OREANDA-NEWS. Northwest Natural Gas Company, dba NW Natural (NYSE:NWN), reported earnings per share of $0.07 on net income of $2.0 million for the second quarter of 2016, compared to $0.08 per share on net income of $2.2 million for 2015. Consolidated net income was $38.7 million, or $1.40 per share, for the first six months of 2016, compared to net income of $30.7 million, or $1.12 per share, for the same period of 2015.

Results for both six month periods were affected by non-cash charges related to the Company's environmental regulatory proceeding, which was resolved in January 2016. The first quarter of 2016 included a $3.3 million pre-tax, or $0.07 per share after-tax disallowance(1), from the OPUC's 2016 Order (2016 Order), which was related to the Company's compliance filing under the environmental mechanism. The first quarter of 2015 included a $15.0 million pre-tax charge or $0.33 per share after-tax disallowance from the February 2015 OPUC Order (2015 Order) in the environmental docket. Excluding these charges(2), consolidated net income was $40.7 million, or $1.47 per share for the first six months of 2016, compared to $1.45 per share on net income of $39.8 million for 2015.

“I’m honored to lead this 157-year old Company. Like those before me, I am committed to operating a safe, reliable system in an environmentally responsible way, providing exceptional service to our customers, and continuing to create a solid value for our investors,” said David Anderson, President and CEO of NW Natural. “We had a strong quarter with solid financial results and saw the benefits of lower natural gas prices and continued customer growth. In the months ahead, we will work to leverage the positive momentum in our local economy and to progress our North Mist storage expansion project.”
_________________

(1)Earnings per share (EPS) calculation based on average diluted shares outstanding of 27.6 million and an income tax rate of 39.5%.
(2) See tabular reconciliation of non-GAAP measures in Consolidated Results section below.

Consolidated Results
For the three months ended June 30, 2016, NW Natural earnings remained relatively flat with a $0.01 per share or $0.2 million decrease, compared to the same period in 2015. Results were driven by a $1.3 million decrease in utility margin from significantly warmer weather than 2015 offset by customer growth and a $0.7 million increase in operating and maintenance (O&M) expense, partially offset by a $1.7 million increase in gas storage revenues from higher asset management agreements and improved storage pricing at our Gill Ranch facility.

The second quarter results are summarized in the table below:

  Three Months Ended June 30,
  2016   2015    
In thousands, except per share data Amount Per Share   Amount Per Share   Change
Net income (loss):              
Utility segment $ 507   $ 0.02     $ 2,245   $ 0.08     $ (1,738 )
Gas storage segment 1,439   0.05     (86 ) —     1,525  
Other 73   —     38   —     35  
Consolidated net income $ 2,019   $ 0.07     $ 2,197   $ 0.08     $ (178 )
Utility margin $ 69,371       $ 70,715       $ (1,344 )
Gas storage operating revenues 6,992       5,333       1,659  

For the six months ended June 30, 2016, NW Natural earnings increased $0.28 per share or $8.0 million compared to 2015. The increase was largely due to the non-cash charges related to the 2015 and 2016 Orders. Excluding these charges on a non-GAAP basis, net income increased by $0.9 million primarily from $4.7 million of higher utility margin attributable to customer growth and gains from gas cost incentive sharing and a $1.7 million increase in gas storage revenues, offset by a $5.2 million decrease in other income related to the recognition of $5.3 million of equity earnings on deferred regulatory assets as a result of the 2015 Order.

The six month results are summarized in the table below:

    Six Months Ended June 30,
    2016   2015    
In thousands, except per share data   Amount Per Share   Amount Per Share   Change
Net income:                
Utility segment   $ 36,359   $ 1.32     $ 30,580   $ 1.12     $ 5,779  
Gas storage segment   2,175   0.08     28   —     2,147  
Other   126   —     75   —     51  
Consolidated net income   $ 38,660   $ 1.40     $ 30,683   $ 1.12     $ 7,977  
Adjustments:                
Regulatory environmental disallowance, net of taxes ($1,304 and $5,925)(1)   1,996   0.07     9,075   0.33     (7,079 )
Adjusted consolidated net income(1)   $ 40,656   $ 1.47     $ 39,758   $ 1.45     $ 898  
Utility margin   $ 206,035       $ 201,316       $ 4,719  
Gas storage operating revenues   12,361       10,636       1,725  

(1) Regulatory environmental disallowance of $3.3 million in 2016 is recorded in utility other income and expense, net ($2.8 million) and utility operations and maintenance expense ($0.5 million). Regulatory environmental disallowance of $15.0 million in 2015 is recorded in utility operations and maintenance expense. Adjusted EPS and net income are non-GAAP financial measures based on the after-tax disallowance. EPS is calculated using the combined federal and state statutory tax rate of 39.5% and 27.6 million and 27.4 million diluted shares for the six months ended June 30, 2016 and 2015, respectively.

