SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _________ to _________
Commission File No. 0-994
[GRAPHIC OMITTED] NW NATURAL
NORTHWEST NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter)
OREGON 93-0256722
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
220 N.W. SECOND AVENUE, PORTLAND, OREGON 97209
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (503) 226-4211
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
At November 6, 2002, 25,536,463 shares of the registrant's Common Stock, $3-1/6
par value (the only class of Common Stock) were outstanding.
NORTHWEST NATURAL GAS COMPANY
September 30, 2002
Summary of Information Reported
The registrant submits herewith the following information:
PART I. FINANCIAL INFORMATION
Page
Number
Item 1. Financial Statements
(1) Consolidated Statements of Income for the three-month
and nine-month periods ended Sept. 30, 2002 and 2001 3
(2) Consolidated Statements of Earnings Invested in the
Business for the nine-month periods ended Sept. 30,
2002 and 2001 4
(3) Consolidated Balance Sheets at Sept. 30, 2002 and 2001
and Dec. 31, 2001 5
(4) Consolidated Statements of Cash Flows for the nine-month
periods ended Sept. 30, 2002 and 2001 7
(5) Consolidated Statements of Capitalization at Sept. 30,
2002 and 2001 and Dec. 31, 2001 8
(6) Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 26
PART II. OTHER INFORMATION
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
Signature 27
Certifications 28
2
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(1) Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
Thousands, except per share amounts Sept. 30, Sept. 30,
- ---------------------------------------------------------------------------------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Operating revenues:
Gross operating revenues $ 78,717 $ 78,359 $ 459,153 $ 413,850
Cost of sales 40,658 41,292 253,864 230,404
---------- ---------- --------- ---------
Net operating revenues 38,059 37,067 205,289 183,446
Operating expenses:
Operations and maintenance 19,685 18,749 62,087 60,778
Taxes other than income taxes 6,781 6,265 25,635 22,224
Depreciation, depletion and amortization 13,035 12,567 38,633 36,982
---------- ---------- --------- ---------
Total operating expenses 39,501 37,581 126,355 119,984
---------- ---------- --------- ---------
Income (loss) from operations (1,442) (514) 78,934 63,462
Other income (expense) 248 240 (14,179) 837
Interest charges - net 8,652 8,306 25,378 24,492
---------- ---------- --------- ---------
Income (loss) before income taxes (9,846) (8,580) 39,377 39,807
Income tax expense (benefit) (3,838) (3,604) 13,930 14,011
---------- ---------- --------- ---------
Net income (loss) (6,008) (4,976) 25,447 25,796
Redeemable preferred and preference stock
dividend requirements 582 595 1,767 1,807
---------- ---------- --------- ---------
Earnings (loss) applicable to common stock $ (6,590) $ (5,571) $ 23,680 $ 23,989
========== ========== ========= =========
Average common shares outstanding 25,492 25,133 25,389 25,148
Basic earnings (loss) per share of common stock $ (0.26) $ (0.22) $ 0.93 $ 0.95
Diluted earnings (loss) per share of common stock $ (0.26) $ (0.22) $ 0.93 $ 0.95
Dividends per share of common stock $ 0.315 $ 0.31 $ 0.945 $ 0.93
--------------------------------------------------
See Notes to Consolidated Financial Statements
3
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(2) Consolidated Statements of Earnings Invested in the Business
(Unaudited)
Nine Months Ended Sept. 30,
-------------------------------------------------
Thousands 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Earnings invested in the business:
Balance at beginning of period $ 147,950 $ 134,189
Net income 25,447 $ 25,447 25,796 $ 25,796
Cash dividends paid:
Redeemable preferred and preference stock (1,776) (1,816)
Common stock (23,980) (23,377)
Common stock repurchased - (2,688)
--------- ---------
Balance at end of period $ 147,641 $ 132,104
========= =========
Accumulated other comprehensive income (loss):
Balance at beginning of period $ (375) $ -
Other comprehensive income:
Change in net unrealized gains (losses) from price
risk management activities - net of tax 291 291 - -
----------------------- ---------------------
Comprehensive income $ 25,738 $ 25,796
========== ========
Balance at end of period $ (84) $ -
========= =========
--------------------------------------------------
See Notes to Consolidated Financial Statements
4
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Balance Sheets
Sept. 30, Sept. 30,
2002 2001 Dec. 31,
Thousands (Unaudited) (Unaudited) 2001
- --------------------------------------------------------------------------------------------------------------------
Assets:
Plant and property:
Utility plant $ 1,514,489 $ 1,455,695 $ 1,465,079
Less accumulated depreciation 548,696 507,284 514,629
------------ ------------ -----------
Utility plant - net 965,793 948,411 950,450
------------ ------------ -----------
Non-utility property 20,831 8,653 18,203
Less accumulated depreciation and depletion 3,976 3,523 3,677
------------ ------------ -----------
Non-utility property - net 16,855 5,130 14,526
------------ ------------ -----------
Total plant and property 982,648 953,541 964,976
------------ ------------ -----------
Other investments 13,174 15,207 23,233
------------ ------------ -----------
Current assets:
Cash and cash equivalents 19,701 8,074 10,440
Accounts receivable 26,106 29,072 66,684
Allowance for uncollectible accounts (1,636) (1,290) (1,962)
Accrued unbilled revenue 15,193 10,152 57,749
Inventories of gas, materials and supplies 55,367 54,492 49,337
Prepayments and other current assets 30,793 33,289 28,086
------------ ------------ -----------
Total current assets 145,524 133,789 210,334
------------ ------------ -----------
Regulatory assets:
Income tax asset 48,469 49,515 48,469
Deferred gas costs receivable - 8,464 -
Unrealized loss on non-trading derivatives 4,090 119,700 111,641
Unamortized loss on debt redemption 6,624 7,086 6,970
Other 5,782 5,824 5,302
------------ ------------ -----------
Total regulatory assets 64,965 190,589 172,382
------------ ------------ -----------
Other assets:
Investment in life insurance 54,155 51,281 53,033
Other 12,229 10,656 11,064
------------ ------------ -----------
Total other assets 66,384 61,937 64,097
------------ ------------ -----------
Total assets $ 1,272,695 $ 1,355,063 $ 1,435,022
============ ============ ===========
--------------------------------------------------
See Notes to Consolidated Financial Statements
5
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(3) Consolidated Balance Sheets
Sept. 30, Sept. 30,
2002 2001 Dec. 31,
Thousands (Unaudited) (Unaudited) 2001
- --------------------------------------------------------------------------------------------------------------------
Capitalization and liabilities:
Capitalization:
Common stock $ 80,834 $ 79,671 $ 79,889
Premium on common stock 246,690 239,351 240,697
Earnings invested in the business 147,641 132,104 147,950
Accumulated other comprehensive income (loss) (84) - (375)
------------ ------------ -----------
Total common stock equity 475,081 451,126 468,161
Redeemable preference stock 25,000 25,000 25,000
Redeemable preferred stock 8,250 9,000 9,000
Long-term debt 446,033 398,449 378,377
------------ ------------ -----------
Total capitalization 954,364 883,575 880,538
------------ ------------ -----------
Current liabilities:
Notes payable - 78,862 108,291
Accounts payable 45,400 39,900 70,698
Long-term debt due within one year 40,000 20,000 40,000
Taxes accrued 8,514 8,113 22,539
Interest accrued 10,655 9,690 3,658
Other current and accrued liabilities 25,379 24,309 28,396
------------ ------------ -----------
Total current liabilities 129,948 180,874 273,582
------------ ------------ -----------
Regulatory liabilities:
Customer advances 1,818 1,956 1,985
Deferred gas costs payable 15,957 - 10,089
------------ ------------ -----------
Total regulatory liabilities 17,775 1,956 12,074
------------ ------------ -----------
Other liabilities:
Deferred income taxes 138,130 142,485 130,424
Fair value of non-trading derivatives 4,026 119,700 111,868
Deferred investment tax credits 8,169 9,081 8,682
Other 20,283 17,392 17,854
