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Executives

Bob Hess - Director-IR

Gregg Kantor - President & CEO

Steve Feltz - SVP & CFO

Analysts

Spencer Joyce – Hilliard Lyons

Northwest Natural Gas Company (NWN) Q3 2013 Earnings Conference Call November 7, 2013 11:00 AM ET

Operator

Good morning and welcome to the Northwest Natural Gas Third Quarter 2013 Teleconference. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Bob Hess. Please go ahead sir.

Bob Hess

Thank you, Dennis. And apologize for the late start. We had technical difficulties. Good morning everybody and welcome to our third quarter earnings call. As a reminder, some of the things that will be said this morning contain forward-looking statements. They are based on management’s assumptions, which may or may not come true, and you should refer to the language at the end of our news release for the appropriate cautionary statements and also our SEC filings for additional information. We do expect to file our 10-Q later today.

As previously mentioned, this teleconference is being recorded and will be available on our website following the call. Please note that these conference calls are designed for financial community. If you’re an individual investor and have questions, please contact me directly at 503-220-2388, media can contact Kim Heiting directly at 503-220-2366.

Speaking this morning are Gregg Kantor, President and Chief Executive Officer, and Steve Feltz, Senior Vice President and Chief Financial Officer. Gregg and Steve have some opening remarks and then will be available to answer your questions. As always joining us today are other members of our executive team, who can help answer your questions.

With that, let me turn you over to Gregg.

Gregg Kantor

Good morning, everyone. Thanks for joining us for our third quarter earnings call. I will start with a brief overview of the period. And then turn it over to Steve to cover the financial details before I wrap up with a look forward.

Our performance in the third quarter was on target. We continued to see positive gains from our gas reserves investment, the customer growth increased to just over 1.1%. The sub-tick in customer additions coincided with economic news that reflects continues really to reflect a slow but steady recovery.

In the quarter, Portland’s unemployment was down for the fifth consecutive month and down nearly 1% year-over-year with an outstanding at 7.3%. The region experienced a year-over-year employment gain of 28,700 jobs, its large since before the recession. In fact Portland’s labor market expanded by 2.8% in the past 12 months, well ahead of the U.S. average of 1.6%. All of these are really very positive signs that our local economy is moving in the right direction.

Turning to third quarter performance, we continued to see an increase in utility margin resulting from two changes coming out of last year’s rate case that were designed to smooth out the seasonality of our earnings, one relating to our decoupling adjustment and the other to an increase in our fixed monthly customer charge.

Beginning in November all the timing impact associated with those rate structure changes were completely flow through. So that going forward, we won’t see big differences in revenue from these items in our quarterly comparison.

Also in the period, we made progress on several regulatory items, last week, we received approval of our annual purchase gas adjustment, which included a 0.8% increase to Oregon residential rate and about a 1.5% increase to Washington residential rate. In Oregon, the PGA filing also included two left-over rate case items recently approved by the commission.

First, $39.5 million of working gas inventory is placed into rates with annual carrying cost of $4.5 million. Second, $19 million of construction costs for the Gasco water treatment station were placed into rates. As you will recall that station was constructed as part of a clean up of our manufactured gas plant operation that date back to late 1800. While those costs were placed into rates, they are still subject to a prudency review that we expect the Commission to complete early in 2014.

That leaves three open items left from last year’s rate case, one of which is the resolution of our environmental docket. As you know, last quarter we filed an all party settlement with the [indiscernible] Commission to address implementation issues around our environmental cost recovery mechanism. That settlement is still under review at the Commission and at this point we are waiting to hear back on whether the proposed settlement is approved or if the Commission believes adjustments will be made.

As we wait for that ruling, we continue to work through the process on the other two remaining rate case item, which are the recovery of carrying cost related to prepaid pension assets and incentive sharing percentages related to our interstate storage and asset optimization activities.

We now expect resolution to both of those dockets in the first half of 2014. Coming close before I turn it over to Steve with two quick updates, in September, we learned for the third time in six years we ranked first in the West and posted the highest score in Nation in the annual JD Power Gas Utility Residential Customer Satisfaction Survey. We worked hard to be an organization focused on continuous improvements and when you combine that with the ambitious metrics and a very talented work force positive things happen. But we also know there is no room for complacency, our goal is to keep improving in all areas of our operations and as we focused on providing the high quality service our customers want and deserve.

