or Canadian regulatory bodies.
In addition, NW Natural has entered into long-term agreements to
release firm pipeline capacity. The aggregate amounts of these
agreements were as follows at December 31, 1997:
Capacity Capacity
Purchase Release
Thousands Agreements Agreements
-----------------------------------------------------------------------
1998 $ 80,100 $ 4,296
1999 80,100 4,296
2000 80,100 4,296
2001 79,379 4,296
2002 77,297 4,296
2003 through 2023 523,459 33,651
-------- -------
Total 920,435 55,131
Less: Amount representing interest 284,800 16,334
-------- -------
Total at present value $635,635 $38,797
======== =======
-----------------------------------------------------------------------
NW Natural's total payments of fixed charges under capacity purchase
agreements in 1997, 1996 and 1995 were $76.7 million, $73.4 million and
$62.2 million, respectively. Included in the amounts for 1997, 1996 and
1995 were reductions for capacity release sales totaling $4.2 million,
$4.2 million and $4.8 million, respectively. In addition, NW Natural is
required to pay per-unit charges based on the actual quantities shipped
under the agreements. In certain of NW Natural's take-or-pay purchase
commitments, annual deficiencies may be offset by prepayments subject
to recovery over a longer term if future purchases exceed the minimum
annual requirements.
Environmental Matters
---------------------
NW Natural owns property in Linnton, Oregon, that is the site of a
former gas manufacturing plant that was closed in 1956. In 1993,
pursuant to Oregon Department of Environmental Quality (ODEQ)
procedures, NW Natural submitted a notice of intent to participate in
the ODEQ's Voluntary Cleanup Program and, in 1994, the site was listed
on ODEQ's Confirmed Release List and Inventory. During 1995, initial
tests revealed environmental contamination, but the extent or the
estimated cost of remediation cannot yet be determined. NW Natural
continues to monitor this site.
NW Natural expects that its costs of investigation and any remediation
at the Linnton site for which it may be responsible should be
recoverable, in large part, from insurance or through future rates.
During the period from 1993 through 1997, NW Natural recorded as
expense a total of $1.6 million for the estimated costs of consultants'
fees, ODEQ oversight and the voluntary investigation.
In 1996, the Eugene Water and Electric Board (EWEB) asked NW Natural to
participate in an investigation and the potential remediation of a 1.5
acre site of a former manufactured gas plant in Eugene, Oregon. NW
Natural purchased the property in 1958, after the plant had been
converted to a liquid propane gas plant. It used the propane plant
until 1960 when the system was converted to natural gas, and continued
to use the site as a service center until 1976 when it was sold.
Although NW Natural never operated the manufactured gas plant, EWEB has
contended that NW Natural's activities on the site may have exacerbated
prior contamination. To date, NW Natural has not agreed to participate
in an investigation of the site and has not obtained sufficient
information to determine the extent of its responsibility, if any, for
remediation of the site.
Litigation
----------
In July 1995, a jury in an Oregon state court returned a verdict
against NW Natural in the case of Northwest Natural Gas Company v.
--------------------------------
Chase Gardens, Inc. (Lane County Circuit Court Case No. 16-91-01370).
-------------------
The Oregon Court of Appeals (Oregon Court of Appeals Case No. CA
A90481) affirmed the trial court decision in February 1997. The Oregon
Supreme Court agreed to hear the case on appeal and is expected to
render a final ruling during 1998. NW Natural recorded a charge of $5.6
million in the fourth quarter of 1996, equivalent to 15 cents a share,
as a reserve against payment of the judgment, costs and post-judgment
interest from the case.
The Company is party to certain other legal proceedings in which
claimants seek material amounts. Although it is not possible to predict
the outcome with certainty, based upon the opinions of legal counsel,
management does not expect disposition of these matters to have a
materially adverse effect on the Company's financial position, results
of operations or cash flows.
