Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
General -------
Northwest Natural Gas Company (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.
The Company is principally engaged in the distribution of natural gas. The Oregon Public Utility Commission (OPUC) has allocated to the Company 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. The Company 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 94 cities, together with neighboring communities, in 16 Oregon counties, and in nine cities, together with neighboring communities, in three Washington counties. At year-end 1994, the Company's service areas had a population of nearly 2,700,000, including about 78 percent of the population of the State of Oregon. 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 and Korea.
At year-end 1994, the Company had about 347,000 residential customers, 44,000 commercial customers, and 600 industrial customers. Industries served include pulp, paper and other forest products; the processing of farm and food products; lumber and plywood; the production of various mineral products; the manufacture of electronic, electrochemical and electrometallurgical products; metal fabrication and casting; and the production of machine tools, machinery and textiles.
The Company has four subsidiaries, each of which is incorporated in the State of Oregon: Oregon Natural Gas
Development Corporation (Oregon Natural), NNG Financial Corporation (Financial Corporation), NNG Energy Systems, Inc. (Energy Systems) and Pacific Square Corporation (Pacific Square).
Oregon Natural is engaged in natural gas exploration, development and production in Oregon and other western states, and, through its wholly-owned subsidiary, Canor Energy Ltd. (Canor), an Alberta corporation, also engages in natural gas and oil exploration, development and production in Alberta and Saskatchewan, Canada. Oregon Natural also holds an equity investment in a Boeing 737-300 aircraft. (See Part I, Item 2, and Part II, Item 8, Notes 2 and 10.)
Financial Corporation holds financial investments as a limited partner in four solar electric generating plants, four wind power electric generation projects and a hydroelectric project, all located in California, and in a low-income housing project in Portland. Financial Corporation also arranges short- term financing for the Company's operating subsidiaries. (See Part II, Item 8, Notes 2, 6 and 10.)
Energy Systems, through its wholly-owned subsidiary, Agrico Cogeneration Corporation (Agrico), formerly owned a 25 megawatt cogeneration plant near Fresno, California. Neither Energy Systems nor Agrico now has any operating activities. (See Part I, Item 2, and Part II, Item 8, Note 2.)
Until 1994, Pacific Square was engaged in real estate management, principally in connection with two office buildings in Portland and other Company-owned properties adjacent to those buildings. During 1994, Pacific Square sold its partnership interests in these buildings and now has no operating activities. (See Part I, Item 2, and Part II, Item 8, Note 2.)
Gas Supply ----------
General -------
The Company meets the needs of its core market (residential, commercial and firm industrial) customers through natural gas purchases from a variety of suppliers. The Company 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 the Company.
Natural gas for the Company's core market is transported by Northwest Pipeline Corporation (NPC), primarily under a contract expiring September 30, 2013, providing for firm transportation capacity of up to 2,460,440 therms(1) per day. NPC's rates for this service 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 Company also has a contract expiring April 1, 2008 for 500,000 therms per day of firm transportation capacity for its core market through participation in an expansion of NPC's system, and an expansion of Pacific Gas Transmission's (PGT) pipeline through central Oregon, southeastern Washington and northern Idaho. In combination, this additional firm transportation capacity provides a connection through Alberta Natural Gas Company Ltd.'s (ANG) system to producing regions of Alberta, Canada.
The cost to the Company 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 the Company's distribution system. While the rates for pipeline transportation and peaking services are regulated, the purchase price of gas is not. Although pipeline costs have increased by 44 percent since 1992, the effect of such increases on core market customers has been largely offset by lower gas prices. In addition the Company
[FN] ---------------- (1) For gas quantities expressed in therms, 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. MMBtu means one million Btu's, or 10 therms. For gas quantities expressed in cubic feet, unless otherwise indicated, all volumes are stated at a pressure base of 14.73 pounds per square inch absolute at 60 degrees Fahrenheit, and in some instances are rounded to the nearest major multiple. Mcf means one thousand cubic feet, Mmcf means one million cubic feet and Bcf means one billion cubic feet.
has been able to offset firm transportation charges, in part, by making off-system sales in periods when core market customers do not fully utilize firm pipeline capacity.
The Company 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".)
Core Market Basic Supply -------------------------
The Company purchases gas for its core market from a variety of suppliers located in the western United States and Canada. At January 1, 1995, the Company had 14 contracts with 12 suppliers with original terms of from four months to 15 years which provided for a maximum of 2,468,790 therms of firm gas per day during the peak winter season and 1,543,300 therms per day during the remainder of the year. About three-fourths of this supply comes from Canada.
The terms of the Company'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 the Company to purchase up to approximately 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 the Company to purchase up to approximately 83,300 therms of firm gas per day. This gas is aggregated from production in Alberta and the Canadian Yukon and Northwest Territories. This contract contains minimum purchase obligations.
An agreement with Poco Petroleums, Ltd. (Poco), a Canadian producer, expiring September 30, 2003, entitles the
Company 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 the Company 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, 1996 with Poco entitles the Company to purchase up to 200,000 therms of firm gas per day. This agreement contains a demand and commodity pricing structure, a provision for annual renegotiations of the commodity price, minimum purchase obligations and a pro rata market share commitment. The demand charge is subject to NEB regulation. This gas is produced in Alberta and British Columbia.
An agreement expiring October 31, 2000 with Summit Resources Ltd. entitles the Company 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 separated into two tiers.
During 1994, new purchase agreements for firm gas were entered into with seven suppliers which provided for a total of 760,000 therms per day. These agreements were similarly structured, as follows: each was for a four-month term, from November 1, 1994 through February 28, 1995; each provided volumes based on a combination of reservation charges and indexed commodity prices; and all but one had a minimum volume obligation at a fixed price. All of the gas purchased under these agreements was produced in the United States Rocky Mountain and San Juan Basin regions. The Company intends to enter new purchase agreements for equivalent volumes of gas with these or other similar suppliers to be available during the winter season extending from November 1, 1995, until February 29, 1996.
During 1994, less than one percent of the Company's purchases for its core market was from the spot market (30 days or less).
The Company's goal in purchasing gas for its core market is to meet customers' needs at reasonable prices. The Company 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.
Core Market Peaking Supply --------------------------
During peak demand periods, the Company 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 the Company to meet its peak demand, these facilities make it possible to lower the annual average cost of gas by allowing the Company 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.
The Company 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 a daily deliverability of 831,380 therms and a total seasonal capacity of 13,082,647 therms. In addition, the Company has a contract with NPC which expires in 1996 for an additional daily deliverability of 94,670 therms and an additional seasonal capacity of 2,779,970 therms from the Jackson Prairie storage field.
The Company 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 1,800,000 therms and a total seasonal capacity of 17,000,000 therms. The Company also owns and operates an underground gas storage facility at Mist, Oregon. This facility has a maximum daily deliverability of 1,000,000 therms and a total seasonal working gas capacity of 70,000,000 therms.
The Company has a contract with Portland General Electric Company (PGE) expiring in 2010 that provides the Company with additional winter peaking supply. With certain limitations, the Company may interrupt gas deliveries to PGE, use that gas for the Company's core customers, and compensate PGE for its cost of replacement fuel oil. The daily deliverability under this contract is 300,000 therms, increasing to 760,000 therms in November 1995.
Transportation --------------
Between 1988 and 1992, most of the Company'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, more than half of these customers have returned to sales service, primarily because the Company'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 the Company to retain most of these customers. Because transportation charges typically are 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 the Company's results of operations. (See "Competition and Marketing" and Part II, Item 7.)
Regulation and Rates --------------------
The Company 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 1994, 92.1 percent of the Company's gas deliveries and 94.4 percent of 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).
The Company'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 1986,
authorized rates also designed to produce a return on common equity of 13.25 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 the Company's service area. The Company has no plans to file general rate cases in either Oregon or Washington in 1995. The Company's returns on average common equity from utility operations were 15.9 percent in 1993 and 11.3 percent in 1994. Its returns from consolidated operations (including subsidiary results) were 13.7 percent in 1993 and 12.2 percent in 1994.
In Oregon, the Company has a Purchased Gas Cost Adjustment (PGA) tariff under which the Company's 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 the Company'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.
The PGA tariff also provides that 80 percent of any difference between actual gas commodity costs and related costs incorporated into rates will be deferred for amortization in subsequent periods. If actual gas commodity costs exceed those incorporated in rates, the Company subsequently will adjust its rates upward to recover 80 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 refund to core customers 80 percent of such gas commodity cost savings.
In Washington, the Company 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 October 1994, the Company filed under its Oregon PGA tariff to reduce rates for Oregon customers by an average of 5.6 percent. In a similar filing in Washington in November 1994, the Company filed to reduce its rates by an average of 7.0 percent. The OPUC and WUTC approved the respective filings
effective December 1, 1994. The decreases pass through reductions in gas costs and remove temporary adjustments to rates which were put into effect on December 1, 1993 for the amortization of prior gas cost savings.
In March 1994, the Company filed for rate decreases in Oregon to refund to customers savings from lower property taxes resulting from voter approval of an initiative measure which reduced property taxes. Effective April 15, 1994, all core market and cost-based transportation rate schedules for Oregon customers were reduced by an average of 1.1 percent.
In December 1994, the Company filed with the OPUC to recover higher revenues from core customers through monthly service charges with an offsetting lower revenue recovery through volumetric rates. These rate redesign changes, which are intended to reduce earnings variability due to weather fluctuations, were approved by the OPUC effective January 1, 1995.
Effective December 1, 1994, the Company terminated its Interruptible Sales Adjustment (ISA) tariff schedule in Oregon. This tariff had provided a mechanism to level margin fluctuations which resulted from the volatility of sales to large industrial interruptible customers caused by price competition between natural gas and residual fuel oil and the migration of such customers from one rate schedule to another. Through negotiation, the OPUC and the Company agreed to a permanent resetting of core market rates to reflect the ISA tariff's experience during the most recent two-year period. This agreement will result in a $1.8 million reduction in core market rates which will be phased in over two years, commencing December 1, 1994.
During 1994, the Company filed with the OPUC, and the OPUC approved, revisions to the Company's tariffed policy relating to the extension of Company facilities which are required to serve new customers. The prior policy based costs for connecting new customers on system-wide average costs and granted such customers an allowance for the cost of constructing Company facilities to serve them which was based on the number of gas appliances installed. Under the new policy approved by the OPUC, installation charges are based on the actual distance and difficulty of the installation, and the estimated gas usage from all gas appliances to be installed. From this estimate, a margin
revenue estimate is derived which is used to determine what amount, if any, the customer must contribute toward the cost of installing Company facilities. It is not expected that the new policy will limit future customer growth since most new space and water heating customers should continue to qualify for gas service without incurring installation charges for connecting Company facilities. The new policy encourages the installation of multiple gas appliances and enables the Company to restrict the addition of new customers to those that are profitable to serve, while retaining the right of other potential customers to contribute to construction costs if they desire gas service.
The OPUC and WUTC have approved transportation tariffs under which the Company 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 the Company's system, generally are equivalent to the margins that would have been realized from sales of Company-owned gas. (See "Transportation" and "Competition and Marketing".)
The OPUC and WUTC have implemented "least-cost planning" processes under which utilities develop plans defining alternative growth scenarios and resource acquisition strategies. In 1994, the OPUC and WUTC acknowledged and accepted the Company's submissions of its second Least Cost Plan. 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 Least Cost 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 which are consistent with acknowledged integrated resource plans.
Competition and Marketing -------------------------
The Company has no direct competition in the territory it serves from other natural gas utility distributors. However, it competes with NPC to serve large industrial customers; with oil and, to a lesser extent, electricity, for industrial uses; with oil, electricity and wood for residential use; and with oil and electricity for commercial uses. Competition among these
forms of energy is based on price, reliability, efficiency and performance. In 1994, the Company maintained its competitive price advantage over electricity and approximate price parity with fuel oil in both the residential and commercial markets. Throughout 1994, 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 the Company's Oregon service area. The Company believes that this rate advantage will continue for the foreseeable future. As a result of price increases in recent years by the Bonneville Power Administration, the wholesale supplier of much of the electricity sold by publicly-owned electric utilities in the Pacific Northwest, the price of natural gas for home heating in most cases is competitive with the price of electricity provided by public utility districts.
The relatively low (estimated at between 30 and 35 percent) residential (single family and attached dwelling) saturation of natural gas in the Company's service territory, 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 1994, 17,793 net (after subtracting disconnected or terminated services) residential customers were added, including 7,983 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, more than half also use gas for water heating. In addition, 1,421 net commercial customers were connected in 1994. The net total of all new customers added in 1994 was 19,211. This constituted a growth rate of 5.2 percent, nearly double the national average for local distribution companies as reported by the American Gas Association.
Natural gas sales volumes to residential and commercial customers during 1994 decreased 5.5 percent to 454.6 million therms from 481.3 million therms in 1993, largely due to warmer weather. For the year 1994, temperatures in the Company's service territory, based on heating degree days, were 10 percent warmer than those of 1993, and were seven percent warmer than the 20-year average. In 1994, 78.3 percent of total utility operating revenues and 45.9 percent of the total therms delivered were derived from deliveries to residential and commercial customers. (See Part II, Item 7.)
Natural gas sales and transportation deliveries to industrial firm customers during 1994 totalled 99.2 million therms which was 0.6 percent below the 1993 level of 99.8 million therms. In 1994, 10.4 percent of total utility operating revenues and 10.0 percent of total therms delivered were derived from deliveries to industrial firm customers.
Total natural gas sales and transportation deliveries to industrial interruptible customers during 1994 totalled 436.5 million therms which was 5.6 below the 1993 level of 462.5 million therms. These deliveries included the transportation of 18.6 million therms to an electric generating plant in 1994, down from 29.3 million therms transported to two plants in 1993. In 1994, 11.1 percent of total utility operating revenues and 44.1 percent of total therms delivered were derived from sales and transportation deliveries to industrial interruptible customers.
The Company and most of its largest industrial customers have entered into high-volume interruptible transportation agreements. These agreements are designed to provide rates that are competitive with the costs of alternative fuels, such as heavy oil, by reducing the per-therm transportation rate. They also are designed to provide rates competitive with "bypass" (direct connection to interstate pipelines) by applying fixed charges that are equivalent to the capital and operating costs of direct connections to NPC's system. These agreements prohibit bypass during their terms. The Company does not expect a significant number of its large customers to bypass its system in the foreseeable future. (See Part II, Item 7.)
During 1994, the OPUC authorized the Company to enter into agreements with industrial customers, without OPUC approval, releasing, at negotiated rates, the Company's rights to portions of its firm pipeline capacity and pipeline transportation services. In its order authorizing the Company to enter into such agreements, the OPUC concluded that rate flexibility was warranted because competition for such services exists. The OPUC's order, which implements legislation adopted by the Oregon legislature in 1993, allows the Company 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 agreements will be credited to core customer gas costs. In a related order issued
in February 1995, the OPUC eliminated its previously-mandated requirement that the OPUC make an annual determination that these markets are subject to competition.
Construction and Financing Programs -----------------------------------
See Part II, Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition.
Environment -----------
The Company is subject to air, water and other environmental regulation by state and federal authorities and has complied in all material respects with applicable regulations. Compliance with these regulations has had no material effect upon the capital expenditures, earnings or the competitive position of the Company.
The Company owns property in Linnton, Oregon and previously owned property in Salem, Oregon that were sites of former gas manufacturing plants. Both sites are under investigation for potential remediation. (See Part II, Item 7, and Item 8, Note 12.)
Employees ---------
At year-end 1994, the Company had 1,338 employees, of which 975 were members of the Office and Professional Employees International Union, Local No. 11. These union employees approved a five-year Joint Accord covering wages, benefits and working conditions effective April 1, 1992.
ITEM 2.



ITEM 2. PROPERTIES
The Company's natural gas distribution system consists of 9,639 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. The
Company also holds all necessary permits for the crossing of the Willamette River and a number of small rivers by its mains.
