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NW Natural Reports Strong 2005 Results

PORTLAND, Ore., Feb 16, 2006 (BUSINESS WIRE) -- Northwest Natural Gas Company (NYSE:NWN) dba NW Natural, reported net income for the 12 months ended Dec. 31, 2005 of $58.1 million, compared to $50.6 million in 2004, an increase of 15 percent. Earnings per diluted share in 2005 were $2.11 compared to earnings of $1.86 in 2004, a 13 percent increase.

Earnings for the fourth quarter of 2005 were $25.8 million, down 4 percent from $27.0 million in the fourth quarter of 2004. Earnings per diluted share for the fourth quarter of 2005 were 93 cents, compared to 97 cents last year.

Among financial and operating highlights for the year, the company:

  • Increased earnings per diluted share by 13 percent for the year on strong utility results and higher earnings from interstate storage operations.
  • Marked 50 consecutive years of increasing dividends paid on common stock by increasing the dividend rate by 6.2 percent in November.
  • Ranked fifth nationally and second in the West on J.D. Power's survey for customer satisfaction among 56 gas utilities.
  • Won regulatory renewal of our conservation tariff for another four years.
  • Added over 20,500 customers during the year to reach 617,000 customers -- a 3.4 percent growth rate -- and more than twice the national average for gas utilities.
  • Refinanced a $200 million credit line at attractive rates and improved the company's liquidity.
  • Continued expansion of the Mist natural gas storage facility to serve the regional interstate market.
  • Updated the company's strategic plan to refine and sharpen our strategic direction and focus on cost controls and improving efficiencies.

President and Chief Executive Officer Mark Dodson said, "I am pleased with the strong financial results and the hard work of our employees this year on behalf of customers and shareholders alike, despite the challenges of higher wholesale gas prices. Our regulatory mechanisms worked as designed, and we completed our 19th year with customer growth of over 3 percent -- more than double the national average. Overall, it was a solid year, and we are well positioned to make further improvements in 2006 by pursuing initiatives and opportunities to foster profitable growth and increasingly efficient operations in the years ahead."

Fourth Quarter Detail

Net income for the fourth quarter of 2005 was $25.8 million, or 4 percent lower, compared to $27.0 million in the fourth quarter of 2004, with the lower results mainly due to resolution of a dispute with a number of industrial customers.

Late in the fourth quarter, NW Natural successfully resolved a billing dispute with 18 industrial customers related to cost of gas issues that arose as these customers moved to sales service rates (which includes the cost of gas) from transportation service rates. The settlements resolve all issues with these customers. Litigation has commenced with the one industrial customer that did not agree to settle. As a result, the company took a pre-tax charge of $2.8 million for costs related to the settlements and anticipated future legal and other costs.

NW Natural's utility operations earned $24.4 million (88 cents per diluted share) in 2005, compared to $26.4 million (95 cents per diluted share) in 2004. In addition, the company earned $1.2 million (4 cents per diluted share) from interstate gas storage operations, compared to $0.8 million (3 cents per diluted share) in 2004. The company also earned $0.2 million (1 cent per diluted share) from subsidiary and other non-utility operations, compared to a recorded loss of $0.2 million (1 cent per diluted share) in 2004.

Total gas deliveries in the fourth quarter were 367 million therms, up 8 percent from last year, and net operating revenues from utility operations were $101.9 million, 6 percent higher than last year's $96.3 million, due to both colder weather and strong customer growth.

Sales to residential and commercial customers in the quarter were 223 million therms, up 13 percent from 197 million therms due mainly to 10 percent colder weather in the period compared to the same period last year. Weather for the fourth quarter was 3 percent colder than average, compared to weather that was 7 percent warmer than average for the same period last year. As a result, the company's weather normalization and decoupling mechanisms in Oregon generated a decrease to margin of $2.8 million in the fourth quarter of 2005, compared to an increase to margin of $4.9 million in 2004, with a return to more average weather conditions.

Gas deliveries to industrial customers in the fourth quarter were 144 million therms, up 1 percent from 143 million therms last year, while margin in this sector was $7.8 million, down 7 percent from $8.4 million last year due primarily to the industrial customer dispute discussed above.

