Robert Hess - Investor Relations Gregg Kantor - President and Chief Executive Officer Stephen Feltz - Senior Vice President and Chief Financial Officer.

Dan Fidel - U.S. Capital Advisors.

Good day, and welcome to the Northwest Natural first quarter 2014 results conference call and webcast. (Operator Instructions) I would now like to turn the conference over to Mr. Bob Hess, Director, Investor Relations. Please go ahead..

Thank you, Nicky. Good morning, everybody, and welcome to our first quarter earnings call for 2014. 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, and you should refer to the language at the end of our press release for the appropriate cautionary statements and also to our SEC filings for additional information. We do expect to file our 10-Q later today.

As previously mentioned this call is being recorded and will be available on our website later today. Please note that these calls are designed for the financial community. If you are an individual investor and have questions, please contact me directly at area code 503-220-2388. Media can contact, Kim Heiting, directly at area code 503-220-2366.

Speaking this morning are Gregg Kantor, President and Chief Executive Officer; and Steve Feltz, Senior Vice President and Chief Financial Officer. Gregg and Steve 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 answer any questions you may have. We look forward to seeing many of you at the upcoming American Gas Association Financial Forum.

If you have any questions about that event, please contact me as soon as you are able, especially regarding scheduling and meeting or attending our dinner. With that, let me turn it over to Gregg..

Thanks Bob. Good morning, everyone, welcome to our first quarter earnings call. I'll begin today with highlights from the quarter. I'll then turn it over to Steve to cover the financial details for the period. And I'll wrap it up with brief comments about our priorities for the remainder of the year.

Our operational performance in the first quarter was as expected and comparable to last year. However, a key highlight in the period was a receipt of $91 million from our insurance carriers for settlements we finalized in January, related to our environmental claims.

Those proceeds coupled with previous settlements bring our total recovery for environmental cleanup activities to approximately $150 million, an outcome we view as very positive. Another key development in the quarter was the announcement we made at the end of March, that we had amended our gas reserves agreement with Encana.

As you know, Northwest Natural entered into an agreement with Encana in 2011 to develop gas reserves to provide long-term price protection for our Oregon utility customers. Under the original agreement, the company was expected to invest a total of $250 million over five years.

To date, we have made a cumulative total investment of $178 million in the venture. These gas reserves are expected to provide a price hedge on approximately 9% of our utility gas purchase requirements for the current year and stable prices for smaller portion of our utility gas supply for years to come.

The amendment to our gas reserves agreement was triggered by Encana's proposed sale of its interest in the Jonah field to an affiliate of Texas Pacific Group Capital.

The amendment essentially ended the drilling of wells in the sections of Jonah field we had been acquiring ownership interest in, and it allows us to drill future wells in those sections under a joint operating agreement. Under this agreement, we would see regulatory review for future drilling.

Once the Encana sale closes, we will begin discussions with TPG to determined next steps. And on a parallel track, we have been analyzing what total percentage of gas reserves is appropriate to hold in our supply portfolio.

We expect to have that analysis completed as part of our next integrated resource plan, which should be filed with Oregon commission by August and we hope to receive acknowledgement of it in early 2015. As you know, one of the key elements of our system planning effort has been our pipe replacement program.

Today, our integrity management program has enabled us to replace all of our cast iron in our system, and we expect to remove the remaining 10 miles of bare steel that we still have in our system by 2013. We feel very fortunate to be in this position.

In fact, SNL energy recently did a comparison of data submitted to the office of Pipeline Safety by all utilities since 2012 that showed our system had one of the lowest leak ratios compared to other distribution systems across the country.

In my view, these results demonstrate how effective our program has been and it's a testament to what can be achieved for a system safety, when you have the support of regulators and customer advocates. Before I turn it over to Steve, let me touch on some of the local economic indicators that impact our growth.

First, Oregon's job growth accelerated in March to its strongest pace in nearly a decade. The state employment department reported an estimated 7,500 new jobs were created in March, which is the largest mean of any four-week stretch since November of 2005.

Oregon's seasonally adjusted unemployment rate was down to 6.9% in March compared to 8% a year ago. And in Vancouver Washington, where we serve about 10% of our customer base, the unemployment rate also dropped down to 7.5% from 10% a year ago. Sector that's particularly important to our business as you know is construction.