------------ ------------ -----------
Total other liabilities 170,608 288,658 268,828
------------ ------------ -----------
Total capitalization and liabilities $ 1,272,695 $ 1,355,063 $ 1,435,022
============ ============ ===========
--------------------------------------------------
See Notes to Consolidated Financial Statements
6
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(4) Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended Sept. 30,
---------------------------
Thousands 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income from operations $ 25,447 $ 25,796
Adjustments to reconcile net income to cash provided by operations:
Depreciation, depletion and amortization 38,633 36,982
Gain on sale of assets (221) -
Loss reserve for PGE acquisition costs 13,699 -
Unrealized gain from price risk management activities 291 -
Deferred income taxes and investment tax credits 7,193 372
Equity in (earnings) losses of investments (1,220) 182
Allowance for funds used during construction (406) (667)
Deferred gas costs - net 5,868 8,509
Other (450) 2,489
----------- -----------
Cash from operations before working capital changes 88,834 73,663
Changes in operating assets and liabilities:
Accounts receivable - net of uncollectible accounts 40,252 32,971
Accrued unbilled revenue 42,556 35,467
Inventories of gas, materials and supplies (6,030) (7,609)
Accounts payable (25,298) (70,798)
Accrued interest and taxes (7,028) 7,041
Other current assets and liabilities (5,890) (9,784)
----------- -----------
Cash provided by operating activities 127,396 60,951
----------- -----------
Investing activities:
Acquisition and construction of utility plant assets (53,271) (55,822)
Investment in non-utility property (2,628) (4)
PGE acquisition costs (4,142) (1,229)
Proceeds from sale of assets and other 2,109 366
----------- -----------
Cash used in investing activities (57,932) (56,689)
----------- -----------
Financing activities:
Common stock issued 5,094 3,665
Common stock repurchased - (5,792)
Redeemable preferred stock retired (750) (750)
Long-term debt issued 90,000 18,000
Long-term debt retired (20,500) (20,000)
Change in short-term debt (108,291) 22,599
Cash dividend payments:
Redeemable preferred and preference stock (1,776) (1,816)
Common stock (23,980) (23,377)
----------- -----------
Cash used in financing activities (60,203) (7,471)
----------- -----------
Increase (decrease) in cash and cash equivalents 9,261 (3,209)
Cash and cash equivalents - beginning of period 10,440 11,283
----------- -----------
Cash and cash equivalents - end of period $ 19,701 $ 8,074
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 18,177 $ 17,582
Income taxes $ 27,912 $ 25,202
Supplemental disclosure of non-cash financing activities:
Conversion to common stock:
7-1/4 % Series of Convertible Debentures $ 1,844 $ 341
--------------------------------------------------
See Notes to Consolidated Financial Statements
7
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(5) Consolidated Statements of Capitalization
Sept. 30, 2002 Sept.30, 2001
Thousands, except share amounts (Unaudited) (Unaudited) Dec. 31, 2001
- ----------------------------------------------------------------------------------------------------------------------
Common Stock Equity:
Common stock - par value $3-1/6 per share $ 80,834 $ 79,671 $ 79,889
Premium on common stock 246,690 239,351 240,697
Earnings invested in the business 147,641 132,104 147,950
Accumulated other comprehensive income (loss) (84) - (375)
-------------- -------------- -------------
Total common stock equity 475,081 50% 451,126 51% 468,161 53%
Redeemable Preference Stock:
$6.95 Series, stated value $100 per share 25,000 2% 25,000 3% 25,000 3%
Redeemable Preferred Stock:
$7.125 Series, stated value $100 per share 8,250 1% 9,000 1% 9,000 1%
Long-Term Debt:
Medium-Term Notes
-----------------
First Mortgage Bonds:
8.050% Series A due 2002 - 10,000 10,000
6.750% Series B due 2002 - 10,000 10,000
5.550% Series B due 2002 20,000 20,000 20,000
6.400% Series B due 2003 20,000 20,000 20,000
6.340% Series B due 2005 5,000 5,000 5,000
6.380% Series B due 2005 5,000 5,000 5,000
6.450% Series B due 2005 5,000 5,000 5,000
6.050% Series B due 2006 8,000 8,000 8,000
6.310% Series B due 2007 20,000 - -
6.800% Series B due 2007 9,500 10,000 10,000
6.500% Series B due 2008 5,000 5,000 5,000
7.450% Series B due 2010 25,000 25,000 25,000
6.665% Series B due 2011 10,000 10,000 10,000
7.130% Series B due 2012 40,000 - -
8.260% Series B due 2014 10,000 10,000 10,000
7.000% Series B due 2017 40,000 40,000 40,000
6.600% Series B due 2018 22,000 22,000 22,000
8.310% Series B due 2019 10,000 10,000 10,000
7.630% Series B due 2019 20,000 20,000 20,000
9.050% Series A due 2021 10,000 10,000 10,000
7.250% Series B due 2023 20,000 20,000 20,000
7.500% Series B due 2023 4,000 4,000 4,000
7.520% Series B due 2023 11,000 11,000 11,000
7.720% Series B due 2025 20,000 20,000 20,000
6.520% Series B due 2025 10,000 10,000 10,000
7.050% Series B due 2026 20,000 20,000 20,000
7.000% Series B due 2027 20,000 20,000 20,000
6.650% Series B due 2027 20,000 20,000 20,000
6.650% Series B due 2028 10,000 10,000 10,000
7.740% Series B due 2030 20,000 20,000 20,000
7.850% Series B due 2030 10,000 10,000 10,000
5.820% Series B due 2032 30,000 - -
Convertible Debentures
7-1/4% Series due 2012 6,533 8,449 8,377
---------- ---------- ----------
486,033 418,449 418,377
Less long-term debt due within one year 40,000 20,000 40,000
---------- ---------- ----------
Total long-term debt 446,033 47% 398,449 45% 378,377 43%
---------- ---- ---------- ---- ---------- ----
Total Capitalization $ 954,364 100% $ 883,575 100% $ 880,538 100%
========== ==== ========== ==== ========== ====
-------------------------------------------------
See Notes to Consolidated Financial Statements
8
NORTHWEST NATURAL GAS COMPANY
PART I. FINANCIAL INFORMATION
(6) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Financial Statements
The information presented in the consolidated financial statements
is unaudited, but includes all material adjustments, including normal recurring
accruals, that the management of the Company considers necessary for a fair
presentation of the results of such periods. These consolidated financial
statements should be read in conjunction with the financial statements and
related notes included in the Company's 2001 Annual Report on Form 10-K (2001
Form 10-K). A significant part of the business of the Company is of a seasonal
nature; therefore, results of operations for interim periods are not necessarily
indicative of the results for a full year.
As referred to herein, the "Company" consists of Northwest Natural
Gas Company (NW Natural), a regulated utility, and non-regulated subsidiary
businesses, NNG Financial Corporation (Financial Corporation), a wholly-owned
subsidiary, and Northwest Energy Corporation (Northwest Energy), which was
formed in 2001 to serve as the holding company for NW Natural and Portland
General Electric Company (PGE) if the acquisition of PGE had been completed (see
Note 7).
Certain amounts from prior periods have been reclassified to
conform with the 2002 presentation. These reclassifications had no impact on
prior year results of operations.
2. Use of Financial Derivatives
NW Natural utilizes derivative instruments to manage commodity
price risks related to natural gas purchases, foreign currency exchange rate
risks related to gas purchase commitments from Canada, oil or propane commodity
price risks related to gas sales and transportation services under rate
schedules pegged to these commodities, and interest rate risks related to
long-term debt maturing or expected to be issued in less than five years. NW
Natural does not enter into derivative instruments for trading purposes. See
Part II, Item 7., "Accounting for Derivative Instruments and Hedging
Activities," and Part II, Item 8., Notes 1 and 11, "Notes to Consolidated
Financial Statements," in the 2001 Form 10-K.
At Sept. 30, 2002, NW Natural had the following derivatives
outstanding covering its exposures to natural gas commodity prices and foreign
currency exchange rates: a series of 23 natural gas price swap contracts, three
natural gas call option contracts, and 69 foreign currency forward contracts.
