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Executives

Bob Hess - Director of Investor Relations

Mark Dodson - Chief Executive Officer

David Anderson - Chief Financial Officer

Gregg Kantor - President and Chief Operating Officer

Analysts

Dan Fidell - Brean Murray, Carret

James Lykins - Hilliard Lyons

William Saul - Janney Montgomery Scott

Elvira Scotto - Banc of America

Joanne Fairechio - Janney Montgomery Scott

Winfried Fruehauf - Fruehauf consulting

Northwest Natural Gas Co. (NWN) Q4 2007 Earnings Call February 14, 2008 11:00 AM ET

Operator

Hello, and welcome to the Northwest Natural Gas Company full year and fourth quarter earnings teleconference. (Operator Instructions) Now I would like to turn the conference over to Bob Hess, Director of Investor Relations. Mr. Hess, you may now begin.

Bob Hess

Thank you Amy. Good morning and welcome to the 2007 full year and fourth quarter earnings teleconference call for Northwest Natural Gas Company. As a reminder, some of the things that will be said this morning contain forward-looking statements. They're based on management's assumptions, which may or may not come true, and you should refer to the language at the end of our press release for the appropriate cautionary statements and also our SEC filings for additional information. As a reminder, we expect to file our 10-K as scheduled by the end of the month. This teleconference is being recorded and will be available on our website following the call.

Speaking this morning are Mark Dodson, Chief Executive Officer of Northwest Natural, and David Anderson, our Senior Vice President, and Chief Financial Officer. Mark and David have some opening remarks and then will be available to answer your questions. Also joining us today are Gregg Kantor, President and Chief Operating Officer of Northwest Natural as well as other members of our executive team.

With that, let me turn you over to Mark.

Mark Dodson

Thank you, Bob. Good morning everyone, welcome, thank you for joining us for our 2007 year-end review. Before I turn it over to David to discuss last year's financial details, I'd like to spend a few minutes talking about our 2007 accomplishments. There are many, thanks to the focus and dedication of our officer team and employees. From the completion of our restructuring effort to our JD Power customer satisfaction ranking, to our financial performance, 2007 was a remarkable year.

After months of planning we moved ahead with the redesign of our operating model that we discussed with you before. By mid-year we had centralized our reporting structure, outsourced more of our routine construction work and completed a number of process improvement initiatives.

As a result of the changes we made, we were able to reduce our employee count by more than 10% and keep our core O&M costs below our customer growth rate. While difficult at times, I'm proud to say that we made virtually all of these reductions through attrition and voluntary separations.

By the fall of 2007 we were providing customers more efficient and responsive service at a lower cost. In addition, falling wholesale gas prices and a successful storage and commodity hedging strategy allowed us to lower our customers' rates by an average of 8% in Oregon, and nearly 10% in Washington. This is good news for our customers and for our company.

On the growth front, while there was a noticeable slowing in the new construction segment, we continued to outpace the national average for adding new customers. Once again, our gas storage business successfully expanded its storage capacity by 1.8 billion cubic feet which contributed to our continued strong financial results.

Another notable contribution to 2007 earnings came from the implementation of tax legislation in Oregon. Due to Senate Bill 408, Northwest Natural recorded an additional $6 million in revenues. This was because we paid more in income taxes than we collected through customer rates over the past two years.

Last year also included strong results from gas sharing mechanisms in Oregon. Results were so strong in the first quarter that we elected to reinvest approximately $5 million of these gains in a number of projects. Those projects were designed to accelerate safety and reliability investments planned for our gas distribution system in future years. I believe this was not only a good move for our customers but also benefits our shareholders over the long term.

We also reached an important regulatory milestone by renewing our Oregon weather normalization and decoupling tariffs through 2012. These rate mechanisms have meant improved conservation programs for our customers and more stable revenues for our investors.

All in all we are very proud of our 2007 business results, but we're even prouder of the response we've received from our customers. The 2007 JD customer satisfaction study ranked us number one in the Western Region and second nationally among 58 participating utilities. We were the highest ranking publicly traded gas company. For us, there is no better punctuation to an exceptional year than being recognized by our customers for providing great service.

I'll return in a while to say more about the progress of our new business development initiatives and discuss the year ahead. But now I'd like to turn it over to David Anderson for fourth quarter and year-end results. David.