The Company 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. The Company owns LNG facilities in Portland and near Newport, Oregon, and also owns two natural gas reservoirs at Mist, Oregon.
The Company 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.
The Company's Mortgage and Deed of Trust constitutes a first mortgage lien on substantially all of the real property constituting its utility plant.
Oregon Natural holds interests in United States oil and gas leases covering 113,062 net acres located in Oregon, California, Wyoming, and Colorado. Canor holds interests in Canadian gas and oil leases covering 128,489 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. Oregon Natural also holds an equity investment in a Boeing 737-300 aircraft.
Energy Systems formerly owned a 25 megawatt cogeneration plant near Fresno, California, through its wholly-owned subsidiary, Agrico, which filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in December 1991. The U.S. Bankruptcy Court confirmed Agrico's reorganization plan in January 1994, allowing the sale in February 1994 of Agrico's assets to Wellhead Electric Company, the contract operator of the cogeneration plant. Neither Energy Systems nor Agrico now owns any property. (See Part II, Item 7, and Item 8, Note 2.)
During 1994, Pacific Square, the Company's subsidiary engaged in real estate management, completed the sale of its partnership interests in One Pacific Square, a 227,000 square
foot office building in Northwest Portland, and an adjacent 31,000 square foot office building, to its joint venture partner. Under the terms of the agreement, the joint venture partner assumed all of the partnership's joint obligations. Pacific Square no longer owns any property.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
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 material adverse effect on the Company's financial position or results of operations.
ITEM 4.

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, 1994.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
Age at December 31, Positions held during Name 1994 last five years ------------------ ---------- ------------------------------- Robert L. Ridgley 60 President and Chief Executive Officer (1985- ); Director (1984- ); Chairman of the Executive Committee of the Board (1985- 95).
Bruce R. DeBolt 47 Senior Vice President, Finance, and Chief Financial Officer (1990- ); Senior Vice President, Finance and Administration (1987-90); General Counsel (1983-90).
Dwayne L. Foley 49 Senior Vice President, Operations and Information Services (1992- ); Senior Vice President, Gas Operations and Information
Services (1990-92); Vice President, Gas Supply and Pipeline Relations (1985-90).
Paul L. Hathaway 60 Senior Vice President, Districts and Administrative Services (1992- ); Senior Vice President, Marketing, Districts and Administrative Services (1990- 92); Senior Vice President, Market Services and Human Resources (1987-90).
Michael S. McCoy 51 Senior Vice President, Customer Services Division (1992- ); Vice President, Operations (1990-92); Vice President, Districts (1984-90).
Bruce B. Samson 59 Senior Vice President, Public Affairs (1990- ); General Counsel (1990- ); Senior Vice President, Regulatory Affairs (1990); President-Public Policy, U. S. WEST Communications (1989).
Diana J. Johnston 50 Vice President, Human Resources (1992- ); Manager, Customers Office Department (1989-92).
C. J. Rue 49 Secretary (1982- ); Assistant Treasurer (1987- ).
D. James Wilson 55 Treasurer and Controller (1987- ).
Each executive officer serves successive annual terms; present terms end May 25, 1995.
There are no family relationships among the Company's executive officers.
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The outstanding common stock of the Company is traded in the over-the-counter market and its price and volume data are reported by the National Association of Securities Dealers Automated Quotation (Nasdaq) system. The Company's common stock is included in the Nasdaq National Market through which the high, low and closing transaction prices, as well as volume data, are reported.
The Company'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.
The quarterly high and low closing trades for the Company's common stock, as quoted on the Nasdaq National Market and published in the Wall Street Journal, were as follows: -------------------
The closing quotation for the common stock on December 30, 1994 was $29-1/2. On December 31, 1993 the closing quotation was $34-1/4.
The Company's convertible preference stock $2.375 Series is traded in the over-the-counter market. Because of the small number of shares of this Series outstanding trading is infrequent. On October 11, 1994, this Series was removed from the Nasdaq system because the Series no longer met the requirements for inclusion in the Nasdaq Stock Market. Prior to such removal, the quarterly high and low closing bid price quotations reported by Nasdaq were as follows:
The closing quotations for the convertible preference stock $2.375 Series on October 10, 1994 (the last date quotations were provided by Nasdaq for this Series) and December 31, 1993 were $49 Bid, $53 Ask and $53-1/2 Bid, $57-1/2 Ask, respectively. Outstanding shares are convertible into shares of common stock at a rate of 1.6502 shares of common stock for each share of convertible preference stock. The Company intends to give notice on March 31, 1995, of the redemption of the convertible preference stock $2.375 Series effective May 15, 1995.
(b) As of January 31, 1995 there were 12,348 holders of record of the Company's common stock and 79 holders of record of its convertible preference stock.
(c) The Company 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 1994 1993 ------------ ---- ----- February 15 $0.44 $0.43 May 16 0.44 0.44 August 15 0.44 0.44 November 15 0.44 0.44 ----- ----- Total per share $1.76 $1.75 ===== =====
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 the Company's earnings, its financial condition and other factors.
The Company'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 the Company'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 1994, with about 55 percent of the Company's shareholders participating, dividend reinvestments and optional cash investments under the Plan aggregated $5.5 million and resulted in the issuance of 173,994 shares of common stock. During the seventeen years the Plan has been available the Company has issued and sold 2,850,791 shares of common stock which produced $54.6 million in additional capital.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Northwest Natural Gas Company's (Northwest Natural) consolidated wholly-owned subsidiaries consist of Oregon Natural Gas Development Corporation (Oregon Natural); NNG Energy Systems, Inc. (Energy Systems); NNG Financial Corporation (Financial Corporation); and Pacific Square Corporation (Pacific Square) (see "Subsidiary Operations" below and Note 2 to the Consolidated Financial Statements). Together, Northwest Natural and these subsidiaries are referred to herein as the "Company."
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, 1994.
Earnings and Dividends -----------------------
The Company earned $2.44 per share in 1994, compared to $2.61 per share in 1993 and $1.11 per share in 1992. The results for 1994 were affected by warmer weather which was partially offset by improved subsidiary results. Higher earnings in 1993 were due to cooler weather. The Company's earnings for 1992 were depressed by the effects of record-setting warm weather and a loss related to Agrico Cogeneration Corporation (Agrico), a subsidiary of Energy Systems.
The Company earned $2.08 per share from utility operations in 1994, compared to $2.72 per share and $1.41 per share in 1993 and 1992, respectively. Weather conditions in the Company's service territory in 1994 were seven percent warmer than normal and 10 percent warmer than in 1993. The Company estimates that the weather-related reduction in margin during 1994 was equivalent to about $0.51 per share compared to a similar period with normal weather, and $1.06 per share compared to actual conditions during 1993. These estimates are derived from the Company'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 weather conditions.
Subsidiary earnings for 1994 were equivalent to $0.36 per share, compared to losses equivalent to $0.11 per share and $0.30 per share in 1993 and 1992, respectively. Improved subsidiary performance in 1994 resulted primarily from a one-time gain from the sale of Pacific Square's investments, equivalent to $0.14 per share, and improved operating performance of Financial Corporation's investments in windpower electric generating projects in California equivalent to $0.12 per share in 1994, compared to a loss equivalent to $0.06 per share in 1993.
1994 was the 39th consecutive year in which the Company's dividends paid have increased. In 1994, dividends paid on common stock were $1.76 per share compared with $1.75 in 1993 and $1.72 in 1992.
Results of Operations ---------------------
Regulatory Matters ------------------
Northwest Natural provides utility gas service in Oregon and Washington, with Oregon representing approximately 95 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, by Northwest Natural's ability to remain price competitive in the large industrial market, and by the ability of management to control expenses.
In 1994, the Oregon Public Utility Commission (OPUC) approved new tariffs for recovery of Demand Side Management (DSM) programs to encourage energy conservation. Also, the OPUC approved a new service line and main extension policy which supports Northwest Natural's strategy of promoting profitable growth. Prospective customers are required by this policy to contribute the amount which exceeds a construction allowance based upon estimated annual margin revenue.
In 1994, Northwest Natural redesigned certain non- traditional industrial services to meet the changing demands of the industrial market. The result was OPUC and Washington Utilities and Transportation Commission (WUTC) approval for a new service to industrial customers combining natural gas from Northwest Natural's supply contracts with pipeline transmission capacity released from Northwest Natural's firm transportation contract with Northwest Pipeline Corporation (NPC). These new industrial services were made possible by the Federal Energy Regulatory Commission's (FERC) Order No. 636, which completed a restructuring of the interstate natural gas pipeline industry, and Northwest Natural's revision of its own gas procurement policies and practices.
Effective April 15, 1994, the OPUC approved rate decreases averaging 1.1 percent for Northwest Natural's residential, commercial and industrial rate schedules. The rate decreases pass through Northwest Natural's lower property tax expenses due to Oregon Ballot Measure 5, an initiative measure adopted in Oregon which reduced property tax expenses. Effective December 1, 1994, the OPUC and WUTC approved rate decreases averaging 5.6 percent and 7.0 percent, respectively. These rate decreases pass through reductions in gas costs and remove temporary adjustments to rates which were put into effect on December 1, 1993, for the amortization of prior gas cost savings. None of the above rate decreases has a material effect on net income.
Comparison of Gas Operations ----------------------------
The following table summarizes the composition of utility gas volumes and revenues for the three years ended December 31:
Residential and Commercial --------------------------
Typically, 75 percent or more of the Company's annual utility operating revenues are derived from gas sales to weather- sensitive residential and commercial customers. Accordingly, shifts in temperatures from one period to the next can significantly affect volumes of gas sold to these customers.
Normal weather conditions are based upon a 20 year average measured by degree days. Weather conditions were seven percent warmer than normal in 1994, three percent cooler than normal in 1993, and 16 percent warmer than normal in 1992. Weather was 10 percent warmer in 1994 compared to 1993, and 22 percent cooler in 1993 compared to 1992.
Higher rates in effect during most of the year and the addition of 19,200 customers, offset by the effects of warmer weather, combined to produce a one percent increase in revenues from residential and commercial customers in 1994 compared to 1993. Therm deliveries to these customers were six percent lower than in 1993. Cooler weather in 1993, combined with 19,400 customer additions and OPUC and WUTC approved rate increases, produced a 34 percent increase in residential and commercial revenues compared to 1992, on 27 percent higher therm deliveries.
Northwest Natural's residential and commercial customer growth has continued at a steady pace. In the last three years, over 55,000 of these customers have been added to the system, representing an average growth rate of 5.2 percent.
Industrial, Transportation and Other ------------------------------------
The combined net operating revenues (margin) from industrial firm and interruptible sales and transportation customers remained relatively stable at $44.0 million in 1994 compared to $44.4 million in 1993. Since other revenues are primarily regulatory adjustments to industrial sales amounts (see Note 1 to the Consolidated Financial Statements), they are treated in this discussion as a component of industrial revenue. Total volumes delivered to these customers were 26.6 million therms lower in 1994 than in 1993, while corresponding revenues and related adjustments from such deliveries were $6.3 million
higher. Contributing to the lower volumes was a 28 million therm reduction in transportation deliveries to the James River Corporation's paper mill in Camas, Washington, which placed a direct (bypass) connection to NPC's system into operation in October 1993. Northwest Natural does not expect a significant number of its other large customers to bypass its system in the foreseeable future, since these customers are served under tariffs which are designed to be competitive with the capital and operating costs of direct connections to NPC's system.
Although volumes decreased, Northwest Natural's revenues and related adjustments from industrial firm sales and industrial interruptible sales and transportation deliveries were 9 percent higher in 1994 compared to 1993, and 29 percent higher than in 1992. The revenue increase was primarily due to a higher level of industrial interruptible sales and a correspondingly lower level of transportation deliveries for these same periods. Since 1992, over half of Northwest Natural's transportation customers have switched to sales service. These customers, which have the option of purchasing gas directly from suppliers and shipping it on the systems of Northwest Natural and its pipeline suppliers for a fee, select the option which, from time to time, provides the lowest cost. The migration from transportation to sales tariffs by these customers reflects the fact that Northwest Natural's industrial sales tariffs were lower than the cost to these customers of purchasing and shipping their own gas. Since transportation charges typically are the same as the margin on an equivalent sale of gas, the increase in revenue attributable to the migration from transportation to sales tariffs was substantially offset by an increase in Northwest Natural's cost of gas.
Cost of Gas -----------
Northwest 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. The cost of gas sold during 1994 was 17 percent greater than in 1993. Total gas volumes delivered to sales customers in 1994 were equivalent to 1993. However, there was an 18 percent increase in the cost of gas per therm, which includes purchased gas costs, related tariff adjustments, and line loss. Increased gas costs resulted from higher commodity prices, as well as higher demand charges placed into effect in April 1993 by NPC, Northwest Natural's primary pipeline supplier, pursuant to FERC Order No. 636.
The cost of gas sold during 1993 was 36 percent greater than in 1992. The primary contributing factors were a 34 percent increase in total volumes sold and a 2 percent increase in the cost of gas per therm.
Subsidiary Operations ---------------------
Consolidated subsidiary earnings for 1994 were equivalent to $0.36 per share, compared to losses equivalent to $0.11 per share and $0.30 per share for the years 1993 and 1992, respectively. The improved subsidiary results for 1994 resulted primarily from three factors. First, Pacific Square sold its partnership interests in two office buildings, including the Company's headquarters building. The Company's gain on the sale was equivalent to $0.14 per share. As a result of the sale of these investments, Pacific Square no longer has any operating activities. Second, Financial Corporation's investments in windpower electric generating projects in California (see Note 10 to the Consolidated Financial Statements) benefitted from favorable wind conditions which improved net income. As a result, Financial Corporation's net income increased $2.2 million compared to 1993 and $1.7 million compared to 1992. Third, the Company realized a gain equivalent to $0.03 per share on the sale of Agrico's assets pursuant to its bankruptcy reorganization plan.
Results of operations for the individual subsidiaries for 1994 were net income of: $0.3 million for Energy Systems; $0.4 million for Oregon Natural; $1.8 million for Financial Corporation; and $2.2 million for Pacific Square.
The subsidiaries' results for 1993 reflect a fourth quarter write-down in the value of unproven gas and oil reserves equivalent to $0.11 per share and increased federal income tax expense equivalent to $0.05 per share (see "Depreciation, Depletion and Amortization" and "Income Taxes" below). The 1992 loss resulted primarily from charges equivalent to $0.24 per share related to Agrico (see Note 2 to the Consolidated Financial Statements).
The following discussion summarizes operating expenses, other income, interest charges, income taxes, and preferred and preference stock dividend requirements.
Operating Expenses ------------------
Operations and Maintenance --------------------------
Northwest Natural's operations and maintenance expenses were $0.5 million lower for 1994 compared to 1993, while subsidiary operations and maintenance expense increased $0.7 million. The reduction in utility operations and maintenance expense was primarily due to a $0.6 million decrease in accruals for estimated employee bonuses. Increased subsidiary operations and maintenance expense was primarily due to increased production expenses related to Oregon Natural's Canadian operations.
The Company's operations and maintenance expenses were $6.5 million, or 10 percent, higher in 1993 than in 1992. Northwest Natural's expenses constituted $6.2 million of this increase including a $3.1 million, or 10 percent, increase in payroll expenses; a $1.3 million increase in employee benefit costs, including an increase of $0.7 million resulting from the adoption of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions;" a $1.2 million increase in the allowance for uncollectible accounts primarily due to higher residential and commercial gas sales; and a $0.5 million accrual for estimated environmental investigation costs (see Note 12 to the Consolidated Financial Statements).
Taxes Other Than Income -----------------------
Northwest Natural's property taxes were $1.9 million lower in 1994 compared to 1993 but were $0.6 million higher in 1994 compared to 1992. The increasing trend in property taxes has resulted primarily from increased plant additions to serve new customers. Between these same years, property taxes fluctuated due to a non-recurring accrual of $0.9 million in 1993 related to a dispute with the OPUC over the amount of prior-year savings on property taxes, which must be refunded to Oregon customers, resulting from voter approval of Oregon Ballot Measure 5.
