Nikki Sparley - Manager, IR David Anderson - President and CEO Brody Wilson - Interim CFO and Treasurer, Chief Accounting Officer

Tate Sullivan - Sidoti & Company Spencer Joyce - Hilliard Lyons

Thank you, Rocko. Good morning, everyone, and welcome to our third quarter 2016 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 occur.

In addition, some of our comments today reference non-GAAP measures. For a complete reconciliation of these measures and other cautionary statements, you should refer to the language at the end of our press release and also our SEC filings for additional information.

We expect to file our 10-Q later today. As mentioned, this teleconference call is being recorded and will be available on our website following the call.

Please note these conference calls are designed for the financial community. If you are an investor and have additional questions, after the call please contact me directly at 503-721-2530.

Media may contact Melissa Moore at 503-220-2436. Speaking this morning are David Anderson, President and Chief Executive Officer; and Brody Wilson Interim CFO and Treasurer as well as Chief Accounting Officer.

David and Brody have some prepared 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 David for his opening remarks.

Thanks Nikki, and good morning everyone and welcome to our third quarter earnings call. Before we walk through the results for the quarter, I would like to take a moment and mention a recent event that you may have read about or even seen in the news.

At approximately 09:40 in the morning on Wednesday, the October 19th, there was a natural gas explosion here in Portland. And a local third-party contractor confirmed they were doing underground work at the construction site and damaged our service line.

The contractor was not working for Northwest Natural. Once we received the damage call, our crews were on site quickly working with other first responders to evacuate the necessary buildings.

At this time, the source of the ignition that caused the explosion is still unknown. We are assisting the Oregon Public Utility Commission and other agencies in the investigation, though it may be some time before we know more.

Those impacted by this explosion continue to be in the thoughts and prayers of Northwest Natural employees. We have been reaching out to make sure they are connected with the contractors' insurance carrier and that they are getting the help that they need.

Public safety is and will remain our absolute Number One priority. This is the kind of event we work tirelessly to prevent, but our employees trained diligently to be ready if they are needed.

I am proud of Northwest Natural's first responders, who arrived on the scene quickly and acted with firefighters and police to evacuate homes and businesses. The collective actions of the Portland Fire Department, Portland Police, and our first responder employees demonstrated a true partnership and safety.

For that, they have my heartfelt appreciation. I will now briefly talk about the quarter and then Brody Wilson, our CFO will walk through the financials and I'll close with an update on our North Mist Expansion Project.

In the quarter, we continued to see higher gas storage revenues and utility customer growth offset by some increase in O&M expenses. On a year-to-date basis, earnings per share was $1.11 per share or an increase of $0.23 over the last year.

As previously disclosed, the major driver was the environmental regulatory proceeding, in the non-cash charges incurred in both the first quarter of 2015 and 2016. Setting aside the one-time environmental charges, our year-to-date results reflected utility customer growth, cash cost incentive sharing gains and higher gas storage revenues.

Now moving to a few economic trends for our region. Overall, the region continues to exhibit signs of growth.

Employment growth in Oregon is outpacing the nation at 3.5%. We had the highest rate of employment growth for the 12 months ended September.

This was double the national growth rate of 1.7%. Average unemployment numbers across the state of Oregon have remained low at 5.1% over the last 12 months, with the major population centers of the valley if you will Portland and Vancouver, coming in slightly lower at 4.9% over the same time period.

Construction of the Portland area continues to be strong. Residential building permits rose over the last 12 months with over 20% increase in Oregon, and almost an 18% increase in the Portland Vancouver metro area.

And over the last year, home sales were up in the Portland area with an average home price increasing by approximately 10.5%. In our Washington service territory, where about 11% of our customers are located, home sales were even stronger with an increase of 9%, and home prices up 9.5%.

This economic news is translating into customer growth. Over the last 12 months, we've added about 11,500 new customers, which equates to a 1.6% growth rate.

The majority of this growth continues to come from new single-family construction and a steady stream of conversions, but we are also seeing a modest increase in multifamily customers, a sector we had been working hard to break into with targeted marketing programs. With that let me turn it over to Brody to cover a little bit more detail on the financials for the quarter.