NW Natural also provides gas storage services to customers in the interstate market from its approximately 14 bcf capacity Mist gas storage field, using storage capacity that has been developed in advance of NW Natural's core utility customers' requirements. Earnings from the interstate gas storage business segment in the fourth quarter of 2005 were $1.2 million, equivalent to 4 cents per diluted share, compared to $0.8 million, or 3 cents per diluted share, in 2004. These results include income from gas storage services, as well as income from a contract with an independent company that seeks to optimize the use of NW Natural's assets by optimizing temporarily unused portions of its gas storage capacity and upstream pipeline transportation capacity.

NW Natural has an annual Purchased Gas Adjustment (PGA) tariff in Oregon and Washington to reflect projected gas costs in customer rates. In Oregon, the company absorbs 33 percent of any excess cost of gas, or retains 33 percent of any gas cost savings, both as compared to the gas commodity prices built into customer rates. The company also retains 33 percent of the margin when it sells surplus gas commodity off-system, and refunds 67 percent to customers. In the fourth quarter, NW Natural recognized $7.5 million of total gas cost savings, with customers receiving $5.0 million. NW Natural's share of the savings was $2.5 million. In 2004, customers and NW Natural realized a reduction in margin of $0.8 million. In Washington, 100 percent of all gas costs are passed through to customers.

Fiscal Year Detail

For the fiscal year ended Dec. 31, 2005, earnings were $58.1 million, up 15 percent, from earnings of $50.6 million in 2004.

NW Natural's utility operations earned $52.8 million ($1.91 per diluted share), compared to $47.1 million ($1.73 per diluted share) in 2004. The company also earned $4.5 million (17 cents per diluted share) in 2005 from interstate gas storage operations, up from $2.9 million (11 cents per diluted share) in 2004, a 55 percent increase, and earned $0.8 million (3 cents per diluted share) from subsidiary and other operations, compared to $0.6 million (2 cents per diluted share) in 2004.

Total gas sales and transportation deliveries in 2005, excluding deliveries of gas stored for others, were slightly higher at 1.16 billion therms, compared to 1.13 billion therms in 2004 due mainly to higher residential and commercial volumes.

Gas sales to residential and commercial customers in 2005 were 605 million therms, up 5 percent, due primarily to weather that was 8 percent colder than in 2004, but was 2 percent warmer than average.

The residential and commercial segments contributed $274 million to margin, up 13 percent from $243 million in 2004, due mainly to increased rates, continued strong customer growth and a return to more average weather conditions. This return to a more average weather pattern resulted in an increase to margin from the company's weather normalization and decoupling mechanisms of approximately $1.6 million in 2005. In 2004, these mechanisms contributed $9.6 million in margin due mainly to much warmer weather than average

Gas deliveries to industrial customers in 2005 were 552 million therms, down 1 percent from last year's 557 million therms. Contribution to margin from sales and transportation in these markets was $32.1 million, up 3 percent from last year's $31.0 million. The higher margin in the industrial market reflects improvement in economic conditions and increased sales in higher margin industrial rate schedules.

For the full year under the PGA tariffs, NW Natural recognized $13.7 million of total gas cost savings, with customers receiving $9.4 million. NW Natural's share of the savings was $4.3 million. In 2004, customers and NW Natural realized a total benefit of about $0.4 million. As previously noted, 100 percent of all gas costs in Washington are passed through to customers.

NW Natural had 617,163 customers at the end of 2005, up 3.4 percent from year-end 2004. As a result, NW Natural has experienced customer growth in excess of 3 percent for the 19th straight year.

Operations and maintenance expenses in 2005 were up 11 percent due mainly to higher payroll and benefit costs and the effect of the industrial customer dispute discussed above. Bad debt expense as a percent of revenues remained well below 1 percent (0.33 percent) compared to 0.47 percent in 2004.

Cash provided by operations in 2005 was $79.1 million, as compared to $104.9 million in 2004. Cash flows in 2005 reflect improved operational results and a $31 million contribution to the company's defined benefit retirement plans versus an $8.3 million contribution in 2004.

The company's capitalization at Dec. 31, 2005 reflected 47 percent common equity, 42 percent long-term debt, and 11 percent short-term debt compared to 49 percent common equity, 41 percent long-term debt, and 10 percent short-term debt at the end of 2004.

Outlook for 2006

The company's 2006 outlook assumes normal weather conditions, continued strong customer growth, benefits from cost reduction initiatives and no significant changes in prevailing regulatory policies.

The company expects full year earnings per diluted share to be within the range of $2.12-$2.27. The company continues to target long-term earnings per share growth of 5 percent or more and to maintain a dividend payout ratio of 60-70 percent.

The company's cash flows are expected to remain strong allowing the company to internally fund capital expenditures, including investing approximately $10 million for an Automated Meter Reading project in 2006 to cover the company's non-joint meter reading areas.

Senior Vice President and Chief Financial Officer David Anderson said, "We continue to take actions to ensure that the company's financial condition remains strong. We are actively engaged in numerous cost-efficiency programs that are focused on keeping cost increases below customer growth levels. In addition, we remain focused on maintaining strong investment grade credit ratings, which currently are at A or above."

Dividend Declaration

The Board of Directors of NW Natural on Jan. 5, 2006 declared a quarterly dividend of 34.5 cents a share on the company's common stock. The dividends were paid Feb. 15, 2006 to shareholders of record on Jan. 31, 2006. NW Natural has increased the dividends paid to common stockholders for 50 consecutive years.

Conference Call Arrangements

As previously released, NW Natural will conduct a conference call and webcast starting at 11:00 a.m. Eastern Time (8:00 a.m. Pacific Time) on Thursday, Feb. 16, to review the company's fourth quarter and full-year financial results as well as earnings guidance for fiscal year 2006.

To hear the conference call live, please dial 800-510-9836 from anywhere in the United States, or 617-614-3670 from international points, including Canada. Participants will be asked for their name, company name, the name of the conference they will be joining ("NW Natural") and their phone number. The participant pass code number is 67099818. A replay of the call will be available two hours after completion of the conference call until March 3, 2006. To access the recording, call 888-286-8010 and enter the conference replay pass code number 65983413.

To hear the conference by webcast, logon to NW Natural's corporate web site at nwnatural.com and select the webcast icon on the home page. A replay of the webcast will be available two hours after the conference concludes.

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 in cents per share on a diluted basis. These amounts reflect factors that directly impact the company's earnings. NW Natural believes this per share information is useful because it enables readers to better understand the impact of these factors on its earnings.

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 Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and other statements that are other than statements of historical facts. The company's expectations, beliefs and projections are expressed in good faith and are believed to have a reasonable basis. However, each such forward-looking statement involves uncertainties and is qualified in its entirety by reference to the factors described in "Forward-Looking Statements" following Part II, Item 7A, in the company's 2004 Annual Report on Form 10-K and "Forward-Looking Statements" in the company's most recent Quarterly Report on Form 10-Q that could cause the actual results of the company to differ materially from those projected in such forward-looking statements.

All subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the company, also are expressly qualified by these cautionary statements. Any forward-looking statement speaks only as of the date on which such statement is made, and the company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. 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 statement.

About NW Natural

NW Natural is headquartered in Portland, Ore., and serves over 617,000 residential and business customers in Oregon and southwest Washington. It is the largest independent natural gas utility in the Pacific Northwest. With customer growth in excess of 3 percent for 19 consecutive years, it is also one of the fastest-growing local distribution companies in the nation. NW Natural has over $2.0 billion in total assets, which includes nearly 14 bcf of underground gas storage capacity at Mist, Ore., within its service territory. The company has in place rate mechanisms that help to protect revenues from warmer than average weather and declining consumption. NW Natural has increased its dividends paid on common stock for 50 consecutive years, one of only four public companies in the U.S. known to have achieved such a record.

NORTHWEST NATURAL GAS COMPANY
                     Comparative Income Statement
                      (Consolidated - Unaudited)

                                         Three Months Ended
                                        --------------------
                                                             Increase
(Thousands, except per share amounts)    12/31/05  12/31/04 (Decrease)
                                         --------- -------------------

Gross Operating Revenues                $ 341,375 $ 262,054  $ 79,321
Net Income                              $  25,793 $  26,961  $ (1,168)
Average Shares of Common Stock
 Outstanding                               27,561    27,463        98
Basic Earnings Per Share of Common
 Stock                                  $    0.94 $    0.98  $  (0.04)
Diluted Earnings Per Share of Common
 Stock                                  $    0.93 $    0.97  $  (0.04)


                                        Twelve Months Ended
                                        --------------------

(Thousands, except per share amounts)    12/31/05  12/31/04  Increase
                                         --------- -------------------

Gross Operating Revenues                $ 910,486 $ 707,604  $202,882
Net Income                              $  58,149 $  50,572  $  7,577
Average Shares of Common Stock
 Outstanding                               27,564    27,016       548
Basic Earnings Per Share of Common
 Stock                                  $    2.11 $    1.87  $   0.24
Diluted Earnings Per Share of Common
 Stock                                  $    2.11 $    1.86  $   0.25



                     NORTHWEST NATURAL GAS COMPANY
                         Financial Highlights
                              (Unaudited)
                         Fourth Quarter - 2005

                              3 Months Ended       12 Months Ended
                                 Dec. 31,              Dec. 31,
(Thousands, except per
 share amounts and
 customers)                   2005       2004       2005       2004
-------------------------- ---------- ---------- ---------- ----------
Gross Operating Revenues  $  341,375 $  262,054 $  910,486 $  707,604
Cost of Sales                228,596    157,840    563,860    399,244
Revenue Taxes                  8,361      6,155     21,633     16,865
                           ---------- ---------- ---------- ----------
Net Operating Revenues       104,418     98,059    324,993    291,495
                           ---------- ---------- ---------- ----------
Operating Expenses:
  O&M                         33,052     27,831    113,216    102,155
  Other Taxes                  5,290      5,401     23,185     21,943
  D&A                         15,686     15,340     61,645     57,371
                           ---------- ---------- ---------- ----------
      Total Operating
       Expenses               54,028     48,572    198,046    181,469
                           ---------- ---------- ---------- ----------
Operating Income              50,390     49,487    126,947    110,026
Other Income                     185        719      1,205      2,828
Interest Charges - Net         9,996      9,269     37,283     35,751
Income Tax Expense            14,786     13,976     32,720     26,531
                           ---------- ---------- ---------- ----------
Net Income from
 Operations               $   25,793 $   26,961 $   58,149 $   50,572
                           ========== ========== ========== ==========

Common Shares Outstanding:
  Average for Period -
   basic                      27,561     27,463     27,564     27,016
  Average for Period -
   diluted                    27,611     27,746     27,621     27,283
  End of period               27,579     27,547     27,579     27,547

Earnings per Share:
  Basic                   $     0.94 $     0.98 $     2.11 $     1.87
  Diluted                 $     0.93 $     0.97 $     2.11 $     1.86

Dividends Paid Per Share  $    0.345 $    0.325 $     1.32 $     1.30
Book Value Per Share - end
 of period                $    21.28 $    20.64 $    21.28 $    20.64
Market Closing Price - end
 of period                $    34.18 $    33.74 $    34.18 $    33.74

Balance Sheet Data (at end
 of period):
  Total Assets            $2,042,031 $1,732,195 $2,042,031 $1,732,195
  Common Stock Equity     $  586,931 $  568,517 $  586,931 $  568,517
  Long-Term Debt          $  529,500 $  499,027 $  529,500 $  499,027
    (including amounts due
     in one year)

Operating Statistics:
Total Customers - end of
 period                      617,163    596,635    617,163    596,635

Gas Deliveries (therms)
  Res. & Comm. Customers     222,832    196,725    605,442    574,925
  Industrial Firm             21,547     17,291     74,963     63,149
  Industrial Interruptible    42,355     33,624    149,106    104,278
  Transportation              80,510     92,028    328,056    389,514
                           ---------- ---------- ---------- ----------
Total                        367,244    339,668  1,157,567  1,131,866