Finally, I’m pleased to report at the end of the quarter the Board approved a dividend increase making this the 58th consecutive year of increasing dividends paid.

With that let me turn it over to Steve for the financial details.

Steve Feltz

Thank you, Gregg and good morning everyone. Before I start, I would like to apologize that the sound of my voice is not consistent as I’m dealing with a seasonal cold and cough. Good news is we are getting into the cold season for gas utility that’s good news. But in terms of the call, I hope to make do my best to make sure it’s not too distracting.

As I report on results for the quarter, please remember that a significant portion of our business is seasonal and financial results are lower in the third quarter of the year due to the impact of warmer weather on customer’s natural gas heating.

For the third quarter of 2013, our net loss was $8 million or $0.31 per share, as compared to $11 million or $0.41 per share last year. The improvement was partly driven by higher utility margins from customer growth and our continuing investments in gas reserve. In addition, this year’s third quarter benefited from positive timing difference and a non-recurring income tax charge taken in the third quarter last year [indiscernible] from decisions in the 2012 rate case.

As Gregg mentioned, starting this month, November, the timing differences we have been reporting for the last three quarters will no longer have an impact on year-over-year results.

Turning now to a more complete discussion of our third quarter, the utility generated a net loss of $9.6 million in the quarter, down from $12.2 million last year. The improvement included margin increases of $4.7 million and an income tax benefit increases of $2.7 million related to the non-recurring charge. Partially offsetting these increases were higher O&M expenses and higher interest cost.

Regarding the margin increase, as discussed in previous quarters we saw favorable timing differences this quarter totaling $5.3 million or $0.12 per share. In addition, we saw $1.2 million or $0.03 per share margin increase from customer growth and gas reserve investment. These drivers accounted for most of the $6.8 million increase from residential and commercial customers.

With respect to industrial customers, volumes and margins were relatively flat year-over-year as a result of lower demand in the pulp and paper sector partly offset by an increase in industrial customers over the last year.

As to our gas storage segment net income in the quarter was relatively flat compared to last year with net income of $1.4 million.

Moving on to operating expenses, for the quarter, we reported total O&M expenses of $32.6 million which was $3.7 million than a year ago. The increase was mostly due to utility payroll cost and an increase in system maintenance and reliability cost which were largely covered in utility rate.

Turning now to year-to-date financial results. For the nine months ended September 30, net income was $32 million or $1.17 per share. This compared to net income of $31 million or $1.14 per share for 2012. The increase was largely driven by the same factors as reported for the quarter namely higher utility margins and non-recurring income tax charge offset by increases in utility O&M and interest expenses. We also realized lower gains this quarter – this year-to-date from our utilities gas cost incentive sharing mechanism which were down from $3.5 million last year to $200,000 this year.

Meanwhile, our gas storage segment increased earnings by $0.05 per share over the last year. In both the first nine months of 2013 and 2012, our utility contributed roughly $27 million to net income with positive impact in 2013 from customer growth, tracked in rate base investment for gas reserves and the non-recurring 2012 tax charge. These positives were offset by increases in O&M and depreciation expenses along with a decrease in net gains from gas cost incentive sharing.

On the year-to-date basis, total gas deliveries were down 2% from last year with sales to residential and commercial customers down 3%, on weather that was 5% warmer than a year ago and 2% warmer than average. Volume losses from weather were partially offset by the additional volume from customer growth.

As Gregg mentioned, our customer growth rate rose to 1.1% for the 12 months ended September 30 compared to 1% a year ago and an eight-tenth of 1% two years ago. Meanwhile year-to-date utility margins from residential and commercial customers were up $7.4 million primarily due to the same factors that drove the quarterly margin increase.

With respect to the industrial sector, gas deliveries decreased 1% and margins decreased $400,000. This generally reflected lower natural gas use in the pulp and paper sector previously mentioned offset in part by industrial customer growth.

Moving on to the gas storage segment, year-to-date net income was $4.5 million which was up from $3.2 million a year ago. The increase reflected higher revenues from third party asset management services and lower operating cost. Consolidated O&M expenses were $99.6 million year-to-date or 4% higher than a year ago. The increase was due to higher utility payroll costs plus system maintenance and reliability expenses partly offset by a decrease in bad debt expense.

