Nikki Sparley - Investor Relations Gregg Kantor - Chief Executive Officer Greg Hazelton - Senior Vice President and Chief Financial Officer

Spencer Joyce - Hilliard Lyons

Thank you, Dow. Good morning, everyone, and welcome to our second quarter 2015 earnings call.

This is Nikki Sparley, acting IR Director and filling in for Bob Hess who is out on medical leave. Please feel free to contact me going forward on all IR related matters.

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.

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. We expect to file our 10-Q later today.

As 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 the financial community.

If you are an investor and have questions, please contact me directly at 503-721-2530. Media may contact, Melissa Moore at 503-220-2436.

Speaking this morning are Gregg Kantor, Chief Executive Officer and Greg Hazelton, Senior Vice President and Chief Financial Officer. Mr.

Kantor and Mr. Hazelton have some opening remarks and then will be available to answer your questions.

Also joining us today are other members of our executive team, who are available to help answer any questions you may have. With that, I will turn it over to Mr.

Kantor for his opening remarks.

Good morning, everyone and welcome to our second quarter earnings call. Before we begin today, I would like to take a few minutes to discuss some changes to our executive team.

First, I’d like to introduce our new Chief Financial Officer, Greg Hazelton. As you know, after a long career with Northwest Natural, Steve Feltz retired in June.

But we’re pleased to have Greg join us from Hawaii Electric where he was Treasurer and Controller. Greg started our his career here in Portland working on the electric side with Portland General Electric and then went on to work in the investment banking world for several years.

He’s gotten impressive and diverse background and he’s already been a great addition to our team. I’m also pleased to announce David Anderson, who is promoted to President of the Company, effective August 1.

Over the past 11 years, David has demonstrated exceptional leadership skills and help build a strong utility that leads the industry in a number of operational areas. David will also retain his role as Chief Operating Officer with responsibility for the bulk of the day-to-day operations and will continue to report directly to me.

Now, moving on to the quarter, I’ll begin today with highlights from the period and then turn it over to the other Greg to cover the financial details. I’ll wrap up the call with brief comments about our priorities for the remainder of the year.

In the period, we continued to work through our open dockets at the Oregon Public Utility Commission. As you know, in the first quarter, we received the commission’s decision on our environmental cost recovery proceeding and on how an earnings test would be applied to environmental expenditures we had incurred and will continue to incur in the future.

As part of the decision, the OPUC required a compliance filing that describes how we would implement their order. We submitted that filing at the end of March and we’re currently working through the review process with OPUC staff and other parties.

It will be subject to final commission approval which we expect by the end of the year. In addition, late yesterday, we received the OPUC’s decision on our pension docket, and you’ll recall, all of the investor owned utilities in Oregon requested that prepaid pension assets be included in rate base and allowed to earn a return.

While we are continuing to evaluate the decision, which as I say we got yesterday afternoon, the commission’s order reaffirms the use of FAS 87 expense for recovery of pension costs but did not support the utilities request to include their prepaid pension assets and rate base. The decision is not what we had hoped for but the company still retains its pension balancing account which allows it to defer annual pension expenses above or below the amount set and rates.

Recovery of these deferred amounts occurs over time as the balancing account fluctuates with higher and lower FAS 87 pension expense. Now shifting to the quarterly results, our performance was slightly better year-over-year; utility margin was up resulting largely from customer growth which increased to 1.5%.

That growth rate translated into 10,000 new customers on a rolling 12-months basis and several economic factors suggest this uptick in activity should continue. For example, between the Portland area and Clark County, Washington, over 29,000 new jobs have been added year-over-year, which equates to about 3% increase.

But the real headline for the quarter is the housing market. The homeowner vacancy rate was 1% and the rental vacancy rate was at 3.5% both in the Portland and Clark County creating a very tight housing market.

For example, in June, a number of homes for sale represented less than two months’ worth of available inventory, well below the six to seven month timeframe you’d see in a more balanced housing market. The average sales price in June was up about 10% in the Portland area compared to a year-ago and up nearly 13% in Clark County.

Compared to the second quarter of 2014, home sales in the period were up about 24% in Portland and up nearly 25% in Clark County. While Oregon’s single-family new construction activity is up over the past 12 months versus a year ago, it’s still not keeping pace with demand and while this imbalance may take some time to correct, we’re optimistic about the potential growth in new construction going forward.

And with that, let me turn it over to Greg Hazelton to cover the financial details for the quarter.

Thank you Gregg for the introduction, I’m very pleased to be part of the Northwest Natural team and on the earnings call with everyone this morning. Turning to our results, earnings for the second quarter of 2015 were $0.08 per share on net income of $2.2 million as compared to $0.04 per share and $1.1 million for the same period last year.

Year-to-date earnings for the first six months of 2015 were $1.12 per share on net income of $30.7 million as compared to $1.43 and $39 million for the same period last year. As highlighted from our call last quarter, we recognized a $15 million pretax or $9.1 million after tax environmental regulatory disallowance in the first quarter.