David Anderson

Thanks Mark and good morning everybody. I will review our financial results for 2007, what we felt was an exceptional year, as well as results for the fourth quarter. However, I will focus most of my comments today on the full year results. I will then discuss our newly released 2008 earnings guidance.

Turning first to our full year results, net income was a record $75 million or $2.76 per share compared to $63 million or $2.29 per share last year. That's a 17% increase in net income and a 21% increase in earnings per share. Utility operations, our largest segment, earned $65 million. That compares to $57 million of net income last year. We also earned around $9 million from our gas storage activities, compared to $6 million net income in the previous year. Other non-utility activities resulted in net income of about $800,000 for both periods.

Total gas sales and transportation deliveries for 2007, excluding gas delivered for others, were 2% higher at 1.21 billion therms due to customer growth and weather that was 7% colder than last year and 3% colder than average. Customer growth continued at a rate above the national average at 2.4% for the trailing 12 month period. We now serve more than 652,000 customers.

Gas sales to residential and commercial customers in the period were 649 million therms. That's 4% higher than in 2006. Our residential and commercial sales, excluding weather normalization and conservation adjustments contributed approximately $300 million to margin. That's up 4% from 2006 levels and that's due mainly to customer growth.

The company's weather and decoupling mechanisms resulted in a net reduction to margin of around $2 million in 2007. This compares to a reduction to margin of around $300,000 from these mechanisms in 2006. The increase is mainly due to colder weather in 2007. In addition, increased gas cost savings contributed $12.1 million, compared to $8.1 million last year, and a regulatory adjustment related to income taxes paid added $6 million to our 2007 results.

Gas deliveries to industrial sales and transportation customers were 566 million therms. That's down 1% from last year, and margin was down 3% in this segment. As we've discussed, a major driver of earnings for the year was gas cost savings from the company's commodity cost sharing mechanism. Customers also benefit from these savings. For the year, $31 million of lower gas costs were deferred for later credit to customers. The company's share of these savings was $12.1 million as I just mentioned. That's equivalent to $0.27 per share of earnings. In Washington, where we have about 10% of our customers, all gas costs are passed through to customers.

In addition, based on the final rules related to Oregon's regulatory adjustments for income taxes paid, better known as Senate Bill 408, we estimate we will begin recovering $1.7 million from customers starting in June of this year, because more taxes were paid than collected in rates for the 2006 tax year. We also estimate a surcharge for the 2007 tax year of around $4.3 million. The combined pre-tax total of $6 million was recorded in the third and fourth quarters of this year as gross operating revenues. The after-tax impact is approximately $0.13 per share.

Operations and maintenance expense increased 5% for the year compared to a 1% increase in 2006. The increase in expenses resulted from higher employee compensation and benefit cost, plus cost for certain strategic initiatives that were accelerated into 2007, based on strong first quarter results.

As Mark mentioned, we were able to reinvest approximately $5 million in our system, with most of these expenditures occurring in the third and fourth quarters. Absent this incremental spend, core O&M would have increased around one percent. Also of note, bad debt expense remained well below 1% of revenues billed at 0.3% for the 12 months ended December 2007.

Earnings for the fourth quarter were around $30 million, or $1.11 per share. This compares to around $30 million or $1.09 per share in the same quarter last year. That represents around a 2% increase in earnings per share for the quarter. Cash provided by operations at December 31, was a record $184 million. That compares to $149 million in 2006, a 23% increase. The higher cash flows reflect improved operating results and deferred gas cost savings.

Cash requirements for investing activities at December 2007 totaled $117 million for the period. This compares to $91 million last year. The increase mainly reflects expenditures related to planned investment in our Mist gas storage facilities as well as initial costs for potential storage and pipeline investments.

Northwest Natural also repurchased around 963,000 shares of its common stock over the year at a cost of approximately $44 million. As of December 31, 2007, the company had 26.4 million shares outstanding compared to 27.3 million shares outstanding at December 31, 2006, an approximate 3% decrease. Our overall financial condition at year-end remains strong with a capital structure made up of 47% common equity, 41% long-term debt and about 12% short-term debt.

As you can tell, 2007 was an exceptional year in many respects including record net income and cash flows and being cash flow positive for a second consecutive year. Our results reflect actions we have taken to ensure our financial condition remains strong in 2008 and beyond.

We started out the year with EPS guidance of $2.30 to $2.45 per share which was about a 7-8% higher level than the previous years' guidance levels. As we discussed here today, our core operational results for the year easily met this initial guidance. But there were two additional items that occurred during the year that warrant further discussion. One, was that we experienced higher than normal commodity cost sharing benefits of $0.27 per share.

As you know, and as we repeat many times, we do not include in guidance any gains or losses from the commodity cost sharing mechanism because it is difficult for us to predict the outcome with a high level of accuracy. I should note that this level of gains, which equates to the highest in the mechanism's history, is very unusual. Almost all factors that could go right last year did. Most of the gains occurred in the first quarter which required us to raise guidance $0.20 per share to $2.50-$2.65. We will continue to work with the Oregon PUC and address the mechanics of this mechanism and to ensure our internal practices continue to manage possible exposure in the coming years.

Last year also benefited from the implementation of Senate Bill 408 here in Oregon, which added $0.13 per share. It was unclear at the beginning of last year as to the ultimate outcome of the legislation on our financial results. As the year progressed and the PUC workshops worked through calculations and implementation issues, it became clear that our 2007 results would benefit when final rules were implemented in September. As a result, we raised guidance last year in the third quarter by a further $0.20 per share to $2.70-$2.85 to reflect the effect of this legislation on the year's results, plus additional gas cost benefits.

Needless to say, last year was an amazing year from numerous viewpoints, especially from a financial perspective. Earnings were up 21%, we produced record cash flows and guidance was raised twice during the year, equating to $0.40 per share, and the list goes on. I am very proud of this team and the results that we posted in 2007.

Now, to establishing full year 2008 guidance. As we note in the press release, and as we mentioned a couple of times here today, the company's earnings guidance assumes normal weather, ongoing benefits from improvements to our cost structure and no significant changes in prevailing regulatory policies. This guidance also does not forecast gains or losses that may occur from the company's commodity cost sharing mechanism.

Today, we are initiating full year earnings per share guidance to be in the range of $2.48 per share to $2.63 per share, which is a 7.5% increase over last year's initial guidance range. Last year's guidance is a fair representation of where earnings, excluding the unusual items we just discussed, would have been. We are estimating a small benefit from Senate Bill 408 for the 2008 tax year in this guidance. This guidance is consistent with our long-term goal of earnings per share growth of 5% of more and to maintain a dividend payout of approximately 60-70% of earnings.

With that, here's Mark to wrap things up.

Mark Dodson

Thanks David. Well, as you've heard, 2007 was a truly great year for our company and our customers. I'm very proud of all we've accomplished in our core utility operations and the continued growth of our interstate storage business. Today we are a more efficient and agile company than ever before. In November I told you about two exciting infrastructure projects we're working on. Both would put Northwest Natural in an excellent position to help the Western US meet its growing demand for natural gas.

Last year we announced the formation of the Palomar pipeline project, a joint venture with TransCanada. Palomar will give Northwest Natural an additional direct connection to the interstate pipeline system, diversifying our delivery options and reinforcing supply reliability for our Oregon customers. Palomar could also potentially serve a liquefied natural gas import terminal if one is built on the Columbia River.

In 2008, Palomar will focus on permit approvals, we expect the regulatory process to be long and rigorous, but we have confidence in the combined expertise of TransCanada and Northwest Natural. Throughout the year we’ll keep you informed as we pass various project milestones.

As we have read recently, we also have good news about the Gill Ranch storage project we plan to develop in California with Pacific Gas and Electric. At the end of 2007 we held an open season inviting potential customers to let us know of their interest in the project, and they seem to be as enthusiastic as we are. The interest we received was much greater than the project's capacity, reaffirming our belief that California needs more gas storage.

Given the strong response, we announced on January 22 of this year that we will proceed with the permitting and design of Gill Ranch. We expect to start construction of the facility late in 2009, and begin operating in mid-2010.

This year will also be an important one on the regulatory front. We are considering filing a Washington Rate Case which will update our revenue requirement and propose a decoupling mechanism. We will keep you updated on our plans to file.

In addition, there is an ongoing proceeding here in Oregon, to review the gas cost sharing mechanism for utilities across the state. Our current gas cost sharing mechanism was developed more than a decade ago, during a time when gas prices were much more stable. Given the volatility we face today, updating the mechanism could create a more appropriate risk-reward balance for customers and shareholders that makes sense for all of us. We expect the proceeding to be completed later in 2008.

As we finish a very successful year, we’re looking ahead not only to 2008, but through years beyond. In the short term we’re moving forward with process improvements that will continue to strengthen our core business. In the long term, we’re looking at the effect that climate change could have on the gas industry. To anticipate, and respond to the impacts on our business we will continue to be active participants of policy discussions. As chair of the American Gas Association’s climate change task force, I’ll continue to work with other utilities to help articulate the important role natural gas must play in the future carbon legislation.

I am also pleased to announce that our President and Chief Operating Officer, Gregg Kantor, was recently appointed by Oregon governor Ted Kulongoski to serve on his new global warming commission as one of 11 members. While there may be questions about what climate change will mean for the future energy picture, we believe there will be greater demand for natural gas. We’re analyzing changes in the nation’s supply scenario to make sure we are ready for the challenges and opportunities they pose for our customers and for our business.

Clearly 2008 is shaping up to be an exciting year that brings new opportunities as well as new challenges. That said, we face the future with clarity and purpose. Our financial position is strong and will remain strong thanks to our new operating model. We have a long record of success with gas storage businesses and we have excellent gas infrastructure projects in development, projects that fit our core confidences.

Given all of this we feel confident about our ability to continue to grow our company in 2008, and the years ahead. Thank you for joining us this morning and for your interest in Northwest Natural. I’ll be happy to answer any questions at this time.

Question-and-Answer Session

Operator

(Operator instructions)

Mark Dodson

While people are lining up for questions let me just make one additional comment on the announcement we made last month to continue funding our storage project in California, Gill Ranch. As we said in the announcement, we decided to fund this in light of the positive response to our open season, and while I can’t comment too much on the specifics of any one bid, let me just say that in addition to the sheer demand for capacity, which pleased us but didn’t surprise us, there were two other factors that I found gratifying.

First of all we had a wide variety of participants, and we had the full spectrum of participants, and second the request for contracts of long duration from quality credit participants was very gratifying. The number of requests for long term contracts was closer to our risk profile and just confirmed that this was the right project for us to be involved in.

I think we’re ready for questions if you are.

Operator

Your first question comes from Dan Fidell of Brean Murray.

Dan Fidell - Brean Murray, Carret

Good morning.

Mark Dodson

Good morning Dan, nice to have you on the call.

Dan Fidell - Brean Murray, Carret

Thank you, it’s nice to be on the call. Congratulations on a nice quarter and good finish to the year. I have a number of questions. I guess first, can you maybe give us some general timeline in terms of Palomar, when you think you might file a draft Environmental Impact Statement with the FERC?

Mark Dodson

Let me just tell you that the key dates for Palomar will be the FERC application probably in the second quarter of 2008, followed by approvals obtained by, let’s say the third quarter 2009, construction sometime 2010, ‘11. We could be in service as early as the end of 2011, that’s pretty much an overall view. We do have a website, www.palomargas.com, and we can keep you posted on those milestones on that website.

Dan Fidell - Brean Murray, Carret

Okay great. Can you give us a little bit more color in terms of how you think potentially if these projects go through with both the Palomar and Gill Ranch, do you think on the capital budget side, are we looking for 2009 and 2010 general increase level of CapEx based on what you’ve published around 150 million in incremental capital spending for those years?

David Anderson

Dan, this is David, the overall from a capital expenditure point of view, the overall utility is usually going to be in the $90 to $100 million range per year, but on the two projects that you’re talking about in the 2008 period they’re fairly low levels. The California storage is probably going to be around 10 million and then Palomar around 15 million for that year. The California storage will ramp up as we move forward in the 2009 period, and you’ll see the bulk of that 150 million spend in ’09 and ‘10. So there’s a little bit of capital expenditure from this year, Palomar depending on the timing and what Mark just walked through, even though there’s some capital expenditures in each one of the coming years, the bulk of those expenditures will occur closer to the implementation date when you actually start turning dirt and putting seal in the ground.

Dan Fidell -Brean Murray, Carret

Okay, but just generally speaking in terms of the pricing, we should be figuring an incremental, roughly 150 million sometime between 2009 and 2011 for each of those projects.

Mark Dodson

Yeah, I think that’s fair, yes I would agree with that.

Dan Fidell -Brean Murray, Carret

Okay, another question or two and I’ll let some other people ask some questions. On share repurchase activities, you bought back about 963,000 shares in ’07. Can you tell us specifically how much you bought back in Q4 and how much you have left under your current authorization?

Bob Hess

Steve, do you have the exact amounts on where we are on the authorization?

Mark Dodson

We have I believe roughly $20 million left - authorization. In terms of how much we bought in the fourth quarter I’d have to…

Steve Feltz

We have to look that up Dan, what we do with the board is on a yearly basis we look at the authorization for the stock buy backs and we believe there’s around 20 million left on the current authorization that usually comes up in the first half of the year with the board and we’ll discuss that with them again. In terms of ’08 buy backs and things like that, right now we’re going to watch the market carefully, but with the large capital projects in front of us we’re not buying back at the current point, at the current time if you will.

Mark Dodson

Dan that was Steve Feltz, our treasurer, were you able to hear him?

Dan Fidell -Brean Murray, Carret

Yes I was. Thanks Steve. Last question, just on O&M, you’d mentioned in the release that O&M actually would have decreased in the fourth quarter if not for some accelerated maintenance spending and other kinds of things you were doing in the fourth quarter. Can you just give us some guidance into ’08 directionally, where you think the O&M line is headed?

David Anderson

Yeah, that’s a good question Dan, and I appreciate that. As you know our long term goal is kind of to have our O&M costs grow at a rate that’s slower than customer growth, so I would anticipate for the coming year, if all things work as planned, our O&M growth rate would probably be in the 1-2%, all things being equal. And again I need to make sure you understand this year had the $5 million of incremental spend, so I’m talking on a core growth rate.

Dan Fidell -Brean Murray, Carret

Right, terrific, thanks very much for your comments.

Bob Hess

Thank you Dan. I’ll give you those numbers now for the fourth quarter. We purchased 290,000 shares for about $10 million, and we have $17 million left of the authorization. We usually renew the authorization in May of each year for another year.

Dan Fidell -Brean Murray, Carret

Great, thank you.

Operator

Our next question comes from Jim Lykins at Hilliard Lyons.

James Lykins - Hilliard Lyons

Good morning everyone.

Mark Dodson

Good morning Jim.

James Lykins - Hilliard Lyons

Congratulations on a great year.

Mark Dodson

Thank you.

James Lykins - Hilliard Lyons

A couple of questions on Senate bills for ’08. First of all, I was wondering if that is going to be just an ’07 and ’08 event or if there could be an impact in '09 as well?

David Anderson

Jim, this is David. The Senate Bill 408, it's a little bit complicated but it really comes down to where your expenses were and your earnings level are compared to where your last rate case was. And what we're forecasting now for 2008 is to be very similar to the levels that we were in the 2006 period. Of course I'm excluding any [Waka] gains or losses in this analysis. So, I would anticipate, barring some kind of expense issues that I’m not aware of at this time that we should stay in a surcharge on a fairly minimal level for the coming years.

James Lykins - Hilliard Lyons

Okay, and you said there’s going to be small benefits in '08 and I’m assuming your not going to give us a number or range, but I’m just wondering if you would characterize the $0.13 in '07 as a small benefit or not?

David Anderson

No. That is not a small benefit. I think if you look at the '06 tax year that we’ve disclosed in our 10-K, it’s about $1.6 or $1.7 million pre-tax. And I think that’s a good proxy for every year, at least the 2008 period without [Waka] gains. And so I think between $1-2 million. The (Waka] gains have a dramatic effect on that Senate Bill 408. So last year, when we had such large gains, what it equates to is about $0.85 of every dollar of positive benefit of [Waka] goes to the bottom line because it's in the Bill 408. So you so you can see how that can magnify what I would call a minimal effect from 408 where last year was not a minimal effect. It was a very substantial effect.

James Lykins - Hilliard Lyons

Okay. That’s very helpful. And then, lastly, I was wondering if maybe you could comment on whether there may be any potential incremental storage opportunities this year at Mist?