Brody?

Thank you, David and good morning everyone. As a reminder, our results typically reflect a loss during the third quarter due to the impact of decreased heating requirements over the summer months.

Starting with consolidated results; for the third quarter of 2016, we reported consolidated net loss of $0.29 per share or $8 million compared to $0.24 per share or $6.7 million for the same period last year. This quarter's results were driven by an increase in O&M expense, offset by strong utility customer growth and higher gas storage revenues.

For the first nine months of 2016, we reported consolidated net income of $1.11 per share or $30.6 million compared to $0.88 per share or $24 million for the same period last year. Year-to-date results were largely driven by the non-cash regulatory environmental charges.

We work through our environmental docket in 2015 and early 2016, which resulted in a mechanism that allows us to recover prudently incurred environmental cleanup costs allocated to Oregon for our legacy manufactured gas plant. The Commission disallowed $9.1 million of after-tax deferred environmental costs in 2015 and an additional $2 million of after-tax costs in the first quarter of 2016, primarily related to accrued interest on their original disallowance.

Excluding these charges, on a non-GAAP basis, net income was $1.18 per share or $32.6 million for the first nine months of 2016, compared to $1.21 per share or $33.1 million for the first nine months of 2015. Under this non-GAAP calculation, net income decreased $0.03 as a result of some larger offsetting drivers.

First, other income was lower by $5.5 million due largely to the 2015 equity earnings recognized as part of the environmental order, and O&M expense increased $3.7 million from higher utility payroll and operating expenses, whereas our utility margin increased $4 million due to customer growth and gains from gas cost incentive sharing, and our gas storage segment revenues increased $3.4 million. We continue to expect O&M expense levels to be comparatively higher in 2016, especially in the third and fourth quarters as a result of the Company implementing cost savings initiatives in the second half of 2015.

The initiatives were in response to an extremely warm winter and the environmental disallowance last year. Through these efforts, we reduced O&M levels by approximately $5 million.

Shifting to our segment results; for the quarter utility segment net income decreased $2 million from an increase in O&M expense as well as a slight decrease in utility margin, reflecting a lower contribution from our gas reserve investment as they amortize each year, offset by customer growth. For the first nine months of 2016, utility segment net income increased $3.8 million.

Key drivers included an increase in utility margin and lower O&M expenses offset by a decline in other income. Utility margin for the year-to-date period reflected customer growth and an increase in gains from gas cost incentive sharing in Oregon, as the Company and customers benefited from lower actual gas costs than prices set in the PGA.

These gains were partially offset by declines in margin from warm weather in the second quarter of 2016 and lower contributions from our gas reserve investment as they amortize. Although weather for the nine-month period was comparable to the prior year, deliveries increased 5% due to comparatively colder weather in the first quarter of 2016 during our peak heating season.

Utility margin is largely, but not entirely protected, from the impact of weather through the Company's weather normalization mechanism in Oregon. As you may recall, weather impacts utility margins from our Washington customers where we do not have any weather mechanism in place, and from our Oregon customers who opt out of the mechanism.

We continue to see the benefits of the Oregon weather normalization mechanism as the region experienced 22% warmer than average weather for the first nine months of 2016 and 2015. Both periods have been extremely warm.

In fact 2015 was the warmest year on record since 1895 and year-to-date 2016 weather is in the Top Five warmest on record. For the quarter, our gas storage segment net income increased $1 million, reflecting increased operating revenues at both facilities, including higher asset management revenues predominantly at our Mist facility and slightly higher firm revenues at Gill Ranch.

We again saw lower interest expense for the quarter as we redeemed the Gill Ranch note in the fourth quarter of 2015. For the nine-month period, net income increased $3.2 million with improvements in operating revenues at both facilities, but particularly at Mist.

We also saw lower operating expenses at Gill Ranch. In addition, we saved $1.1 million in interest expense with the redemption of the Gill note.

Moving briefly to cash flows, cash provided by operating activities increased $34 million compared to last year as a result of changes in working capital balances from lower natural gas prices. These positives were offset by a decrease in cash from the early credit to customers for gas cost savings in June of 2016.

Cash used in investing activities increased $7 million, due to higher capital expenditures on infrastructure investments in Vancouver, Washington, our LNG facility in Newport, and the North Mist gas storage expansion. Cash used in financing activities increased $20 million, as we reduced short-term debt with our operating cash flows.

And finally, the Company reaffirms 2016 earnings guidance today in the range of $1.98 to $2.18 per share, which includes the $3.3 million pre-tax or $0.07 per share after tax charge from the January 2016 order. Excluding the charge, our guidance range is $2.05 to $2.25 per share on a non-GAAP basis.

With that, I'll turn the call back over to David for his concluding remarks.

Thanks Brody and before I update you on our North Mist expansion project, I would like to give you a few other highlights which might be of interest. Yesterday, we reduced rather customer rates once again for Oregon residential customers.

This meant a decrease of 2.6%, and for Washington customers, a decrease of 1.5%. These reductions were on top of a $20 million bill credit this past summer.

I would tell you it is truly gratifying to be able to capture savings and pass them on the customers and amazingly, customers today are paying less for their total gas bill than they did 15 years ago. I'm also pleased to report Northwest Natural placed first, among large utilities in the West for the seventh time in 10 years in the 2016 J.D.

Power Gas Utility Residential Customer Satisfaction Study. This also marked the ninth time in the last decade that Northwest Natural ranked in the Top Two highest scores of all, gas utilities in the country.

And finally, in October, we announced our 61st year of increasing dividends paid to investors. It is an honor to continue this legacy.

Now an update on our North Mist gas storage expansion, many of you that follow us know we have been working through the preliminary phases of this project and working closely with Portland General Electric to ensure that project meets everyone's needs before beginning construction. I'm very pleased to report that in September, we reached an important project milestone by receiving Notice to Proceed from PGE.

This Notice allows us to move forward on one of the most significant utility projects in our history. The Mist storage assets have been invaluable for our business and integral to serving our energy needs since they began operations in 1989.

And this expansion underscores their worth yet again with the project support in Oregon's move toward 50% renewable electricity by 2040. The expansion will supply innovative no notice storage services that can be drawn on anytime to support generating plants that will integrate more wind power into the electric grid.

The expansion includes a new reservoir providing up to 2.5 billion cubic feet of available storage, and additional compressor station and a new dedicated 13-mile pipeline. The estimated cost of the North Mist project is $128 million.

To-date, we have spent about $14 million on the project. During the fall, we plan to spend an additional $8 million to $10 million as we begin constructing well pads, ordering equipment, and purchasing materials for the pipeline and compressor.

Next year will be the heaviest construction year with the bulk of the spend, about $80 million to $90 million, taking place. Activities will include drilling and completing the injection and withdrawal wells, building and testing the compressor station as well as the pipeline.

And finally in 2018, if all goes well, we expect to inject base gas into the facility, startup and commission the plant, test injection and withdrawal of the wells and do a final inspection. As previously mentioned, we are targeting the facility to be in service during the winter of 2018-2019.

And when the expansion is placed into service, the investment will go immediately into rates, under an established tariff schedule that has already been approved by the Public Utility Commission of Oregon. In summary, we are on track with our North Mist expansion project and are pleased to report -- support rather our community's energy needs.

So, thanks again for taking time this morning to join us. With that, Rocko, will open it up for questions if anybody has any.

On North Mist, I mean you mentioned it goes into -- the spending goes into rates on a tariff schedule and I assume that's in rate base as it helps provide an uninterrupted supply of gas to your customers. But is there a separate monthly fixed bill to Portland General Electric?

How does the income from this expansion bifurcate based on what Portland General electric might pay for?

Tate, this is David. You're right.

It's immediately rate base. What's unique about this is the tariff schedule at least as it currently stands is for one customer and one customer only, which is PGE.

So, once the unit goes into service i.e., becomes used and useful, that's when the billings will begin to Portland General Electric. They will fund the revenue requirement piece of that and so it'll look in -- it will be rate base, it just has one customer associated with it.

One customer. And so that will not be rate base for all your other residential customers, and [Multiple Speakers].

Yes, that's right. It is rate base, right.

It is just not paid for by all customers, it is paid for solely by PGE because it's literally just for them.

And it doesn't matter the tariff schedule how much gas they pull from the expanded storage facility. Is it a fixed fee or how does that work?

It's a revenue requirement to cost of service fee. So there are [multiple speakers] for compression etcetera, but all of that is factored into the billings.

My next point is just on natural gas price volatility in general at least in the next four months of the Henry Hub strip, it's been very volatile in the last couple months. I mean are you seeing that pricing volatility in your area and can you just talk about, if you are seeing that, I mean what you think is due to?

Tate, we've seen a little bit of volatility, not like what you're seeing in the Henry Hub area. We just entered our -- November 1st is when our PGA goes into effect and so our hedge policies are in place.

We hedge out about 75% of our portfolio. So the other 25% even though it's "un-hedged" it's priced at the forward curve for the rest of the period.

So at this juncture, there's really been no big update that we would need to provide you in terms of either gains or losses on that [indiscernible] mechanism. That's where that volatility would pass-through in the utility.

On the storage side of the equation, we've seen a little bit of volatility there, mainly saw more volatility last year due to weather and weather is going to be providing probably the biggest differences if you will the intrinsic spreads between summer and winter. But at this juncture, we haven't seen a lot of additional volatility in the California market.

Last one from me is on, you mentioned the gas incident in your area in October. I mean whatever, it wasn't your fault, it's local contractor, but what are your potential repercussions or were there any regulatory review repercussions or customer reticence that you've seen historically in the industry in general?

Needless to say the investigation is continuing. The investigation is under the direction of the Oregon Public Utility Commission.

They completed most of their work last week, and most of that is exactly what you would expect is to look at the site, look at the service that was hit by the contractor, look at locate marks and things like that. We are expecting that they would issue some kind of final reports possibly in the next one to three months and that report, I can't tell you what's going to be in it right now.

But in terms of repercussions, we're working closely with the PUC, they kind of say is there anything that could have been done to prevent this. We have to call before we dig, you have locates, you have all those type of additional activities, but we're working very closely with the safety staff of PUC and are there other factors that could be done to prevent issues like this.

Nothing to report on that front, but in terms of repercussions it's just a matter of where they take the investigation, what the investigation ultimately recovers. From everything that we've seen from our point of view, we believe that our Company did what it needed to do, the locates were good and will determine how the investigation work plays out.

Just two quick ones from me. First, Dave I believe you mentioned you're seeing a slight uptick in the number of multifamily connections or new customer growth driven by multifamily.

Do you think that's just a bit of an anomaly, I mean is it a representative of where the new home construction is or is that something that you all have been able to drive a little bit on your own accord either through marketing or education or something you're doing there kind of on the ground level?

Frankly, as you probably recall, we've been working on this for little bit over a year. The dynamics of Portland, we have an urban growth boundary and there are encouraging additional saturation and one of the outcomes of that that we've seen and will likely continue to see is additional multifamily dwellings, because it's just the best way to use space in an artificially constrained urban growth boundary situation.

We've always done fairly well from a market share perspective, if you will the higher-end condos and town houses and things like that where our challenge is always been is when you kind of get down to the apartment level for example. And I think a lot of that Spencer is, a lot of times builders are focused on first cost and so we've been doing a lot of work with them to kind of show them how gas could be beneficial to them.

For instance, we've done some research and they can charge more rent for an apartment that has natural gas in it, and actually the building would probably be more valuable long-term, if they had natural gas built into it. So, our marketing department continues to work this very, very hard in terms of trying to educate the developers out there, the benefits of natural gas.

A lot of times also you'll get the boiler load, for sure this is talking about whether you can expand the gas into the dwellings like for cooktops or hot water or other factors like that that the boiler might not be addressing. So I think frankly a lot of it is just additional attention on our front and helping to educate people and then we're also working on various programs out there to see if maybe we can help with some of those first cost dynamics.

And I think we're starting to see the benefit of that, but I think this is literally just having good solid focus on the situation and working with folks to benefit from having natural gas in their facilities.

Is there anything potentially on the state level or the regulatory front that would help facilitate getting more natural gas either in -- specifically to the multifamily or is it really kind of a collaboration between you and the developer?

Right now it's a collaboration. We are evaluating whether we should work on additional tariff with the commission that might help offset some of that first cost.

So, if you will, maybe some of those first cost that happened at the building level in order to pipe the individual units, you could bill back on the meter. And there's various ways to do that and I -- nothing has been filed on that front right now.

So that's just kind a little bit of our thinking, Spencer, but that would be one item that possibly this year we might approach with the PUCs same as this the way that we might be able to help the developers put natural gas in versus other products, specifically base board electric heating which is what a lot of the apartments are doing, which is a very inefficient, high carbon output form of heating.

Well, congratulations on that front. Your customer growth is really starting to stand out here against the peer group.

Secondly, just wanted to ask briefly about Greg's departure, I know he hadn't been there too long, I just wonder if you could talk a little bit about either the planning or the succession planning there. I know Brody is now wearing a bunch of hats there and maybe he could chime in about being the CAO, CFO, and Controller as well, but just give us a sense that how you're approaching that at this point?

I appreciate it Spencer of course I think you're referring to Greg Hazelton, who was the CFO, the departed, to go back to back home to Hawaii. So, we love Portland but I guess Hawaii has got a little bit of a bigger draw, which we are appreciate.

[Multiple Speakers] for that.

So, what we're doing is we do have an active search. We're really pleased that Brody did step up and you're right he's wearing a couple of hats.

We would anticipate and actually I [indiscernible] Brody through his name into hat, which is outstanding. We'll go through a formal process very much like what we did with Greg Hazelton, and I would anticipate these take a little while to work through, because it's a very important position in the Company and I would anticipate that this would probably barring in some kind of immediate perfect candidate popping up Spencer, we'd probably easily go into next year.

I don't really want to give a timing, I think it will be the first half of next year at the latest overall that we would have some type of announcement there. And then I think the other thing that maybe as you recall, I have done the job before so Brody not just out here on an island, he is getting a little bit help from me, probably more than he wants.

I think we're well covered.

Can you give an update on the total CapEx expectations for 2016, given the first nine months and what you've already and will spend on the Mist and do you have an indication for 2017 for total CapEx as well?

Let me get Brody to kind of give you some update there.

Yes, I think that we are in the range of 155 million to 175 million for 2016. We're probably trending towards the lower-end of that range this year just given some timing of some of our larger projects coming in towards the end of the year and some of that included the North Mist, project which we now have noticed proceed on and we'll continue to work hard in the fourth quarter on that project.

And then going forward I think we've been disclosed on a five-year forecast for CapEx, which is in the range of 850 to 950 over the five-year period and then nothing significantly discrete for 2017, other than the discussion David had earlier about North Mist and our expectation of, I think he said somewhere in the range of $80 million to $90 million in 2017.

And then on the O&M discussion, given the context of what you did last year with very warm winter and it appears first nine months are pretty similar to last year. I mean is this something we will flex up and down in terms of payroll, based on the weather?

Are you at on operating level that you'll continue going forward? So if it ends up being warmer this winter, do you cut back again to levels where you were last year?

How do you look at that?

So I think we worked hard to manage costs through some sort of one-time initiatives last year that we don't expect to occur this year. We have increased our footprint from employee levels to a more sustainable level that we expect going forward.

So, I mentioned on the call the $5 million that we managed to save last year that we don't anticipate to occur in the second half of this year, so, some of that came through in the third quarter. We'd expect the rest of that, probably more than half to come back in the fourth quarter.

All right Rocko. Thank you very much and thanks for everybody for joining us today.

Have a great rest of your day. And if you have any questions, please follow-up with Nikki.

Thank you.