And in March seasonally adjusted construction employment broke through 80,000 in Oregon for the first time since January of 2009. Housing activity also continue to improve slightly with more movement in the existing stock. For example, in the Portland Metro area, new listings and home sales were both up about 2% compared to the first quarter of 2013.

Home prices in Portland were also up about 13% from a year earlier. And according to the state economist, a single-family new construction in Oregon is expected to increase by about 10% in 2014 compared to 2013.

These economic and housing sector improvements contributed to an increase in our customer growth rate to just over 1.3% in the quarter compared to 1.1% a year earlier.

As the year progresses, we hope to see more new construction activity, but we're also using our strong price advantage over oil and electricity, pursue growth within the existing housing stock.

With less than 60% market share and as much as a 60% price advantage, we believe there are substantial conversions opportunities As you may recall last fall, we launched a new online portal where potential conversion customers can check for gas availability and find the information they need to switch to gas all from their computer tablet or smartphone.

We've integrated the promotion of this new tool into our marketing efforts and have been very pleased with the results. We can now use web analytics from this new portal, identify gas connection enquiries by residential premise, both on and off the main enabling us to refine our marketing efforts and more effectively target conversion prospects.

In fact, web analytics are helping us asses' main extension opportunities to potentially serve new customers under Senate Bill 844, the Greenhouse Gas Reduction bill that was passed last year in Oregon. I'll talk more about that bill and the opportunities it provides after Steve's report..

Thank you, Gregg, and good morning everyone. We reported consolidated net income of $37.9 million or $1.40 per share for the quarter compared to net income of $37.6 million or $1.40 per share last year.

During the first quarter of 2014, our utility accounted for net income of $36 million, about the same as last year on whether that was 1% warmer than a year ago or 2% colder than average.

Utility net income results primarily reflect an increase in operating revenues offset by higher gas costs, higher O&M expense and an increase in the state effective rate.

Utility operating revenues for the quarter included a $5.4 million increase in margins over last year, which was primarily driven by residential and commercial customer growth, an increase in industrial margins and incremental rate base returns from gas reserves, pipeline integrity and other tracked in capital investments.

However, those revenue gains were partially offset by a $1.8 million loss this year as compared to a $600,000 gain last year from our gas cost incentive sharing mechanism. The sharing loss was largely due to higher spot gas prices this quarter, which were driven by record cold temperatures in other parts of the country.

The average cost of gas delivered to our customers in the first quarter of 2014 was $4.52 per dekatherm as compared to $3.96 per dekatherm embedded in customer rate. As part of our regulatory gas cost sharing mechanism, we absorbed 10% of the difference between actual and embedded gas cost on volumes that are not hedged for the period.

We typically hedge about 80% to 90% of our volumes during the winter months. From an operational standpoint, utility gas deliveries in the quarter were up 2% over last year with sales to residential and commercial customers up 2% on weather that was 1% warmer and on volumes for industrial customers that were up less than 1%.

Unlike other parts of the country, which had endured extreme cold weather this quarter, we generally experienced average winter temperatures with the exception of one severe weather event.

That cold weather event came on February 6, and produced a record daily volume sendout for the company of 9 million therms breaking the previous record that was set 10 years ago.

A key factor for the quarter was our customer growth rate, which is a little over 1.3% for the trialing 12 month bringing our total customer count to nearly 700,000 at March 31. That compares to an annual growth rate of 1.1% at the same point last year.

What we're seeing is a gradual, but continuing increase in customer growth in our service territory with a slowly improving economy in the housing market that has been aided by low interest rate and a declining unemployment rate. Turning now to our gas storage segment.

Net income for the quarter was $1.6 million or $0.06 per share, which is about the same as last year. While results for the quarter were consistent year-over-year, the market for gas storage in general remains challenging due to the flat forward price curve. In particular, market factors have negatively impacted California storage prices.

Our Mist storage facility in Oregon, while non-immune to these issues continues to perform well mainly due to limited storage capacity in the Northwest. In California, we expect our Gill Ranch faculty to continue experiencing headwind, as the state's economy and demand for natural gas improves slowly.

However, we remain bullish long-term that natural gas storage in California is needed, as the state's economy improves and as the increased use of renewable energy drive the demand for flexible storage asset.

Consolidated operating expenses, excluding cost of gas, were $1.9 million higher in 2014 than 2013, driven by O&M costs that were $1.6 million higher and depreciation expenses that were $600,000 higher.