Each of these contracts was designated as a cash flow hedge. NW Natural also had
one physical natural gas supply contract with an embedded derivative, which did
not qualify as a normal sales or purchase contract. The estimated fair values
and the notional amounts of derivative instruments outstanding were as follows:
Jan. 1, 2002 Sept. 30,2002
------------------------------------------------------
Fair Value Notional Fair Value Notional
Thousands Gain (Loss) Amount Gain (Loss) Amount
---------------------------------------------------------------------------------------------------------------------
Fixed-price natural gas commodity swaps $ (110,935) $ 254,209 $ (6,105) $ 208,050
Fixed-price natural gas call options (832) 6,390 1,906 30,341
Physical natural gas supply contract with embedded option - - 213 4,621
Foreign currency forward purchase contracts (101) 10,223 (40) 6,536
------------------------- ------------------------
Total $ (111,868) $ 270,822 $ (4,026) $ 249,548
========================= ========================
9
3. Recent Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting
for Asset Retirement Obligations." SFAS No. 143, which is effective for fiscal
years beginning after June 15, 2002, requires that obligations associated with
the retirement of a tangible long-lived asset be recorded as a liability when
those obligations are incurred, with the amount of the liability initially
measured at fair value. The liability for the asset retirement obligation is
recorded as a capitalized cost increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period and the capitalized cost is depreciated over the useful life of the
related asset. The Company's adoption of SFAS No. 143, effective Jan. 1, 2003,
is not expected to have a material impact on its financial condition or results
of operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statement Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections," effective for financial statements issued for fiscal years
beginning after May 15, 2002. SFAS No. 145, which updates, clarifies and
simplifies existing accounting pronouncements, addresses the reporting of debt
extinguishments and accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which replaces Emerging Issues
Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities, such as lease
termination costs and certain employee severance costs, when they are incurred
rather than at the date of a commitment to an exit or disposal plan. The primary
effect of applying SFAS No. 146, which is effective for all exit or disposal
activities initiated after Dec. 31, 2002, will be on the timing of recognition
of costs associated with exit or disposal activities.
The Company is currently evaluating the impact of the adoption of
SFAS No. 145 and SFAS No. 146 upon its financial condition and results of
operations.
4. Adoption of New Accounting Standards
Effective Jan. 1, 2002, the Company adopted SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting. It also
specifies the types of acquired intangible assets that are required to be
recognized and reported separately from goodwill. SFAS No. 142 requires
goodwill, of which the Company had none as of Sept. 30, 2002, and other
intangibles with indefinite lives to be tested for impairment at least annually
rather than being amortized as previously required. The adoption of SFAS No. 141
and SFAS No. 142 did not have a material impact on the Company's financial
condition or results of operations.
The Company also adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," effective Jan. 1, 2002. SFAS No.
144 establishes a single accounting model for recognition and measurement of the
impairment of long-lived assets to be held and used, the measurement of
long-lived assets to be disposed of by sale and for segments of a business to be
disposed of. SFAS No. 144 also expands the scope of discontinued operations to
include all components of an entity that can be distinguished from the rest of
10
the entity and will be eliminated from the ongoing operations of the entity in a
disposal transaction. The adoption of SFAS No. 144 did not have a material
impact on the Company's financial condition or results of operations.
5. Segment Information
The Company principally operates in a segment of business,
"Utility", consisting of the distribution of natural gas. Another segment, "Gas
Storage", represents natural gas storage services provided to upstream
interstate customers using storage capacity that has been developed in advance
of core utility customers' requirements. The remaining segment, "Other",
primarily consists of non-regulated investments in alternative energy projects
in California and a Boeing 737-300 aircraft leased to Continental Airlines, and
deferred costs relating to the acquisition of PGE (see Note 7).
The following table presents information about the reportable
segments for the three and nine months ended Sept. 30, 2002 and 2001.
Inter-segment transactions are insignificant.
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
------------------------------------------------- -----------------------------------------------
Thousands Utility Gas Storage Other Total Utility Gas Storage Other Total
- ---------------------------------------------------------------------------------------------------------------------------------
2002
- ----
Net operating revenues $ 36,519 $ 1,504 $ 36 $ 38,059 $ 199,434 $ 5,722 $ 133 $ 205,289
Depreciation, depletion
and amortization 12,926 109 - 13,035 38,334 299 - 38,633
Other operating expenses 26,248 187 31 26,466 86,933 684 105 87,722
Income (loss) from
operations (2,655) 1,208 5 (1,442) 74,167 4,739 28 78,934
Income from financial
investments - - 605 605 - - 1,220 1,220
Net income (loss) (6,958) 424 526 (6,008) 30,147 2,402 (7,102) 25,447
Assets 1,238,215 16,500 17,980 1,272,695 1,238,215 16,500 17,980 1,272,695
2001
- ----
Net operating revenues $ 36,351 $ 662 $ 54 $ 37,067 $ 180,671 $ 2,654 $ 121 $ 183,446
Depreciation, depletion
and amortization 12,543 24 - 12,567 36,910 72 - 36,982
Other operating expenses 24,891 130 (7) 25,014 82,863 216 (77) 83,002
Income (loss) from
operations (1,083) 508 61 (514) 60,898 2,366 198 63,462
Income (loss) from financial
investments - - 51 51 - - (182) (182)
Net income (loss) (5,543) 280 287 (4,976) 23,762 1,365 669 25,796
Assets 1,330,281 4,847 19,935 1,355,063 1,330,281 4,847 19,935 1,355,063
6. Restated Stock Option Plan
At the Company's Annual Meeting in May 2002, the shareholders
approved an amendment to the Restated Stock Option Plan that increased the total
number of shares authorized for option grants from 1,200,000 to 2,400,000
shares. At Sept. 30, 2002, options on 1,432,400 shares were available for grant
and options to purchase 462,314 shares were outstanding.
11
7. Commitments and Contingencies
Acquisition of Portland General Electric Company
NW Natural recorded a loss contingency of $13.7 million at June
30, 2002 relating to transaction costs incurred in connection with its efforts
to acquire PGE (see Part I, Item 2., "Application of Critical Accounting
Policies - Contingencies" and "Acquisition of Portland General Electric
Company," in the Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002). This non-recurring charge, equivalent to $8.3 million after tax,
or 32 cents a diluted share, was based on the Company's judgment that the
acquisition was no longer considered probable. The amount of the loss reserve
outstanding at Sept. 30, 2002 is $13.7 million, which is equivalent to NW
Natural's deferred costs relating to the acquisition effort. NW Natural will
re-evaluate the loss reserve if it resumes its acquisition efforts.
Environmental Matters
NW Natural has accrued all material loss contingencies relating to
environmental matters which it believes to be probable of assertion and
reasonably estimable. See Part II, Item 8., Note 12, "Notes to Consolidated
Financial Statements," in the 2001 Form 10-K. Due to the preliminary nature of
these environmental investigations, the range of any additional possible loss
contingency cannot be currently estimated.
The City of Portland has notified NW Natural that it is planning a
sewer improvement project that would include excavation within the former site
of a gas manufacturing plant (the Front Street site) that was owned and operated
by a predecessor of the Company between 1860 and 1913. The preliminary
assessment of this site performed by a consultant for NW Natural in 1987
indicated that it could be assumed that by-product tars may have been disposed
of on the site. The report concluded, however, that it is likely that waste
residues from the plant, if present on the site, were covered by deep fill
during construction of the nearby seawall and probably have stabilized due to
physical and chemical processes. Neither the City of Portland nor the Oregon
Department of Environmental Quality has notified NW Natural whether a further
investigation or potential remediation might be required on the site in
connection with the sewer excavation. Available information is insufficient to
determine either the total amount of liability, if any, or a range of any
potential liability.
NW Natural expects that its costs of further investigation and
remediation for which it may be responsible with respect to the Linnton site,
the Wacker site, the Portland Harbor Superfund site and the Front Street site,
if any, should be recoverable, in large part, from insurance. In the event these
costs are not recovered from insurance, NW Natural will seek recovery through
future rates.
Litigation
The Company is party to certain legal actions in which claimants
seek material amounts. Although it is impossible to predict the outcome with
certainty, based upon the opinions of legal counsel, management does not expect
disposition of these matters to have a materially adverse effect on the
Company's financial position, results of operations or cash flows.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The consolidated financial statements include:
Regulated utility:
Northwest Natural Gas Company (NW Natural)
Non-regulated wholly-owned subsidiary businesses:
NNG Financial Corporation (Financial Corporation), and its wholly-owned
subsidiaries
Northwest Energy Corporation (Northwest Energy), and its wholly-owned
subsidiary
Together these businesses are referred to herein as the "Company"
(see "Non-utility Operations," below, and Part II, Item 8., Note 2, "Notes to
Consolidated Financial Statements," in the Company's 2001 Annual Report on Form
10-K (2001 Form 10-K)).
The following is management's assessment of the Company's
financial condition including the principal factors that affect results of
operations. The discussion refers to the consolidated activities of the Company
for the three and nine months ended Sept. 30, 2002 and 2001.
Application of Critical Accounting Policies
In preparing the Company's financial statements using generally
accepted accounting principles in the United States of America,
management exercises judgment in the selection and application of accounting
principles, including making estimates and assumptions. Management considers its
critical accounting policies to be those which are most important to the
representation of the Company's financial condition and results of operations
and which require management's most difficult and subjective or complex
judgments, including those which could result in materially different amounts if
the Company reported under different conditions or using different assumptions.
Management considers its current critical accounting policies to be in the areas
of regulatory accounting, revenue recognition, derivative and hedging activities
(see "Part II, Item 7., "Critical Accounting Policies - Regulatory Accounting,
Revenue Recognition and Accounting for Derivative Instruments and Hedging
Activities," in the Company's 2001 Form 10-K), and loss contingencies.
Contingencies
The Company records loss contingencies when it is probable that a
loss has been incurred and the amount of the loss is reasonably estimable.
Estimating probable losses requires analysis of uncertainties that often depend
upon judgments about potential actions by third parties. In the normal course of
business, NW Natural's accruals for loss contingencies include allowances for
uncollectible accounts, environmental claims and property damage claims. In
addition, NW Natural records receivables for anticipated recoveries under
existing insurance contracts when recovery is probable.
NW Natural recorded a loss contingency of $13.7 million at
June 30, 2002 relating to transaction costs incurred in connection with its
efforts to acquire Portland General Electric Company from Enron Corp. (Enron)
(see Part I, Item 6., "Application of Critical Accounting Policies -
Contingencies" and "Acquisition of Portland General Electric Company" in the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
This non-recurring charge, equivalent to $8.3 million after tax or 32 cents a
diluted share, was based on the Company's judgment that the acquisition was no
longer considered probable. The amount of the loss reserve outstanding at Sept.
30, 2002 is $13.7 million, which is equivalent to NW Natural's deferred costs
relating to the acquisition effort. NW Natural will re-evaluate the loss reserve
if it resumes its acquisition efforts.
13
Earnings and Dividends
The Company incurred losses applicable to common stock of $6.6
million and $5.6 million for the quarters ended Sept. 30, 2002 and 2001,
respectively. The loss applicable to common stock for the third quarter of 2002
was equivalent to 26 cents a diluted share, compared to a loss of 22 cents a
share for the third quarter of 2001. A third quarter loss is customary for NW
Natural, reflecting low summertime use of natural gas.
NW Natural lost 29 cents a diluted share from gas utility
operations in the third quarter of 2002, compared to a loss of 24 cents a share
in the same period in 2001. Operating margin from gas utility operations was
$0.2 million, or 1 percent, higher in the third quarter of 2002, but this
improvement was more than offset by higher utility operating expenses.
The Company reported consolidated earnings applicable to common
stock of $23.7 million, or 93 cents a diluted share, for the nine months ended
Sept. 30, 2002, compared to earnings of $24.0 million, or 95 cents a share, for
the nine months ended Sept. 30, 2001. Results before non-recurring charges for
the first nine months of 2002 were earnings applicable to common stock of $32.0
million, or $1.25 a diluted share. The reported results for the first nine
months of 2002 include a non-recurring charge to a loss reserve for NW Natural's
transaction costs incurred in its efforts to acquire PGE from Enron. The amount
of the charge was $13.7 million, or $8.3 million after tax, equivalent to 32
cents a diluted share. The charge represents NW Natural's deferred costs
including financial advisory and legal fees, loan arrangement fees and other
costs relating to the acquisition effort. (See Note 7, "Commitments and
Contingencies - Acquisition of Portland General Electric Company.")
For the year-to-date, NW Natural earned $1.11 a diluted share from
utility operations compared to earnings of 87 cents a share in the same period
in 2001. Weather in the first nine months of the year was 4 percent colder than
the 20-year average, but 2 percent warmer than in 2001. Residential and
commercial customers' consumptions per heating degree day were an estimated 11
percent and 16 percent lower, respectively, during the first nine months of 2002
than average consumptions prior to the significant increases in gas commodity
prices experienced and tracked into rates during 2000 and 2001. The Company
estimates that the lower average consumptions per degree day reduced residential
and commercial sales in the first nine months of 2002 by about 37 million therms
and margin revenues by about $10.7 million, equivalent to 25 cents a share (see
"Results of Operations - Regulatory Developments," below). NW Natural's share of
the savings and margins realized from the gas commodity and upstream gas sales
programs under its Purchased Gas Adjustment (PGA) tariff (see "Results of
Operations - Cost of Gas," below) contributed $12.0 million of margin in the
first nine months of 2002, equivalent to 28 cents a share of earnings. The
equivalent result in the first nine months of 2001 was a negative $0.6 million,
equivalent to a loss of 1 cent a share, primarily representing the absorption of
$1.1 million in excess gas costs.
Non-utility operating results for the quarter were earnings of 3
cents a share compared to earnings of 2 cents a share from these operations in
2001. Excluding the non-recurring charge taken in the second quarter of 2002,
non-utility operating results year-to-date were earnings of 14 cents a share
compared to earnings of 8 cents a share from these operations during the
comparable period in 2001. See "Non-utility Operations," below.
Dividends paid on common stock were 31.5 cents and 31 cents a
share, respectively, for the three-month periods ended Sept. 30, 2002 and 2001.
In October 2002, the Company's Board of Directors declared a quarterly dividend
of 31.5 cents a share on the common stock, payable Nov. 15, 2002, to
shareholders of record on Oct. 31, 2002. The current indicated annual dividend
rate is $1.26 a share.
14
Results of Operations
Regulatory Developments
On Sept. 12, 2002, the Oregon Public Utility Commission (OPUC)
approved a settlement that NW Natural entered into with respect to a
conservation tariff filed in 2001. The new regulatory mechanisms implemented
under the settlement are intended to help stabilize margin revenues to assure NW
Natural of fixed cost recovery and more predictable earnings in the face of
above or below normal consumption patterns.
The approved settlement includes an elasticity adjustment
which became effective on Oct. 1, 2002. This elasticity adjustment is intended
to mitigate the impact of changes in customer consumption due to rate changes.
NW Natural believes that reductions in recent years in its customers' gas
consumptions per degree day were caused by the higher cost of purchased gas,
which was passed on to customers as rate increases, and to efforts throughout
the region to conserve energy. NW Natural estimates that lower average
consumptions per degree day reduced margin from residential and commercial sales
by $11 million, equivalent to 26 cents a share, in 2001, and by $10.7 million,
equivalent to 25 cents a share, in the first nine months of 2002. Under the
elasticity adjustment, NW Natural has increased rates by 2.6 cents a therm to
residential customers and 1.3 cents a therm to commercial customers, effective
Oct. 1, 2002.
Also, under the settlement approved by the OPUC, NW Natural
implemented a partial decoupling mechanism, effective Oct. 1, 2002. Decoupling
mechanisms are used to break the link between a utility's earnings and the
energy consumed by its customers so that the utility does not have an incentive
to discourage customers' conservation efforts. The decoupling mechanism works by
adding margin revenues during periods when customer consumptions are lower than
baseline consumption or by deducting margin revenues when higher than the
baseline. Under the partial decoupling mechanism, a balancing account is
established whereby NW Natural will defer and subsequently amortize 90 percent
of the margin revenue differentials between baseline usage by its residential
and commercial customers and weather-normalized actual usage by these customers.
The deferred amounts are treated as adjustments to be refunded or collected in
future periods. Baseline consumption is based on current customer consumption
patterns, adjusted for consumptions resulting from new customers. NW Natural
will continue to bear the risk of weather-related variations in customer usage.
The partial decoupling mechanism will expire at the end of September 2005 unless
the OPUC approves an extension based on the results of an independent study to
measure the mechanism's effectiveness.
In connection with the settlement, NW Natural agreed to adopt
certain service quality measures that establish the Company's performance goal
for minimizing at-fault complaints. If the Company exceeds the prescribed level
of at-fault complaints, it will be subject to penalties.
Under the settlement, NW Natural agreed to file a general rate
case by the end of November 2002, enabling a full review of NW Natural's cost
and rate structures, including an assessment of the costs related to the
extension of the Company's South Mist Pipeline, with new rates expected to be
implemented in the third or fourth quarter of 2003. The amount of the general
rate increase to be requested has not been determined.
On Sept. 26, 2002, the OPUC approved rate decreases effective Oct.
1, 2002 averaging 14 percent for NW Natural's Oregon sales customers, and on
Sept. 25, 2002, the Washington Utilities and Transportation Commission (WUTC)
approved rate decreases effective Oct. 1, 2002 averaging 25 percent for NW
Natural's Washington sales customers. These rate decreases reflect changes in NW
Natural's purchased gas costs, the application of temporary rate adjustments to
amortize regulatory balancing accounts, and the removal of temporary rate
15
adjustments effective the previous year. These changes are all part of NW
Natural's annual PGA tariff filing (see "Comparison of Gas Operations - Cost of
Gas," below).