The charge to O&M was associated with the February 2015 OPUC Order on the recovery of past environmental cost deferrals. Excluding this charge, consolidated earnings for the first six months of 2015 were $1.45 per share or $39.8 million, which is slightly up from last year on higher utility earnings offset by lower gas storage results.

Regarding our utility, we reported net income of $2.2 million in the second quarter of 2015, an increase of $40,000 from the prior year based on higher utility margins and decrease in interest expense offset by an increase in O&M. For the first six months, utility net income was $30.6 million or a decrease of $7.6 million from last year, mainly due to the $9.1 million environmental charge which was mitigated by improved utility results.

Positive drivers included higher utility margins, an increase in other income, and lower interest expense partially offset by an increase in O&M expense. Utility margin for the quarter increased $920,000, driven by customer growth, rate base returns on tracked-in items, and gains from gas costs incentive sharing.

Utility margins for the year-to-date period were impacted by record loan weather in our service territory during our peak, during our heating season in the first quarter, which continued into the second quarter. Overall, average temperatures for the first six months of 2015 were 18% warmer than year ago and 22% warmer than normal.

Total gas deliveries decreased 12% and gross revenues were down 6% during this period. Although our utility margins are generally protected from weather, we do have about 11% of our customer base in Washington, which does not have a weather normalization mechanism and 7% of our Oregon customers elect out of weather normalization.

In spite of the decline in volumes and gross revenues, net margins increased $1.2 million mainly due to continued customer growth, rate based returns on tracked-in items, and gains from gas cost incentive sharing. Moving to our gas storage segment, for the quarter, we reported a net loss of $90,000, reflecting $1.1 million improvement in results from a year ago.

Drivers included $300,000 increase in operating revenues due to slightly higher contract prices for 2015-2016 gas storage year and $930,000 reduction in operating expenses. For the first six months, net income was $30,000 or a decrease in net income of $440,000 from the year prior.

Results included $2.2 million decrease in operating revenues due to lower contract prices for the 2014-2015 gas storage year. This was offset by $1 million reduction in operating expenses.

As we’ve mentioned in previous quarters, our Mist storage facility in Oregon continues to perform well due to limited storage capacity and growing demand in the Pacific Northwest. Our Gill Ranch facility in California continues to face headwinds as the oversupply of storage persist and demand for natural gas storage recovers slowly.

We are seeing slightly higher pricing for the 2015-2016 gas storage year and we continue to remain optimistic on the value of gas storage in California over the long term. With regards to consolidated O&M, for the quarter, we reported an increase of $580,000 over last year.

That increase primarily reflects utility cost increases for higher benefit in payroll costs. Offsetting the increase were lower repair and power costs at the Gill Ranch facility.

For the first six months, excluding the disallowance, O&M increased $4.3 million over last year. Key drivers were increases at the utility for payroll and benefits, including higher wage rates under the union labor contract that was effective June 1, 2014, and increases in non-payroll costs primarily associated with ongoing growth initiatives and facility costs.

These increases were offset by lower repair and power costs at our Gill Ranch facility. Meanwhile, other income for the quarter increased $870,000 compared to last year as we applied insurance proceeds under the environmental mechanism.

Other income for the first six months increased $4.5 million compared to last year, primarily due to the recognition of $5.3 million of regulatory equity interest income on deferred environmental expense as was discussed on our first quarter call. This income was partially offset by higher interest expense on deferred regulatory balances.

Regarding interest expense, over the last 12 months, the utilities - the utility has remedied $100 million of debentures without reissuance as a result of our using our environmental insurance proceeds to pay down debt. Consequently, interest expense decreased $1.2 million for the quarter and $2.3 million for the six months of the year.

Cash flow from operating activities for the first six months of 2015 was $167 million as compared to $233 million a year ago. Last year’s cash flow was significantly enhanced by $91 million of insurance recoveries.

This is partially offset by other working capital changes. As Gregg mentioned, we received the commission’s decision regarding the recovery of financing costs on our prepayment pension asset.

As you may recall, the prepaid pension asset represents the timing difference between cash contributions made to the plans and the recognition of FAS 87 expense. Although we will not recover at these financing costs, there will be no financial impact to earnings from this order.

We continued recovering our FAS 87 pension expense through current rates and our pension balancing account, which also earns our rate of return. Today, the company reaffirms its guidance for reported earnings in the range of $1.77 to $1.97 per share for 2015, which includes the $15 million pre-tax charge.

Adjusting to exclude the charge, our guidance for 2015 remains unchanged at $2.10 to $2.30 per share. The company's guidance assumes continued customer growth from our utility segment, average weather conditions going forward, slow recovery of the gas storage market and no significant changes in prevailing legislative and regulatory policies or outcomes.

With that, I'll turn it back over to Gregg for his concluding remarks.

Thanks, Greg. At this point in the year, our focus is two-fold.

