For the nine-month period, net income was $43.7 million, or $1.64 per share, compared to $36.3 million, or $1.37 per share, representing a 20 percent increase in both net income and earnings per share between periods.

"We are pleased with what we've been able to accomplish given the current economic situation," said Gregg Kantor, NW Natural's President and Chief Executive Officer. "We are adjusting to a lower customer growth environment in the utility through further process improvements, as well as voluntary staffing reductions and attrition, to reduce operating and capital costs."

Third quarter financial and operating highlights

Income and earnings per share

Results of operations produced a net loss for the quarter of $6.7 million, or 25 cents per share, compared to a net loss of $10.1 million, or 38 cents per share in 2008. Results from utility operations are typically low during the third quarter due to reduced use of natural gas in summer months. The utility recorded a net loss of $9.2 million (35 cents per share) in the quarter, compared to a net loss of $12.3 million (47 cents per share) in the third quarter of 2008. Gas storage contributed net income of $2.3 million (9 cents per share), compared to $1.9 million (8 cents per share) in 2008. Other non-utility activities resulted in net income for the quarter of $0.2 million, compared to $0.3 million in 2008's third quarter.

California Public Utilities Commission issues key Gill Ranch Storage permit

In October, the California Public Utilities Commission (CPUC) issued a Certificate of Public Convenience and Necessity (CPCN) to the Gill Ranch Storage (GRS) project. The receipt of the CPCN was necessary to establish the need for the project and was a condition to proceeding with the development of GRS. The underground gas storage project is on target to begin construction before the end of 2009. Gill Ranch Storage has an August 2010 scheduled in-service date.

Rate decreases approved for 2009-10 heating season for customers

NW Natural received approval of residential rate reductions for the 2009-2010 heating season of 16 percent in Oregon and 22 percent in Washington. The reductions are due mainly to lower gas prices, and result in the lowest rates in five years. Commercial and industrial sales customers saw similar decreases.

Rates are established each year under purchased gas adjustment (PGA) mechanisms in Oregon and Washington to reflect the expected cost of natural gas commodity purchases, including gas storage, purchased prices hedged with financial derivatives, and other factors. The company filed its PGA in Oregon and Washington in late August and the new rates went into effect Nov. 1, 2009. The rate reduction is in addition to the gas cost savings the company refunded to customers earlier this year.

Depreciation study affects quarterly operating results

In late 2008, the Oregon and Washington utility commissionsapproved the company's updated depreciation study, which authorized lower depreciation rates on utility plant in Oregon and Washington with a corresponding decrease to customer rates effective January 1, 2009. As a result, utility depreciation expense decreased $2.2 million and $7.0 million for the three- and nine-month periods ended Sept. 30, 2009, compared to decreases in utility margin of $1.0 million and $7.5 million, respectively. The annual margin decrease from lower depreciation rates is recognized unevenly each quarter because it is tied to variable delivered volumes, but the decrease in depreciation expense occurs evenly over the year. On a full-year basis, the change in depreciation rates will have only a minimal impact on earnings, but will cause quarterly differences due to the timing of revenue and expense recognition.

Customer growth

Although NW Natural's utility customer growth continues to be affected by the slowdown in new construction and conversions due to the national and regional economic recession, the rate of decline appears to be slowing. At Sept. 30, 2009, the company had 659,000 customers, with an annual growth rate of 0.7 percent over the prior 12 months, which compares to 0.8 percent at June 30, 2009, and 2.4 percent at Sept. 30, 2008.

Mist storage expansion planned

Seismic survey testing was completed and engineering design was started at NW Natural's 16 Bcf Mist storage field in Northwest Oregon during the quarter. The expansion is expected to initially add approximately 3-4 Bcf of storage and include additional compression and other pipeline work. Early next year, the company will be conducting an open season to determine pricing and capacity levels with potential customers. Subject to a successful open season, construction will commence in 2010 with a planned operational date in late 2011.

J.D. Power ranks NW Natural customer satisfaction among the best

For the sixth consecutive year, NW Natural has ranked in the top two in the West for overall customer satisfaction in the J.D. Power and Associates Gas Utility Residential Customer Satisfaction Study.

Operational results

NW Natural's total gas sales and transportation deliveries in the third quarter of 2009, excluding deliveries of gas stored for others, were 157 million therms, compared to 185 million therms, or 15 percent lower than in 2008, mainly due to warmer weather and lower industrial usage. Margin from utility operations in the quarter was $43.6 million, compared to $39.3 million in the same quarter of 2008, with the increase primarily due to gas cost savings, which were partially offset by weather that was 21 percent warmer than last year and 40 percent warmer than average, and by the margin decrease attributed to lower depreciation rates noted previously.

Sales to residential and commercial customers in the quarter were 53 million therms, compared to 55 million therms in 2008. The decline in the quarter was primarily due to lower usage in the period resulting from warmer weather than last year and economic conditions. Residential and commercial margin was $31.4 million in the 2009 period, compared to a margin contribution of $31.9 million in 2008. Margin includes the company's decoupling rate mechanism in Oregon.

Gas deliveries to industrial customers in the third quarter of 2009 were 104 million therms, compared to 130 million therms in2008, with the reduction mainly due to the slowdown in the regional and national economy. Margin for the period was $6.5 million compared to $6.8 million in 2008, with the decrease due to the lower volumes, as well as the impact of lower depreciation rates noted previously.

Operations and maintenance costs lower

Operations and maintenance costs were one percent lower in the third quarter, compared tothe previous period last year, due mainly to reduced payroll and contractlabor expenses, partially offset by higher pension and healthcare expenses.

Year-to-date (nine months) financial and operating highlights

For the nine-month period, net income increased to $43.7 million, or $1.64 per share, compared to $36.3 million, or $1.37 per share in the first nine months of 2008, a 20 percent increase in both net income and earnings per share. Year-to-date earnings were higher due mainly to gas cost savings in 2009 versus 2008, as well as a $2.4 million increase from a regulatory adjustment for income taxes paid versus collected in rates. NW Natural's utility operations contributed $36.6 million ($1.38 per share), compared to $27.4 million ($1.03 per share), in last year's first nine months. Gas storage contributed $7.0 million (27 cents per share). This compared to $6.8 million (26 cents per share) for the 2008 period. Other non-utility activities resulted in a negligible gain for 2009, compared to earnings of $2.1 million (8 cents per share) in 2008, with the major reason for the change in periods due to an after-tax gain on the sale of a non-core asset in 2008.

Operating results

The company's total gas sales and transportation deliveries in the first nine months of 2009, excluding deliveries of gas stored for others, were 777 million therms, compared to 897 million therms for the same 2008 period. The 13 percent decrease in delivered volumes was due to a combination of warmer weather and reduced industrial use. Utility margin, however, was up 8 percent to $241.8 million, compared to $223.8 million last year, due mainly to higher gas cost savings.

Gas sales to residential and commercial customers in the first nine months of 2009 were 436 million therms, compared to 475 million therms last year, with the decline in usage primarily due to warmer weather. Residential and commercial sales contributed $197 million to margin, compared to $203 million in 2008, with the decrease primarily due to lower depreciation rates noted previously and the warm weather impact from customers not covered by the Oregon weather normalization mechanism. Margin results include the effect of the company's weather normalization and decoupling mechanisms in Oregon. Gas sales to industrial customers in the first nine months of 2009 were 341 million therms, compared to 422 million therms in the first nine months of 2008. Contribution to margin in these markets was $20.4 million, compared to $22.1 million last year.

As noted earlier, for the first nine months of the year, gas costs were lower than costs embedded in rates. Under the company's 80-20 sharing mechanism in Oregon for thePGA year ending October 31, 2009, this contributed a $14.7 million benefit to margin in the first nine months of 2009. This compared to a $7.5 million reduction to margin through the first nine months of 2008.

Regulatory adjustment for taxes paid

Based on NW Natural's regulated operations through Sept. 30, 2009, the company recognized $3.8 million of incremental margin revenues, representing a difference of $3.6 million for federal and state income taxes paid in excess of taxes collected in rates for the 2009 tax year, plus accrued interest of $0.2 million. This indicated surcharge is primarily driven by the 2009 gains from gas cost savings.

YTD O&M costs

Operations and maintenance costs for the nine-month period in 2009 were $91.2 million versus $81.7 million in 2008. The increase was primarily related to higher pension and healthcare expenses, higher incentive bonus accruals based on improved operating results, and higher accruals for bad debt write-offs. However, bad debt expense as a percent of revenues remained well below 1 percent at 0.39 percent for the 12 months ended Sept. 30, 2009.

Depreciation expense

Utility depreciation expense decreased $7.0 million for the year-to-date period compared to the same period in 2008 due to the reduced depreciation rates approved by theOregon and Washingtonutility commissionsdiscussed above.

Income tax expense increase

Income taxes increased $5.6 million in the nine months ended Sept. 30, 2009 compared to 2008, primarily due to higher pre-tax income and a higher effective corporate income tax rate in Oregon.

Cash flows and capital structure

According to NW Natural Senior Vice President and Chief Financial Officer David H. Anderson, "Our results this quarter and year-to-date were very positive, especially considering the difficult economic environment. Our overall financial position remains strong and our liquidity position was strengthened with the issuances of $125 million of long-term debt earlier this year, and the recent maturity extension of $40 million from May 2012 to May 2013, bringing the entire $250 million credit facility to a maturity date of May 2013. Despite the economic challenges, we feel the company is in a strong financial position as we head into the fourth quarter and 2010."

Cash provided by operations in the first nine months of 2009 was $199.3 million, compared to $72.0 million in the same period in 2008. Cash flows reflect improved financial results, positive working capital changes, and commodity cost savings compared to last year. Cash used in investing activities in 2009 have totaled $96.5 million, compared to $75.2 million in the same period of 2008, with the increase due mainly to developmental costs for the company's Gill Ranch Storage project.

NW Natural's capitalization at Sept. 30, 2009 reflected 47.5 percent common equity, 47.2 percent long-term debt, and 5.3 percent short-term debt. This compared to 46.8 percent common equity, 39.7 percent long-term debt, and 13.5 percent short-term debt at Sept. 30, 2008. Cash on hand at Sept. 30, 2009 was $13.7 million, compared to $4.1 million last year.

Outlook for 2009

NW Natural reaffirmed its prior estimate that full-year 2009 earnings per share will be in the range of $2.70 to $2.85. The company's earnings guidance assumes normal weather conditions, continued customer growth, ongoing benefits from improvements to our cost structure, and no significant changes in prevailing regulatory policies. The company's outlook does not include forecasts of future gains or losses that may occur from the company's commodity cost sharing mechanism in Oregon, since the company cannot predict future gas cost increases or decreases with reasonable certainty. The company continues to target a dividend payout ratio of 60 to 70 percent of earnings.

Dividend declaration

NW Natural on Oct. 1, 2009 increased the quarterly dividend on the company's common stock to 41.5 cents from 39.5 cents per share, an increase of 5.1 percent. The dividends will be paid Nov. 13, 2009, to shareholders of record on Oct. 30, 2009. The current indicated annual dividend rate is now $1.66 per share.

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 on an equivalent cents per share basis. These amounts reflect factors that directly impact the company's earnings.