Partially offsetting the decline in property taxes in 1994 was an increase in franchise taxes based on higher utility
operating revenues. Franchise taxes increased $0.6 million in 1994 compared to 1993 and $1.8 million in 1993 compared to 1992.
Depreciation, Depletion and Amortization ----------------------------------------
Northwest Natural's depreciation expense increased $1.9 million, or six percent, in 1994 and $1.9 million, or seven percent, in 1993, primarily due to additional utility plant in service. A program for the removal of all of its underground gasoline tanks accounted for $0.4 million of the increased 1993 expense.
Subsidiary depreciation expense decreased $3.5 million in 1994 compared to 1993, and increased $4.7 million in 1993 compared to 1992. The 1993 increase resulted primarily from charges totalling $3.5 million from the write-downs of Oregon Natural's unproven gas and oil properties (see Note 2 to the Consolidated Financial Statements).
Other Income ------------
The increase in other income for 1994 compared to 1993 and 1992 resulted primarily from a $3.2 million pre-tax gain related to the sale of Pacific Square's investments and a $2.5 million increase due to improved operating results from Financial Corporation's investments.
Interest Charges ----------------
Interest charges remained stable in 1994 compared to 1993 on equivalent total debt balances. Higher short term rates in 1994 offset lower long term rates resulting from 1993 debt refinancings (see "Financing Activities" below).
Northwest Natural's interest expense for 1993 decreased $1.3 million compared to 1992. The decrease was a result of debt refinancings which reduced interest expense by $0.6 million; $11.5 million lower average outstanding commercial paper balances; and a decrease in average interest rates for utility commercial paper from 3.9 percent in 1992 to 3.3 percent in 1993.
Subsidiary interest expense for 1993 decreased $0.3 million compared to 1992 due to a decrease in interest expense under Financial Corporation's commercial paper program. Financial Corporation's average outstanding commercial paper balances decreased $4.4 million from 1992 to 1993. In addition, Financial Corporation's average interest rates for commercial paper decreased from 4.1 percent in 1992 to 3.3 percent in 1993.
Income Taxes ------------
The effective corporate income tax rates for 1994, 1993, and 1992 were 37 percent, 37 percent, and 31 percent, respectively, compared to the Company's statutory tax rates for these periods of 39 percent, 39 percent, and 38 percent, respectively. Effective January 1, 1993, the federal income tax rate for corporations increased from 34 to 35 percent. The cumulative effect of the tax rate increase was recorded in the third quarter of 1993 and resulted in additional income tax expense of $0.6 million, an increase in deferred tax liabilities of $3.0 million, and an increase in regulatory assets of $2.6 million.
Preferred and Preference Stock Dividend Requirements ----------------------------------------------------
Preferred and preference stock dividend requirements for 1994 were lower by $0.5 million, or 14 percent, compared to 1993, due to redemptions and refundings of preferred stock in 1993. The principal amount of preferred and preference stock outstanding was $1.5 million, or three percent, lower at December 31, 1994, than at December 31, 1993. Also, effective December 1, 1993, the Company cancelled the $8.75 Series of Preferred Stock in exchange for issuance of the $7.125 Series of Preferred Stock (see "Financing Activities" below).
Financial Condition -------------------
Capital Structure -----------------
Northwest Natural's capital expenditures are required for utility construction resulting from customer growth and system improvements. Northwest Natural finances these
expenditures from cash provided by operations, and 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 Northwest Natural's residential and commercial customers influences the Company's financing requirements. Short-term liquidity is 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 40 to 45 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, this target structure is managed by issuing new debt or equity depending upon market conditions. The Company also uses these sources to meet long-term debt and preferred stock redemption requirements (see Notes 3 and 5 to the Consolidated Financial Statements).
Cash Flows ----------
Operating Activities --------------------
Cash provided from operating activities was 91 percent higher in 1994 compared to 1993 primarily due to rate increases in late 1993 reflecting completion of amortizations of credit balances in regulatory accounts. Also contributing was the effect of weather conditions from year to year on accounts receivable, unbilled revenue, and accounts payable.
Northwest Natural has lease and purchase commitments related to its operating activities which are financed with cash flows from operations (see Note 12 to the Consolidated Financial Statements).
Investing Activities --------------------
Cash requirements for utility construction, primarily related to system improvements and customer growth, totalled $77.7 million, up $7.3 million, or 10 percent, from 1993. 1993 expenditures were up $9.7 million, or 16 percent, from 1992. The
1994 and 1993 increases include $8.5 million and $6.3 million, respectively, for the replacement of Northwest Natural's customer information system. The total cost of the new system, scheduled for completion in 1997, is estimated at $25 million.
Northwest Natural's construction expenditures are estimated at $76 million for 1995. Over the five year period 1995 through 1999, these expenditures are estimated at between $350 and $375 million. It is anticipated that approximately 60 percent of the funds required for these expenditures will be internally generated, and that the remainder will be funded through short-term borrowings which will be refinanced periodically through the sale of long-term debt and equity securities.
In 1994, subsidiary capital expenditures were primarily for Oregon Natural's Canadian gas exploration and production program. In 1993, Oregon Natural received $2.3 million from sales and exchanges of gas producing properties. Oregon Natural anticipates investing up to $10 million, in addition to internally generated cash, in its Canadian gas exploration and production program during the three years 1995 through 1997.
Investments shown on the Consolidated Balance Sheets under "Investments and Other" for 1992 included a $5.5 million restricted cash deposit with a commercial bank which related to Pacific Square. This deposit was reclassified as a current asset in 1993 due to the pending sale of Pacific Square's primary real estate investments. Upon the sale of Pacific Square's investments in 1994, $4.0 million was collected while the remaining $1.5 million was secured by a note receivable due no later than December 1, 1999.
Financing Activities --------------------
During 1994, Northwest Natural sold $20 million of its Medium-Term Notes, the proceeds of which were used to repay short term debt incurred to fund Northwest Natural's construction program.
During 1993 and 1992, Northwest Natural sold $100 million and $45 million, respectively, of its Medium-Term Notes. Of the proceeds from the 1993 sales, $82.6 million was used to redeem higher-cost long-term debt, and the remainder was used to
pay the cost of Northwest Natural's construction program and to reduce short-term borrowing incurred for such purpose. Of the proceeds from the 1992 sales, $30.2 million was used to redeem higher-cost long-term debt and $15 million was used to reduce short-term borrowing. As a result of these transactions, the average interest rate on long-term debt declined from 9.7 percent at December 31, 1991 to 8.3 percent at December 31, 1993.
In order to pay the cost of Northwest Natural's construction program, to refund higher-cost Preferred Stock, and to increase its equity ratios, Northwest Natural sold $25 million of Preference Stock and $28.5 million, or 990,000 shares, of Common Stock during the fourth quarter of 1992. In January 1993, approximately $9 million of the proceeds from the sale of Preference Stock was used to redeem all of the outstanding shares of Northwest Natural's $8.00 and $2.42 Series of Preferred Stock. In 1993, Northwest Natural also redeemed all of the outstanding shares of its $6.875 Series of Preferred Stock.
In 1993, Northwest Natural refinanced $15 million of its $8.75 Series of Preferred Stock with an equivalent amount of the $7.125 Series of Preferred Stock.
In the first quarter of 1995, Northwest Natural sold 1.15 million shares of its Common Stock. The net proceeds of $33.0 million received from the offering were added to the general funds of the Company and used for corporate purposes, primarily to fund, in part, Northwest Natural's construction program, and to repay short-term debt incurred for such purpose. The projected dilution of earnings per share resulting from this sale is estimated at five percent.
Ratios of Earnings to Fixed Charges -----------------------------------
For the years ended December 31, 1994, 1993, and 1992, the Company's ratios of earnings to fixed charges, computed by the Securities and Exchange Commission method, were 3.08, 3.22, and 1.81, respectively. Earnings consist of net income to which has been added taxes on income and fixed charges. Fixed charges consist of interest on all indebtedness, amortization of debt expense and discount or premium, and the estimated interest portion of rentals charged to income.
Environmental Matters ---------------------
In June 1992, the City of Salem, Oregon, requested Northwest Natural's participation in its review of an environmental assessment of riverfront property in Salem that is the proposed site for a park and other public developments. Within the property is a block previously owned by Northwest Natural which was the site of a former manufactured gas plant. Northwest Natural's corporate predecessor owned the plant for less than four months in 1929. The City has determined that there is environmental contamination on the site, and that a remediation process involving Northwest Natural and at least two other prior owners of the block will be required. To date Northwest Natural has not obtained sufficient information to determine the extent of its responsibility for any such remediation.
Northwest Natural owns property in Linnton, Oregon, that is the site of a former gas manufacturing plant that was closed in 1956. Although limited testing for environmental contamination has been undertaken by other parties on portions of the site, no comprehensive studies have been performed. Northwest Natural submitted a work plan for the site to the Oregon Department of Environmental Quality (ODEQ) in 1987, but further efforts were suspended at ODEQ's request while Northwest Natural and other parties participated in a joint hydrogeologic study of an area adjacent to the site. In September 1993, pursuant to ODEQ procedures, Northwest Natural submitted a notice of intent to participate in the ODEQ's Voluntary Cleanup Program and, in April 1994, the site was listed on ODEQ's Confirmed Release List and Inventory. It is anticipated that the site investigation will commence during 1995.
In September 1993, Northwest Natural recorded an expense of $0.5 million for the estimated costs of consultants' fees, ODEQ oversight cost reimbursements, and legal fees in connection with the voluntary investigation at the Linnton site. To date, Northwest Natural has not obtained sufficient information to determine whether any remediation will be required at this site or, if so, the extent of its responsibility for any such remediation. Northwest Natural expects that its costs of investigation and any remediation for which it may be responsible should be recoverable, in large part, from insurance or through future rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------- Page ---- 1. Management's Responsibility for Financial Statements . . . . . 36
2. Independent Auditors' Report . . . . . . . . . . . . . . . . . 37
3. Consolidated Financial Statements: Consolidated Statements of Income for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . 38
Consolidated Statements of Earnings Invested in the Business for the Years Ended December 31, 1994, 1993 and 1992 . . . . 39
Consolidated Balance Sheets, December 31, 1994 and 1993. . . . 40
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . 42
Consolidated Statements of Capitalization, December 31, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . . . 43
Notes to Consolidated Financial Statements . . . . . . . . . . 44
4. Quarterly Financial Information (unaudited). . . . . . . . . . 71
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 management 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 Deloitte & Touche LLP, 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/ Robert L. Ridgley ------------------------------- Robert L. Ridgley President and Chief Executive Officer
/s/ Bruce R. DeBolt ------------------------------- Bruce R. DeBolt Senior Vice President, Finance, and Chief Financial Officer
DELOITTE & TOUCHE LLP ----------------------------------------------------------------- 3900 US Bancorp Tower Telephone: (503) 222-1341 111 SW Fifth Avenue Facsimile: (503) 224-2172 Portland, Oregon 97204-3698
INDEPENDENT AUDITORS' REPORT ----------------------------
To the Board of Directors and Shareholders Northwest Natural Gas Company Portland, Oregon
We have audited the accompanying consolidated financial statements of Northwest Natural Gas Company and subsidiaries, listed in the accompanying table of contents to financial statements and financial statement schedules at Item 8. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules 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 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Notes 7 and 9 to the consolidated financial statements, the Company changed its method of accounting for income taxes and postretirement benefits in the year ended December 31, 1993.