NORTHWEST NATURAL GAS COMPANY
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
---------------------Quarter Ended -----------------------
Dollars (Thousands, Except Per
Share Amounts) Mar. 31 June 30 Sept. 30 Dec. 31 Total
- ------------------------------------------------------------------------------------------------------
1997
Operating revenues 134,347 65,855 46,283 115,271 361,756
Net operating revenues 84,039 43,726 32,488 72,191 232,444
Net income 24,753 2,360 (2,448) 18,394 43,059
Basic Earnings (loss) per share 1.07 0.07 (0.14) 0.78 1.78*
Diluted Earnings (loss) per share 1.04 0.07 (0.14) 0.76 1.76*
1996
Operating revenues 137,561 71,884 50,585 120,288 380,318
Net operating revenues 83,504 46,183 34,578 73,248 237,513
Net income 23,356 5,508 255 17,674** 46,793
Basic Earnings (loss) per share 1.02 0.22 (0.02) 0.76** 1.97*
Diluted Earnings (loss) per share 1.00 0.22 (0.02) 0.74** 1.94*
- --------------------------------------------------------------------------------------------------------
* Quarterly earnings per share are based upon the average number of common
shares outstanding during each quarter. Because the average number of shares
outstanding has increased in each quarter shown, the sum of quarterly earnings
may not equal earnings per share for the year. Variations in earnings between
quarterly periods are due primarily to the seasonal nature of the Company's
business.
** Results for the fourth quarter of 1996 include a charge equivalent to 15
cents a share resulting from a judgment against NW Natural in litigation dating
from 1995, and an adjustment reducing tax expense by $1.9 million, or 8 cents a
share, for reversal of deferred tax amounts provided in prior years.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
(Item 10. Directors and Executive Officers of the Registrant;
Item 11. Executive Compensation; Item 12. Security Ownership of
Certain Beneficial Owners and Management; and Item 13. Certain
Relationships and Related Transactions.)
Information called for by Part III (Items 10., 11., 12. and 13.)
is incorporated herein by reference to portions of the Company's definitive
proxy statement. See the Additional Item included in Part I for information
concerning executive officers of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. A list of all Financial Statements is incorporated by
reference to Item 8.
2. List of Exhibits filed:
*(3a.) Restated Articles of Incorporation, as filed
and effective June 24, 1988 and amended
December 8, 1992, December 1, 1993 and
May 27, 1994 (incorporated herein by
reference to Exhibit (3a.) to Form 10-K for
1994, File No. 0-994).
(3b.) Bylaws as amended December 18, 1997.
*(4a.) Copy of Mortgage and Deed of Trust, dated as
of July 1, 1946, to Bankers Trust and R. G.
Page (to whom Stanley Burg is now
successor), Trustees (incorporated herein by
reference to Exhibit 7(j) in File No.
2-6494); and copies of Supplemental
Indentures Nos. 1 through 14 to the Mortgage
and Deed of Trust, dated respectively, as of
June 1, 1949, March 1, 1954, April 1, 1956,
February 1, 1959, July 1, 1961, January 1,
1964, March 1, 1966, December 1, 1969,
April 1, 1971, January 1, 1975, December 1,
1975, July 1, 1981, June 1, 1985 and
November 1, 1985 (incorporated
herein by reference to Exhibit 4(d) in File
No. 33-1929); Supplemental Indenture No. 15
to the Mortgage and Deed of Trust, dated as
of July 1, 1986 (filed as Exhibit (4)(c) in
File No. 33-24168); Supplemental Indentures
Nos. 16, 17 and 18 to the Mortgage and
Deed of Trust, dated, respectively, as of
November 1, 1988, October 1, 1989 and July 1,
Exhibit (4)(c) in File No. 33-40482);
Supplemental Indenture No. 19 to the
Mortgage, and Deed of Trust, dated as of
June 1, 1991 (incorporated herein by
reference to Exhibit 4(c) in File No.
33-64014); and Supplemental Indenture No. 20
to the Mortgage and Deed of Trust, dated as
of June 1, 1993 (incorporated herein by
reference to Exhibit 4(c) in File No.
33-53795).
*(4d.) Copy of Indenture, dated as of June 1, 1991,
between the Company and Bankers Trust
Company, Trustee, relating to the Company's
Unsecured Medium-Term Notes (incorporated
herein by reference to Exhibit 4(e) in File
No. 33-64014).