David Anderson

This is David. I’ll go ahead and take that one. We just implemented an additional 1.8 Bcf as Mark put in his comments. And typically what we like to do - you’ll see us do that once every one, two, three year period. We do not have anything built into our current capital budget to add another reservoir. But we’re looking in the future to add more. So, we watch the interstate market. We watch where our core market is in terms of storage needs. And we’ll develop those at the right time, when the market can support that storage expansion.

James Lykins - Hilliard Lyons

Alright. Thank you gentlemen.

Operator

Our next question comes from William Saul at Janney Montgomery Scott

William Saul - Janney Montgomery Scott

Hi. Good morning. I have a question about that tax regulatory adjustment. I just wanted to confirm if I have the EPS benefits broken into the correct quarters, with $4.3 million in the third quarter and $1.7 million in the fourth quarter. I think that’s $0.16 and $0.14 of operating revenue per share. But in terms of EPS is that $0.10 and $0.025 third quarter and fourth quarter respectively?

David Anderson

That's for the quarter. I mean overall the effect was $0.13 on the year. Most of that was in the third quarter. Steve, do you remember the quarter breakdown?

Steve Feltz

Yeah. It was close to $0.10 in the third quarter. So the other $0.03 or $0.04 was in the fourth quarter. Did you hear that?

William Saul - Janney Montgomery Scott

Yes, I did. Thank you very much.

Operator

The next question comes from Elvira Scotto of Banc of America

Elvira Scotto - Banc of America

Good morning. Couple of quick questions: Given what you’re seeing in the housing market and the general economy and slowdown in growth, what are you embedding in your 2008 in terms of your customer growth outlook, and then also bad debt expense? How should we think about those two?

David Anderson

Yeah, Elvira. This is David Anderson, again.. Good morning. As you know, this company has been experiencing customer growth north of 3% for 20 plus years and last year was the first year that we actually dipped below that. So, on a trailing 12 month basis we were around 4.2% last year.

This part of the country is experiencing a lot of the slow down that the rest of the country does. I still think that some of the dynamics that occur here in terms of customer growth that provide a positive customer growth that provide us positive customer growth versus other parts of the country, still exists. Directly to your question though. We’re looking to around 2% customer growth in the 2008 period. Obviously if customer growth is better than that it will be beneficial to results and if it’s a little bit lower than that then we’ll address that as it occurs.

But I still believe that the dynamics that are in place allows this company to grow at twice the national average, still exist. I just think the national average, obviously, with all that's going on in the country is going to be down.

In terms of your second question, in terms of bad debt expense, on a trailing 12 basis, our bad debt expense is well below 1% of revenues, around 0.3% of revenues. I think you will find that that compares quite favorably to almost any other utility in the country that you would look at. It’s a fairly low level and so a lot of that is just good hard work on our part in terms of working with customers, payment plans and things like that to make sure that we don’t have the bad debt expense happen. But I think your point is valid. When you're into a situation in a market slowdown and possibly a recession, you have to be concerned about that.

We’ll continue to watch it closely, I’ll remind you from a regulatory perspective that we do get to update the gas costs piece of this. So if we see an increase in bad debt expense during the year, and the gas costs represent about two thirds of our bill, we automatically get to roll that in to the next PGA price setting mechanism.

So I think we’re fairly well covered. But right now, I will tell you in the month of January we actually saw a downturn in delinquencies. I don’t think one month makes a trend. But I think we’re as concerned as you are about it. I think the levels are fairly low. But I think that with the team we have in place, and the regulatory aspects in place, I’m not terribly concerned about it.

Elvira Scotto - Banc of America

Okay.

Mark Dodson

I might add one comment. This is Mark. One of the unique things about our service territory is when you see new construction go down we still have a very low penetration, since natural gas came so late to the Pacific Northwest. So frankly, we just re-double our efforts in conversions which we did toward the end of 2007 and you’ll probably see us do that again in 2008 working with our heating dealers to encourage people to add gas to their homes. And frankly I think that a lot of the whole climate change things and everything else going on, and our arguments about direct use are going to help us in that regard.

Elvira Scotto - Banc of America

Okay, on the O&M side, I know that O&M was higher - you had pulled forward about $5 million - or there were about $5 million of incremental expenses from strategic initiatives that you’ve pulled forward. Are there any incremental expenses expected in 08?