DELOITTE & TOUCHE LLP
February 22, 1995
NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME (Thousands, Except Per Share Amounts)
Year Ended December 31 1994 1993 1992 ------------------------------------------------------------------------ NET OPERATING REVENUES: Operating revenues $368,261 $358,717 $274,366 Cost of sales 162,788 138,833 101,916 -------- -------- -------- Net operating revenues 205,473 219,884 172,450 -------- -------- -------- OPERATING EXPENSES: Operations and maintenance 70,881 70,723 64,249 Taxes other than income taxes 24,263 25,561 20,865 Depreciation, depletion and amortization 38,058 39,683 33,035 Loss on cogeneration facility - - 4,575 -------- -------- -------- Total operating expenses 133,202 135,967 122,724 -------- -------- -------- INCOME FROM OPERATIONS 72,271 83,917 49,726 -------- -------- -------- OTHER INCOME (EXPENSE) 8,582 933 (267) -------- -------- -------- INTEREST CHARGES: Interest on long-term debt 21,921 22,578 23,001 Other interest 2,473 1,906 3,223 Amortization of debt discount and expense 850 775 511 -------- -------- -------- Total interest charges 25,244 25,259 26,735
Allowance for funds used during construction (325) (152) (2) -------- -------- -------- Total interest charges-net 24,919 25,107 26,733 -------- -------- --------
INCOME BEFORE INCOME TAXES 55,934 59,743 22,726
INCOME TAXES 20,473 22,096 6,951 -------- -------- -------- NET INCOME 35,461 37,647 15,775 Preferred and preference stock dividend requirements 2,983 3,488 2,560 -------- -------- -------- EARNINGS APPLICABLE TO COMMON STOCK $ 32,478 $ 34,159 $ 13,215 ======== ======== ======== AVERAGE COMMON SHARES OUTSTANDING 13,295 13,074 11,909
EARNINGS PER SHARE OF COMMON STOCK $2.44 $2.61 $1.11 ===== ===== ===== DIVIDENDS PER SHARE OF COMMON STOCK $1.76 $1.75 $1.72 ==== ==== ==== ----------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS INVESTED IN THE BUSINESS (Thousands of Dollars)
1994 1993 1992 -------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $88,497 $77,690 $86,361
Net Income 35,461 37,647 15,775
Cash dividends: Preferred and preference stock (3,041) (3,401) (2,525) Common stock (23,365) (22,853) (20,406) Capital stock expense and other (277) (586) (1,515) ------- ------- ------- BALANCE AT END OF YEAR $97,275 $88,497 $77,690 ======= ======= =======
----------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (Thousands)
December 31 1994 1993 ------------------------------------------------------------------------ ASSETS:
PLANT AND PROPERTY IN SERVICE: Utility plant in service $908,238 $840,030 Less accumulated depreciation 279,112 255,282 -------- -------- Utility plant - net 629,126 584,748
Non-utility property 49,586 42,764 Less accumulated depreciation and depletion 24,456 20,646 -------- -------- Non-utility property - net 25,130 22,118 -------- -------- Total plant and property in service 654,256 606,866 -------- -------- INVESTMENTS AND OTHER: Investments 34,183 32,818 Long-term notes receivable 2,914 1,756 -------- -------- Total investments and other 37,097 34,574 -------- -------- CURRENT ASSETS: Cash and cash equivalents 8,068 4,198 Accounts receivable - customers 43,016 45,340 Allowance for uncollectible accounts (864) (1,368) Accrued unbilled revenue 20,320 25,890 Inventories of gas, materials and supplies 14,958 16,838 Prepayments and other current assets 10,041 16,412 -------- -------- Total current assets 95,539 107,310 -------- -------- REGULATORY TAX ASSETS 60,430 62,130 -------- -------- DEFERRED DEBITS AND OTHER 41,982 38,156 -------- -------- TOTAL ASSETS $889,304 $849,036 ======== ========
--------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (Thousands)
December 31 1994 1993 ------------------------------------------------------------------------ CAPITALIZATION AND LIABILITIES:
CAPITALIZATION (See Consolidated Statements of Capitalization): Common stock $ 42,492 $ 41,728 Premium on common stock 134,641 128,340 Earnings invested in the business 97,275 88,497 -------- -------- Total common stock equity 274,408 258,565
Preference stock 26,252 26,633 Redeemable preferred stock 15,950 17,041 Long-term debt 291,076 272,931 -------- -------- Total capitalization 607,686 575,170 -------- -------- CURRENT LIABILITIES: Notes payable 53,654 72,548 Accounts payable 48,517 44,318 Long-term debt due within one year 1,000 - Taxes accrued 6,584 6,757 Interest accrued 4,570 4,438 Other current and accrued liabilities 11,757 10,180 -------- -------- Total current liabilities 126,082 138,241 -------- -------- DEFERRED INVESTMENT TAX CREDITS 13,530 14,567 -------- -------- DEFERRED INCOME TAXES 112,433 104,300 -------- -------- REGULATORY BALANCING ACCOUNTS AND OTHER 29,573 16,758 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 12) - - -------- -------- TOTAL CAPITALIZATION AND LIABILITIES $889,304 $849,036 ======== ======== ------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands)
Year Ended December 31 1994 1993 1992 ------------------------------------------------------------------------ OPERATING ACTIVITIES: Net income $ 35,461 $ 37,647 $ 15,775 Adjustments to reconcile net income to net cash provided by (used for) operations: Depreciation, depletion and amortization 38,058 39,683 33,035 Loss on cogeneration facility - - 4,575 Deferred income taxes and investment tax credits 8,796 6,205 (1,115) Equity in (earnings)losses of investments (2,331) 302 1,506 Allowance for funds used during construction (325) (152) (2) Regulatory balancing accounts and other - net 8,989 (10,754) (10,776) ------- ------- ------- Cash from operations before working capital changes 88,648 72,931 42,998
Changes in operating assets and liabilities: Accounts receivable 1,820 (10,964) (5,821) Accrued unbilled revenue 5,570 (5,152) (2,603) Inventories of gas, materials and supplies 1,880 (1,041) 1,052 Accounts payable 4,199 4,036 (3,507) Accrued interest and taxes (41) (387) 881 Other current assets and liabilities 7,948 (1,899) 2,636 -------- -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES 110,024 57,524 35,636 -------- -------- -------- INVESTING ACTIVITIES: Acquisition and construction of utility plant assets (77,668) (70,404) (60,709) Investment in non-utility plant (7,455) (955) (11,907) Investments and other (192) (40) (8,697) -------- -------- -------- CASH USED IN INVESTING ACTIVITIES (85,315) (71,399) (81,313) -------- -------- -------- FINANCING ACTIVITIES: Common stock issued 5,847 5,720 33,826 Preference stock issued - - 25,000 Preferred stock retired (1,091) (11,177) (930) Long-term debt: Issued 20,000 100,000 45,000 Retired (18) (82,606) (30,191) Change in short-term debt (18,894) 25,439 (41,510) Cash dividend payments: Preferred and preference stock (3,041) (3,401) (2,525) Common stock (23,365) (22,853) (20,406) Capital stock expense and other (277) (586) (1,515) -------- -------- -------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (20,839) 10,536 6,749 -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,870 (3,339) (38,928)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 4,198 7,537 46,465 -------- -------- -------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 8,068 $ 4,198 $ 7,537 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 24,262 $ 26,838 $ 26,502 Income taxes $ 12,054 $ 11,103 $ 10,141
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Conversion to common stock: $2.375 Series of Convertible Preference Stock $381 $133 $103 7-1/4 percent Series of Convertible Debentures $837 $367 $131
----------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Thousands, Except Share Amounts)
December 31 1994 1993 -------------------------------------------------------------------- COMMON STOCK EQUITY: Common stock - par value $3-1/6 per share; authorized - 1994, 60,000,000 shares; 1993, 30,000,000 shares: outstanding - 1994, 13,418,685 shares; 1993, 13,177,256 shares $ 42,492 $ 41,728 Premium on common stock 134,641 128,340 Earnings invested in business 97,275 88,497 -------- -------- Total common stock equity 274,408 45% 258,565 45% -------- ---- -------- ---- PREFERENCE STOCK, authorized 2,000,000 shares: $2.375 Series, convertible, stated value $25 per share; outstanding - 1994, 50,079 shares; 1993, 65,323 shares 1,252 1,633 $6.95 Series, stated value $100 per share; outstanding - 1994, 250,000 shares; 1993, 250,000 shares 25,000 25,000 -------- -------- Total preference stock 26,252 4% 26,633 5% -------- ---- -------- ---- REDEEMABLE PREFERRED STOCK, authorized 1,500,000 shares, all outstanding series have a stated value of $100 per share: $4.68 Series, outstanding - 1994, 7,319 shares; 1993, 9,301 shares 732 930 $4.75 Series, outstanding - 1994, 9,685 shares; 1993, 11,105 shares 968 1,111 $7.125 Series, outstanding - 1994, 142,500 shares; 1993, 150,000 shares 14,250 15,000 -------- -------- Total redeemable preferred stock 15,950 3% 17,041 3% -------- ---- -------- ---- LONG-TERM DEBT: First Mortgage Bonds -------------------- 9-3/4% Series due 2015 50,000 50,000 9-1/8% Series due 2019 25,000 25,000 Medium-Term Notes ----------------- First Mortgage Bonds: 4.80% Series A due 1996 5,000 5,000 7.38% Series A due 1997 20,000 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 6.50% Series B due 2008 5,000 5,000 8.26% Series B due 2014 10,000 - 8.31% Series B due 2019 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 Unsecured: 4.90% Series A due 1996 10,000 10,000 8.69% Series A due 1996 5,000 5,000 7.40% Series A due 1997 5,000 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 12,076 12,931 -------- -------- 292,076 272,931 Less long-term debt due within one-year 1,000 - -------- -------- Total long-term debt 291,076 48% 272,931 47% -------- ---- -------- ---- TOTAL CAPITALIZATION $607,686 100% $575,170 100% ======= === ======= === ------------------------------------------------------------------- See Accompanying 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 (Northwest Natural)
Non-regulated wholly-owned businesses: --Oregon Natural Gas Development Corporation (Oregon Natural) --NNG Financial Corporation (Financial Corporation) --Pacific Square Corporation (Pacific Square) --NNG Energy Systems, Inc. (Energy Systems)
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 1994 presentation.
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.
Utility Plant -------------
Utility plant for Northwest Natural is stated at original cost (see table in Note 10). When a depreciable unit of property is retired, the cost is credited to utility plant and debited to the accumulated provision for depreciation together with the cost of removal, less any salvage. No gain or loss is recognized upon normal retirement.
Northwest 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 4.1 percent of average depreciable plant in 1994 and 1993, and 4.0 percent for 1992.
Allowance for Funds Used During Construction (AFUDC), a non- cash item, is calculated using actual commercial paper interest rates. If commercial paper balances are insufficient to finance the amount of work in progress, a composite of interest costs of debt, shown as a reduction to interest charges, and a return on equity funds, shown as other income, is used to compute AFUDC. This amount is added to utility plant which is a component of rate base. 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. The Company's weighted average AFUDC rates were 3.4 percent for 1994, 3.5 percent for 1993, and 4.5 percent for 1992.
Regulatory Balancing Accounts -----------------------------
Regulatory balancing accounts are established 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, Northwest Natural's utility customers.
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 ----------------
Northwest Natural accrues for gas deliveries not billed to customers from the meter reading dates to month end.
Inventories -----------
Northwest Natural's inventories of gas in storage and materials and supplies are stated at the lower of average cost or net realizable value.
Foreign Currency Fluctuation Hedges -----------------------------------
Northwest Natural uses foreign currency hedge transactions to reduce its exposure to currency fluctuations on firm Canadian gas purchase commitments by entering into foreign currency forward contracts with concurrent maturities. Northwest Natural does not engage in currency speculation. The forward contracts generally have terms ranging from one to 12 months. All contracts are specifically purchased for firm commitments and are physically delivered to satisfy those commitments. Changes in market values of foreign currency contracts are deferred and recognized as adjustments to gas purchase costs upon concurrent settlement of these contracts (see Note 11).
Income Taxes ------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," on January 1, 1993. SFAS No. 109, among other things, (i) requires the liability method be used in computing deferred taxes on all temporary differences between book and tax basis of assets and liabilities; (ii) requires that deferred tax liabilities and assets be adjusted for an enacted change in tax laws or rates; and (iii) prohibits net-of-tax accounting and reporting. Regulated enterprises are required to recognize such adjustments as regulatory assets or liabilities if it is probable that such amounts will be recovered from or returned to customers in future rates. As of December 31, 1994, the Company had regulatory assets of $60.4 million, an amount which is primarily derived from differences between the book and tax basis of the utility plant in service and the accumulated reserve for depreciation.
The Company provides deferred federal income tax for the timing differences between book depreciation and tax depreciation under the Accelerated Cost Recovery System (ACRS) for 1981 - 1985 property additions and Modified Accelerated Cost Recovery System (MACRS) for post-1985 property additions. Consistent with rate and accounting instructions of regulatory authorities, deferred income taxes are not currently collected for those income tax temporary differences where the prescribed regulatory accounting methods do not provide for current recovery in rates.
Investment tax credits on utility property additions which reduce income taxes payable are deferred for financial statement purposes and are amortized over the life of the related property. Investment and energy tax credits generated by non-regulated subsidiaries are amortized over a period of two to five years.
Earnings Per Share ------------------
Primary earnings per share are computed based on the weighted average number of common shares outstanding each year. Outstanding stock options are common stock equivalents but are excluded from primary earnings per share computations due to immateriality. The Company reports fully-diluted earnings per share when dilution is three percent or greater. This calculation reflects the potential effects of the conversion of the $2.375 Series of Convertible Preference Stock and the 7-1/4 percent Series of Convertible Debentures and the exercise of stock options.
2. CONSOLIDATED SUBSIDIARY OPERATIONS: ----------------------------------------
Oregon Natural Gas Development Corporation ------------------------------------------
Oregon Natural is a natural gas exploration and production subsidiary of the Company. Approximately $22.5 million of Oregon Natural's total assets of $40.7 million at year-end 1994 are invested in its wholly-owned subsidiary, Canor Energy Ltd., which manages and develops natural gas and oil properties in Canada.
Oregon Natural accounts for its exploration costs under the successful-efforts method. Costs to acquire and develop oil and gas properties are capitalized until the volume of proved gas reserves is determined. If there are inadequate gas reserves, the related deferred costs are expensed. Capitalized costs associated with properties under development were $4.4 million at December 31, 1994 and $1.4 million at December 31, 1993.
NNG Financial Corporation -------------------------
Financial Corporation provides short-term financing for Oregon Natural and Energy Systems and has several financial investments, including investments as a limited partner in
four solar electric generating systems, four windpower electric generating projects, a hydroelectric facility and a low-income housing project (see Note 10).
Pacific Square Corporation --------------------------
Pacific Square was a real estate management subsidiary of the Company. During 1994, Pacific Square sold its partnership interests in two commercial office buildings, including the Company's headquarters building. As a result of the sale of these investments, Pacific Square no longer has any operating activities.
NNG Energy Systems, Inc. ------------------------
Energy Systems was formed to design, construct, own and operate cogeneration facilities. Agrico Cogeneration Corporation (Agrico) is a wholly-owned subsidiary of Energy Systems. In December 1991, Agrico filed with the United States Bankruptcy Court for the Eastern District of California a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The U. S. Bankruptcy Court confirmed Agrico's reorganization plan in January 1994. The sale of Agrico's assets closed in February 1994. Based upon the estimated costs to the Company under related settlements, the estimated net proceeds to be received from the sale of Agrico's assets, and other elements of a Chapter 11 reorganization plan, the Company recorded a charge of $4.6 million in 1992, resulting in an after-tax charge of $2.8 million, equivalent to 24 cents per share.
3. CAPITAL STOCK: --------------------
Common Stock ------------
At December 31, 1994, Northwest Natural had reserved 87,864 shares of common stock for issuance under the Employee Stock Purchase Plan, 449,209 shares under its
Dividend Reinvestment and Stock Purchase Plan, 147,504 shares under its 1985 Stock Option Plan (see Note 4), 82,719 shares for future conversions of its convertible preference stock and 444,396 shares for future conversions of its 7-1/4 percent Convertible Debentures.
In the first quarter of 1995, Northwest Natural sold 1.15 million shares of its Common Stock. The net proceeds of $33.0 million will be used for corporate purposes, primarily to fund, in part, Northwest Natural's construction program, and to repay short-term debt incurred for such purpose. The projected dilution of earnings per share resulting from this sale is estimated at five percent.
Preference Stock ----------------
The $2.375 Series of Convertible Preference Stock is convertible into shares of common stock at a conversion rate of 1.6502 shares of common stock for each share of preference stock. Subject to certain restrictions, it is callable at stipulated prices, plus accrued dividends. 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 $1.1 million in 1995, 1996, 1997 and 1998 and $1.0 million in 1999. These requirements are noncumulative. At any time Northwest 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 redeemable preferred stock is callable at stipulated prices, plus accrued dividends. At December 31, 1994, redemption prices were $100 per share for the $4.68 and $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 Northwest Natural's capital stock and the premium on common stock for the years 1994, 1993 and 1992:
4. STOCK OPTION AND PURCHASE PLANS: -------------------------------------
Northwest Natural's 1985 Stock Option Plan (Plan) authorizes an aggregate of 300,000 shares of common stock for issuance as incentive or non-statutory stock options. These options may be granted only to officers and key employees of the Company designated by its Board of Directors.
All options granted are at an option price not less than 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 owned by them for at least one year, at the current market price, to purchase shares at the option price.
During 1985, 1990 and 1994, 150,000, 86,500 and 75,182 options were granted under the Plan at option prices of $17.625, $24.875 and $36.00, respectively. Since inception of the Plan, 20,182 options have expired.
Northwest Natural has an employee stock purchase plan whereby employees may purchase common stock at 92 percent of average bid and ask market price on the subscription date. The subscription date is set annually, and each employee may purchase up to 600 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. Northwest 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 for 33-1/2 shares of common stock for each $1,000 face value ($29.85 per share).
The sinking fund requirements and maturities for the five years ending December 31, 1999, on the long-term debt outstanding at December 31, 1994, amount to: $1.0 million in 1995; $21.0 million in 1996; $26.0 million in 1997; $16.0 million in 1998; and $11.0 million in 1999.
6. NOTES PAYABLE AND LINES OF CREDIT: ---------------------------------------
Northwest Natural has available through September 30, 1995, committed lines of credit totalling $80 million consisting of a primary fixed amount of $40 million plus an excess amount of up to $40 million available as needed, at Northwest Natural's option, on a monthly basis. Financial Corporation has available through September 30, 1995, committed lines of credit with two commercial banks totalling $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 Northwest Natural.
Under the terms of these lines of credit, Northwest 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 Northwest Natural or Financial Corporation lines of credit as of December 31, 1994 or December 31, 1993.
Northwest 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 Northwest Natural. The amounts
and average interest rates of commercial paper outstanding were as follows at December 31:
7. INCOME TAXES: -----------------
The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective January 1, 1993. The adoption of the new standard resulted in an increase in net deferred tax liabilities of $62.1 million to reflect deferred taxes on differences previously flowed-through and to adjust existing deferred taxes to the level required at the current statutory rate. An offsetting regulatory asset of $62.1 million was also recorded. This regulatory tax asset has decreased to $60.4 million at December 31, 1994. The regulatory asset is primarily based upon differences between the book and tax basis of utility plant in service and the accumulated provision for depreciation. It is expected that the regulatory asset will be recovered in future rates. The implementation of SFAS No. 109 did not significantly impact results of operations.
A reconciliation between income taxes calculated at the statutory federal tax rate and the tax provision reflected in the financial statements is as follows:
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8. EMPLOYEE RETIREMENT PLANS: -------------------------------
The Company has two non-contributory defined benefit retirement plans covering all regular, full-time 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. The Company's funding policy is to make the annual contribution required by applicable regulations and recommended by its actuary. Plan assets consist primarily of marketable securities, corporate obligations, U.S. government obligations, real estate and cash equivalents.
