Nikki Sparley - Manager, Investor Relations David Anderson - President and Chief Executive Officer Brody Wilson - Interim Chief Financial Officer and Treasurer.

Tate Sullivan - Sidoti & Co.

Good day, and welcome to the Northwest Natural Gas First Quarter 2017 Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Nikki Sparley. Please go ahead..

Thank you, Ryan. Good morning, everyone, and welcome to our first quarter 2017 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 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. 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, everybody. I'll start today with highlights from the quarter and then turn it over to Brody to cover our financial performance. And then finally, I'll wrap up the call with an update on some of our key projects.

2017 is off to a good start and our financial results were solid, and operationally we are making significant headway on our objectives. For the first quarter, net income increased $3.7 million to $40.3 million. The utility performed well due to customer growth and the effects of colder weather.

Our region is also off to a good start this year from an economic standpoint. We continue to see growth and outpace the nation on many fronts. Unemployment numbers were favorable with Oregon posting the lowest monthly unemployment rate since 1976 at 3.8% in March. This compares favorably to the U.S. national monthly unemployment rate of 4.5%.

Average unemployment numbers in our major population centers, which is mainly Portland and Vancouver, have remained low at 4.5% over the last 12 months. During that same period, construction of the Portland, Vancouver area was down with a 5% decrease in single-family permits, but overall remained strong on the heels of a healthy 2016.

In fact, the metro areas posted the highest number of total residential permits issued, that includes both single-family and multi-family permits since 2007. Although home sales were down about 4% for the last 12 months after a peak early in 2016, average home prices in the Portland area increased by about 12%.

In our Washington service territory, home sales were up year-over-year, with an increase of about 4% and home prices increased 13%. All of this translated to continued strong customer growth with the addition of over 12,000 customers in the past year and a growth rate of 1.7%.

As our region and customer base continues to grow, we are focused on several capital projects to ensure the safety and continued reliability of our distribution system. Our liquefied natural gas facilities at Newport and here in Portland are central to operations during peak heating days, like the ones our territory experienced this past winter.

A few years ago, we began making improvements of these facilities and we expect them to be complete next year with a total investment of about $35 million. As you may remember, in Clark County, Washington, we had been adding high pressure distribution lines over the last couple of years to support customers in our fastest growing community.

We expect to complete our $25 million upgrade in 2019. This past March, the Oregon Public Utility Commission issued on order after months of collaboration with Natural Gas Utilities in Oregon. The order allows utilities to request tracker mechanisms for specific investments related to safety.

The order provides high-level guidelines for these request and the commission's key objectives. While the order does not guarantee programs would be approved or investments would be tracked in, this framework is an important step in continuing to possibly prioritize safety and reliability investments.

Northwest Natural, with the support of the Oregon Public Utility Commission, has a legacy of integrated safety programs that have allowed us to ensure the integrity of our distribution system and transmission assets, including the removal of all the cast iron and all the bare steel from our system, making our system one of the most modern in the country.

We look forward to working with the Commission on these programs in the coming months. Now with that, I'll turn it over to Brody to cover the financial results for the quarter.

Brody?.

Thank you, David, and good morning, everyone. I'll start this morning with the quarter results and wrap up with a brief review of cash flows in 2017 guidance. For the first quarter of 2017, we reported net income of $40.3 million, compared to $36.6 billion for the same period last year, or an increase of $3.7 million.

Results were driven by a $4.3 million increase in utility segment net income offset by a $700,000 decrease in our gas storage segment.

The utility's strong results reflected a $5.5 million pre-tax, or $3.3 million after-tax increase in margin, and a $3 million pre-tax, or $1.8 million after tax increase in other income, mainly due to the non-cash charge taken in 2016, as we closed the environmental cost recovery docket. These items were offset by higher O&M expense.

The $3.3 million increase in utility margin reflected customer growth and the effects of colder weather. In total, deliveries increased 26% due to customer growth and colder than average weather with record-breaking precipitation in February, and above-average rain in March. This compared to a warm first quarter in 2016.