Comparison of Gas Operations
The following table summarizes the composition of gas utility
volumes and revenues for the three and nine months ended Sept. 30, 2002 and
2001:
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
--------------------------------------------------------
(Thousands, except customers and degree days) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------
Gas Sales and Transportation Volumes - Therms:
Residential and commercial sales 53,100 54,505 446,392 440,483
Unbilled volumes 1,940 (485) (44,589) (45,386)
---------- ----------- ------------ ----------
Weather-sensitive volumes 55,040 54,020 401,803 395,097
Industrial firm sales 10,544 17,962 49,974 60,256
Industrial interruptible sales 2,444 18,969 22,724 47,528
---------- ----------- ------------ ----------
Total gas sales 68,028 90,951 474,501 502,881
Transportation deliveries 107,927 85,328 325,275 289,667
---------- ----------- ------------ ----------
Total volumes sold and delivered 175,955 176,279 799,776 792,548
========== =========== ============ ==========
Utility Operating Revenues - Dollars:
Residential and commercial sales $ 58,954 $ 50,830 $ 423,509 $ 369,117
Unbilled revenues 2,062 (179) (42,564) (34,163)
---------- ----------- ------------ ----------
Weather-sensitive revenues 61,016 50,651 380,945 334,954
Industrial firm sales 8,198 10,451 35,089 35,117
Industrial interruptible sales 1,595 9,347 14,166 23,845
---------- ----------- ------------ ----------
Total gas sales 70,809 70,449 430,200 393,916
Transportation revenues 5,984 5,777 19,867 14,495
Other revenues 363 (41) 2,442 (2,289)
---------- ----------- ------------ ----------
Total utility operating revenues $ 77,156 $ 76,185 $ 452,509 $ 406,122
========== =========== ============ ==========
Cost of gas sold $ 40,637 $ 39,834 $ 253,075 $ 225,451
========== =========== ============ ==========
Net operating revenues (utility margin) $ 36,519 $ 36,351 $ 199,434 $ 180,671
========== =========== ============ ==========
Total number of customers (end of period) 546,644 527,719 546,644 527,719
========== =========== ============ ==========
Actual degree days 75 82 2,724 2,768
========== =========== ============ ==========
20-year average degree days 97 98 2,607 2,595
========== =========== ============ ==========
16
NW Natural refunded deferred gas cost savings to its Oregon
customers through billing credits in June 2002. The refunds were the customers'
67 percent portion of gas cost savings realized between October 2001 and March
2002, which had been deferred, with interest, pursuant to NW Natural's PGA
tariff in Oregon (see "Cost of Gas," below). The refunds reduced gross operating
revenues for the first nine months of 2002 by $30.4 million, cost of gas by
$29.5 million and deferred gas costs payable by $29.5 million. The refunds also
reduced margin revenues by about $0.9 million, but this amount was largely
offset by corresponding reductions in franchise tax expense and uncollectible
expense with the result that the effect of the refunds on net income was
negligible.
Residential and Commercial
NW Natural continues to experience rapid customer growth, with
18,925 customers added since Sept. 30, 2001, for a growth rate of 3.6 percent.
In the three years ended Dec. 31, 2001, more than 63,000 customers were added to
the system, representing an average annual growth rate of 4.4 percent.
Typically, 80 percent or more of NW Natural's annual operating
revenues are derived from gas sales to weather-sensitive residential and
commercial customers. Accordingly, variations in temperatures between periods
affect volumes of gas sold to these customers. Average weather conditions are
calculated from the most recent 20 years of temperature data measured by heating
degree-days. Weather conditions in the third quarter of 2002 were 23 percent
warmer than average and 9 percent warmer than in the third quarter of 2001. For
the first nine months of 2002, weather was 4 percent colder than average, but 2
percent warmer than in the first nine months of 2001.
Volumes of gas sold to residential and commercial customers were
1.0 million therms, or 1.9 percent, higher in the third quarter of 2002 than in
the third quarter of 2001. Related revenues increased $10.4 million, or 20.5
percent. Year-to-date, volumes of gas sold to residential and commercial
customers were 6.7 million therms, or 1.7 percent, higher than in the same
period of 2001. Excluding the impact of the refunds in the nine months ended
Sept. 30, 2002, related revenues increased $71.9 million, or 21.5 percent,
primarily due to PGA tariff rate increases effective Oct. 1, 2001. (See Part II,
Item 7., "Results of Operations - Regulatory Matters," in the 2001 Form 10-K.)
Customer growth in the residential and commercial segments since Sept. 30, 2001
contributed an estimated 11.2 million therms in sales volumes and $4.8 million
in additional margin during the first nine months of 2002.
In order to match revenues with related purchased gas costs, NW
Natural records unbilled revenues for gas delivered and sold to customers, but
not yet billed, through the end of the period. Amounts reported as unbilled
revenues reflect the increase or decrease in the balance of unbilled revenues
over the prior year-end. End of period balances are affected by weather
conditions, rate changes and customer billing dates from one period to the next.
Industrial, Transportation and Other Revenues
Total volumes delivered to industrial and electric generation
customers in the third quarter of 2002 decreased 1.3 million therms, or 1
percent, from 122 million therms in the third quarter of 2001. However, combined
margins from these customers decreased $3.3 million, or 27 percent, from $12.4
million in the third quarter of 2001. Year-to-date, volumes of gas delivered to
industrial and electric generation customers were 398 million therms compared to
397 million therms in the first nine months of 2001. Related margins increased 3
percent, from $34.5 million in 2001 to $35.5 million in 2002.
17
Excluding volumes delivered to electric generation customers,
volumes delivered to end-use industrial sales and transportation customers in
the third quarter of 2002 totaled 121 million therms. This was 4.8 million
therms, or 4 percent, higher than in the third quarter of 2001. Related margins
decreased, however, from $10.3 million to $9.1 million, due to migrations of
some industrial customers from higher margin firm service to lower margin
interruptible service. Volumes delivered to industrial sales and transportation
customers in the first nine months of 2002 increased 11 percent from 353 million
therms in 2001 to 393 million therms in 2002. Margins to these customers
decreased $1.0 million reflecting the migration of industrial customers to lower
margin rate schedules.
In the electric generation segment of the industrial market,
volumes delivered in the third quarter of 2002 totaled 0.1 million therms. This
was 6.0 million therms, or 99 percent, lower than in the third quarter of 2001.
Margin from the electric generation market was lower by $2.2 million, or 5 cents
a share, in the third quarter of 2002. Contracts for service to two customers in
this market were for one-year terms, going into effect in the second half of
2001 and expiring at the end of the second quarter of 2002. Year-to-date,
volumes delivered to electric generation customers decreased from 45.9 million
therms in 2001 to 3.4 million therms in 2002. The related margin increased from
$2.6 million in 2001 to $4.6 million in 2002, an increase of 79 percent. One
customer served under a contract with low fixed and relatively high volumetric
charges used 36.8 million therms in the first nine months of 2001 and 3.0
million therms in the first nine months of 2002. On the other hand, the two
electric generation customers added in mid-2001 used only 0.4 million therms in
the first six months of 2002, but generated $4.5 million in margin as compared
to $2.2 million in 2001 because they were served on contracts with high fixed
and low volumetric charges.
Other revenues include amortizations from regulatory accounts and
miscellaneous fee income. Other revenues increased $0.4 million during the third
quarter of 2002 compared to the third quarter of 2001. Year-to-date, other
revenues increased $4.7 million compared to the first nine months of 2001.
Factors contributing to the increase in the first nine months of 2002 were
reduced amortizations from regulatory accounts related to conservation programs
($2.8 million), refunds due to sharing of income from interstate gas storage
service ($1.2 million), reduced property tax amortizations ($0.2 million),
higher revenues from customer late payment and reconnection fees ($0.1 million)
and increased miscellaneous revenues ($0.3 million).
Cost of Gas
The cost per therm of gas sold was 36 percent higher during the
third quarter of 2002 than in the third quarter of 2001. Year-to-date, the cost
per therm of gas sold was 19 percent higher than the first nine months of 2001.
The cost of gas sold includes current gas purchases, gas drawn from storage
inventory, gains or losses from commodity hedges, demand cost equalization,
regulatory deferrals and company use.
Results for the nine months ended Sept. 30, 2002 include an
adjustment reducing cost of gas by $29.5 million (see "Comparison of Gas
Operations," above). Excluding the impact of this adjustment, cost per therm of
gas sold was 33 percent higher in the first nine months of 2002 compared to the
same period in 2001, primarily due to higher prices in the natural gas commodity
market. Results for the nine months ended Sept. 30, 2002 also include
adjustments reducing cost of gas by $2.9 million to correct the amount of
deferred expenses related to the recovery of pipeline demand charges under NW
Natural's PGA mechanism. These adjustments contributed 7 cents a share to
earnings in the second quarter. The corrected methodology will continue to be
applied in the future.