Effective January 1, 1995, the Company changed the assumed discount rate used in determining the funded status of the plans from 7.50 percent to 8.00 percent. The new discount rate was used in determining the funded status of the plans at year-end 1994 and will be used to determine annual pension cost in 1995.
The Company 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. Contributions to these plans in 1994, 1993 and 1992 were $0.7 million, $0.5 million and $0.3 million, respectively.
The Company 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 $1.0 million in 1994, $0.8 million in 1993 and $0.9 million in 1992.
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.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The Company elected to recognize the cumulative effect of approximately $11.3 million over a period of 20 years.
The incremental costs of approximately $1.1 million per year (pre-tax) relating to SFAS No. 106 are not included in Northwest Natural's rates. The staff of the OPUC has
recommended that Northwest Natural's portion of these costs allocated to Oregon (approximately 87 percent) 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. Northwest Natural is charging the Oregon portion of these costs to expense. The WUTC has approved deferred accounting treatment for the portion of these costs allocated to Washington (approximately five percent), pending final approval for recovery in a general rate case filing. Northwest Natural monitors its need for general rate cases covering these and other expenses but has no present plans to file a general rate case in Oregon or Washington.
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation for pre- Medicare eligibility is nine percent for 1995 and 1996; eight percent for 1997; then decreasing over the next seven years to 4.5 percent. The assumed rate for HMO plan and post-Medicare eligibility is eight percent for 1995 and 1996, then decreasing over the next seven years to 4.5 percent. A one-percentage-point change in the assumed health care cost trend rate for each year would adjust the accumulated postretirement benefit obligation as of December 31, 1994 and net postretirement health care cost by approximately 13.5 percent. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 8.5 percent at December 31, 1994 and 7.5 percent at December 31, 1993.
10. PROPERTY AND INVESTMENTS: ------------------------------
Financial Corporation has invested in four solar electric generation plants located near Barstow, California. Power generated by these stations 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 four 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.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS: -----------------------------------------
The estimated fair values of Northwest 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:
Fair value of preference stock and 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.
In connection with its Canadian gas purchase commitments, Northwest Natural uses foreign currency forward contracts to hedge against currency fluctuation. At December 31, 1994, these contracts totalled $13.6 million, with a market value of $13.4 million.
12. COMMITMENTS AND CONTINGENCIES: -----------------------------------
Lease Commitments -----------------
Future lease commitments are: $4.9 million in 1995; $4.2 million in 1996; $4.0 million in 1997; and $1.8 million in 1998 and 1999. Thereafter, total commitments amount to $10.2 million. These commitments principally relate to the lease of the Company's office headquarters and computer systems.
Total rental expense for 1994, 1993, and 1992 was $5.1 million, $5.2 million and $4.4 million, respectively.
Purchase Commitments --------------------
Northwest Natural has signed agreements providing for the availability of firm pipeline capacity. Under these agreements, Northwest Natural 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, Northwest Natural has entered into long-term agreements which release capacity. The aggregate amounts of these agreements were as follows at December 31, 1994:
Northwest Natural's total payments of fixed charges under capacity purchase agreements in 1994, 1993 and 1992 were $50.0 million, $46.7 million and $34.7 million, respectively. Included in the amounts for 1994 and 1993 were reductions for capacity release sales totalling $3.7 million and $1.7 million, respectively. In addition, Northwest Natural is required to pay per-unit charges based on the actual quantities shipped under the agreements. In certain of Northwest 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.
Northwest Natural has contracted with an external vendor for the development of a customer information system with remaining commitments of $0.8 million in 1995 and $3.8 million in 1996.
Environmental Matters ---------------------
In June 1992, the City of Salem, Oregon, requested Northwest Natural's participation in its review of an environmental assessment of riverfront property in Salem that is the proposed site for a park and other public developments. Within the property is a block previously owned by Northwest Natural which was the site of a former manufactured gas plant. Northwest Natural's corporate predecessor owned the plant for less than four months in 1929. The City has determined that there is environmental contamination on the site, and that a remediation process involving Northwest Natural and at least two other prior owners of the block will be required. To date Northwest Natural has not obtained sufficient information to determine the extent of its responsibility for any such remediation.
Northwest Natural owns property in Linnton, Oregon, that is the site of a former gas manufacturing plant that was closed in 1956. Although limited testing for environmental contamination has been undertaken by other parties on portions of the site, no comprehensive studies have been performed. Northwest Natural submitted a work plan for the site to the Oregon Department of Environmental Quality (ODEQ) in 1987, but further efforts were suspended at ODEQ's request while Northwest Natural and other parties participated in a joint hydrogeologic study of an area adjacent to the site. In September 1993, pursuant to ODEQ procedures, Northwest Natural submitted a notice of intent to participate in the ODEQ's Voluntary Cleanup Program and, in April 1994, the site was listed on ODEQ's Confirmed Release List and Inventory. It is anticipated that the site investigation will commence during 1995.
In September 1993, Northwest Natural recorded an expense of $0.5 million for the estimated costs of consultants' fees, ODEQ oversight cost reimbursements, and legal fees in connection with the voluntary investigation at the Linnton site. To date, Northwest Natural has not obtained sufficient information to determine whether any remediation will be required at this site or, if so, the extent of its responsibility for any such remediation. Northwest Natural expects that its costs of investigation and any remediation for which it may be responsible should be recoverable, in large part, from insurance or 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 or results of operations.
NORTHWEST NATURAL GAS COMPANY QUARTERLY FINANCIAL INFORMATION (UNAUDITED) -----------------------------------------------------------------
*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 does 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.
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 and Supplementary Schedules 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.
(3b.) Bylaws as amended effective February 24, 1995.
*(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, 1990 (incorporated herein by reference to Exhibit (4)(c) in File No. 33-40482); Supplemental Indenture No. 19 to the Mortgage and Deed of Trust (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).
*(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.
(10j.(4)) Firm Transportation Service Agreement, dated October 22, 1993, between Pacific Gas Transmission Company and the Company.
(10j.(5)) Letter Agreement, dated May 11, 1994, between Pacific Gas and Electric Company and the Company.
(10j.(6)) Service Agreement, dated January 20, 1995 between Nova Corporation and the Company.
(10j.(7)) Service Agreement, dated June 12, 1991, between Alberta Natural Gas Company Ltd. and the Company.
(10j.(8)) Service Agreement, dated November 9, 1994, applicable to firm transportation service under Rate Schedule FS-1 between Alberta Natural Gas Company Ltd. and the Company.
(11) Statement re computation of fully- diluted per share earnings.
(12) Statement re computation of ratios.
(23) Independent Auditors' Consent.
(27) Financial Data Schedule.
Executive Compensation Plans and Arrangements: ----------------------------------------------
*(10a.) Employment agreement, dated October 27, 1983, between the Company and an executive officer (incorporated herein by reference to Exhibit (10a.) to Form 10-K for 1989, File No. 0-994).
(10b.) Executive Supplemental Retirement Income Plan, 1995 Restatement.
(10c.) 1985 Stock Option Plan, as amended effective February 23, 1995.
*(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 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.
*(10f.) Directors Deferred Compensation Plan, 1988 Restatement, effective January 1, 1988 (incorporated herein by reference to Exhibit (10g.) to Form 10-K for 1987, File No. 0-994).
(10f.-1) Amendment No. 1 to Directors Deferred Compensation Plan.
*(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 July 1, 1991 (incorporated herein by reference to Exhibit (10i.) to Form 10-K for 1991, File No. 0-994).
*(10k.) Executive Annual Incentive Plan, effective March 1, 1990, as amended effective January 1, 1992 (incorporated herein by reference to Exhibit (10k.) to Form 10-K for 1991, 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.
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, 1994.
___________________________________
*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 23, 1995 By /s/ Robert L. Ridgley ------------------ ----------------------------- Robert L. Ridgley, 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 --------- ----- ----
/s/ Robert L. Ridgley Principal Executive ------------------------- Officer and Director March 23, 1995 Robert L. Ridgley President and Chief Executive Officer
/s/ Bruce R. DeBolt Principal Financial ------------------------- Officer March 23, 1995 Bruce R. DeBolt Senior Vice President, Finance, and Chief Financial Officer
/s/ D. James Wilson Principal Accounting ------------------------ Officer March 23, 1995 D. James Wilson Treasurer and Controller
/s/ Mary Arnstad Director ) ------------------------ ) Mary Arnstad ) ) /s/ Thomas E. Dewey, Jr. Director ) ------------------------ ) Thomas E. Dewey, Jr. ) ) Director ) ------------------------ ) Tod R. Hamachek ) ) /s/ Richard B. Keller Director ) ------------------------ ) Richard B. Keller ) ) /s/ Wayne D. Kuni Director ) ------------------------ ) Wayne D. Kuni ) ) /s/ Dwight A. Sangrey Director ) March 23, 1995 ------------------------ ) 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 ) ) Director ) ------------------------ ) William R. Wiley ) ) /s/ Carlton Woodard Director ) ------------------------ ) Carlton Woodard )
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX To Annual Report on Form 10-K For Fiscal Year Ended December 31, 1994
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 effective February 24, 1995 (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 July 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.)
* 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))
Letter Agreement, dated May 11, 1994, between Pacific Gas and Electric Company and the Company (10j.(5))
Service Agreement, dated January 20, 1995 between Nova Corporation and the Company (10j.(6))
Service Agreement, dated June 12, 1991, between Alberta Natural Gas Company Ltd. and the Company (10j.(7))
Service Agreement, dated November 9, 1994, applicable to firm transportation service under Rate Schedule FS-1 between Alberta Natural Gas Company Ltd. and the Company (10j.(8))
Statement re computation of fully-diluted per share earnings (11)
Statement re computation of ratios (12)
Independent Auditors' Consent (23)
Financial Data Schedule (27)
Executive Compensation Plans and Arrangements ---------------------------------------------
* Employment Agreement, dated October 27, 1983, between the Company and an executive officer (10a.)
Executive Supplemental Retirement Income Plan, 1995 Restatement (10b.)
1985 Stock Option Plan as amended effective February 23, 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)
* Directors Deferred Compensation Plan, 1988 Restatement, effective January 1, 1988 (10f.)
Amendment No. 1 to Directors Deferred Compensation Plan (10f.-1)
* 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 July 1, 1991 (10i.)
* Executive Annual Incentive Plan, effective March 1, 1990, as amended effective January 1, 1992 (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.)
-------------------------- * Incorporated by reference
ex-index


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Northwest Natural Gas Company's (Northwest Natural) consolidated wholly-owned subsidiaries consist of Oregon Natural Gas Development Corporation (Oregon Natural); NNG Energy Systems, Inc. (Energy Systems); NNG Financial Corporation (Financial Corporation); and Pacific Square Corporation (Pacific Square) (see "Subsidiary Operations" below and Note 2 to the Consolidated Financial Statements). Together, Northwest Natural and these subsidiaries are referred to herein as the "Company."
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, 1994.
Earnings and Dividends -----------------------
The Company earned $2.44 per share in 1994, compared to $2.61 per share in 1993 and $1.11 per share in 1992. The results for 1994 were affected by warmer weather which was partially offset by improved subsidiary results. Higher earnings in 1993 were due to cooler weather. The Company's earnings for 1992 were depressed by the effects of record-setting warm weather and a loss related to Agrico Cogeneration Corporation (Agrico), a subsidiary of Energy Systems.
The Company earned $2.08 per share from utility operations in 1994, compared to $2.72 per share and $1.41 per share in 1993 and 1992, respectively. Weather conditions in the Company's service territory in 1994 were seven percent warmer than normal and 10 percent warmer than in 1993. The Company estimates that the weather-related reduction in margin during 1994 was equivalent to about $0.51 per share compared to a similar period with normal weather, and $1.06 per share compared to actual conditions during 1993. These estimates are derived from the Company'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 weather conditions.
Subsidiary earnings for 1994 were equivalent to $0.36 per share, compared to losses equivalent to $0.11 per share and $0.30 per share in 1993 and 1992, respectively. Improved subsidiary performance in 1994 resulted primarily from a one-time gain from the sale of Pacific Square's investments, equivalent to $0.14 per share, and improved operating performance of Financial Corporation's investments in windpower electric generating projects in California equivalent to $0.12 per share in 1994, compared to a loss equivalent to $0.06 per share in 1993.
1994 was the 39th consecutive year in which the Company's dividends paid have increased. In 1994, dividends paid on common stock were $1.76 per share compared with $1.75 in 1993 and $1.72 in 1992.
Results of Operations ---------------------
Regulatory Matters ------------------
Northwest Natural provides utility gas service in Oregon and Washington, with Oregon representing approximately 95 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, by Northwest Natural's ability to remain price competitive in the large industrial market, and by the ability of management to control expenses.
In 1994, the Oregon Public Utility Commission (OPUC) approved new tariffs for recovery of Demand Side Management (DSM) programs to encourage energy conservation. Also, the OPUC approved a new service line and main extension policy which supports Northwest Natural's strategy of promoting profitable growth. Prospective customers are required by this policy to contribute the amount which exceeds a construction allowance based upon estimated annual margin revenue.
In 1994, Northwest Natural redesigned certain non- traditional industrial services to meet the changing demands of the industrial market. The result was OPUC and Washington Utilities and Transportation Commission (WUTC) approval for a new service to industrial customers combining natural gas from Northwest Natural's supply contracts with pipeline transmission capacity released from Northwest Natural's firm transportation contract with Northwest Pipeline Corporation (NPC). These new industrial services were made possible by the Federal Energy Regulatory Commission's (FERC) Order No. 636, which completed a restructuring of the interstate natural gas pipeline industry, and Northwest Natural's revision of its own gas procurement policies and practices.
Effective April 15, 1994, the OPUC approved rate decreases averaging 1.1 percent for Northwest Natural's residential, commercial and industrial rate schedules. The rate decreases pass through Northwest Natural's lower property tax expenses due to Oregon Ballot Measure 5, an initiative measure adopted in Oregon which reduced property tax expenses. Effective December 1, 1994, the OPUC and WUTC approved rate decreases averaging 5.6 percent and 7.0 percent, respectively. These rate decreases pass through reductions in gas costs and remove temporary adjustments to rates which were put into effect on December 1, 1993, for the amortization of prior gas cost savings. None of the above rate decreases has a material effect on net income.
Comparison of Gas Operations ----------------------------
The following table summarizes the composition of utility gas volumes and revenues for the three years ended December 31:
Residential and Commercial --------------------------
Typically, 75 percent or more of the Company's annual utility operating revenues are derived from gas sales to weather- sensitive residential and commercial customers. Accordingly, shifts in temperatures from one period to the next can significantly affect volumes of gas sold to these customers.
Normal weather conditions are based upon a 20 year average measured by degree days. Weather conditions were seven percent warmer than normal in 1994, three percent cooler than normal in 1993, and 16 percent warmer than normal in 1992. Weather was 10 percent warmer in 1994 compared to 1993, and 22 percent cooler in 1993 compared to 1992.
Higher rates in effect during most of the year and the addition of 19,200 customers, offset by the effects of warmer weather, combined to produce a one percent increase in revenues from residential and commercial customers in 1994 compared to 1993. Therm deliveries to these customers were six percent lower than in 1993. Cooler weather in 1993, combined with 19,400 customer additions and OPUC and WUTC approved rate increases, produced a 34 percent increase in residential and commercial revenues compared to 1992, on 27 percent higher therm deliveries.
Northwest Natural's residential and commercial customer growth has continued at a steady pace. In the last three years, over 55,000 of these customers have been added to the system, representing an average growth rate of 5.2 percent.