Offsetting these positive factors were lower competitive gains from our gas cost incentive sharing in Oregon. The company and customers continued to benefit from lower actual gas costs than prices set in the rates, although the spread has narrowed this year.

For the quarter, our gas storage segment net income decreased $700,000, reflecting lower asset management revenues for Mist, as well as higher expenses at Gill Ranch for routine periodic pipeline and compressor maintenance. We have contracted both our Mist and Gill Ranch facilities for the 2017/18 gas storage year, which began on April 1.

Our Mist facility remains under long-term contracts at similar prices to prior periods. At our Gill Ranch facility, we contracted about half of the capacity in firm contracts at slightly higher prices than the prior gas storage year, but overall prices have remained below historic level.

The remaining capacity at Gill is under asset management agreements with a third-party and will be subject to market pricing.

For the Gill Ranch facility, we are closely watching for the final gas storage regulation from the division of oil, gas and geothermal resources to be issued, which will help us further assess the cost required to comply with the new regulations and our future investment in this asset. Moving briefly to cash flow.

For the first quarter, the company generated $145 million in operating cash flow from higher customer receipts due to colder weather, offset by higher gas purchases and income tax payments. We invested $39 million in capital expenditures, reduced short-term debt by $53 million and paid dividends of about $14 million. Moving to 2017 financial guidance.

We continue to expect capital expenditures in the range of $225 million to $250 million for 2017, including $80 million to $90 million associated with our North Mist Expansion. The company reaffirms 2017 guidance today in the range of $2.05 to $2.25 per share.

Guidance continues to assume customer growth from our utility segment, average weather conditions, slow recovery of gas storage markets and no significant changes in prevailing regulatory policies, mechanisms or outcomes or significant laws or regulations. With that, I'll turn the call back over to David for his concluding remarks..

continuing to provide superior customer service and meeting the evolving needs and expectations of our customers; enabling core utility growth, furthering a constructive regulatory agenda; continuing to attract and retain the talents of workforce and effectively positioning our company for a low-carbon future.

As part of that strategy work, we've had a team focused on identifying new areas where we can proactively reduce emissions. We are calling this our low carbon pathway initiative, and one area of focus is putting our pipeline system to work in new ways.

To that end, I am excited to report that, in April, we announced our first renewable natural gas project with the City of Portland with the city announced as a single largest climate action project today.

For its part, the city will build a renewable natural gas production facility to recover, convert and clean biogas from the city's largest wastewater treatment plant to our pipeline quality standards. Once claimed, the renewable natural gas will be delivered through Northwest Natural's existing pipeline system to serve heavy-duty vehicles.

Under the agreement, Northwest Natural will build and maintain the compressed natural gas vehicle fueling station, allowing us to earn a regulated return for that investment under an existing tariff. We expect the station to be operational by the end of 2017.

While our investment will be modest for this initial project, it is noteworthy due to its aggressive reduction in greenhouse gas emissions. In fact, the city notes that single project will cut emissions by 21,000 tons annually.

We are proud to be helping our city close the loop on waste and take advantage of our modern distribution system in new and exciting ways. It's our hope that this is the first of other renewable natural gas projects to come. Finally let me give an update on our North Mist Expansion Project.

As we discussed, the North Mist Project will support grid reliabilities by supplying innovative no-notice storage service to Portland General Electric that can be drawn on at any time, balancing the variability of additional renewable power on the electric system.

The estimated cost of North Mist is $128 million and includes development of a new reservoir of 2.5 Bcf, a compressor station and pipeline. In the first quarter, we finished construction of the primary well pad and cleared compressor station site.

We also received the crucial approval for delta pressure from the Department of Geology and Mineral interest Industries, allowing us to store the necessary amount of natural gas in the reservoir. In the coming months, we will be drilling the remaining wells and constructing the compressor station and pipeline.