Gas Revenues
  Res. & Comm. Customers  $  282,836 $  220,875 $  722,049 $  584,126
  Industrial Firm             20,962     14,022     64,247     44,624
  Industrial Interruptible    34,905     20,908    100,740     55,380
  Transportation               2,466      3,075     10,755     12,655
  Other Revenues              (2,351)     1,398      2,862      4,160
                           ---------- ---------- ---------- ----------
Total                     $  338,818 $  260,278 $  900,653 $  700,945

Cost of Gas Sold          $  228,586 $  157,817 $  563,772 $  399,176
Revenue Taxes             $    8,361 $    6,155 $   21,633 $   16,865
Net Operating Revenues
 (utility margin)         $  101,871 $   96,306 $  315,248 $  284,904

Degree Days
  Normal (25-year average)     1,613      1,613      4,265      4,265
  Actual                       1,656      1,501      4,178      3,853
Colder (Warmer) than
 Normal                            3%       (7%)       (2%)      (10%)



NORTHWEST NATURAL GAS COMPANY
----------------------------------------------------------------------
Consolidated Balance Sheets (unaudited)    December 31,  December 31,
Thousands                                      2005           2004
-------------------------------------------  -----------    ----------

Assets:
Plant and property:
   Utility plant                            $1,875,444     $1,794,972
   Less accumulated depreciation               536,867        505,286
                                             ----------     ----------
        Utility plant - net                  1,338,577      1,289,686
                                             ----------     ----------
  Non-utility property                          40,836         33,963
  Less accumulated depreciation and
   amortization                                  5,990          5,244
                                             ----------     ----------
        Non-utility property - net              34,846         28,719
                                             ----------     ----------
        Total plant and property             1,373,423      1,318,405
                                             ----------     ----------

Other investments                               58,451         60,618
                                             ----------     ----------

Current assets:
  Cash and cash equivalents                      7,143          5,248
  Accounts receivable                           84,418         60,634
  Accrued unbilled revenue                      81,512         64,401
  Allowance for uncollectible accounts          (3,067)        (2,434)
  Gas inventory                                 77,256         58,015
  Materials and supplies inventory               8,905          8,462
  Income taxes receivable                       13,234         15,970
  Prepayments and other current assets          54,309         26,821
                                             ----------     ----------
        Total current assets                   323,710        237,117
                                             ----------     ----------

Regulatory assets:
  Income tax asset                              65,843         64,734
  Deferred environmental costs                  18,880          6,325
  Deferred gas costs receivable                  6,974          9,551
  Unamortized costs on debt redemptions          6,881          7,332
  Other                                              -          3,321
                                             ----------     ----------
        Total regulatory assets                 98,578         91,263
                                             ----------     ----------

Other assets:
  Fair value of non-trading derivatives        178,653         16,399
  Other                                          9,216          8,393
                                             ----------     ----------
        Total other assets                     187,869         24,792
                                             ----------     ----------
        Total assets                        $2,042,031     $1,732,195
                                             ==========     ==========

Capitalization and liabilities:
Capitalization:
  Common stock                              $   87,334     $   87,231
  Premium on common stock                      296,471        300,034
  Earnings invested in the business            205,687        183,932
  Unearned stock compensation                     (650)          (862)
  Accumulated other comprehensive income
   (loss)                                       (1,911)        (1,818)
                                             ----------     ----------
        Total common stock equity              586,931        568,517
  Long-term debt                               521,500        484,027
                                             ----------     ----------
        Total capitalization                 1,108,431      1,052,544
                                             ----------     ----------

Current liabilities:
  Notes payable                                126,700        102,500
  Long-term debt due within one year             8,000         15,000
  Accounts payable                             135,287        102,478
  Taxes accrued                                 12,725         10,242
  Interest accrued                               2,918          2,897
  Other current and accrued liabilities         40,935         34,168
                                             ----------     ----------
        Total current liabilities              326,565        267,285
                                             ----------     ----------

Regulatory liabilities:
  Accrued asset removal costs                  169,927        153,258
  Unrealized gain on non-trading
   derivatives, net                            171,777         10,912
  Customer advances                              1,847          1,529
  Other                                            661              -
                                             ----------     ----------
        Total regulatory liabilities           344,212        165,699
                                             ----------     ----------

Other liabilities:
  Deferred income taxes                        222,331        211,080
  Deferred investment tax credits                5,069          5,660
  Fair value of non-trading derivatives          6,876          5,487
  Other                                         28,547         24,440
                                             ----------     ----------
        Total other liabilities                262,823        246,667
                                             ----------     ----------
Commitments and contingencies (see Note 12)          -              -
                                             ----------     ----------
        Total capitalization and
         liabilities                        $2,042,031     $1,732,195
                                             ==========     ==========



NORTHWEST NATURAL GAS COMPANY
--------------------------------------------------------------------
Consolidated Statements of Cash Flows (unaudited)
Thousands (year ended December 31)                  2005       2004
-------------------------------------------------- --------- ---------
Operating activities:
   Net income                                     $ 58,149  $  50,572
   Adjustments to reconcile net income to cash
    provided by operations:
      Depreciation and amortization                 61,645     57,371
      Deferred income taxes and investment tax
       credits                                       9,551     36,713
      Undistributed earnings from equity
       investments                                     (57)      (181)
      Allowance for funds used during construction    (520)    (1,690)
      Deferred gas costs - net                       2,577    (15,178)
      Contributions to qualified defined benefit
       pension plans                               (31,000)    (8,261)
      Non-cash expenses related to qualified
       defined benefit pension plans                 4,532      4,322
      Deferred environmental costs                  (9,132)    (2,215)
      Income from investment in life insurance      (1,873)    (2,855)
      Other                                          3,856      5,781
      Changes in working capital:
          Accounts receivable - net                (23,151)   (11,593)
          Accrued unbilled revenue - net           (17,111)    (5,292)
          Inventories of gas, materials and
           supplies                                (19,684)   (15,618)
          Income taxes receivable                    2,736     (6,984)
          Prepayments and other current assets      (3,439)       245
          Accounts payable                          32,809     16,449
          Accrued interest and taxes                 2,504      1,536
          Minimum pension liability adjustment         (93)      (802)
          Other current and accrued liabilities      6,767      2,579
                                                   --------  ---------
      Cash provided by operating activities         79,066    104,899
                                                   --------  ---------
Investing activities:
   Investment in utility plant                     (89,259)  (138,347)
   Investment in non-utility property               (6,842)   (10,568)
   Proceeds from sale of non-utility investments     3,001          -
   Proceeds from life insurance                        296     17,575
   Other                                               796     (1,291)
                                                   --------  ---------
      Cash used in investing activities            (92,008)  (132,631)
                                                   --------  ---------
Financing activities:
   Common stock issued, net of expenses              7,486     46,616
   Common stock purchased                          (14,945)      (537)
   Long-term debt issued                            50,000          -
   Long-term debt redeemed                         (15,528)         -
   Change in short-term debt                        24,200     17,300
   Dividends paid on common stock                  (36,376)   (35,105)
                                                   --------  ---------
      Cash provided by financing activities         14,837     28,274
                                                   --------  ---------
Increase in cash and cash equivalents                1,895        542
Cash and cash equivalents - beginning of period      5,248      4,706
                                                   --------  ---------
Cash and cash equivalents - end of period         $  7,143  $   5,248
                                                   ========  =========

--------------------------------------------------------------------
Supplemental disclosure of cash flow information:
      Interest paid                               $ 36,974  $  36,061
      Income taxes paid - net                     $ 28,479  $   2,500

--------------------------------------------------------------------
Supplemental disclosure of non-cash financing
 activities:
   Conversion to common stock:
      7-1/4 % Series of Convertible Debentures    $  3,999  $   1,292

SOURCE: Northwest Natural Gas Company

Northwest Natural Gas Company
Bob Hess, 503-220-2388 (Investor Contact)
Bob.Hess@nwnatural.com
or
Steve Sechrist, 503-220-2594 (Press Contact)
steve.sechrist@nwnatural.com

"Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: Statements in this press release regarding NW Natural's business which are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's Annual Report or Form 10-K for the most recently ended fiscal year.