*(4e.) Officers' Certificate dated June 12, 1991
creating Series A of the Company's Unsecured
Medium-Term Notes (incorporated herein by
reference to Exhibit (4e.) to Form 10-K for
1993, File No. 0-994).
*(4f.) Officers' Certificate dated June 18, 1993
creating Series B of the Company's Unsecured
Medium-Term Notes (incorporated herein by
reference to Exhibit (4f.) to Form 10-K for
1993, File No. 0-994).
*(4g.) Rights Agreement, dated as of February 27,
1996, between the Company and Boatmen's
Trust Company (ChaseMellon Shareholder
Services, successor), which includes as
Exhibit A thereto the form of a Right
Certificate and as Exhibit B thereto the
Summary of Rights to Purchase Common Shares
(incorporated herein by reference to Exhibit
1 to Form 8-A, dated February 27, 1996, File
No. 0-994).
*(10j.) Transportation Agreement, dated June 29,
1990, between the Company and Northwest
Pipeline Corporation (incorporated herein by
reference to Exhibit (10j.) to Form 10-K for
1993, File No. 0-994).
*(10j.(1)) Replacement Firm Transportation Agreement,
dated July 31, 1991, between the Company and
Northwest Pipeline Corporation (incorporated
herein by reference to Exhibit (10j.(2)) to
Form 10-K for 1992, File No. 0-994).
*(10j.(2)) Firm Transportation Service Agreement, dated
November 10, 1993, between the Company and
Pacific Gas Transmission Company incorporated
herein by reference to Exhibit (10j.(2)) to
Form 10-K for 1993, File No.
0-994).
*(10j.(3)) Service Agreement, dated June 17, 1993,
between Northwest Pipeline Corporation and
the Company (incorporated herein by reference
to Exhibit (10j.(3)) to Form 10-K for 1994,
File No. 0-994).
*(10j.(4)) Firm Transportation Service Agreement, dated
October 22, 1993, between Pacific Gas
Transmission Company and the Company
(incorporated herein by reference to Exhibit
(10j.(4)) to Form 10-K for 1994, File No.
0-994).
*(10j.(5)) Firm Transportation Service Agreement, dated
June 22, 1994, between Pacific Gas
Transmission Company and the Company
(incorporated herein by reference to Exhibit
(10j.(5)) to Form 10-K for 1995, File No.
0-994).
(10j.(6)) Firm Transportation and Supply Agreement,
dated May 9, 1997, between PanEnergy Trading
and Market Services, LLC, Inland Pacific
Energy Services Corp., and the Company.
(11) Statement re computation of per share
earnings.
(12) Statement re computation of ratios.
(23a.) Consent of Deloitte & Touche LLP.
(23b.) Consent of Price Waterhouse LLP.
(27) Financial Data Schedule.
Executive Compensation Plans and Arrangements:
----------------------------------------------
*(10b.) Executive Supplemental Retirement Income
Plan, 1995 Restatement (incorporated herein
by reference to Exhibit (10b.) to Form 10-K
for 1994, File No. 0-994).
*(10b.-1) 1995 Amendment to Executive Supplemental
Retirement Income Plan (1995 Restatement)
(incorporated herein by reference to Exhibit
(10b.-1) to Form 10-K for 1995, File No.
0-994).
*(10c.) 1985 Stock Option Plan, as amended effective
May 25, 1995 (incorporated herein by
reference to Exhibit (10c.) to Form 10-K for
1995, File No. 0-994).
*(10e.) Executive Deferred Compensation Plan, 1990
Restatement, effective January 1, 1990
(incorporated herein by reference to Exhibit
(10e.) to Form 10-K for 1990, File No.
0-994).
*(10e.-1) Amendment No. 1 to Executive Deferred
Compensation Plan (incorporated herein by
reference to Exhibit (10e.-1) to Form 10-K
for 1991, File No. 0-994).
*(10e.-2) Amendment No. 2 to Executive Deferred
Compensation Plan (incorporated herein by
reference to Exhibit (10e.-2) to Form 10-K
for 1994, File No. 0-994).