NW Natural uses a natural gas commodity hedge program under the
terms of its Derivatives Policy (see Part II, Item 7., "Management's Discussion
and Analysis of Results of Operations and Financial Condition," and Item 8.,
Note 11, "Notes to Consolidated Financial Statements," in the Company's 2001
Form 10-K) to help manage its variable
18
price gas commodity contracts. NW Natural recorded net losses from commodity
swap and call option contracts of $24.9 million in the third quarter of 2002,
compared to net losses of $8.7 million in the third quarter of 2001.
Year-to-date, NW Natural realized net losses of $70.3 million, compared to net
gains of $78.2 million during the first nine months of 2001. Gains (losses) from
commodity hedges are recorded as reductions (increases) to the cost of gas and
the majority of these hedge contracts are included in annual PGA rate
adjustments.
Under NW Natural's PGA tariff in Oregon, net income from Oregon
operations is affected within defined limits by changes in purchased gas costs.
NW Natural absorbs 33 percent of the higher cost of gas sold, or retains 33
percent of the lower cost, in either case as compared to projected costs built
into rates. The remaining 67 percent of the higher or lower gas costs is
recorded as deferred debits or credits (regulatory assets or liabilities) for
recovery from or refund to customers in future rates. Net savings realized from
gas commodity purchases in the third quarter of 2002 contributed $1.6 million of
margin, equivalent to 4 cents a share of earnings. The equivalent result in the
third quarter of 2001 was shared savings and margins of $0.2 million, equivalent
to less than 1 cent a share of earnings. Year-to-date, net savings realized from
gas commodity purchases contributed $12.0 million of margin, equivalent to 28
cents a share of earnings, and $24.4 million of deferred gas costs credits to be
refunded to customers. The equivalent results in the first nine months of 2001
were a negative $0.6 million of margin, equivalent to a loss of 1 cent a share,
and $1.1 million of deferred gas cost charges to be collected from customers.
Under an agreement with the OPUC, revenues from off-system gas
sales are treated as a reduction of gas costs. These sales reduced the cost of
gas sold by $2.3 million and $1.6 million for the first nine months of 2002 and
2001, respectively.
Non-utility Operations
At Sept. 30, 2002 and 2001, the Company had two direct
wholly-owned subsidiaries, Financial Corporation and Northwest Energy. Northwest
Energy was formed in 2001 to serve as the holding company for NW Natural and PGE
if the acquisition of PGE had been completed. A loss reserve for costs relating
to the acquisition of PGE ($13.7 million, before tax) was recorded by Northwest
Energy in the second quarter of 2002.
Financial Corporation
Financial Corporation's operating results for the three months
ended Sept. 30, 2002 and 2001, were net income of $0.5 million and $0.3 million,
respectively, equivalent to 1 cent a share in both periods. Year-to-date,
operating results in 2002 were net income of $1.2 million compared to net income
of $0.6 million for the comparable period in 2001. The increase in year-to-date
net income from 2001 to 2002 was due to a $0.6 million improvement in the
operating results of Financial Corporation's investments in solar and wind-power
electric projects in California. Financial Corporation's net assets at Sept. 30,
2002 were $9.1 million, compared to $7.8 million at Sept. 30, 2001.
Gas Storage Services
NW Natural realized net income from gas storage services, after
regulatory sharing and income taxes, of $0.4 million, or 2 cents a share, in the
three months ended Sept. 30, 2002, up from $0.3 million, or 1 cent a share, in
the three months ended Sept. 30, 2001. Year-to-date operating results were net
income of $2.4 million, compared to net income of $1.4 million for the same
period in 2001. Gas storage services are provided to upstream interstate
customers using storage capacity that has been developed in advance of core
utility customers' requirements. NW Natural retains 80 percent of the income
before tax from storage services and
19
credits the remaining 20 percent to a deferred regulatory account for sharing
with its core utility customers.
Operating Expenses
Operations and Maintenance
Consolidated operations and maintenance expenses increased
$0.9 million, or 5 percent, and $1.3 million, or 2 percent, in the three- and
nine- month periods ended Sept. 30, 2002, respectively, compared to the same
periods in 2001. In the three-month period, the increase was due to higher
expenses for pensions ($0.4 million), health benefits ($0.4 million), and
customer service ($0.3 million), which were partially offset by lower
information technology costs ($0.4 million). In the nine-month period, the
increase was due to higher expenses for pensions ($2.0 million), customer
service ($0.7 million) and health benefits ($0.6 million), partially offset by
lower expenses for information technology ($1.7 million) and market services
($0.4 million). The Company expects to incur continued increases in pension
costs, reflecting changes in the market values of its retirement plan assets,
and health care costs.
Taxes Other than Income Taxes
Taxes other than income taxes, which are principally comprised of
property, franchise and payroll taxes, were $3.4 million, or 15 percent, higher
in the first nine months of 2002 compared to the same period in 2001. Property
taxes increased $1.5 million, or 18 percent, due to higher property tax rates
and utility plant additions. Franchise taxes, which are based on gross revenues,
increased $1.4 million, or 16 percent, reflecting higher revenues due to NW
Natural's growing customer base and rate increases effective in late 2001.
Regulatory fees and payroll tax expenses also increased slightly.
Depreciation, Depletion and Amortization
The Company's depreciation, depletion and amortization expense in
the nine months ended Sept. 30, 2002, increased $1.7 million, or 4 percent,
compared to the first nine months of 2001. The increase was primarily due to a 5
percent increase in utility plant in service. Depreciation, depletion and
amortization expense was approximately 3 percent of average plant and property
for both of the nine-month periods ended Sept. 30, 2002 and 2001.
Other Income (Expense)
The Company's other income (expense) decreased $15.0 million in
the nine months ended Sept. 30, 2002, compared to the same period in 2001,
primarily due to a $13.7 million charge to a loss reserve for costs incurred in
the effort to acquire PGE. Excluding the charge for PGE acquisition costs, other
income (expense) decreased $1.3 million in the nine-month period ended Sept. 30,
2002 compared to the same period in 2001. This decrease was due to an increase
in interest expense on deferred regulatory account balances ($2.5 million),
partially offset by an increase in earnings from investments ($1.4 million). The
first nine months of 2002 included interest expense of $2.3 million on deferred
regulatory account balances, compared to interest income of $0.2 million in the
first nine months of 2001.
Interest Charges - net
The Company's net interest expense increased by $0.9 million, or 4
percent, in the nine months ended Sept. 30, 2002, compared to the same period in
2001, primarily due to higher average balances of long-term debt outstanding.
20
Income Taxes
The effective corporate income tax rates for the three months
ended Sept. 30, 2002 and 2001, were 39.0 percent and 42.0 percent, respectively.
Year-to-date, the effective corporate income tax rate was 35.4 percent, compared
to 35.2 percent for the first nine months of 2001.
Financial Condition
Capital Structure
The Company's goal is to maintain a capital structure comprised of
45 to 50 percent common stock equity, 5 to 10 percent preferred and preference
stock and 45 to 50 percent short-term and long-term debt. When additional
capital is required, debt or equity securities are issued depending upon both
the target capital structure and market conditions. These sources also are used
to meet long-term debt and preferred and preference stock redemption
requirements (see "Liquidity and Capital Resources," below, and Part II, Item
8., Notes 3 and 5, "Notes to Consolidated Financial Statements," in the 2001
Form 10-K).
Liquidity and Capital Resources
At Sept. 30, 2002, the Company had $19.7 million in cash and cash
equivalents compared to $8.1 million at Sept. 30, 2001. Short-term liquidity is
provided by cash from operations and from the sale of the Company's commercial
paper notes, which are supported by commercial bank lines of credit (see Part
II, Item 8., Note 6, "Notes to Consolidated Financial Statements," in the
Company's 2001 Form 10-K). The Company has available through Sept. 30, 2004,
committed lines of credit with four commercial banks (see "Lines of Credit,"
below). On Dec. 31, 2002, NW Natural will redeem all 250,000 outstanding shares
of its $6.95 Series of Redeemable Preference Stock at $100 per share plus
accrued dividends. NW Natural expects to use its short-term cash or to borrow
through its commercial paper program to fund this redemption.
