Nov. 4--Despite the economic slowdown's depressing effect on customer demand, Northwest Natural Gas Co. has been able to boost profits this year by purchasing gas for far less than it forecasted last fall.

The utility says its commodity costs are a strict, dollar-for-dollar pass-through to customers on which it makes no markup. But that's something of an oversimplification. To wit, if it can purchase supplies cheaper than the cost that is embedded in customers' rates based on its own forecast, its shareholders get to keep a percentage of the savings.

The difference may seem semantic, but regulators believe the sharing mechanism is an incentive to buy gas judiciously.

This year, it's a bit of a bonanza. Gas prices have plummeted since last fall, when regulators increased the utility's rates by 14 percent based on the company's forecast of costs for the coming year. With the drop in prices, the utility has saved about $75 million through the first nine months of the year. On Tuesday, it reported 20 percent of that total, or $15 million, as earnings for the period. That amounted to one third of the company's net income for the first three quarters of 2009.

The rest of the savings are being passed through to ratepayers, both in the form of a one-time refund that the company issued in June, as well as lower rates next year that partially reflect this year's savings.

The sharing mechanism works both ways. In 2008, NW Natural's shareholders lost about $6 million from the sharing mechanism because gas costs came in higher than expected. In 2007, they made $12.1 million.

"There's a desire for us to have some skin in the game," said Kim Heiting, a company spokeswoman. "The volatility in prices is tough, and we wouldn't pretend to be able to predict it. But clearly, there's real skin in the game."

Residential ratepayer advocates say they're comfortable with the small windfall the sharing mechanism is generating for the utility this year.

"It's working the way its supposed to, but that large a number is unusual," said Bob Jenks, executive director of the Citizen's Utility Board of Oregon. "We recognize that this is an unusual circumstance, but customers are still getting 80 percent of the benefit."

NW Natural said Tuesday that it lost $6.7 million, or 25 cents per share, on revenues of $116.9 million in the quarter ended Sept 30. That compares to a loss of $10.1 million, or 38 cents per share, on revenues of $109.7 million in the third quarter of 2008.

The utility typically loses money in the third quarter, when demand is at its weakest. Its 25 cent loss was still 12 cents better than the consensus estimate of analysts surveyed by Thomson Financial, though revenues were 2 percent lower than analysts expected.

The company said it has earned $43.7 million, or $1.64 per share, in the first nine months of the year. It also reaffirmed its 2009 earnings forecast of $2.70-2.85 per share.

Gas demand was down 15 percent in the third quarter, contributing to a $9.2 million loss from utility operations. That was partially offset by a $2.3 million profit in the company's gas storage business.

The company plans to expand the storage side of its business, which is unregulated and highly profitable. NW Natural said Tuesday that it plans to expand its natural gas storage capacity by 25 percent near the Northwest Oregon town of Mist, where it warehouses the commodity for utilities and other industrial customers by pumping it into depleted gas wells.

The company also recently received a key approval from California regulators to continue the development of its Gil Ranch storage project, where it hopes to be operating by August.

Northwest Natural released its earnings before the opening of financial markets. Its shares, traded on the Nasdaq Stock Market, closed at $41.73, up 23 cents. Ted Sickinger

-----

To see more of The Oregonian, or to subscribe the newspaper, go to http://www.oregonian.com.

Copyright (c) 2009, The Oregonian, Portland, Ore.

Distributed by McClatchy-Tribune Information Services.

For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.

NYSE:NWN, NYSE:TRI,

A service of YellowBrix, Inc.