Industrial, Transportation and Other ------------------------------------
The combined net operating revenues (margin) from industrial firm and interruptible sales and transportation customers remained relatively stable at $44.0 million in 1994 compared to $44.4 million in 1993. Since other revenues are primarily regulatory adjustments to industrial sales amounts (see Note 1 to the Consolidated Financial Statements), they are treated in this discussion as a component of industrial revenue. Total volumes delivered to these customers were 26.6 million therms lower in 1994 than in 1993, while corresponding revenues and related adjustments from such deliveries were $6.3 million
higher. Contributing to the lower volumes was a 28 million therm reduction in transportation deliveries to the James River Corporation's paper mill in Camas, Washington, which placed a direct (bypass) connection to NPC's system into operation in October 1993. Northwest Natural does not expect a significant number of its other large customers to bypass its system in the foreseeable future, since these customers are served under tariffs which are designed to be competitive with the capital and operating costs of direct connections to NPC's system.
Although volumes decreased, Northwest Natural's revenues and related adjustments from industrial firm sales and industrial interruptible sales and transportation deliveries were 9 percent higher in 1994 compared to 1993, and 29 percent higher than in 1992. The revenue increase was primarily due to a higher level of industrial interruptible sales and a correspondingly lower level of transportation deliveries for these same periods. Since 1992, over half of Northwest Natural's transportation customers have switched to sales service. These customers, which have the option of purchasing gas directly from suppliers and shipping it on the systems of Northwest Natural and its pipeline suppliers for a fee, select the option which, from time to time, provides the lowest cost. The migration from transportation to sales tariffs by these customers reflects the fact that Northwest Natural's industrial sales tariffs were lower than the cost to these customers of purchasing and shipping their own gas. Since transportation charges typically are the same as the margin on an equivalent sale of gas, the increase in revenue attributable to the migration from transportation to sales tariffs was substantially offset by an increase in Northwest Natural's cost of gas.
Cost of Gas -----------
Northwest 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. The cost of gas sold during 1994 was 17 percent greater than in 1993. Total gas volumes delivered to sales customers in 1994 were equivalent to 1993. However, there was an 18 percent increase in the cost of gas per therm, which includes purchased gas costs, related tariff adjustments, and line loss. Increased gas costs resulted from higher commodity prices, as well as higher demand charges placed into effect in April 1993 by NPC, Northwest Natural's primary pipeline supplier, pursuant to FERC Order No. 636.
The cost of gas sold during 1993 was 36 percent greater than in 1992. The primary contributing factors were a 34 percent increase in total volumes sold and a 2 percent increase in the cost of gas per therm.
Subsidiary Operations ---------------------
Consolidated subsidiary earnings for 1994 were equivalent to $0.36 per share, compared to losses equivalent to $0.11 per share and $0.30 per share for the years 1993 and 1992, respectively. The improved subsidiary results for 1994 resulted primarily from three factors. First, Pacific Square sold its partnership interests in two office buildings, including the Company's headquarters building. The Company's gain on the sale was equivalent to $0.14 per share. As a result of the sale of these investments, Pacific Square no longer has any operating activities. Second, Financial Corporation's investments in windpower electric generating projects in California (see Note 10 to the Consolidated Financial Statements) benefitted from favorable wind conditions which improved net income. As a result, Financial Corporation's net income increased $2.2 million compared to 1993 and $1.7 million compared to 1992. Third, the Company realized a gain equivalent to $0.03 per share on the sale of Agrico's assets pursuant to its bankruptcy reorganization plan.
Results of operations for the individual subsidiaries for 1994 were net income of: $0.3 million for Energy Systems; $0.4 million for Oregon Natural; $1.8 million for Financial Corporation; and $2.2 million for Pacific Square.
The subsidiaries' results for 1993 reflect a fourth quarter write-down in the value of unproven gas and oil reserves equivalent to $0.11 per share and increased federal income tax expense equivalent to $0.05 per share (see "Depreciation, Depletion and Amortization" and "Income Taxes" below). The 1992 loss resulted primarily from charges equivalent to $0.24 per share related to Agrico (see Note 2 to the Consolidated Financial Statements).
The following discussion summarizes operating expenses, other income, interest charges, income taxes, and preferred and preference stock dividend requirements.
Operating Expenses ------------------
Operations and Maintenance --------------------------
Northwest Natural's operations and maintenance expenses were $0.5 million lower for 1994 compared to 1993, while subsidiary operations and maintenance expense increased $0.7 million. The reduction in utility operations and maintenance expense was primarily due to a $0.6 million decrease in accruals for estimated employee bonuses. Increased subsidiary operations and maintenance expense was primarily due to increased production expenses related to Oregon Natural's Canadian operations.
The Company's operations and maintenance expenses were $6.5 million, or 10 percent, higher in 1993 than in 1992. Northwest Natural's expenses constituted $6.2 million of this increase including a $3.1 million, or 10 percent, increase in payroll expenses; a $1.3 million increase in employee benefit costs, including an increase of $0.7 million resulting from the adoption of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions;" a $1.2 million increase in the allowance for uncollectible accounts primarily due to higher residential and commercial gas sales; and a $0.5 million accrual for estimated environmental investigation costs (see Note 12 to the Consolidated Financial Statements).
Taxes Other Than Income -----------------------
Northwest Natural's property taxes were $1.9 million lower in 1994 compared to 1993 but were $0.6 million higher in 1994 compared to 1992. The increasing trend in property taxes has resulted primarily from increased plant additions to serve new customers. Between these same years, property taxes fluctuated due to a non-recurring accrual of $0.9 million in 1993 related to a dispute with the OPUC over the amount of prior-year savings on property taxes, which must be refunded to Oregon customers, resulting from voter approval of Oregon Ballot Measure 5.
Partially offsetting the decline in property taxes in 1994 was an increase in franchise taxes based on higher utility
operating revenues. Franchise taxes increased $0.6 million in 1994 compared to 1993 and $1.8 million in 1993 compared to 1992.
Depreciation, Depletion and Amortization ----------------------------------------
Northwest Natural's depreciation expense increased $1.9 million, or six percent, in 1994 and $1.9 million, or seven percent, in 1993, primarily due to additional utility plant in service. A program for the removal of all of its underground gasoline tanks accounted for $0.4 million of the increased 1993 expense.
Subsidiary depreciation expense decreased $3.5 million in 1994 compared to 1993, and increased $4.7 million in 1993 compared to 1992. The 1993 increase resulted primarily from charges totalling $3.5 million from the write-downs of Oregon Natural's unproven gas and oil properties (see Note 2 to the Consolidated Financial Statements).
Other Income ------------
The increase in other income for 1994 compared to 1993 and 1992 resulted primarily from a $3.2 million pre-tax gain related to the sale of Pacific Square's investments and a $2.5 million increase due to improved operating results from Financial Corporation's investments.
Interest Charges ----------------
Interest charges remained stable in 1994 compared to 1993 on equivalent total debt balances. Higher short term rates in 1994 offset lower long term rates resulting from 1993 debt refinancings (see "Financing Activities" below).
Northwest Natural's interest expense for 1993 decreased $1.3 million compared to 1992. The decrease was a result of debt refinancings which reduced interest expense by $0.6 million; $11.5 million lower average outstanding commercial paper balances; and a decrease in average interest rates for utility commercial paper from 3.9 percent in 1992 to 3.3 percent in 1993.
Subsidiary interest expense for 1993 decreased $0.3 million compared to 1992 due to a decrease in interest expense under Financial Corporation's commercial paper program. Financial Corporation's average outstanding commercial paper balances decreased $4.4 million from 1992 to 1993. In addition, Financial Corporation's average interest rates for commercial paper decreased from 4.1 percent in 1992 to 3.3 percent in 1993.
Income Taxes ------------
The effective corporate income tax rates for 1994, 1993, and 1992 were 37 percent, 37 percent, and 31 percent, respectively, compared to the Company's statutory tax rates for these periods of 39 percent, 39 percent, and 38 percent, respectively. Effective January 1, 1993, the federal income tax rate for corporations increased from 34 to 35 percent. The cumulative effect of the tax rate increase was recorded in the third quarter of 1993 and resulted in additional income tax expense of $0.6 million, an increase in deferred tax liabilities of $3.0 million, and an increase in regulatory assets of $2.6 million.
Preferred and Preference Stock Dividend Requirements ----------------------------------------------------
Preferred and preference stock dividend requirements for 1994 were lower by $0.5 million, or 14 percent, compared to 1993, due to redemptions and refundings of preferred stock in 1993. The principal amount of preferred and preference stock outstanding was $1.5 million, or three percent, lower at December 31, 1994, than at December 31, 1993. Also, effective December 1, 1993, the Company cancelled the $8.75 Series of Preferred Stock in exchange for issuance of the $7.125 Series of Preferred Stock (see "Financing Activities" below).
Financial Condition -------------------
Capital Structure -----------------
Northwest Natural's capital expenditures are required for utility construction resulting from customer growth and system improvements. Northwest Natural finances these
expenditures from cash provided by operations, and 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 Northwest Natural's residential and commercial customers influences the Company's financing requirements. Short-term liquidity is 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 40 to 45 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, this target structure is managed by issuing new debt or equity depending upon market conditions. The Company also uses these sources to meet long-term debt and preferred stock redemption requirements (see Notes 3 and 5 to the Consolidated Financial Statements).
Cash Flows ----------
Operating Activities --------------------
Cash provided from operating activities was 91 percent higher in 1994 compared to 1993 primarily due to rate increases in late 1993 reflecting completion of amortizations of credit balances in regulatory accounts. Also contributing was the effect of weather conditions from year to year on accounts receivable, unbilled revenue, and accounts payable.
Northwest Natural has lease and purchase commitments related to its operating activities which are financed with cash flows from operations (see Note 12 to the Consolidated Financial Statements).
Investing Activities --------------------
Cash requirements for utility construction, primarily related to system improvements and customer growth, totalled $77.7 million, up $7.3 million, or 10 percent, from 1993. 1993 expenditures were up $9.7 million, or 16 percent, from 1992. The
1994 and 1993 increases include $8.5 million and $6.3 million, respectively, for the replacement of Northwest Natural's customer information system. The total cost of the new system, scheduled for completion in 1997, is estimated at $25 million.
Northwest Natural's construction expenditures are estimated at $76 million for 1995. Over the five year period 1995 through 1999, these expenditures are estimated at between $350 and $375 million. It is anticipated that approximately 60 percent of the funds required for these expenditures will be internally generated, and that the remainder will be funded through short-term borrowings which will be refinanced periodically through the sale of long-term debt and equity securities.
In 1994, subsidiary capital expenditures were primarily for Oregon Natural's Canadian gas exploration and production program. In 1993, Oregon Natural received $2.3 million from sales and exchanges of gas producing properties. Oregon Natural anticipates investing up to $10 million, in addition to internally generated cash, in its Canadian gas exploration and production program during the three years 1995 through 1997.
Investments shown on the Consolidated Balance Sheets under "Investments and Other" for 1992 included a $5.5 million restricted cash deposit with a commercial bank which related to Pacific Square. This deposit was reclassified as a current asset in 1993 due to the pending sale of Pacific Square's primary real estate investments. Upon the sale of Pacific Square's investments in 1994, $4.0 million was collected while the remaining $1.5 million was secured by a note receivable due no later than December 1, 1999.
Financing Activities --------------------
During 1994, Northwest Natural sold $20 million of its Medium-Term Notes, the proceeds of which were used to repay short term debt incurred to fund Northwest Natural's construction program.
During 1993 and 1992, Northwest Natural sold $100 million and $45 million, respectively, of its Medium-Term Notes. Of the proceeds from the 1993 sales, $82.6 million was used to redeem higher-cost long-term debt, and the remainder was used to
pay the cost of Northwest Natural's construction program and to reduce short-term borrowing incurred for such purpose. Of the proceeds from the 1992 sales, $30.2 million was used to redeem higher-cost long-term debt and $15 million was used to reduce short-term borrowing. As a result of these transactions, the average interest rate on long-term debt declined from 9.7 percent at December 31, 1991 to 8.3 percent at December 31, 1993.
In order to pay the cost of Northwest Natural's construction program, to refund higher-cost Preferred Stock, and to increase its equity ratios, Northwest Natural sold $25 million of Preference Stock and $28.5 million, or 990,000 shares, of Common Stock during the fourth quarter of 1992. In January 1993, approximately $9 million of the proceeds from the sale of Preference Stock was used to redeem all of the outstanding shares of Northwest Natural's $8.00 and $2.42 Series of Preferred Stock. In 1993, Northwest Natural also redeemed all of the outstanding shares of its $6.875 Series of Preferred Stock.
In 1993, Northwest Natural refinanced $15 million of its $8.75 Series of Preferred Stock with an equivalent amount of the $7.125 Series of Preferred Stock.
In the first quarter of 1995, Northwest Natural sold 1.15 million shares of its Common Stock. The net proceeds of $33.0 million received from the offering were added to the general funds of the Company and used for corporate purposes, primarily to fund, in part, Northwest Natural's construction program, and to repay short-term debt incurred for such purpose. The projected dilution of earnings per share resulting from this sale is estimated at five percent.
Ratios of Earnings to Fixed Charges -----------------------------------
For the years ended December 31, 1994, 1993, and 1992, the Company's ratios of earnings to fixed charges, computed by the Securities and Exchange Commission method, were 3.08, 3.22, and 1.81, respectively. Earnings consist of net income to which has been added taxes on income and fixed charges. Fixed charges consist of interest on all indebtedness, amortization of debt expense and discount or premium, and the estimated interest portion of rentals charged to income.
Environmental Matters ---------------------
In June 1992, the City of Salem, Oregon, requested Northwest Natural's participation in its review of an environmental assessment of riverfront property in Salem that is the proposed site for a park and other public developments. Within the property is a block previously owned by Northwest Natural which was the site of a former manufactured gas plant. Northwest Natural's corporate predecessor owned the plant for less than four months in 1929. The City has determined that there is environmental contamination on the site, and that a remediation process involving Northwest Natural and at least two other prior owners of the block will be required. To date Northwest Natural has not obtained sufficient information to determine the extent of its responsibility for any such remediation.
Northwest Natural owns property in Linnton, Oregon, that is the site of a former gas manufacturing plant that was closed in 1956. Although limited testing for environmental contamination has been undertaken by other parties on portions of the site, no comprehensive studies have been performed. Northwest Natural submitted a work plan for the site to the Oregon Department of Environmental Quality (ODEQ) in 1987, but further efforts were suspended at ODEQ's request while Northwest Natural and other parties participated in a joint hydrogeologic study of an area adjacent to the site. In September 1993, pursuant to ODEQ procedures, Northwest Natural submitted a notice of intent to participate in the ODEQ's Voluntary Cleanup Program and, in April 1994, the site was listed on ODEQ's Confirmed Release List and Inventory. It is anticipated that the site investigation will commence during 1995.
In September 1993, Northwest Natural recorded an expense of $0.5 million for the estimated costs of consultants' fees, ODEQ oversight cost reimbursements, and legal fees in connection with the voluntary investigation at the Linnton site. To date, Northwest Natural has not obtained sufficient information to determine whether any remediation will be required at this site or, if so, the extent of its responsibility for any such remediation. Northwest Natural expects that its costs of investigation and any remediation for which it may be responsible should be recoverable, in large part, from insurance or through future rates.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------- Page ---- 1. Management's Responsibility for Financial Statements . . . . . 36
2. Independent Auditors' Report . . . . . . . . . . . . . . . . . 37
3. Consolidated Financial Statements: Consolidated Statements of Income for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . 38
Consolidated Statements of Earnings Invested in the Business for the Years Ended December 31, 1994, 1993 and 1992 . . . . 39
Consolidated Balance Sheets, December 31, 1994 and 1993. . . . 40
Consolidated Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . 42
Consolidated Statements of Capitalization, December 31, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . . . 43
Notes to Consolidated Financial Statements . . . . . . . . . . 44
4. Quarterly Financial Information (unaudited). . . . . . . . . . 71
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 management 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 Deloitte & Touche LLP, 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/ Robert L. Ridgley ------------------------------- Robert L. Ridgley President and Chief Executive Officer
/s/ Bruce R. DeBolt ------------------------------- Bruce R. DeBolt Senior Vice President, Finance, and Chief Financial Officer
DELOITTE & TOUCHE LLP ----------------------------------------------------------------- 3900 US Bancorp Tower Telephone: (503) 222-1341 111 SW Fifth Avenue Facsimile: (503) 224-2172 Portland, Oregon 97204-3698
INDEPENDENT AUDITORS' REPORT ----------------------------
To the Board of Directors and Shareholders Northwest Natural Gas Company Portland, Oregon
We have audited the accompanying consolidated financial statements of Northwest Natural Gas Company and subsidiaries, listed in the accompanying table of contents to financial statements and financial statement schedules at Item 8. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules 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 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, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Notes 7 and 9 to the consolidated financial statements, the Company changed its method of accounting for income taxes and postretirement benefits in the year ended December 31, 1993.