We expect most of the construction on the project will be complete this year with plans for it to be on service for the winter of 2018. When the expansion is placed in the service, the investment will immediately be rate-based under an established tariff scheduled that is approved by the Oregon Public Utility Commission.

Overall I feel very good about the opportunities in front of us. We remain focused on working with policymakers and customers to continue providing value for both our communities and investors.

Before we take questions, I would also like to say how pleased I am to have Frank Burkhartsmeyer join our executive team, as Senior Vice President and Chief Financial Officer on May 17. Frank comes to Northwest Natural with a wealth of experience in the energy industry and an impressive and varied career.

Most recently, Frank was President and CEO of Avangrid Renewables. I am confident Frank will be a great addition to our team. I would also like to thank Brody for all of his work as interim CFO these past months, and congratulate him on his promotion of Vice President and Treasurer in addition to his roles as Controller and Chief Accounting Officer.

Thanks again for taking time this morning with us. And Ryan, we'll open it up for Q&A at this point..

We will now begin the question-and-answer session. [Operator Instructions]. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Tate Sullivan with Sidoti. Please go ahead..

Hi, thank you. You had some great description of North Mist in the press release and in your comments too.

Can you - outside the Expansion Project, can you get other similar agreements for your other storage capacity, Gill Ranch, North Mist, or is this really a one-off?.

Yes. It's a good question, Tate. North Mist is a wonderful asset in the northwest. As you know, there is not a lot of underground storage in northwest. So to have an ability for us to expand and provide additional storage, you have the scarcity value. So it's all about location, location, location. So North Mist is one of those opportunities.

Gill Ranch is in a little bit of a different situation. Obviously the Northern California market right now, if you look at them, the market numbers that the markets are charging for storage, it's indicating we are in an oversupplied market.

I think our thesis has been long-term that California, as they continue to add more and more renewables, will need additional gas storage to balance. But at this juncture, the market is clearly telling all of us we're oversupplied. We'll see what happens going forward along that front.

We've got a lot of things that are changing in the California market. We've got the new regulations coming out that Brody referenced, the DOGGR regulations are going to be coming out. We'll have to see how the market prices those and what happens there. And then I think we are also going to be hopefully learning information this week from PG&E [ph].

They are having a public meeting about storage and their rate case dynamics. So maybe there will be some additional information that will be coming out of that meeting that will be beneficial, or at least help identify the area. But with the North Mist Project, it's about location, location, location.

So I think that asset is perfectly positioned not only for this opportunity but maybe even opportunities in the future. With Gill Ranch, we are just going to have to see the supplier storage or the demand for storage go up in my opinion..

Okay. And following up on Gill Ranch and North Mist. I think, Brody, you said that, Gill is about 50% of the capacity contracted at slightly higher prices.

Is that about the percent of capacity that is contracted at this point last year too?.

No, it's actually a little bit less, Tate. When we are in this variable pricing market that we are in, when we look at contracting, first off, most of our contracting is short-term in nature anyways. We've got to couple that are very long-term contracts. But the bad news is we are in an oversupplied market, which is dropping pricing.

So we want to make sure that we don't contract that in for the long-term. So last year, we actually contracted a little bit larger capacity, still in short-term. What we are doing this year is we are holding a little bit back for our optimizer to take advantage of the market.

So we are hoping that the results will be a little bit better as a result, but it's a little bit less than it was last year..

Okay. Thank you for that. I'll get back in queue..

Thank you, Tate..

[Operator Instructions]. And currently showing no further questions, I'd like to turn the conference back over to Nikki Sparley for any closing remarks..

Well, thanks, Ryan. This is David. Thanks everybody for joining us this morning. If you had some other questions, give Nikki a call and we will hopefully also be seeing a lot of you here in a couple of weeks at the AGA Financial Forum. So let us know if you need to meet with us.

I think we've got a pretty full schedule right now, but we'd be happy to see if we can do something. Again thanks, everybody, and have a great day..

Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect..