News Details

• Reported earnings per share of $1.53 in the quarter on net income of $40.8 million, compared to earnings per share of $1.64 per share on net income of $43.6 million in the first quarter of 2010.
• Received approval from the Public Utility Commission of Oregon (OPUC) for a $250 million long-term gas supply investment with Encana Oil & Gas (USA) Inc. to develop gas reserves.
• The utility’s customer growth rate was 0.9 percent at March 31, 2011, compared to 0.7 percent a year earlier.
• The gas storage business began its first full season of operations from Gill Ranch Storage (GRS).

PORTLAND, Ore.--(BUSINESS WIRE)-- NW Natural Gas Company, dba NW Natural (NYSE:NWN) reported net income for the first quarter of 2011 of $40.8 million, compared to net income of $43.6 million in the first quarter of 2010. Earnings per share were $1.53 in the quarter, down 7 percent from $1.64 for the first quarter of 2010, which included a net $6.1 million pre-tax benefit from a refund of property taxes.

“Our utility operations performed well in the quarter, reflecting the proactive efforts we’ve taken to control costs and improve productivity,” said Gregg Kantor, NW Natural President and Chief Executive Officer. “In addition, we were pleased with the recent conclusion and regulatory approval of our joint venture to develop gas reserves on behalf of our customers. It will provide real value to our customers and shareholders.”

First quarter 2011 financial and operating results

Consolidated results of operations produced net income of $40.8 million ($1.53 per share), compared to $43.6 million ($1.64 per share) in last year’s quarter. The company’s utility operations earned $40.1 million ($1.50 per share), compared to $40.9 million ($1.54 per share) in the same quarter of 2010. Gas storage contributed net income of $0.7 million (3 cents per share) in the 2011 quarter, compared to net income of $2.5 million (9 cents per share) in 2010’s first quarter. Other non-utility financial results included a small loss in 2011’s first quarter, compared to a gain of 1 cent per share in 2010’s first quarter.

NW Natural concludes Encana gas transaction

On April 28, 2011, the OPUC approved the company’s joint venture investment with Encana Oil & Gas (USA) Inc. to develop gas reserves on behalf of NW Natural’s Oregon customers. NW Natural’s investment is expected to amount to approximately $45-55 million a year, over a five-year-period, for a total investment of about $250 million. The investment will cover a portion of expected drilling costs in exchange for working interests in two sections of the Jonah Field, located north of Rock Springs, Wyo. The sections include both future and currently producing wells.

The gas reserves are expected to provide a portion of the company’s long-term gas supplies for customers over a period of approximately 30 years. During the first 10 years of the investment, the volume of gas projected to be received will be approximately 58 billion cubic feet (Bcf), or 8-10 percent of the company’s average annual sales requirements for utility operations.

Over the life of the investment, approximately 93 Bcf of gas is anticipated to be generated at an average total cost of approximately $5.15 per dekatherm. The anticipated net present value benefits to customers are expected to be more than $50 million over the life of the investment.

Utility growth rate remains around 1 percent

NW Natural’s customer growth rate for the trailing 12-month period ending March 31, 2011 was 0.9 percent, with the company adding over 6,000 new customers in the period. This compared to a growth rate of 0.7 percent a year ago.

Utility results benefit from colder weather and gas cost savings

NW Natural’s total gas sales and transportation deliveries in the first quarter of 2011, excluding deliveries of gas stored for others, were 401 million therms, up 20 percent from 333 million therms in 2010’s first quarter. The increase in usage was mainly due to weather that was 21 percent colder than a year ago and 6 percent colder than average. Margin from utility operations in 2011 increased 3 percent to $129.2 million, compared to $125.5 million in 2010, as higher sales volumes to residential and commercial customers were largely offset by the company’s weather normalization adjustment mechanism in Oregon. In addition to some benefits from colder weather, margin also reflected increases in gas cost savings and gas deliveries to industrial customers.

Volumes sold to residential and commercial customers in the first quarter of 2011 were 275 million therms, up 29 percent from 213 million therms in the first quarter of 2010. Residential and commercial sales revenues in the quarter totaled $294.1 million in the quarter, up 18 percent over first-quarter 2010 revenues of $249.7 million. NW Natural’s weather and decoupling mechanisms in Oregon adjusted margin up by $2.9 million in 2011, compared to a margin adjustment increase of $21.4 million in the first quarter of 2010, which was driven by weather that was significantly warmer than average in the period.

Gas deliveries to industrial customers in the first quarter were 127 million therms, or 5 percent higher than 121 million therms in 2010’s first quarter. Margin from industrial customers increased 7 percent to $7.6 million.

The company’s gas cost incentive sharing mechanism in Oregon provided a margin contribution of $1.0 million in the first quarter of 2011 compared to a contribution of $0.2 million in 2010. Under the annual purchased gas adjustment (PGA) mechanism, the company is subject to an earnings review to determine if the utility is earning above its allowed return on equity (ROE). Based upon our current projections and the utility’s allowed ROE, we accrued an estimated $1.0 million in the first quarter of 2011 for refund to customers in future rates.

Gas storage business update

The company’s gas storage segment primarily consists of non-utility investments at the company’s Mist underground storage facility in Oregon, investments at the Gill Ranch Storage (GRS) underground facility in California, and asset optimization services using available gas storage and transportation capacity.

Our gas storage segment reported net income of $0.7 million for the first quarter of 2011, as compared to $2.5 million in last year’s first quarter. The decrease primarily reflects first year results at GRS, including start-up costs and a low level of contracted capacity, current low gas storage prices, and a decrease in optimization revenues at Mist. GRS revenues and earnings are expected to improve as the company entered the first full year of gas storage operations on April 1, 2011, which is generally regarded as the beginning of the injection season for storage customers.

Oregon legislature to address repeal of SB 408

On March 29, 2011, Senate Bill 967 was introduced in the Oregon Senate to repeal the existing statutes governing the annual regulatory adjustment for taxes paid. Senate Bill 967 has passed the Senate and will likely be reviewed by the Oregon House of Representatives this month.

Oregon enacted legislation in 2007 (Senate Bill 408), which required certain regulated gas and electric utilities to annually review the amount of income taxes collected in utility rates and compare it to amounts of income taxes paid. Under this law, if companies pay less in income taxes than are collected from Oregon utility customers, they are required to refund those amounts to customers. If companies pay more in income taxes than are collected from Oregon utility customers, the utilities are required to collect a surcharge from customers.

NW Natural’s income taxes have resulted in a surcharge every year since SB 408 was passed. For the 2008 and 2009 tax years, the OPUC approved the company’s recovering $0.2 million and $5.1 million, respectively, from customers in the form of a surcharge. The 2008 amount, plus accrued interest, was collected over a one-year period beginning June 1, 2010. It was also agreed that the 2009 surcharge and interest would be collected over a one-year period beginning June 1, 2011. Senate Bill 967 is expected to be addressed by the Oregon House in May. If signed by the governor, the law, in its current form, will require utilities, including NW Natural, to reverse amounts accrued for the 2010 and 2011 tax years.

For the three months ended March 31, 2011, the company estimated a surcharge of $2.7 million, but did not recognize it for accounting purposes due to the significant uncertainty surrounding our ability to collect this amount in future rates. For the three months ended March 31, 2010, the company did recognize a surcharge of $3.0 million, including accrued interest for the 2008 and 2009 tax years.

If SB 967 becomes law in its current form and the company is denied recovery of the indicated surcharge for the 2010 tax year, then NW Natural will be required to record a one-time charge of $7.4 million (17 cents per share) based on the asset balance at March 31, 2011.

O&M costs stable and bad debt expense remains low

Operations and maintenance expense was 2 percent higher in the first quarter of 2011, compared to 2010, primarily due to operating costs at Gill Ranch Storage, which became operational in the fourth quarter of 2010. Utility bad debt expense as a percent of revenues was well below 1 percent at 0.18 percent for the 12 months ended March 31, 2011.

Income tax expense

Income taxes decreased by $2.2 million (7 percent) in the first quarter of 2011, due primarily to lower earnings and a lower effective income tax rate.

Cash flows and capital structure

Cash provided by operations in the first quarter of 2011 increased to $108.1 million from $74.2 million in 2010’s first quarter. The increase was primarily due to the timing of inventory and deferred gas cost balances, combined with an increase from deferred income taxes.

NW Natural’s capitalization at March 31, 2011 reflected 47.9 percent common equity, 36.5 percent long-term debt, and 15.6 percent short-term debt and current maturities of long-term debt. This compared to 48.6 percent common equity, 42.2 percent long-term debt, and 9.2 percent of short-term debt and current maturities of long-term debt at March 31, 2010.