NW Natural's capital expenditures are primarily related to
utility construction resulting from customer growth and system improvements (see
"Cash Flows - Investing Activities," below). In addition, NW Natural has certain
long-term contractual obligations, such as capital lease obligations, operating
leases and long-term gas supply purchase obligations that require an adequate
source of funding. These capital and contractual expenditures are financed
through cash from operations and from the issuance of short-term debt, which is
periodically refinanced through the sale of long-term debt or equity securities.
21
The following table shows NW Natural's contractual obligations (in
thousands) by maturity and type of obligation:
Commercial
Paper Preferred Total
Payments Due in Years Supported and Capital Long-term Gas Contractual
by Lines Preference Long-term Lease Operating Supply Purchase Cash
Ending Sept. 30, of Credit Stock Debt Obligations Leases Obligations Obligations
- ------------------------------------------------------------------------------------------------------------------------
2003 $ - $ 25,750 $ 50,000 $ 328 $ 2,760 $ 81,915 $ 160,753
2004 - 750 - 43 2,672 50,189 53,654
2005 - 750 - - 2,602 45,442 48,794
2006 - 750 15,000 - 1,582 42,287 59,619
2007 - 750 38,000 - 156 41,912 80,818
------------------------------------------------------------------------------------------------
Total 2003 - 2007 - 28,750 103,000 371 9,772 261,745 403,638
Thereafter - 4,500 383,033 - 3,371 219,321 610,225
Less: imputed interest - - - (17) - (84,893) (84,910)
------------------------------------------------------------------------------------------------
Total $ - $ 33,250 $ 486,033 $ 354 $ 13,143 $ 396,173 $ 928,953
================================================================================================
Commercial Paper
The Company's primary source of short-term funds is commercial
paper notes payable. Both NW Natural and Financial Corporation issue commercial
paper under agency agreements with a commercial bank. NW Natural's commercial
paper is supported by its committed bank lines of credit (see "Lines of Credit,"
below), while Financial Corporation's commercial paper is supported by committed
bank lines of credit and the guaranty of NW Natural (see Part II, Item 8., Note
6, "Notes to Consolidated Financial Statements," in the 2001 Form 10-K). NW
Natural had no commercial paper notes outstanding at Sept. 30, 2002, compared to
$78.9 million and $108.3 million at Sept. 30, 2001 and Dec. 31, 2001,
respectively. Financial Corporation had no commercial paper notes outstanding at
Sept. 30, 2002 or 2001, or at Dec. 31, 2001.
Lines of Credit
NW Natural has renewed its lines of credit effective Oct. 1, 2002,
with four commercial banks totaling $150 million. Half of the credit with each
bank, totaling $75 million, is committed and available through Sept. 30, 2003,
and the other $75 million is committed and available through Sept. 30, 2004. In
addition, Financial Corporation has available through Sept. 30, 2003, committed
lines of credit with two commercial banks totaling $20 million. Financial
Corporation's lines are supported by the guaranty of NW Natural.
Under the terms of these lines of credit, NW Natural and Financial
Corporation pay commitment fees but are not required to maintain compensating
bank balances. The interest rates on borrowings under these lines of credit, if
any, are based on current market rates. There were no outstanding balances on
either the NW Natural or Financial Corporation lines of credit as of Dec. 31,
2001, or Sept. 30, 2002 or 2001.
NW Natural's lines of credit require that credit ratings be
maintained in effect at all times and that notice be given of any change in its
senior unsecured debt ratings. A change in NW Natural's credit rating is not an
event of default, nor is the maintenance of a specific minimum level of credit
rating a condition to drawing upon the lines of credit. However, interest rates
on any loans outstanding under NW Natural's bank lines are tied to credit
ratings, which would increase or decrease the cost of bank debt, if any, when
ratings are changed. The lines of credit require that NW Natural maintain an
indebtedness to total capitalization ratio, as defined in the credit agreements,
of 65 percent or less. Also, effective Oct. 1, 2002, the lines of credit require
NW Natural to maintain a net worth at least equal to 80 percent of its net worth
at Sept. 30, 2002, plus 50 percent
22
of the Company's net income for each subsequent fiscal quarter. Failure to
comply with either of these covenants would entitle the banks to terminate their
lending commitments and to accelerate the maturity of all amounts outstanding.
At Sept. 30, 2002, NW Natural was in compliance with the debt to total capital
covenant and, had it been in effect, would have been in compliance with the
minimum net worth covenant.
Cash Flows
Operating Activities
Cash provided by operating activities was $127.4 million in
the nine months ended Sept. 30, 2002, compared to $61.0 million in the first
nine months of 2001. The 109 percent increase was due to a $15.2 million
increase in cash from operations before working capital changes and a $51.3
million decrease in working capital requirements. The increase in cash from
operations before working capital changes was primarily due to higher net income
excluding the non-cash loss reserve for PGE acquisition costs ($13.7 million),
combined with an increase in deferred income taxes and investment tax credits
($6.8 million) and an increase in depreciation, depletion and amortization ($1.7
million), partially offset by a decrease in deferred gas costs ($2.6 million)
and an increase in earnings of investments accounted for on an equity basis
($1.4 million). The decrease in working capital requirements was primarily due
to a smaller reduction in accounts payable ($45.5 million), a larger reduction
in accounts receivable ($7.3 million) and a larger reduction in accrued unbilled
revenue ($7.1 million), partially offset by a decrease in accrued interest and
taxes in 2002 compared to an increase in these items in 2001 ($14.1 million).
NW Natural's refunds to customers of approximately $30.4 million
of deferred gas cost savings in the nine months ended Sept. 30, 2002 (see
"Results of Operations - Comparison of Gas Operations," above) reduced cash
flows from operations by that amount, but the reduction was more than offset by
the other factors affecting cash flows cited above.
The Job Creation and Worker Assistance Act of 2002 (the Act),
enacted on March 9, 2002, allows an additional first-year tax deduction for
depreciation equal to 30 percent of the adjusted basis of "qualified property."
The extra 30 percent depreciation deduction in the first year is an acceleration
of depreciation deductions that otherwise would have been taken in the later
years of an asset's recovery period. Special rules apply as to the application
of this new provision. However, in general, the extra 30 percent depreciation
deduction is available for most personal property acquired after Sept. 10, 2001,
and before Sept. 11, 2004. The Company elected to apply the first-year 30
percent depreciation deduction effective with the filing of its 2001 federal
income tax return in September 2002. The Company anticipates enhanced cash flow
from reduced income taxes, totaling an estimated $25 million to $30 million,
during the effective period of the Act, based on actual or projected plant
investments between Sept. 11, 2001 and Sept. 10, 2004.
The Company has lease and purchase commitments relating to its operating
activities that are financed with cash flows from operations (see "Liquidity and
Capital Resources," above, and Part II, Item 8., Note 12, "Notes to Consolidated
Financial Statements," in the 2001 Form 10-K).
Investing Activities
Cash requirements for investing activities in the first nine
months of 2002 totaled $57.9 million, up from $56.7 million in the same period
of 2001. The increase was primarily due to $4.1 million in such costs relating
to the proposed acquisition of PGE, compared to $1.2 million in such costs
during the first nine months of 2001. Cash requirements for utility construction
totaled $53.3 million, down $2.6 million from $55.8 million in the first nine
months of 2001.
23
NW Natural's utility construction expenditures are estimated to
total $84 million for 2002. Over the five-year period 2002 through 2006, these
expenditures are estimated at between $500 million and $600 million. The level
of capital expenditures over the next five years reflects projected customer
growth, system replacement and reinforcement projects, and the development of
additional gas storage facilities including the extension of a pipeline that
moves gas from NW Natural's Mist Storage Field into growing portions of its
service area. An estimated 60 percent of the required funds is expected to be
internally generated over the five-year period, with the remainder funded
through a combination of long-term debt and equity securities with short-term
debt providing liquidity and bridge financing.
The Company entered into a stipulation with the OPUC in 2001 for
an enhanced pipeline safety program that includes an accelerated bare steel
replacement program and a geo-hazard safety program. The bare steel replacement
program accelerates the replacement of the Company's bare steel piping over 20
years instead of 40 years. The geo-hazard safety program includes the
identification, assessment and remediation of risks to the Company's piping
infrastructure created by landslides, washouts, earthquakes or similar
occurrences. The stipulation allowed the Company to receive deferred accounting
rate treatment commencing Oct. 1, 2002, for costs associated with the programs.