Mark Dodson

In terms of like strategic expenses, you mean?

Elvira Scotto - Banc of America

Right. Correct.

David Anderson

No. We don’t have that. In fact last year was so unusual. I mean you typically don’t see a utility like, do what we did. But again with the large first quarter gains, it gave us the opportunity to reinvest the $5 million. And this is things like working, like putting up guard posts and working on bridge line maintenance and things like that we were going to do in future years. It allowed us to accelerate it, and one of the reasons we did it is that it actually helps our overall expense profile on a going forward basis. So I do not anticipate baring some kind of large gains this year, having incremental expenditures like we did this year, in 2007 rather.

Elvira Scotto - Banc of America

Okay. I just have two more quick ones. In terms of the incremental storage at Mist, do you have a breakdown of what the incremental storage contributed to earnings in 07?

Mark Dodson

I don’t have that for you. I mean overall the storage properties contributed around $0.32 for the year, and that’s made up of actually firm capacity payments and also the optimization. The storage facilities went in about mid-year so we didn’t have a full year of results from them. But I think we can work on that Elvira and we’ll get back to you. I don’t have that specific piece.

Elvira Scotto - Banc of America

Okay. And then just my final question. You’d mentioned that the PGA is up for review in Oregon, and could you just talk a little bit more about the timing? I think you said late 08 and then what happens beyond that period?

Gregg Kantor

Elvira, this is Gregg Kantor. I’ll take a shot at that. I guess right now we’re in the middle of the docket, and at this point it’s a little too early to tell where it’s going to go. But I would say that there seems to be a consensus around a couple of points on the docket, and that is that almost all the parties, in fact all the parties, believe there really does need to be a shifting of the risk-reward profile for shareholders and for customers and it needs to be narrowed down, because of the volatility that crept into the gas market.

The other one that I think is interesting is that all of the customer groups believe that the utilities need to have some skin in the game of some sort. So the discussion really is around ways to narrow the risk, and we’ve talked about callers. We’ve talked about taking the 66 /57/33 and reducing it to 80/20 or 90/10, those kinds of things. Again, too early to tell where it’s going. I would say on this issue the docket involves some other details that will probably trail on through the summer, but on this issue, about how the mechanism and the sharing part of it will be (shaped) I think we will probably see something mid to late summer.

Mark Dodson

Elvira, this is Mark. Let me just make one quick comment on this. This sharing mechanism is kind of a time honored tradition that goes clear back to when I handled regulation, when I cam over as general counsel. And I think it’s a kind of a, if it isn't broke don't fix it, so my guess is what you will see in the time frame that Gregg is talking about is, we'll tweak it but I don’t think we are going to scrap it. It's worked too well for us over the last decade.

Elvira Scotto- Banc of America

Ok, that’s all I had. Thank you.

Operator

The next question comes from Brooke Glenn Mullin at JP Morgan

Unidentified Analyst - JP Morgan

Hi, this is Erica. I was wondering of you have an update to the timeline that you provided in October '07 presentation on Bradwood Landing.

Mark Dodson

The latest on Bradwood Landing, again they are a company that is NorthernStar, which is submitting the LNG terminal on the Columbia. They very recently got approval of their land use change, which was an encouraging sign. They believe that they expect to have a FERC permit decision in the spring of this year, or maybe late spring of this year.

Unidentified Analyst - JP Morgan

Okay, thank you.

Mark Dodson

I would say that we looked at that project and we continue to update people on the Bradwood project. If we look at it through the lenses of the company looking at building the Palomar pipeline, it's important to understand, from our perspective Palomar is really two projects in one. The first project is the Molalla to Madras that is the figment of the line that is east, that goes over the mountains and that connects two interstate pipelines in Oregon together. It’s a project we have actually been looking at for about thirty years, and one that the utility needs from a reliability standpoint. The other part of that project, if LNG is built, we would take the pipeline up from Molalla, up to the Columbia River. So we are staying close to what is going on at Bradwood because of that second phase of the project. But whether that goes or not, we are still interested in proceeding forward with the eastern side of the Palomar.

David Anderson

I would like to point out Erica, they have their own website. It is www.bradwoodlanding.com. So you can keep track of their milestones on that website as well.