DELOITTE & TOUCHE LLP
February 22, 1995
NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF INCOME (Thousands, Except Per Share Amounts)
Year Ended December 31 1994 1993 1992 ------------------------------------------------------------------------ NET OPERATING REVENUES: Operating revenues $368,261 $358,717 $274,366 Cost of sales 162,788 138,833 101,916 -------- -------- -------- Net operating revenues 205,473 219,884 172,450 -------- -------- -------- OPERATING EXPENSES: Operations and maintenance 70,881 70,723 64,249 Taxes other than income taxes 24,263 25,561 20,865 Depreciation, depletion and amortization 38,058 39,683 33,035 Loss on cogeneration facility - - 4,575 -------- -------- -------- Total operating expenses 133,202 135,967 122,724 -------- -------- -------- INCOME FROM OPERATIONS 72,271 83,917 49,726 -------- -------- -------- OTHER INCOME (EXPENSE) 8,582 933 (267) -------- -------- -------- INTEREST CHARGES: Interest on long-term debt 21,921 22,578 23,001 Other interest 2,473 1,906 3,223 Amortization of debt discount and expense 850 775 511 -------- -------- -------- Total interest charges 25,244 25,259 26,735
Allowance for funds used during construction (325) (152) (2) -------- -------- -------- Total interest charges-net 24,919 25,107 26,733 -------- -------- --------
INCOME BEFORE INCOME TAXES 55,934 59,743 22,726
INCOME TAXES 20,473 22,096 6,951 -------- -------- -------- NET INCOME 35,461 37,647 15,775 Preferred and preference stock dividend requirements 2,983 3,488 2,560 -------- -------- -------- EARNINGS APPLICABLE TO COMMON STOCK $ 32,478 $ 34,159 $ 13,215 ======== ======== ======== AVERAGE COMMON SHARES OUTSTANDING 13,295 13,074 11,909
EARNINGS PER SHARE OF COMMON STOCK $2.44 $2.61 $1.11 ===== ===== ===== DIVIDENDS PER SHARE OF COMMON STOCK $1.76 $1.75 $1.72 ==== ==== ==== ----------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS INVESTED IN THE BUSINESS (Thousands of Dollars)
1994 1993 1992 -------------------------------------------------------------------------
BALANCE AT BEGINNING OF YEAR $88,497 $77,690 $86,361
Net Income 35,461 37,647 15,775
Cash dividends: Preferred and preference stock (3,041) (3,401) (2,525) Common stock (23,365) (22,853) (20,406) Capital stock expense and other (277) (586) (1,515) ------- ------- ------- BALANCE AT END OF YEAR $97,275 $88,497 $77,690 ======= ======= =======
----------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (Thousands)
December 31 1994 1993 ------------------------------------------------------------------------ ASSETS:
PLANT AND PROPERTY IN SERVICE: Utility plant in service $908,238 $840,030 Less accumulated depreciation 279,112 255,282 -------- -------- Utility plant - net 629,126 584,748
Non-utility property 49,586 42,764 Less accumulated depreciation and depletion 24,456 20,646 -------- -------- Non-utility property - net 25,130 22,118 -------- -------- Total plant and property in service 654,256 606,866 -------- -------- INVESTMENTS AND OTHER: Investments 34,183 32,818 Long-term notes receivable 2,914 1,756 -------- -------- Total investments and other 37,097 34,574 -------- -------- CURRENT ASSETS: Cash and cash equivalents 8,068 4,198 Accounts receivable - customers 43,016 45,340 Allowance for uncollectible accounts (864) (1,368) Accrued unbilled revenue 20,320 25,890 Inventories of gas, materials and supplies 14,958 16,838 Prepayments and other current assets 10,041 16,412 -------- -------- Total current assets 95,539 107,310 -------- -------- REGULATORY TAX ASSETS 60,430 62,130 -------- -------- DEFERRED DEBITS AND OTHER 41,982 38,156 -------- -------- TOTAL ASSETS $889,304 $849,036 ======== ========
--------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (Thousands)
December 31 1994 1993 ------------------------------------------------------------------------ CAPITALIZATION AND LIABILITIES:
CAPITALIZATION (See Consolidated Statements of Capitalization): Common stock $ 42,492 $ 41,728 Premium on common stock 134,641 128,340 Earnings invested in the business 97,275 88,497 -------- -------- Total common stock equity 274,408 258,565
Preference stock 26,252 26,633 Redeemable preferred stock 15,950 17,041 Long-term debt 291,076 272,931 -------- -------- Total capitalization 607,686 575,170 -------- -------- CURRENT LIABILITIES: Notes payable 53,654 72,548 Accounts payable 48,517 44,318 Long-term debt due within one year 1,000 - Taxes accrued 6,584 6,757 Interest accrued 4,570 4,438 Other current and accrued liabilities 11,757 10,180 -------- -------- Total current liabilities 126,082 138,241 -------- -------- DEFERRED INVESTMENT TAX CREDITS 13,530 14,567 -------- -------- DEFERRED INCOME TAXES 112,433 104,300 -------- -------- REGULATORY BALANCING ACCOUNTS AND OTHER 29,573 16,758 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 12) - - -------- -------- TOTAL CAPITALIZATION AND LIABILITIES $889,304 $849,036 ======== ======== ------------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Thousands)
Year Ended December 31 1994 1993 1992 ------------------------------------------------------------------------ OPERATING ACTIVITIES: Net income $ 35,461 $ 37,647 $ 15,775 Adjustments to reconcile net income to net cash provided by (used for) operations: Depreciation, depletion and amortization 38,058 39,683 33,035 Loss on cogeneration facility - - 4,575 Deferred income taxes and investment tax credits 8,796 6,205 (1,115) Equity in (earnings)losses of investments (2,331) 302 1,506 Allowance for funds used during construction (325) (152) (2) Regulatory balancing accounts and other - net 8,989 (10,754) (10,776) ------- ------- ------- Cash from operations before working capital changes 88,648 72,931 42,998
Changes in operating assets and liabilities: Accounts receivable 1,820 (10,964) (5,821) Accrued unbilled revenue 5,570 (5,152) (2,603) Inventories of gas, materials and supplies 1,880 (1,041) 1,052 Accounts payable 4,199 4,036 (3,507) Accrued interest and taxes (41) (387) 881 Other current assets and liabilities 7,948 (1,899) 2,636 -------- -------- -------- CASH PROVIDED BY OPERATING ACTIVITIES 110,024 57,524 35,636 -------- -------- -------- INVESTING ACTIVITIES: Acquisition and construction of utility plant assets (77,668) (70,404) (60,709) Investment in non-utility plant (7,455) (955) (11,907) Investments and other (192) (40) (8,697) -------- -------- -------- CASH USED IN INVESTING ACTIVITIES (85,315) (71,399) (81,313) -------- -------- -------- FINANCING ACTIVITIES: Common stock issued 5,847 5,720 33,826 Preference stock issued - - 25,000 Preferred stock retired (1,091) (11,177) (930) Long-term debt: Issued 20,000 100,000 45,000 Retired (18) (82,606) (30,191) Change in short-term debt (18,894) 25,439 (41,510) Cash dividend payments: Preferred and preference stock (3,041) (3,401) (2,525) Common stock (23,365) (22,853) (20,406) Capital stock expense and other (277) (586) (1,515) -------- -------- -------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (20,839) 10,536 6,749 -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,870 (3,339) (38,928)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 4,198 7,537 46,465 -------- -------- -------- CASH AND CASH EQUIVALENTS - END OF YEAR $ 8,068 $ 4,198 $ 7,537 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 24,262 $ 26,838 $ 26,502 Income taxes $ 12,054 $ 11,103 $ 10,141
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Conversion to common stock: $2.375 Series of Convertible Preference Stock $381 $133 $103 7-1/4 percent Series of Convertible Debentures $837 $367 $131
----------------------------------------------------------------------- See Accompanying Notes to Consolidated Financial Statements.
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Thousands, Except Share Amounts)
December 31 1994 1993 -------------------------------------------------------------------- COMMON STOCK EQUITY: Common stock - par value $3-1/6 per share; authorized - 1994, 60,000,000 shares; 1993, 30,000,000 shares: outstanding - 1994, 13,418,685 shares; 1993, 13,177,256 shares $ 42,492 $ 41,728 Premium on common stock 134,641 128,340 Earnings invested in business 97,275 88,497 -------- -------- Total common stock equity 274,408 45% 258,565 45% -------- ---- -------- ---- PREFERENCE STOCK, authorized 2,000,000 shares: $2.375 Series, convertible, stated value $25 per share; outstanding - 1994, 50,079 shares; 1993, 65,323 shares 1,252 1,633 $6.95 Series, stated value $100 per share; outstanding - 1994, 250,000 shares; 1993, 250,000 shares 25,000 25,000 -------- -------- Total preference stock 26,252 4% 26,633 5% -------- ---- -------- ---- REDEEMABLE PREFERRED STOCK, authorized 1,500,000 shares, all outstanding series have a stated value of $100 per share: $4.68 Series, outstanding - 1994, 7,319 shares; 1993, 9,301 shares 732 930 $4.75 Series, outstanding - 1994, 9,685 shares; 1993, 11,105 shares 968 1,111 $7.125 Series, outstanding - 1994, 142,500 shares; 1993, 150,000 shares 14,250 15,000 -------- -------- Total redeemable preferred stock 15,950 3% 17,041 3% -------- ---- -------- ---- LONG-TERM DEBT: First Mortgage Bonds -------------------- 9-3/4% Series due 2015 50,000 50,000 9-1/8% Series due 2019 25,000 25,000 Medium-Term Notes ----------------- First Mortgage Bonds: 4.80% Series A due 1996 5,000 5,000 7.38% Series A due 1997 20,000 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 6.50% Series B due 2008 5,000 5,000 8.26% Series B due 2014 10,000 - 8.31% Series B due 2019 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 Unsecured: 4.90% Series A due 1996 10,000 10,000 8.69% Series A due 1996 5,000 5,000 7.40% Series A due 1997 5,000 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 12,076 12,931 -------- -------- 292,076 272,931 Less long-term debt due within one-year 1,000 - -------- -------- Total long-term debt 291,076 48% 272,931 47% -------- ---- -------- ---- TOTAL CAPITALIZATION $607,686 100% $575,170 100% ======= === ======= === ------------------------------------------------------------------- See Accompanying 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 (Northwest Natural)
Non-regulated wholly-owned businesses: --Oregon Natural Gas Development Corporation (Oregon Natural) --NNG Financial Corporation (Financial Corporation) --Pacific Square Corporation (Pacific Square) --NNG Energy Systems, Inc. (Energy Systems)
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 1994 presentation.
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.
Utility Plant -------------
Utility plant for Northwest Natural is stated at original cost (see table in Note 10). When a depreciable unit of property is retired, the cost is credited to utility plant and debited to the accumulated provision for depreciation together with the cost of removal, less any salvage. No gain or loss is recognized upon normal retirement.
Northwest 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 4.1 percent of average depreciable plant in 1994 and 1993, and 4.0 percent for 1992.
Allowance for Funds Used During Construction (AFUDC), a non- cash item, is calculated using actual commercial paper interest rates. If commercial paper balances are insufficient to finance the amount of work in progress, a composite of interest costs of debt, shown as a reduction to interest charges, and a return on equity funds, shown as other income, is used to compute AFUDC. This amount is added to utility plant which is a component of rate base. 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. The Company's weighted average AFUDC rates were 3.4 percent for 1994, 3.5 percent for 1993, and 4.5 percent for 1992.
Regulatory Balancing Accounts -----------------------------
Regulatory balancing accounts are established 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, Northwest Natural's utility customers.
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 ----------------
Northwest Natural accrues for gas deliveries not billed to customers from the meter reading dates to month end.
Inventories -----------
Northwest Natural's inventories of gas in storage and materials and supplies are stated at the lower of average cost or net realizable value.
Foreign Currency Fluctuation Hedges -----------------------------------
Northwest Natural uses foreign currency hedge transactions to reduce its exposure to currency fluctuations on firm Canadian gas purchase commitments by entering into foreign currency forward contracts with concurrent maturities. Northwest Natural does not engage in currency speculation. The forward contracts generally have terms ranging from one to 12 months. All contracts are specifically purchased for firm commitments and are physically delivered to satisfy those commitments. Changes in market values of foreign currency contracts are deferred and recognized as adjustments to gas purchase costs upon concurrent settlement of these contracts (see Note 11).
Income Taxes ------------
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," on January 1, 1993. SFAS No. 109, among other things, (i) requires the liability method be used in computing deferred taxes on all temporary differences between book and tax basis of assets and liabilities; (ii) requires that deferred tax liabilities and assets be adjusted for an enacted change in tax laws or rates; and (iii) prohibits net-of-tax accounting and reporting. Regulated enterprises are required to recognize such adjustments as regulatory assets or liabilities if it is probable that such amounts will be recovered from or returned to customers in future rates. As of December 31, 1994, the Company had regulatory assets of $60.4 million, an amount which is primarily derived from differences between the book and tax basis of the utility plant in service and the accumulated reserve for depreciation.
The Company provides deferred federal income tax for the timing differences between book depreciation and tax depreciation under the Accelerated Cost Recovery System (ACRS) for 1981 - 1985 property additions and Modified Accelerated Cost Recovery System (MACRS) for post-1985 property additions. Consistent with rate and accounting instructions of regulatory authorities, deferred income taxes are not currently collected for those income tax temporary differences where the prescribed regulatory accounting methods do not provide for current recovery in rates.
Investment tax credits on utility property additions which reduce income taxes payable are deferred for financial statement purposes and are amortized over the life of the related property. Investment and energy tax credits generated by non-regulated subsidiaries are amortized over a period of two to five years.
Earnings Per Share ------------------
Primary earnings per share are computed based on the weighted average number of common shares outstanding each year. Outstanding stock options are common stock equivalents but are excluded from primary earnings per share computations due to immateriality. The Company reports fully-diluted earnings per share when dilution is three percent or greater. This calculation reflects the potential effects of the conversion of the $2.375 Series of Convertible Preference Stock and the 7-1/4 percent Series of Convertible Debentures and the exercise of stock options.
2. CONSOLIDATED SUBSIDIARY OPERATIONS: ----------------------------------------
Oregon Natural Gas Development Corporation ------------------------------------------
Oregon Natural is a natural gas exploration and production subsidiary of the Company. Approximately $22.5 million of Oregon Natural's total assets of $40.7 million at year-end 1994 are invested in its wholly-owned subsidiary, Canor Energy Ltd., which manages and develops natural gas and oil properties in Canada.
Oregon Natural accounts for its exploration costs under the successful-efforts method. Costs to acquire and develop oil and gas properties are capitalized until the volume of proved gas reserves is determined. If there are inadequate gas reserves, the related deferred costs are expensed. Capitalized costs associated with properties under development were $4.4 million at December 31, 1994 and $1.4 million at December 31, 1993.
NNG Financial Corporation -------------------------
Financial Corporation provides short-term financing for Oregon Natural and Energy Systems and has several financial investments, including investments as a limited partner in
four solar electric generating systems, four windpower electric generating projects, a hydroelectric facility and a low-income housing project (see Note 10).