(10e.-3) Amendment No. 3 to Executive Deferred
Compensation Plan.
(10f.) Directors Deferred Compensation Plan,
effective June 1, 1981, restated as of
December 1, 1997.
*(10g.) Form of Indemnity Agreement as entered into
between the Company and each director and
executive officer (incorporated herein by
reference to Exhibit (10g.) to Form 10-K for
1988, File No. 0-994).
(10i.) Non-Employee Directors Stock Compensation
Plan, as amended effective January 1, 1998.
*(10k.) Executive Annual Incentive Plan, effective
March 1, 1990, as amended effective
January 1, 1992 and January 1, 1996
(incorporated by reference to Exhibit (10k.)
to Form 10-K for 1995, File No. 0-994).
*(10l.) Employment agreement dated November 27, 1989,
between the Company and an executive officer
(incorporated herein by reference to Exhibit
(10l.) to Form 10-K for 1991, File No.
0-994).
*(10m.) Agreement dated September 22, 1994, between
the Company and an executive officer
(incorporated herein by reference to Exhibit
(10m.) to Form 10-K for 1994, File No.
0-994).
*(10n.) Employment agreement dated November 2, 1995,
as amended February 27, 1996, between the
Company and an executive officer
(incorporated herein by reference to Exhibit
(10n.) to Form 10-K for 1995, File No.
0-994).
(10n.-1) Amendment dated December 18, 1997 to
employment agreement dated November 2, 1995,
as previously amended February 27, 1996,
between the Company and an executive officer.
*(10o.) Form of Severance Agreement as entered into
between the Company and designated executive
officers (incorporated herein by reference
to Exhibit (10o.) to Form 10-K for 1995,
File No. 0-994).
*(10p.) Employment Agreement dated July 2, 1997,
between the Company and an executive officer
(incorporated herein by reference to Exhibit
10 (a) to Form 10-Q for the quarter ended
September 30, 1997, File No. 0-994).
(10p.-1) Amendment dated December 18, 1997 to
employment agreement dated July 2, 1997,
between the Company and an executive officer.
The Company agrees to furnish the Commission, upon request,
a copy of certain instruments defining rights of holders of
long-term debt of the Company or its consolidated
subsidiaries which authorize securities thereunder in
amounts which do not exceed 10% of the total assets of the
Company.
(b) Reports on Form 8-K.
No Current Reports on Form 8-K were filed during the quarter
ended December 31, 1997.
- -------------------------------------------
*Incorporated herein by reference as indicated
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
Date: March 17, 1998 By: /s/ Richard G. Reiten
-----------------------
Richard G. Reiten, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- ------------------------------ ---------------------------------------- --------------
Richard G. Reiten Principal Executive Officer and Director March 17, 1998
- ------------------------------
Richard G. Reiten, President
and Chief Executive Officer
/s/ Bruce R. DeBolt Principal Financial Officer March 17, 1998
- ------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
/s/ D. James Wilson Principal Accounting Officer March 17, 1998
- -------------------------------
D. James Wilson
Treasurer and Controller
/s/ Mary Arnstad Director )
- ------------------------------- )
Mary Arnstad )
)
/s/ Thomas E. Dewey, Jr. Director )
- ------------------------------- )
Thomas E. Dewey, Jr. )
)
/s/ Tod R. Hamachek Director )
- ------------------------------- )
Tod R. Hamachek )
)
/s/ Richard B. Keller Director )
- ------------------------------- )
Richard B. Keller )
)
/s/ Wayne D. Kuni Director )
- ------------------------------- )
Wayne D. Kuni )
) March 17, 1998
Director )
- ------------------------------ )
Randall C. Pape )
)
/s/ Robert L. Ridgley Director )
- ------------------------------ )
Robert L. Ridgley )
)
/s/ Dwight A. Sangrey Director )
- ------------------------------ )
Dwight A. Sangrey )
)
/s/ Melody C. Teppola Director )
- ------------------------------ )
Melody C. Teppola )
)
/s/ Russell F. Tromley Director )
- ------------------------------ )
Russell F. Tromley )
)
/s/ Benjamin R. Whiteley Director )
- ------------------------------
Benjamin R. Whiteley
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Annual Report on Form 10-K
For Fiscal Year Ended
December 31, 1997
Exhibit
Document Number
-------- -------
* Restated Articles of Incorporation, as filed
June 24, 1988 and amended December 8, 1992,
December 1, 1993 and May 27, 1994 (3a.)