Unidentified Analyst - JP Morgan

Ok, great. Thank you very much.

Mark Dodson

Thanks Erica.

Operator

The next question comes from Joanne Fairechio from Janney Montgomery Scott.

Joanne Fairechio - Janney Montgomery Scott

Yes, good morning. I just have a quick question. I want to make sure that I understand what your 2008 guidance compares with. Would you take the $2.76 and back out the $0.13 and the $0.27 and come up with the $2.36 from operating earnings, and then use that as a base for the '08 guidance?

David Anderson

Joanne, this is David. Good morning. The way to think about it, if you are trying to get to a normalized number, which is what I think you are trying to do. We reported around $2.76, and I'm going to back out the commodity gain, so you can determine your numbers going forward, if you want to put a number in there. But if you back out the commodity gain, the mark to market gains we had, and just effects of weather, that would back down margin around $0.35.

Joanne Fairechio - Janney Montgomery Scott

Okay.

David Anderson

And you would add back around $0.17 for incremental spend on O&M and some other O&M issues. And then the only other item, again, trying to get back to what our original guidance was, and call it a normalized number, if you will, you would also have to take away around $0.13 from Senate Bill 408, and that gets you into the $2.40 range, for the year. Now obviously, Senate Bill 408 is going to be beneficial, going forth. In the call I had talked about it a minute ago, it's not going to be $0.13. It's going to be a much smaller number. So I backed out all of the commodity gains for you, I'll leave it to you if you want to put some of those in, or commodity loses, in terms of your estimate.

Joanne Fairechio - Janney Montgomery Scott

Right, but your guidance, the company's guidance, excludes anything from the Senate Bill?

David Anderson

That’s correct. And that’s why, when you look at this years guidance on a normalized basis, and again, if you go back to last years guidance, that’s why it's up around 7.5 %.

Joanne Fairechio - Janney Montgomery Scott

Ok, thank you.

David Anderson

Does that make sense?

Joanne Fairechio - Janney Montgomery Scott

Yes.

Mark Dodson

David, it excluded the Senate Bill 408 last year, but not this year.

Operator

Our next question comes from Winfried Fruehauf from Fruehauf consulting.

Winfried Fruehauf - Fruehauf consulting

Good morning. Thank you. I have a question on Canadian Natural Gas. What is your assessment of the availability of natural gas from Canada over the next five years, through your company?

Mark Dodson

Well I think one of the reasons why Palomar Pipeline and the reliability of that is important to us, is we need to draw from as many Canadian reservoirs as we can and have access to that interstate pipeline. You begin to see that some of the Canadian reserves are a little shallower then they have been in the past, so we anticipate that we are going to see a little less gas out of Canada that’s going to be available, at least, that is what we are seeing, going forward.

Winfried Fruehauf - Fruehauf consulting

And regarding incremental supplies of Rockies gas to Oregon and Washington, how do you assess that situation?

Mark Dodson

It's hard to know right now. You’ve got the Rex pipeline that’s going to come in, which will put some pressure, in terms of price on gas to the northwest out of the Rockies. It’s a little hard to know what it will do in terms of supply.

David Anderson

Winifred, as you recall, about 75% of our supplies come from Canada. 25% comes from the Rockies. It's also another reason why LNG is important to this part of the region.

Gregg Kantor

Winifred, its Gregg Kantor. I was actually on a call yesterday with the Canadian pipeline folks and I would say that everything Mark said is true. But they are quick to remind you that while supplies may be declining, there is still lots to purchase up there and it's only a matter of price, rather then available supplies. At the right price you can find the supply up there.

Mark Dodson

I think we need to clarify for our Canadian colleagues, they are not telling us that they are running out, but they are going to command a higher price. We are going to see an increase in gas demand. I don’t see any other way around it, going forward.

Winfried Fruehauf - Fruehauf consulting

Ok. Thank you very much.

Mark Dodson

Thank you, Winfried.

Operator

At this time there are no further questions. Would you like to make any further comments?

Mark Dodson

Well, we thank everybody for joining us and I hope we can have a good year in '08, just like we did in '07. Thanks so much for joining us this morning.

Operator

The conference is now concluded. Thank you for attending. You may now disconnect.

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Source: Northwest Natural Gas Co. Q4 2007 Earnings Call Transcript
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