The O&M increase was primarily due to adjustments in our bad debt reserve balances a year ago, along with the increased system maintenance and safety program costs. Despite the $1 million increase in bad debt expense this year, our bad debt expense ratio remains very low at 0.2% of gross revenues on an annualized basis.

Excluding the increase in bad debt expense, our O&M increase was just 2% over last year. Cash flow from operating activities was $220 million in the first quarter of 2014, which is more than twice the $106 million generated in 2013 first quarter.

This significant increase reflects the receipt of $91 million in insurance proceeds from our environmental claims, plus various increases in working capital account, including a $30 million increase from accounts receivable and gas inventory.

Partially offsetting these increases was a $16 million decrease from deferred gas cost related to the higher gas prices discussed previously, which we'll be able to recover through our annual PGA filing later this year.

As reported earlier in the quarter, on March 28, we amended our gas reserve agreement in order to facilitate Encana's proposed sale of its interest in the Johan field. Our investment today totals $178 million. We will continue to earn a rate of return on that investment and provide long-term gas price protection for utility customers.

We also retain the right to drill additional wells with new owners in the Jonah field, but we would need regulatory approval to recover our growing costs through customer rates. At this time, we do not have plans to drill additional wells this year.

Looking ahead to the rest of 2014, we are expecting continued investments in our utility distribution system to support customer growth as well as our ongoing pipeline integrity replacement program.

In addition, we will be filing our integrated resource plans with Oregon and Washington later this year, which are expected to identify reliability and resource requirements for the utility. From a cash flow perspective, our liquidity position improved significantly in the quarter, as a result of the insurance recovery mentioned earlier.

And in the near-term, we anticipate using a portion of those insurance proceeds to redeem the $50 million of medium-term notes in July that are due in July, as well as pay for ongoing environmental cleanup expenditures and for other general corporate purposes of the utility.

The company reaffirmed earnings guidance today in a range of $2.15 to $2.35 per share for 2014.

This guidance assumes a continued economic recovery, customer growth, average weather condition, no changes to the recoverability of regulated assets, no changes in prevailing legislative or regulatory policies and a successful resolution for environmental cost recovery mechanism in 2014.

With that, I will turn the call back over to Greg, for his concluding remarks..

Thanks, Steve. Clearly, a key priority for us in 2014 is to work through the remaining regulatory issues carried over from our 2012 Oregon rate case. Dockets involving in environmental earnings test, recovery of prepaid pension assets and the review of our interstate storage revenue sharing.

These proceedings are all underway and remain on track for completion this year. Another important priority for this year is to determine whether or not we'll be moving forward with an expansion at our Mist storage facility in Oregon.

As you know, for the past year we've been working with Portland General Electric to explore how a Mist expansion to provide a flexible on-demand fuel source for their gas plants at Port Westward plants, designed to integrate wind resources into their system supply.

The proposed expansion would require the development of storage wells, a compression station and additional pipeline facilities. As I mentioned on our last call, we are currently working with PGE to refine cost estimates, and we expect a decision on whether to proceed with the project by the fall.

Finally this morning, let me give you an update on where we are with Oregon Senate Bill 844 opportunities. As you know, this new bill allows the OPUC to establish a voluntary greenhouse gas reduction program. To incent natural gas utilities to invest in projects that reduce emissions.

We've been very supportive of the bill, believing it provides a unique proactive way for us to earn on investments that have quantifiable environmental benefits for customers. A rulemaking effort to establish project and investment criteria is currently underway at the OPUC.

One important requirement already identified is that the investment opportunities need to support projects that would otherwise not move forward. Using that condition as a starting point, we have begun to evaluate a number of potential investments, so that we can have projects in hand for consideration, once the rulemaking effort is complete.

For example, one project we are assessing is an oil conversion effort to target residential homes in our service area, some of which are off our existing system and may not be in a position to convert because doing so would require a long main extension.

We are also evaluating the viability of including low income oil heat customers in this proposal, consumers that for financial reasons haven't been able to convert to natural gas despite more than a 60% price advantage.

So lot of work left to do, but we are optimistic about the potential opportunities ahead that represent a win for the environment, our customers and the company. We'll keep you posted on how the greenhouse gas reduction program unfolds as the year progresses. Thanks again for joining us today. And with that, I'll open it up for questions..

(Operator Instructions) Our first question comes from Dan Fidel with U.S. Capital Advisors..

Just a few questions, as always you covered my questions pretty well in the script, I guess. One question I had on customer growth. Certainly positive, it's on the rise, new listings and home sales up as you mentioned, but can you just remind us what assumptions you're using in for the 2014 guidance in terms of new customer adds.