Utility Results
For the three months ended June 30, 2016, utility segment net income decreased $1.7 million or $0.06 per share due to a $1.3 million decrease in utility margin primarily reflecting significantly warmer weather during the quarter than the same period in 2015 offset by strong customer growth, a $0.9 million increase in O&M expense, and a $0.7 million decrease in other income from lower interest earned on net regulatory assets.

The 7% decrease in deliveries and $1.3 million decrease in margin for the second quarter of 2016 compared to 2015 was mainly due to lower residential and commercial volumes reflecting weather that was 21% warmer than a year ago, and 42% warmer than average. The region experienced exceptionally warm weather during the quarter. Significantly warmer weather can impact utility margins as our Washington customers do not have a weather normalization mechanism in place, and 9% of our Oregon customers have opted out of weather normalization.

For the six months ended June 30, 2016, utility segment net income increased $5.8 million or $0.20 per share due to a $4.7 million increase in utility margin reflecting customer growth and an increase in gas cost incentive sharing gains, a $13.8 million decrease in O&M expense primarily due to the $15.0 million regulatory disallowance as a result of the 2015 Order; and an $8.5 million decrease in other income due to a $2.8 million interest write-off as a result of the 2016 Order and the recognition of $5.3 million of equity earnings on deferred regulatory assets as a result of the 2015 Order.

Although weather for the six months ended June 30, 2016 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. Weather was 22% warmer than average due to significantly warmer weather in the second quarter of 2016.

Customer Growth. NW Natural achieved a customer growth rate for the trailing 12-month period ended June 30, 2016 of 1.5%, with the Company serving over 718,000 customers at quarter end.

Utility Volume and Margin. The following table presents key utility margin metrics:

      Three Months Ended
June 30,		   Six Months Ended
June 30,		   Favorable/(Unfavorable)
Change		   Favorable/(Unfavorable) 
% Change
(Dollars and therms in thousands)   2016   2015   2016   2015   QTD   YTD   QTD   YTD
Gas sales and transportation deliveries   192,933     207,886     565,482     537,863     (14,953 )   27,619     (7 )%   5 %
Weather (in heating degree days)   403     512     1,988     1,993     (109 )   (5 )   (21 )   —  
Utility operating revenues   $ 92,135     $ 132,891     $ 342,239     $ 389,197     $ (40,756 )   $ (46,958 )   (31 )   (12 )
Less: Cost of gas   20,871     62,176     129,282     187,881     41,305     58,599     66     31  
  Environmental remediation expense   1,893     —     6,922     —     (1,893 )   (6,922 )   —     —  
Utility margin(1)   $ 69,371     $ 70,715     $ 206,035     $ 201,316     $ (1,344 )   $ 4,719     (2 )%   2 %

(1) In November 2015 the Company began collecting revenues from customers through the environmental mechanism. These collections are included in utility operating revenues and are offset by the amortization of environmental liabilities presented in the environmental remediation expense line in the operating expense section of the income statement. Utility margin provides a key metric in assessing the performance of the utility segment.

Gas Storage Results
For the three and six months ended June 30, 2016, the Company's gas storage segment net income increased $1.5 million or $0.05 per share and $2.1 million or $0.08 per share, respectively. Results reflected an increase in revenues from our asset management agreements as well as improved pricing at Gill Ranch for the 2016-17 gas storage year. In addition, lower operating costs and interest expense at the Gill Ranch facility contributed to improved results.

Consolidated Operations
For the three months ended June 30, 2016, consolidated O&M expense increased $0.7 million compared to the same period in 2015 due to higher professional services and contractor work. For the six months ended June 30, 2016 consolidated O&M expense decreased $14.5 million compared to the same period in 2015 primarily due to the $15.0 million pre-tax charge from the 2015 Order offset by the higher professional services and contractor work.

For the three months ended June 30, 2016, other income decreased $0.6 million compared to the same period in 2015 due to lower interest earned on net regulatory assets. For the six months ended June 30, 2016 other income decreased $8.0 million compared to the same period in 2015 due to the recognition of $5.3 million of equity earnings from deferred environmental expenses in the first quarter of 2015 as a result of the 2015 Order. In addition, the 2016 Order resulted in a write-off of $2.8 million of interest in the first quarter of 2016.

Cash Flows
Cash provided by operations increased $32.1 million to $199.6 million for the first six months of 2016 due to $20.1 million higher net deferred tax liabilities from the extension of bonus depreciation; $20.4 million increase in cash from lower accounts payable balances reflecting comparatively lower gas prices and volumes sold, and $6.9 million of cash collections under our environmental mechanism as well as positive changes for other working capital items. These items were partially offset by a $31.0 million decrease in cash primarily from the payment of the early refund of gas cost savings to customers in June 2016.

2016 Earnings Guidance
The Company reaffirmed earnings guidance today in the range of $1.98 to $2.18 per share including the effects of the pre-tax charge of $3.3 million or $0.07 per share after-tax(1), related to the 2016 Order. Excluding the charge on a non-GAAP basis, earnings guidance is $2.05 to $2.25 per share. The Company’s 2016 earnings guidance assumes customer growth from the utility segment, average weather conditions, sustainable operations and maintenance expense levels and normal inflationary increases, slow recovery of the gas storage market, the impact of the five-year extension of bonus depreciation resulting from the enactment of the Federal PATH Act of 2015, and no significant changes in prevailing legislative and regulatory policies, mechanisms, or outcomes.

(1)EPS calculation based on average diluted shares outstanding of 27.6 million and an income tax rate of 39.5%.

Dividend Declaration
The board of directors of NW Natural declared a quarterly dividend of 46.75 cents per share on the Company’s common stock. The dividends will be paid on August 15, 2016 to shareholders of record on July 29, 2016. The Company’s indicated annual dividend rate is $1.87 per share.

Presentation of Results
In addition to presenting the results of operations and earnings amounts in total, certain financial measures are expressed in cents per share or exclude the after-tax regulatory charges related to the Orders implementing the SRRM in 2015 and 2016, which are non-GAAP financial measures. The Company presents net income and EPS excluding the regulatory disallowance along with the GAAP measures to illustrate the magnitude of this disallowance on ongoing business and operational results. Although the excluded amounts are properly included in the determination of these items under GAAP, the Company believes the amount and nature of such disallowance make period to period comparisons of operations difficult or potentially confusing. Financial measures are expressed in cents per share as these amounts reflect factors that directly impact earnings, including income taxes. All references in this section to EPS are on the basis of diluted shares. The Company uses such non-GAAP financial measures to analyze its financial performance because it believes they provide useful information to its investors and creditors in evaluating its financial condition and results of operations.

About NW Natural
NW Natural (NYSE:NWN) is headquartered in Portland, Ore., and provides natural gas service to more than 718,000 residential, commercial, and industrial customers through approximately 14,000 miles of mains and service lines in western Oregon and southwestern Washington. It is the largest independent natural gas utility in the Pacific Northwest with $2.9 billion in total assets. NW Natural and its subsidiaries currently own and operate underground gas storage facilities with storage capacity of approximately 31 Bcf in Oregon and California. 

  NORTHWEST NATURAL GAS COMPANY
  Financial Highlights (Unaudited)
  Second Quarter - 2016
                                       
      Three Months Ended     Six Months Ended     Twelve Months Ended  
In thousands, except per share amounts, customer, and degree day data   June 30,     June 30,     June 30,  
2016   2015 Change 2016   2015 Change 2016   2015 Change
Operating revenues $ 99,183     $ 138,280     (28 )% $ 354,712     $ 399,945     (11 )% $ 678,558     $ 727,427     (7 )%
                                     
Operating expenses:                                    
  Cost of gas   20,871       62,176     (66 )   129,282       187,881     (31 )   268,706       339,890     (21 )
  Operations and maintenance   35,962       35,311     2     74,901       89,427     (16 )   142,995       156,292     (9 )
  Environmental remediation   1,893       —     100     6,922       —     100     10,435       —     100  
  General taxes   7,438       7,649     (3 )   16,122       16,381     (2 )   30,022       30,423     (1 )
  Depreciation and amortization   20,413       20,230     1     40,807       40,341     1     81,389       80,236     1  
  Total operating expenses   86,577       125,366     (31 )   268,034       334,030     (20 )   533,547       606,841     (12 )
Income from operations   12,606       12,914     (2 )   86,678       65,915     31     145,011       120,586     20  
Other income and expense, net   513       1,135     (55 )   (1,796 )     6,184     (129 )   (233 )     6,472     (104 )
Interest expense, net   9,718       10,438     (7 )   19,454       20,919     (7 )   41,074       42,263     (3 )
Income before income taxes   3,401       3,611     (6 )   65,428       51,180     28     103,704       84,795     22  
Income tax expense   1,382       1,414     (2 )   26,768       20,497     31     42,024       34,375     22  
Net income $ 2,019     $ 2,197     (8 )   38,660       30,683     26   $ 61,680     $ 50,420     22  
                                     
Common shares outstanding:                                    
  Average diluted for period   27,632       27,388       27,591       27,378       27,519       27,319    
  End of period   27,550       27,363       27,550       27,363       27,550       27,363    
                                       
Per share information:                                    
Diluted earnings per share $ 0.07     $ 0.08     $ 1.40     $ 1.12     $ 2.24     $ 1.85    
Dividends declared per share of common stock   0.4675       0.4650       0.9350       0.9300       1.8675       1.8600    
Book value per share, end of period   29.04       28.39       29.04       28.39       29.04       28.39    
Market closing price, end of period   64.82       42.18       64.82       42.18       64.82       42.18    
                                     
Capital structure, end of period:                                    
  Common stock equity   51.7 %     49.2 %     51.7 %     49.2 %     51.7 %     49.2 %  
  Long-term debt   36.8       38.8       36.8       38.8       36.8       38.8    
  Short-term debt (including amounts due in one year)   11.5       12.0       11.5       12.0       11.5       12.0    
  Total   100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %  
                                       
Operating statistics:                                    
Customers - end of period   718,191       707,539     1.5 %   718,191       707,539     1.5 %   718,191       707,539     1.5 %
Utility volumes - therms:                                    
  Residential and commercial sales   82,625       97,066       325,499       303,883       592,344       554,097    
  Industrial sales and transportation   110,308       110,820       239,983       233,980       463,887       462,286    
Total utility volumes sold and delivered   192,933       207,886       565,482       537,863       1,056,231       1,016,383    
Utility operating revenues:                                    
  Residential and commercial sales $ 82,509     $ 117,919     $ 320,181     $ 358,831     $ 606,185     $ 648,083    
  Industrial sales and transportation   10,972       17,138       28,636       37,664       62,467       73,289    
  Other revenues   1,102       1,131       2,513       2,537       3,890       3,877    
  Less: Revenue taxes   2,448       3,297       9,091       9,835       17,290       18,044    
Total utility operating revenues   92,135       132,891       342,239       389,197       655,252       707,205    
  Less: Cost of gas   20,871       62,176       129,282       187,881       268,706       339,890    
    Environmental remediation expense   1,893       —       6,922       —       10,435       —    
Utility margin, net $ 69,371     $ 70,715       206,035     $ 201,316     $ 376,111     $ 367,315    
Degree days:                                    
  Average (25-year average)   691       691       2,562       2,546       4,256       4,240    
  Actual   403       512     (21 )%   1,988       1,993   —%   3,453       3,365     3 %
Percent colder (warmer) than average weather   (42 )%     (26 )%     (22 )%     (22 )%     (19 )%     (21 )%  
NORTHWEST NATURAL GAS COMPANY            
Consolidated Balance Sheets (Unaudited)     June 30,     June 30,
In thousands     2016     2015
Assets:            
Current assets:            
  Cash and cash equivalents   $ 5,463     $ 4,466  
  Accounts receivable     23,353       32,041  
  Accrued unbilled revenue     14,175       12,760  
  Allowance for uncollectible accounts     (570 )     (723 )
  Regulatory assets     49,004       63,016  
  Derivative instruments     7,445       1,023  
  Inventories     66,171       76,511  
  Gas reserves     15,707       18,214  
  Income taxes receivable     —       —  
  Deferred tax assets     —       12,693  
  Other current taxes     21,312       14,007  
    Total current assets     202,060       234,008  
Non-current assets:            
  Property, plant, and equipment     3,146,631       3,042,671  
  Less: Accumulated depreciation     932,179       893,722  
    Total property, plant, and equipment, net     2,214,452       2,148,949  
  Gas reserves     108,286       121,355  
  Regulatory assets     344,969       342,806  
  Derivative instruments     3,541       1,369  
  Other investments     67,868       68,147  
  Restricted cash     —       4,500  
  Other non-current assets     1,968       2,782  
    Total non-current assets     2,741,084       2,689,908  
    Total assets   $ 2,943,144     $ 2,923,916  
Liabilities and equity:            
Current liabilities:            
  Short-term debt   $ 152,800     $ 190,300  
  Current maturities of long-term debt     24,987       —  
  Accounts payable     57,756       49,505  
  Taxes accrued     6,237       8,782  
  Interest accrued     5,793       5,922  
  Regulatory liabilities     27,300       26,712  
  Derivative instruments     3,471       15,017  
  Other current liabilities     35,289       31,332  
    Total current liabilities     313,633       327,570  
Long-term debt     570,045       613,737  
Deferred credits and other non-current liabilities:            
  Deferred tax liabilities     554,400       524,099  
  Regulatory liabilities     341,259       328,646  
  Pension and other postretirement benefit liabilities     219,049       233,554  
  Derivative instruments     474       1,077  
  Other non-current liabilities     144,285       118,269  
    Total deferred credits and other non-current liabilities     1,259,467       1,205,645  
Equity:            
  Common stock     388,967       378,887  
  Retained earnings     417,857       407,490  
  Accumulated other comprehensive loss     (6,825 )     (9,413 )
    Total equity     799,999       776,964  
    Total liabilities and equity   $ 2,943,144     $ 2,923,916  
NORTHWEST NATURAL GAS COMPANY            
Consolidated Statements of Cash Flows (Unaudited)     Six Months Ended June 30,
In thousands     2016     2015
Operating activities:            
  Net income   $ 38,660     $ 30,683  
  Adjustments to reconcile net income to cash provided by operations:            
    Depreciation and amortization     40,807       40,341  
    Regulatory amortization of gas reserves     7,647       10,023  
    Deferred tax liabilities, net     27,022       6,886  
    Qualified defined benefit pension plan expense     2,737       3,032  
    Contributions to qualified defined benefit pension plans     (6,120 )     (5,810 )
    Deferred environmental (expenditures) recoveries, net     (5,521 )     (5,659 )
    Regulatory disallowance of prior environmental cost deferrals     3,273       15,000  
    Interest expense (income) on deferred environmental expenses     —       (5,322 )
    Amortization of environmental remediation     6,922       —  
    Other     2,121       418  
    Changes in assets and liabilities:            
      Receivables     87,271       85,121  
      Inventories     4,525       1,321  
      Taxes accrued     3,710       (249 )
      Accounts payable     (17,141 )     (37,532 )
      Interest accrued     (80 )     (157 )
      Deferred gas costs     (9,295 )     21,718  
      Other, net     13,022       7,670  
    Cash provided by operating activities     199,560       167,484  
Investing activities:            
  Capital expenditures     (62,153 )     (58,072 )
  Utility gas reserves     —       (1,945 )
  Restricted cash     —       (1,500 )
  Other     2,453       201  
    Cash used in investing activities     (59,700 )     (61,316 )
Financing activities:            
  Common stock issued, net     4,332       812  
  Long-term debt retired     —       (40,000 )
  Change in short-term debt     (117,235 )     (44,400 )
  Cash dividend payments on common stock     (25,677 )     (25,398 )
  Other     (28 )     (2,250 )
    Cash used in financing activities     (138,608 )     (111,236 )
Increase (decrease) in cash and cash equivalents     1,252       (5,068 )
Cash and cash equivalents, beginning of period     4,211       9,534  
Cash and cash equivalents, end of period   $ 5,463     $ 4,466  
                   
Supplemental disclosure of cash flow information:            
  Interest paid, net of capitalization   $ 18,124     $ 19,615  
  Income taxes paid (refunded)     (7,900 )     4,625