Investments in non-utility property during the first nine months
of 2002 totaled $2.6 million, up from a negligible amount in the same period of
2001. The increase was due to greater investments in facilities used for
underground gas storage, a business segment treated for accounting purposes as
separate from the Company's utility operations (see Note 5, "Notes to
Consolidated Financial Statements," above, and Part II, Item 8., Note 2, "Notes
to Consolidated Financial Statements," in the 2001 Form 10-K).
The $4.1 million in costs relating to the proposed acquisition of
PGE included financial advisory and legal fees, loan arrangement fees and other
costs. In June 2002, the Company recorded a non-recurring charge to a loss
reserve ($13.7 million) for all of NW Natural's costs incurred and deferred
through June 30, 2002 in its efforts to acquire PGE from Enron. (See
"Application of Critical Accounting Policies - Contingencies," above.)
Financing Activities
Cash used in financing activities in the first nine months of 2002
totaled $60.2 million, an increase of $52.7 million from the first nine months
of 2001. The increase was primarily due to a larger use of funds to pay down
long-term and short-term debt, partially offset by a larger amount of new
long-term debt issued.
NW Natural sold $60 million of its secured Medium-Term Notes,
Series B (MTNs), in March 2002 and another $30 million in September 2002 and
used the proceeds, together with internally generated cash in the first nine
months of 2002, to reduce short-term debt ($108.3 million), retire long-term
debt ($10 million) and provide cash for investments in utility plant. Proceeds
from the sale of $18 million of Medium-Term Notes, Series B, in June 2001,
together with a $22.6 million increase in short-term borrowings in the first
nine months of 2001, were used to reduce long-term debt ($20 million) and
provide cash for investments in utility plant.
In May 2000, the Company commenced a program to repurchase up to 2
million shares, or up to $35 million in value, of NW Natural's common stock
through a repurchase program which has been extended through May 2003. The
purchases are made in the open market or through privately negotiated
transactions. The Company used $5.8 million for the repurchase of 246,700 shares
under the program during the first six months of 2001. No shares were
repurchased during the six months ended Dec. 31, 2001, while the Company was
negotiating the purchase of PGE, or during the nine months ended Sept. 30, 2002.
Since the program's inception in 2000, the Company has repurchased 355,400
shares of common stock at a total cost of $8.2 million.
24
Ratios of Earnings to Fixed Charges
For the nine months and 12 months ended Sept. 30, 2002, and the 12
months ended Dec. 31, 2001, the Company's ratios of earnings to fixed charges,
computed using the Securities and Exchange Commission method, were 2.46, 3.09
and 3.14, respectively. For this purpose, earnings consist of net income before
taxes plus fixed charges, and fixed charges consist of interest on all
indebtedness, the amortization of debt expense and discount or premium and the
estimated interest portion of rentals charged to income.
Forward-Looking Statements
This report and other presentations made by the Company from time
to time may contain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934, as amended. Forward-looking statements
include statements concerning plans, objectives, goals, strategies, future
events or performance, and other statements that are other than statements of
historical facts. The Company's expectations, beliefs and projections are
expressed in good faith and are believed to have a reasonable basis. However,
each such forward-looking statement involves uncertainties and is qualified in
its entirety by reference to the following important factors that could cause
the actual results of the Company to differ materially from those projected in
such forward-looking statements: (i) prevailing governmental policies and
regulatory actions, including those of the OPUC and the WUTC, with respect to
allowed rates of return, industry and rate structure, purchased gas and
investment recovery, acquisitions and dispositions of assets and facilities,
operation and construction of plant facilities, the maintenance of pipeline
integrity, present or prospective wholesale and retail competition, changes in
tax laws and policies and changes in and compliance with environmental and
safety laws and policies; (ii) weather conditions and other natural phenomena;
(iii) unanticipated population growth or decline, and changes in market demand
and demographic patterns; (iv) competition for retail and wholesale customers;
(v) pricing of natural gas relative to other energy sources; (vi) risks
resulting from uninsured property damage to Company property, intentional or
otherwise; (vii) unanticipated changes in interest or foreign currency exchange
rates or in rates of inflation; (viii) economic factors that could cause a
severe downturn in certain key industries, thus affecting demand for natural
gas; (ix) unanticipated changes in operating expenses and capital expenditures;
(x) unanticipated changes in future liabilities relating to employee benefit
plans; (xi) capital market conditions, including its effect on pension costs;
(xii) competition for new energy development opportunities; (xiii) legal and
administrative proceedings and settlements; and (xiv) risks relating to the
potential negotiation of a new agreement for the acquisition of PGE, including
risks and uncertainties relating to the impact of Enron's bankruptcy on PGE,
obtaining regulatory approvals, securing financing at reasonable interest rates
and realizing expected synergies and other benefits from the acquisition, if
completed. All subsequent forward-looking statements, whether written or oral
and whether made by or on behalf of the Company, also are expressly qualified by
these cautionary statements.
25
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the information provided in
Part II, Item 7A., "Quantitative and Qualitative Disclosures About Market Risk,"
in the 2001 Form 10-K.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Within the 90 days prior to the date of the filing of this report,
the Company evaluated, under the supervision and with the participation of the
Company's management, including the Company's Chairman and Chief Executive
Officer, and the Company's Senior Vice President, Finance, and Chief Financial
Officer, the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14 under the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's
Chairman and Chief Executive Officer, together with the Company's Senior Vice
President, Finance, and Chief Financial Officer, concluded that the Company's
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic filings with the
Securities and Exchange Commission.
(b) Changes in Internal Controls.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date the Company carried out its evaluation.
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
On Sept. 24, 2002, the Audit Committee of the Board of Directors
pre-approved certain ongoing non-audit related services performed by the
Company's independent auditor, PricewaterhouseCoopers LLP, and established a
procedure for the pre-approval of any future non-audit related services
performed by its auditor. The non-audit services approved included:
o Audits of the Company's Retirement Plans, its Retirement K Savings
Plan and its Cafeteria Plan (Plan No. 507) that are required under
provisions of the Employee Retirement Income Security Act of 1974, as
amended, and audits of the Company's transfer agent and registrar
functions that are required by the New York Stock Exchange;
o Tax compliance and other tax services, including technical tax
guidance, assistance and technical support, in an amount not to exceed
$25,000 in any calendar year; and
o Services related to the Company's issuance of securities, including
the issuance of comfort letters and consents relating to the issuance
of its Medium-Term Notes; and
o Such other non-audit services, in an amount not to exceed $5,000 for
each such service, as may be deemed necessary by management to support
normal business operations.
The Committee determined that the ongoing non-audit services would
be reviewed annually concurrently with the engagement of the auditor.
26
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 10(a) - Northwest Natural Gas Company Restated Stock Option
Plan, as amended May 23, 2002
Exhibit 10(b) - Northwest Natural Gas Company Non-Employee Directors
Stock Compensation Plan, as amended September 26,
2002, effective October 1, 2002
Exhibit 11 - Statement re: Computation of Per Share Earnings
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 99 - Certificate Pursuant to Section 906 of Sarbanes - Oxley
Act of 2002
(b) Reports on Form 8-K
No Current Reports on Form 8-K were filed during the third quarter
of 2002. However, on Oct. 9, 2002, the Company filed its Current Report on Form
8-K, dated Sept. 12, 2002, relating to (1) the appointment of a new chief
executive officer and election of a director, (2) the renewal of lines of credit
and (3) the approval by the Oregon Public Utility Commission of a settlement in
the Company's conservation tariff proceeding.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NORTHWEST NATURAL GAS COMPANY
(Registrant)
Dated: November 12, 2002 /s/ Stephen P. Feltz
-----------------------------------
Stephen P. Feltz
Principal Accounting Officer
Treasurer and Controller
27
CERTIFICATIONS
I, Richard G. Reiten, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northwest Natural
Gas Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Richard G. Reiten
-------------------------------------
Richard G. Reiten
Chairman of the Board and
Chief Executive Officer
28
I, Bruce R. DeBolt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Northwest Natural
Gas Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Bruce R. DeBolt
--------------------------------
Bruce R. DeBolt
Senior Vice President, Finance,
and Chief Financial Officer
29
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX
To
Quarterly Report on Form 10-Q
For Quarter Ended
September 30, 2002
Exhibit
Document Number
Northwest Natural Gas Company Restated Stock Option Plan, as amended
May 23, 2002 10(a)
Northwest Natural Gas Company Non-Employee Directors Stock Compensation
Plan, as amended September 26, 2002, effective October 1, 2002 10(b)
Statement re: Computation of Per Share Earnings 11
Computation of Ratios of Earnings to Fixed Charges 12
Certificate Pursuant to Section 906 of Sarbanes - Oxley Act of 2002 99