And then longer-term the thoughts on where you think this may settle into future years. It's been steadily increasingly here in the last couple of years..

Customer growth, we have projected a little over -- we're currently at 1.3%, a little over that. And we are projecting somewhere in that range. We're adding somewhere between 9,000 and 10,000 customers a year, strong in both residential and commercial sectors as well as some industrial customers..

On the longer-term view of this, we, as all of us in the industry, I think and particularly who are involved with construction, we are pretty conservative going forward about the increase back. It's been slow getting to where we are. We were well below 1% for a number of years.

So we've got fairly modest increases, a constant, but modest increases on our forecast going forward. We continue, though, to be optimistic about conversions. That's where we feel like we have more control over it.

We've got a something similar to what we've been seeing in the way of conversions and we continue it, as I said, with Senate Bill 844 and our new portal, we continue to really target conversions and are hopeful that we can increase them..

Just switching topics quickly in terms of the storage side. Can you talk a little bit how you're viewing this space longer-term as I think as you said in your prepared remarks, talked about being kind of longer term positive on the space.

Can you talk about maybe the potential opportunities that you see? I think you mentioned California, certainly an area with more renewables in the need of more storage taking the place of traditional zone, et cetera.

Can you just give a little bit more color on long-term opportunities in storage?.

Particularly in California, I believe its being driven by very aggressive goals around renewables. We've heard discussions that they're going to potentially go from 33% to 50%. They're already zooming in on 33%. And when you include rooftop solar, not just the utility portfolio, you're getting over 33%, maybe as high as 40% in the way of renewables.

And that creates this peaking need and the need to backup those renewables when the sun isn't shining and the wind isn't blowing.

And that really puts a spotlight on storage because you're really focused on trying to find a least cost way of supporting a peaking facility and it's having storage to support it versus pipeline capacity, it's usually a lot less expensive.

So we continue to believe that trend will continue in California, and that storage, not just as this renewal book picture unfolds, but as they close down San Onofre, the nuclear plant and as the economy continues hopefully to comeback down there that it is really going to create an environment where storage has an opportunity to be very integrated in their system and successful for them, so very optimistic about it.

In Oregon, we continue, as Steve said in his remarks, to have really good focus on Mist because of the lack of storage capacity in the Northwest overall and the needs that utilities have because of all the wind that's being produced, appear to provide peaking power as well.

So as I've said in the past the storage facility in Oregon is really driven much more by utility needs, not by marketing efforts and that has kept it in good stead over the years. And I expect that that will continue into the future..

The next question comes from [ph] Matthew Levinson with Matthew Levinson & Associates..

A number of other gas utilities have made stress in their conference calls of service request from individuals who are currently using propane.

And is this a factor in your customer growth as mentioned and what potential exists for this?.

I don't believe it is a large factor in our customer growth. We had a fairly large propane system in Coos Bay area in North Bend Coos Bay and we went into that area maybe seven, eight years ago and replaced all of the propane that was down there with, naturally not all of it, but a great deal of it.

And I think that was probably the largest area in our service territory at the time from a propane standpoint. We do have some communities that are kind of on the fringes of the urban areas that we don't serve where there is some propane.

And we're actually looking at the potential for the Senate Bill 844, opportunities to get pipe out through these communities that currently don't have natural gas. And I think in the future, if we're successful at that, we could be in a position of replacing propane.

But at this point, we're kind of in that early stage of figuring out, how Senate Bill 844 is going to work and whether it will be allowed to take pipe out to some of these suburban communities that don't have natural gas. But I think that could be a potential for us in the future..

Would you estimate the potential number of additional customers you would pick up by doing this?.

I really can't estimate it. I am not all that familiar with some of those communities that we don't serve right now, and how much of it is driven by propane. A lot of those communities, propane is used there, but a lot of them are very reliant on electricity with baseboard heating.

So very inefficient heating sources, very costly for the customer also, emissions are a big issues as well from those kinds of inefficient heating sources. But I really can't hazard a guess on how much of it is propane..

As we're showing no further questions, I would like to turn the conference back over to Mr. Kantor for any closing remarks..

Well, Thank you all again for being with us today. And look forward to seeing you all at the AGA Financial Forum later this month, see you in Miami..

That does conclude our conference. Thank you for attending today's presentation. You may now disconnect your lines..