Bylaws as amended December 18, 1997 (3b.)
* Mortgage and Deed of Trust, dated as of July 1,
1946, as supplemented by Supplemental Indenture
Nos. 1 through 20 (4a.)
* Indenture, dated as of June 1, 1991, between
the Company and Bankers Trust Company (4d.)
* Officers' Certificate dated June 12, 1991
creating Unsecured Medium-Term Notes Series A (4e.)
* Officers' Certificate dated June 18, 1993
creating Unsecured Medium-Term Notes Series B (4f.)
* Rights Agreement, dated as of February 27, 1996,
between the Company and Boatmen's Trust Company
(ChaseMellon Shareholder Services, successor) (4g.)
* Transportation Agreement, dated June 29, 1990,
between the Company and Northwest Pipeline
Corporation (10j.)
* Replacement Firm Transportation Agreement,
dated July 31, 1991, between the Company and
Northwest Pipeline Corporation (10j.(1))
* Firm Transportation Service Agreement, dated
November 10, 1993, between the Company and
Pacific Gas Transmission Company (10j.(2))
* Service Agreement, dated June 17, 1993, between
Northwest Pipeline Corporation and the Company (10j.(3))
* Firm Transportation Service Agreement, dated
October 22, 1993, between Pacific Gas
Transmission Company and the Company (10j.(4))
* Firm Transportation Service Agreement, dated
June 22, 1994, between Pacific Gas Transmission
Company and the Company (10j.(5))
Firm Transportation and Supply Agreement, dated
May 9, 1997, between PanEnergy Trading and Market
Services, Inland Pacific Energy Services Corp., and the
Company (10j.(6))
Statement re computation of per share earnings (11)
Statement re computation of ratios (12)
Consent of Deloitte & Touche LLP (23a.)
Consent of Price Waterhouse LLP (23b.)
Financial Data Schedule (27)
Executive Compensation Plans and Arrangements
---------------------------------------------
* Executive Supplemental Retirement Income Plan,
1995 Restatement (10b.)
* 1995 Amendment to Executive Supplemental
Retirement Income Plan (1995 Restatement) (10b.-1)
* 1985 Stock Option Plan as amended effective
May 25, 1995 (10c.)
* Executive Deferred Compensation Plan, 1990
Restatement, effective January 1, 1990 (10e.)
* Amendment No. 1 to Executive Deferred
Compensation Plan (10e.-1)
* Amendment No. 2 to Executive Deferred
Compensation Plan (10e.-2)
Amendment No. 3 to Executive Deferred Compensation Plan (10e.-3)
Directors Deferred Compensation Plan, effective June 1, 1981, restated as
of December 1, 1997 (10f.)
* Form of Indemnity Agreement entered into
between the Company and each director and
executive officer (10g.)
Non-Employee Directors Stock Compensation Plan,
as amended effective January 1, 1998 (10i.)
* Executive Annual Incentive Plan, effective
March 1, 1990, as amended effective
January 1, 1992 and January 1, 1996 (10k.)
* Employment agreement dated November 27, 1989
between the Company and an executive officer (10l.)
* Agreement dated September 22, 1994 between the Company
and an executive officer (10m.)
* Employment agreement dated November 2, 1995, as amended
February 27, 1996, between the Company and an executive
officer (10n.)
Amendment dated December 18, 1997 to employment
agreement dated November 2, 1995 (10n.-1)
* Form of Severance Agreement as entered into between the
Company and designated executive officers (10o.)
* Employment agreement dated July 2, 1997 between the Company
and an executive officer (10p.)
Amendment dated December 18, 1997 to employment agreement
dated July 2, 1997 (10p.-1)
- ----------------------------------
* Incorporated by reference