Earnings Call Excerpt
Start time: 11:00
End time: 11:33
Northwest Natural Gas Company (NWN)
Q3 2008 Earnings Call
November 4, 2008 11:00 am
Executives
Mark S. Dodson – Chief Executive Officer
David H. Anderson – Senior Vice President & Chief Financial Officer
Alex Miller - Managing Director
Analysts
Daniel Fidell – Brean Murray, Carret & Co.
Gregory McGowan – Sidoti & Company, LLC
Presentation
David H. Anderson
As reported last quarter, and for the first time in many years, we have been experiencing gas cost losses from our PGA incentive sharing mechanism here in Oregon. Weather for the winter months, or for the first part of the second quarter, was colder than average. Colder weather depletes our storage inventories at rates faster than planned. In addition, prices for natural gas, like oil, were high and above amounts set in last year’s PGA until later in the third quarter.
Over the past nearly 20 years that the Oregon PGA incentive sharing mechanism has been in place, our hedge positions have fluctuated. Over the past couple of years our total hedge position averages approximately 75% of expected purchases in a normal weather year. Over the life of the mechanism, hedge positions have been as high as 90%.
Our year-to-date results reflect commodity cost losses of $7.5 million, or $0.17 per share, of which $1.8 million, or approximately $0.04 per share was reported in the third quarter. This compares to record gains of $10.8 million, or $0.24 per share last year in the year-to-date period. In Washington, all gas costs are passed through to customers.
Mark mentioned earlier that the Oregon Commission issued an order modifying the PGA cost sharing mechanism for gas utilities that operate in Oregon. I would like to provide some additional color around those changes.
Under the prior mechanism, we collected an amount for purchase gas costs based on estimates included in rates. If the actual purchase gas costs differed from the estimated amounts included in rates, then the company was required to defer that difference and pass it on to customers as an adjustment to future rates.
As part of an incentive mechanism, the company historically deferred 67% of the difference such that the impact on current earnings would either be a pre-tax charge to expense for 33% of the higher cost of gas sold, or a credit to expense for 33% of the lower purchase gas costs.
Under the modified PGA cost sharing mechanism approved by the OPUC on October 21st, the price-setting mechanism remains the same but the incentive mechanism changes. The company is now required to select either an 80/20% or a 90/10% ratio by August 1st of each year which represents the customer/shareholder sharing percentage for commodity cost differences. This annual election will be in effect November 1st of each year.
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