First, we will be working hard to advance our growth initiatives and at the same time, we will be continuing our cost control efforts to help reduce the financial impact of a record warm winter. On our growth initiatives in July, we submitted our first carbon solutions program under Oregon’s greenhouse gas reduction legislation.

As we've talked about before, Senate Bill 844 allows the OPUC to incent natural gas utilities to undertake projects that will reduce greenhouse gas emissions. Our first proposal is designed to further the use of combined heat and power in Oregon, a goal that the state has had for many years.

Under our CHP proposal, industrial and commercial customers in the market could submit CHP projects for consideration. Our program will then provide incentive funding based on the verified carbon savings, making the project more financially feasible from a customer’s perspective.

Over the last year, we've been collaborating on this proposal with other regional and state organizations interested in helping CHP gain more traction. In our view, this is an important effort that could provide a very significant carbon reduction benefit for our customers and for Oregon.

The OPUC has set a schedule for review of our CHP filing that calls for a decision by the end of the year. In parallel with that effort, we've also been working on an oil to gas furnace replacement program to serve the residential market.

We've completed the stakeholder review process and hope to file the program later this fall. As I said before, overall, we've been very pleased with the level of interest and engagement we’re getting from the OPUC staff, customer groups, state agencies, environmental groups across the state and we're proud to be one of the first gas utilities in the country to attempt this kind of program and I would say, we've learned a great deal about carbon accounting, what opportunities exist for reductions and how to best structure programs going forward.

We believe this knowledge will be a real asset in navigating an energy landscape increasingly shaped by climate change policies. Finally this morning, let me give you a quick update on the potential expansion project at our underground storage facility in Mist, Oregon.

As you know, last December, we received approval from Portland General Electric to move forward with the permitting and land acquisition work required for the expansion project. Project would provide no notice storage services to PGE’s natural gas fired generating plants at Fort Westwood and would include a new reservoir, providing up to 2.5 billion cubic feet of available storage, an additional compressor station and a new pipeline.

In April, we submitted an application to the Oregon Energy Facility Siting Council for an amendment to our existing Mist site certificate, a step required to support the expansion. In June, we received information requests about our application from the Oregon Department of Energy and in July, we submitted our responses.

The next major step in the process will occur when the Department of Energy and the Siting Council publish a proposed order later this year. Between now and the issuance of that proposed order, we will continue to work with both organizations to address any questions about our filing.

And our team also continues to work on obtaining other required permits and property rights. Assuming successful and timely completion of those items, the current estimated cost of the expansion is approximately $125 million with a potential in-service date in the 2018, 2019 winter season, again depending on the permitting process and the construction schedule.

With that, thanks again for joining us this morning and now, I'd like to open it up for questions.

First things first Greg, welcome to the team and welcome back to the mainland here. I know they’ve got a good culture there at Northwest, I’m sure you’ll enjoy it.

Thank you, yeah. It's one I’m familiar with.

I started my career in Portland, it feels like coming back home.

Perfect, even better there and then Dave, also congratulations in order there for the incremental promotion there and an additional responsibility, I'm sure that's exciting.

Thank you, Spencer. I appreciate it.

Turning towards the quarter here a little bit, and Greg, you touched on it there towards the end of the call, it looks like the Mist expansion potentially online for the 2018, ‘19 heating season. Just refresh us that is still on par with the initial schedule, correct and then secondarily the $125 million investment, that's also still largely unchanged?

Correct. Nothing has changed at this point.

Still on schedule, still approximately $125 million.

Yeah. Perfect, good to hear.

Separately, wanted to turn towards the other income line of the income statement. I know there had been a couple of special items here over the last year or so, the deferred environmental expense accrual there and then the insurance item that have caused that to jump up a little bit as far as income is concerned.

Can you talk a little bit about how that particular line item might play out over the next year or two, I'm kind of assuming that could trend a little bit lower or we could see a little bit less income there as we kind of model out ‘16, ‘17?

Well, we have a number of things that flow through that line item. Usually, that would include all the interest that we accrue on our deferred balances, so that would be impacted by accruals on the liability, the insurance liability that would be also impacted by equity earnings on regulatory assets as well.

We did highlight that we received a fairly large recognition with the recent order in February in the receipt of insurance proceeds against our environmental liabilities, which made that equity income higher than I would expect it to be going forward, absent something similar. So I think if you normalize out that $5.3 million pre-tax number, the run rate may be slightly impacted by higher - by some of the interest costs that we have going through there on the deferred balances.

And Spencer, we've gotten all of the insurance, I should say, there is a small amount that I think is still possible in the million dollar range, but we’ve essentially gotten the insurance proceeds that we’re going to get out of our insurers.

Okay, perfect. So I guess from a modeling standpoint, I mean, we’re not going to totally fall off a cliff here, but I would expect some of those balances that we’re earning or some of those accrued balances that we're earning a bit on to trend a little lower?

That's fair.

Okay. It doesn't look like we’ve got any other calls.

So thanks again for joining us and have a great finish to the summer season everyone. Take care.

Thank you.