Outlook for 2011

As discussed above, the company has not recognized the $2.7 million surcharge indicated for 2011 SB 408 results earned to date. The company’s prior guidance for 2011 of $2.45 to $2.65 per share included SB 408 surcharges for 2011. Excluding SB 408 surcharges for 2011, the company’s guidance for 2011 would remain unchanged but final results will likely be at the lower end of the range. Additionally, if SB 967 is enacted into law in its current form (see SB 408 repeal discussion above) there would be a potential one-time charge to earnings of $7.4 million (17 cents per share). The company’s 2011 earnings guidance assumes a continued slow economic recovery and customer growth, normal weather conditions, ongoing benefits from improvements to our cost structure, Gill Ranch operational losses due to first year operations, and no further significant changes in prevailing legislative and regulatory policies. The company’s outlook does not include forecasts of future gains or losses that may occur from the company’s gas cost sharing mechanism in Oregon since the company cannot predict future gas cost increases or decreases with reasonable certainty.

Dividend declaration

The board of directors of NW Natural declared a quarterly dividend of 43.5 cents a share on the company’s common stock. The dividends will be payable on May 13, 2011 to shareholders of record on April 29, 2011. The company’s indicated annual dividend rate is $1.74 per share.

Presentation of results

In addition to presenting results of operations and earnings amounts in total, NW Natural has expressed certain measures in this press release on an equivalent cents per share basis. These amounts reflect factors that directly impact the company's earnings. In calculating these financial measures, we allocate income tax expense based on the effective tax rate. NW Natural believes this per share information is useful because it enables readers to better understand the impact of these factors on its earnings.

Conference call arrangements

As previously reported, NW Natural will conduct a conference call and webcast starting at 8 a.m. Pacific Time (11 a.m. Eastern Time) on May 4th, to review the company's financial and operating results for the three months ended March 31, 2011. To hear the conference call live, please dial 1-877-317-6789 within the United States and 1-866-605-3852 from Canada. International callers can dial 1-412-317-6789. To access the conference replay, please call 1-877-344-7529 and enter the conference identification pass code (449772). To hear the replay from international locations, please dial 1-412-317-0088.

To hear the conference by webcast, log on to NW Natural's corporate website at www.nwnatural.com.

Forward-looking Statements

This report, and other presentations made by NW Natural from time to time, may contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects” and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements regarding the following: plans, objectives, goals, strategies, future events, investments, estimated gas reserves and their financial value, volumes and supplies, customer savings, rate recovery, customer refunds, continued drilling, project costs, commodity costs, financing, financial positions, revenues and earnings, dividends, performance, legislative actions and impact, regulatory actions or approvals, and other statements that are other than statements of historical facts.

Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed by reference to the factors described in Part I, Item 1A “Risk Factors,” and Part II, Item 7 and Item 7A “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosure about Market Risk” in the company’s most recent Annual Report on Form 10-K and in Part I, Items 2 and 3 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk,” and Part II, Item 1A, “Risk Factors,” in the company’s quarterly reports filed thereafter.

All forward-looking statements made in this report and all subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the company, are expressly qualified by these cautionary statements. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. New factors emerge from time to time and it is not possible for the company to predict all such factors, nor can it assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements.

About NW Natural

NW Natural (NYSE:NWN) is headquartered in Portland, Ore., and provides safe, reliable, cost-effective natural gas service to about 676,000 residential, commercial, and industrial customers through 14,000 miles of mains and service lines in western Oregon and southwestern Washington. It is the largest independent natural gas utility in the Pacific Northwest. The company has approximately $2.6 billion in total assets. The company operates and owns 16 Bcf of underground storage capacity in Mist, Ore., and also operates the designed 20 Bcf Gill Ranch underground storage facility in California, in which it owns a 75 percent undivided interest. Together, NW Natural and its subsidiaries currently own and operate underground gas storage facilities with designed storage capacity of approximately 31 Bcf in Oregon and California. Additional information is available at www.nwnatural.com.

Source: NW Natural Gas Company

NW Natural

Investor Contact

Bob Hess, 503-220-2388

bob.hess@nwnatural.com

or

Media Contact

Kim Heiting, 503-220-2366

kah@nwnatural.com