Pacific Square Corporation --------------------------
Pacific Square was a real estate management subsidiary of the Company. During 1994, Pacific Square sold its partnership interests in two commercial office buildings, including the Company's headquarters building. As a result of the sale of these investments, Pacific Square no longer has any operating activities.
NNG Energy Systems, Inc. ------------------------
Energy Systems was formed to design, construct, own and operate cogeneration facilities. Agrico Cogeneration Corporation (Agrico) is a wholly-owned subsidiary of Energy Systems. In December 1991, Agrico filed with the United States Bankruptcy Court for the Eastern District of California a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The U. S. Bankruptcy Court confirmed Agrico's reorganization plan in January 1994. The sale of Agrico's assets closed in February 1994. Based upon the estimated costs to the Company under related settlements, the estimated net proceeds to be received from the sale of Agrico's assets, and other elements of a Chapter 11 reorganization plan, the Company recorded a charge of $4.6 million in 1992, resulting in an after-tax charge of $2.8 million, equivalent to 24 cents per share.
3. CAPITAL STOCK: --------------------
Common Stock ------------
At December 31, 1994, Northwest Natural had reserved 87,864 shares of common stock for issuance under the Employee Stock Purchase Plan, 449,209 shares under its
Dividend Reinvestment and Stock Purchase Plan, 147,504 shares under its 1985 Stock Option Plan (see Note 4), 82,719 shares for future conversions of its convertible preference stock and 444,396 shares for future conversions of its 7-1/4 percent Convertible Debentures.
In the first quarter of 1995, Northwest Natural sold 1.15 million shares of its Common Stock. The net proceeds of $33.0 million will be used for corporate purposes, primarily to fund, in part, Northwest Natural's construction program, and to repay short-term debt incurred for such purpose. The projected dilution of earnings per share resulting from this sale is estimated at five percent.
Preference Stock ----------------
The $2.375 Series of Convertible Preference Stock is convertible into shares of common stock at a conversion rate of 1.6502 shares of common stock for each share of preference stock. Subject to certain restrictions, it is callable at stipulated prices, plus accrued dividends. 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 $1.1 million in 1995, 1996, 1997 and 1998 and $1.0 million in 1999. These requirements are noncumulative. At any time Northwest 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 redeemable preferred stock is callable at stipulated prices, plus accrued dividends. At December 31, 1994, redemption prices were $100 per share for the $4.68 and $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 Northwest Natural's capital stock and the premium on common stock for the years 1994, 1993 and 1992:
4. STOCK OPTION AND PURCHASE PLANS: -------------------------------------
Northwest Natural's 1985 Stock Option Plan (Plan) authorizes an aggregate of 300,000 shares of common stock for issuance as incentive or non-statutory stock options. These options may be granted only to officers and key employees of the Company designated by its Board of Directors.
All options granted are at an option price not less than 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 owned by them for at least one year, at the current market price, to purchase shares at the option price.
During 1985, 1990 and 1994, 150,000, 86,500 and 75,182 options were granted under the Plan at option prices of $17.625, $24.875 and $36.00, respectively. Since inception of the Plan, 20,182 options have expired.
Northwest Natural has an employee stock purchase plan whereby employees may purchase common stock at 92 percent of average bid and ask market price on the subscription date. The subscription date is set annually, and each employee may purchase up to 600 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. Northwest 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 for 33-1/2 shares of common stock for each $1,000 face value ($29.85 per share).
The sinking fund requirements and maturities for the five years ending December 31, 1999, on the long-term debt outstanding at December 31, 1994, amount to: $1.0 million in 1995; $21.0 million in 1996; $26.0 million in 1997; $16.0 million in 1998; and $11.0 million in 1999.
6. NOTES PAYABLE AND LINES OF CREDIT: ---------------------------------------
Northwest Natural has available through September 30, 1995, committed lines of credit totalling $80 million consisting of a primary fixed amount of $40 million plus an excess amount of up to $40 million available as needed, at Northwest Natural's option, on a monthly basis. Financial Corporation has available through September 30, 1995, committed lines of credit with two commercial banks totalling $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 Northwest Natural.
Under the terms of these lines of credit, Northwest 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 Northwest Natural or Financial Corporation lines of credit as of December 31, 1994 or December 31, 1993.
Northwest 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 Northwest Natural. The amounts
and average interest rates of commercial paper outstanding were as follows at December 31:
7. INCOME TAXES: -----------------
The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective January 1, 1993. The adoption of the new standard resulted in an increase in net deferred tax liabilities of $62.1 million to reflect deferred taxes on differences previously flowed-through and to adjust existing deferred taxes to the level required at the current statutory rate. An offsetting regulatory asset of $62.1 million was also recorded. This regulatory tax asset has decreased to $60.4 million at December 31, 1994. The regulatory asset is primarily based upon differences between the book and tax basis of utility plant in service and the accumulated provision for depreciation. It is expected that the regulatory asset will be recovered in future rates. The implementation of SFAS No. 109 did not significantly impact results of operations.
A reconciliation between income taxes calculated at the statutory federal tax rate and the tax provision reflected in the financial statements is as follows:
-------------------------------------------------------------------
8. EMPLOYEE RETIREMENT PLANS: -------------------------------
The Company has two non-contributory defined benefit retirement plans covering all regular, full-time 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. The Company's funding policy is to make the annual contribution required by applicable regulations and recommended by its actuary. Plan assets consist primarily of marketable securities, corporate obligations, U.S. government obligations, real estate and cash equivalents.
Effective January 1, 1995, the Company changed the assumed discount rate used in determining the funded status of the plans from 7.50 percent to 8.00 percent. The new discount rate was used in determining the funded status of the plans at year-end 1994 and will be used to determine annual pension cost in 1995.
The Company 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. Contributions to these plans in 1994, 1993 and 1992 were $0.7 million, $0.5 million and $0.3 million, respectively.
The Company 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 $1.0 million in 1994, $0.8 million in 1993 and $0.9 million in 1992.
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.
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The Company elected to recognize the cumulative effect of approximately $11.3 million over a period of 20 years.
The incremental costs of approximately $1.1 million per year (pre-tax) relating to SFAS No. 106 are not included in Northwest Natural's rates. The staff of the OPUC has
recommended that Northwest Natural's portion of these costs allocated to Oregon (approximately 87 percent) 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. Northwest Natural is charging the Oregon portion of these costs to expense. The WUTC has approved deferred accounting treatment for the portion of these costs allocated to Washington (approximately five percent), pending final approval for recovery in a general rate case filing. Northwest Natural monitors its need for general rate cases covering these and other expenses but has no present plans to file a general rate case in Oregon or Washington.
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation for pre- Medicare eligibility is nine percent for 1995 and 1996; eight percent for 1997; then decreasing over the next seven years to 4.5 percent. The assumed rate for HMO plan and post-Medicare eligibility is eight percent for 1995 and 1996, then decreasing over the next seven years to 4.5 percent. A one-percentage-point change in the assumed health care cost trend rate for each year would adjust the accumulated postretirement benefit obligation as of December 31, 1994 and net postretirement health care cost by approximately 13.5 percent. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 8.5 percent at December 31, 1994 and 7.5 percent at December 31, 1993.
10. PROPERTY AND INVESTMENTS: ------------------------------
Financial Corporation has invested in four solar electric generation plants located near Barstow, California. Power generated by these stations 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 four 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.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS: -----------------------------------------
The estimated fair values of Northwest 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:
Fair value of preference stock and 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.
In connection with its Canadian gas purchase commitments, Northwest Natural uses foreign currency forward contracts to hedge against currency fluctuation. At December 31, 1994, these contracts totalled $13.6 million, with a market value of $13.4 million.
12. COMMITMENTS AND CONTINGENCIES: -----------------------------------
Lease Commitments -----------------
Future lease commitments are: $4.9 million in 1995; $4.2 million in 1996; $4.0 million in 1997; and $1.8 million in 1998 and 1999. Thereafter, total commitments amount to $10.2 million. These commitments principally relate to the lease of the Company's office headquarters and computer systems.
Total rental expense for 1994, 1993, and 1992 was $5.1 million, $5.2 million and $4.4 million, respectively.
Purchase Commitments --------------------
Northwest Natural has signed agreements providing for the availability of firm pipeline capacity. Under these agreements, Northwest Natural 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, Northwest Natural has entered into long-term agreements which release capacity. The aggregate amounts of these agreements were as follows at December 31, 1994:
Northwest Natural's total payments of fixed charges under capacity purchase agreements in 1994, 1993 and 1992 were $50.0 million, $46.7 million and $34.7 million, respectively. Included in the amounts for 1994 and 1993 were reductions for capacity release sales totalling $3.7 million and $1.7 million, respectively. In addition, Northwest Natural is required to pay per-unit charges based on the actual quantities shipped under the agreements. In certain of Northwest 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.
Northwest Natural has contracted with an external vendor for the development of a customer information system with remaining commitments of $0.8 million in 1995 and $3.8 million in 1996.
Environmental Matters ---------------------
In June 1992, the City of Salem, Oregon, requested Northwest Natural's participation in its review of an environmental assessment of riverfront property in Salem that is the proposed site for a park and other public developments. Within the property is a block previously owned by Northwest Natural which was the site of a former manufactured gas plant. Northwest Natural's corporate predecessor owned the plant for less than four months in 1929. The City has determined that there is environmental contamination on the site, and that a remediation process involving Northwest Natural and at least two other prior owners of the block will be required. To date Northwest Natural has not obtained sufficient information to determine the extent of its responsibility for any such remediation.
Northwest Natural owns property in Linnton, Oregon, that is the site of a former gas manufacturing plant that was closed in 1956. Although limited testing for environmental contamination has been undertaken by other parties on portions of the site, no comprehensive studies have been performed. Northwest Natural submitted a work plan for the site to the Oregon Department of Environmental Quality (ODEQ) in 1987, but further efforts were suspended at ODEQ's request while Northwest Natural and other parties participated in a joint hydrogeologic study of an area adjacent to the site. In September 1993, pursuant to ODEQ procedures, Northwest Natural submitted a notice of intent to participate in the ODEQ's Voluntary Cleanup Program and, in April 1994, the site was listed on ODEQ's Confirmed Release List and Inventory. It is anticipated that the site investigation will commence during 1995.
In September 1993, Northwest Natural recorded an expense of $0.5 million for the estimated costs of consultants' fees, ODEQ oversight cost reimbursements, and legal fees in connection with the voluntary investigation at the Linnton site. To date, Northwest Natural has not obtained sufficient information to determine whether any remediation will be required at this site or, if so, the extent of its responsibility for any such remediation. Northwest Natural expects that its costs of investigation and any remediation for which it may be responsible should be recoverable, in large part, from insurance or 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 or results of operations.
NORTHWEST NATURAL GAS COMPANY QUARTERLY FINANCIAL INFORMATION (UNAUDITED) -----------------------------------------------------------------
*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 does 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.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
(Item 10.







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 and Supplementary Schedules 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.
(3b.) Bylaws as amended effective February 24, 1995.
*(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, 1990 (incorporated herein by reference to Exhibit (4)(c) in File No. 33-40482); Supplemental Indenture No. 19 to the Mortgage and Deed of Trust (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).
*(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.
(10j.(4)) Firm Transportation Service Agreement, dated October 22, 1993, between Pacific Gas Transmission Company and the Company.
(10j.(5)) Letter Agreement, dated May 11, 1994, between Pacific Gas and Electric Company and the Company.
(10j.(6)) Service Agreement, dated January 20, 1995 between Nova Corporation and the Company.
(10j.(7)) Service Agreement, dated June 12, 1991, between Alberta Natural Gas Company Ltd. and the Company.
(10j.(8)) Service Agreement, dated November 9, 1994, applicable to firm transportation service under Rate Schedule FS-1 between Alberta Natural Gas Company Ltd. and the Company.
(11) Statement re computation of fully- diluted per share earnings.
(12) Statement re computation of ratios.
(23) Independent Auditors' Consent.
(27) Financial Data Schedule.
Executive Compensation Plans and Arrangements: ----------------------------------------------
*(10a.) Employment agreement, dated October 27, 1983, between the Company and an executive officer (incorporated herein by reference to Exhibit (10a.) to Form 10-K for 1989, File No. 0-994).
(10b.) Executive Supplemental Retirement Income Plan, 1995 Restatement.
(10c.) 1985 Stock Option Plan, as amended effective February 23, 1995.
*(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 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.
*(10f.) Directors Deferred Compensation Plan, 1988 Restatement, effective January 1, 1988 (incorporated herein by reference to Exhibit (10g.) to Form 10-K for 1987, File No. 0-994).
(10f.-1) Amendment No. 1 to Directors Deferred Compensation Plan.
*(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 July 1, 1991 (incorporated herein by reference to Exhibit (10i.) to Form 10-K for 1991, File No. 0-994).
*(10k.) Executive Annual Incentive Plan, effective March 1, 1990, as amended effective January 1, 1992 (incorporated herein by reference to Exhibit (10k.) to Form 10-K for 1991, 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.
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, 1994.
___________________________________
*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 23, 1995 By /s/ Robert L. Ridgley ------------------ ----------------------------- Robert L. Ridgley, 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 --------- ----- ----
/s/ Robert L. Ridgley Principal Executive ------------------------- Officer and Director March 23, 1995 Robert L. Ridgley President and Chief Executive Officer
/s/ Bruce R. DeBolt Principal Financial ------------------------- Officer March 23, 1995 Bruce R. DeBolt Senior Vice President, Finance, and Chief Financial Officer
/s/ D. James Wilson Principal Accounting ------------------------ Officer March 23, 1995 D. James Wilson Treasurer and Controller
/s/ Mary Arnstad Director ) ------------------------ ) Mary Arnstad ) ) /s/ Thomas E. Dewey, Jr. Director ) ------------------------ ) Thomas E. Dewey, Jr. ) ) Director ) ------------------------ ) Tod R. Hamachek ) ) /s/ Richard B. Keller Director ) ------------------------ ) Richard B. Keller ) ) /s/ Wayne D. Kuni Director ) ------------------------ ) Wayne D. Kuni ) ) /s/ Dwight A. Sangrey Director ) March 23, 1995 ------------------------ ) 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 ) ) Director ) ------------------------ ) William R. Wiley ) ) /s/ Carlton Woodard Director ) ------------------------ ) Carlton Woodard )
NORTHWEST NATURAL GAS COMPANY
EXHIBIT INDEX To Annual Report on Form 10-K For Fiscal Year Ended December 31, 1994
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 effective February 24, 1995 (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 July 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.)
* 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))
Letter Agreement, dated May 11, 1994, between Pacific Gas and Electric Company and the Company (10j.(5))
Service Agreement, dated January 20, 1995 between Nova Corporation and the Company (10j.(6))
Service Agreement, dated June 12, 1991, between Alberta Natural Gas Company Ltd. and the Company (10j.(7))
Service Agreement, dated November 9, 1994, applicable to firm transportation service under Rate Schedule FS-1 between Alberta Natural Gas Company Ltd. and the Company (10j.(8))
Statement re computation of fully-diluted per share earnings (11)
Statement re computation of ratios (12)
Independent Auditors' Consent (23)
Financial Data Schedule (27)
Executive Compensation Plans and Arrangements ---------------------------------------------
* Employment Agreement, dated October 27, 1983, between the Company and an executive officer (10a.)
Executive Supplemental Retirement Income Plan, 1995 Restatement (10b.)
1985 Stock Option Plan as amended effective February 23, 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)
* Directors Deferred Compensation Plan, 1988 Restatement, effective January 1, 1988 (10f.)
Amendment No. 1 to Directors Deferred Compensation Plan (10f.-1)
* 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 July 1, 1991 (10i.)
* Executive Annual Incentive Plan, effective March 1, 1990, as amended effective January 1, 1992 (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.)
-------------------------- * Incorporated by reference
ex-index