Cash flow from operating activities for the first nine months of 2013 was $157 million down from $178 million for the same period last year. The decline primarily reflected changes in working capital balances mostly from accounts receivable which were aided last year by nearly $40 million in customer refund credit. This working capital decreases were somewhat offset by lower pension contributions in 2013.

As for cash used and investing activities, we spent $119 million so far this year which is down from $143 million for the same period last year mainly reflecting a decrease in capital expenditures related to a few facility project initiatives a year ago.

Finally, with respect to 2013 earnings guidance, today we are reconfirming our previous range of $2.02 to $2.22. Our guidance range assumes that the OPUC approves a proposed regulatory settlement on environmental cost prior to year-end and if approved as filed, we would expect to record a one-time net after tax charge of $3.4 million or $0.13 per share.

In addition, our earnings guidance range also assumes continued slow economic recovery and customer growth. Normal weather condition and no significant changes in prevailing legislative and regulatory policies were out [ph] there.

With that, I’ll turn the call back over to Gregg.

Gregg Kantor

Thanks Steve, amazingly you did not cough during any of that presentation.

Let me finish with a brief update on a few of our growth opportunities. As you know, we’ve been working on evaluating the viability of a Mist storage expansion project to support PGE’s gas fired plants at Port Westward. The concept for this expansion is to use Mist’s storage capacity to provide a flexible and reliable on-demand yield source for PGE’s gas fired generation that is being, that they are building to backup their wind resources.

Since our last call, we continued working through engineering details that would be used in an EPC contract bid. Once that work is complete, we will be reviewing those costs with PGE to determine whether to proceed with the project.

As I have mentioned before, the project would require the development of new storage wells, a compressor station and additional pipeline facility. While we’re cautiously optimistic about the expansion moving forward, there is a great deal of work left to do, we hope to know whether the project will proceed before the end of the second quarter of next year.

During our last conference call, I mentioned that we had filed a tariff with the Oregon Commission to provide high pressure gas service for CNG vehicle refueling. If approved that tariff would allow us to offer this service to fleet owners interested in the cost and environmental benefits of natural gas.

Last week, there was a public meeting at the Oregon Commission to discuss the tariff and it was decided that a hearing would be scheduled on the matter in the coming week. While a decision when the tariff is still pending, we were really pleased with the level of support that was voiced from local businesses and organizations at the public meeting. And I can also tell you that as the incoming American Gas Association Chair, I’m hearing from gas utility CEOs and many others from across the country about, a very high level of optimism and positive momentum for CNG vehicles.

Frankly, whether we are talking about the use of natural gas in homes and businesses, or in fleets and marine vessel, from a price and environmental perspective, our product has never been better positioned. Exciting to contemplate what might lay ahead given the opportunities for natural gas further a number of our nation’s economic and environmental comparatives.

With that, let me stop and open it up for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Spencer Joyce from Hilliard Lyons. Please go ahead.

Spencer Joyce – Hilliard Lyons

Good morning guys. Thanks for taking my call.

Gregg Kantor

Good morning, Spencer.

Spencer Joyce – Hilliard Lyons

Just one quick question for you, on the charge that we had in Q3 last year, was that $2.7 million after tax and I’m showing that to be about $0.11, are both of those right, so if we think about this year, we would see or that $0.30 would be about a good comp there, is that right?

Gregg Kantor

Well, first of, yes. The 2.7 million wasn’t after tax. It was a tax write-down. So it was potentially before an after tax but it was an after tax impact and it was $0.10 per share.

Spencer Joyce – Hilliard Lyons

Okay. Great. Bob, I’ll probably give you a call here later but that’s all I have right off the bed. Thanks.

Bob Hess

All right. Thanks Spencer.

Operator

(Operator Instructions) We show no further questions at this time. So I would like to turn the conference back over to management for any closing remarks.

Gregg Kantor

Well, I know this is a busy day for calls and ETI meetings and everything else. So if you do come up with some questions, feel free to give us a call, connect with Bob. Beyond that thank you, again, for tuning in today and we look forward to further conversation.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.

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