Last year in my letter to shareholders I wrote that, after a strong financial performance in 2005, NW Natural had no intention of resting on its laurels. We were more determined than ever to improve our core operations and better position the company for the future.
I am pleased to report that in 2006 NW Natural delivered solidly on this commitment. It was a year in which we shifted our thinking about fundamental processes, introduced key operational improvements and successfully managed important external challenges.
In the end, we realigned our operations, and still - through the focus, discipline and hard work of our employees - provided excellent customer service and a 29 percent total shareholder return. We met our pledge to make NW Natural stronger by design and those efforts are already producing results.
Highlights
In 2006, NW Natural:
- Earned $2.29 per share, a 9 percent increase over 2005;
- Produced a total shareholder return of 29 percent;
- Marked the 51st consecutive year of increasing dividends paid;
- Added 19,421 customers, growing by more than 3 percent - twice the national average - for the 20th consecutive year;
- Rose to third highest for customer satisfaction among the nation's 56 gas utilities and first in billing and payment services, according to the latest J.D. Power & Associates survey;
- Had its corporate credit rating upgraded to AA- and commercial paper rating to A-1+ by Standard & Poor's;
- Continued to expand the Mist underground gas storage facility;
- Joined with TransCanada to explore the feasibility of building a new transmission pipeline in Oregon;
- Held operating and maintenance (O&M) expenses to a
- 1 percent increase over 2005 levels; and
- Was recognized as one of America's top 100 corporate citizens for the sixth consecutive year.
An Outstanding Year
In 2006, NW Natural delivered excellent financial results and took important steps to enhance its operational efficiency. Earnings were $2.29 per share, a 9 percent increase over last year. Revenues exceeded $1 billion resulting in net operating revenues of $340 million - both the highest in company history. Earnings and cash provided by operations also reached record levels. These solid results also allowed the company to produce free cash flow (cash from operations less capital expenditures and common dividends) for the first time in many years.
Total shareholder return was 29 percent. The share price increased by 24 percent, from $34.18 to $42.44, and shareholders enjoyed the 51st consecutive year of increasing dividends paid.
Strong customer growth continued to drive earnings. NW Natural again added customers at a pace more than double the national average. Many companies talk about growth, but what makes NW Natural stand out is its ability to bring that growth to the bottom line while still providing exceptional customer service. The latest J.D. Power survey is strong proof. This year NW Natural rose to third in the nation (second in the West) in overall customer satisfaction and was ranked number one in billing and payment services.
Last year there was solid evidence of our strong balance sheet and sharp focus on cost management. Standard & Poor's upgraded both our long- and short-term credit ratings. And last year we held O&M expenditures to a 1 percent increase over 2005 levels, meeting our objective to keep annual cost increases below the customer growth rate.
NW Natural kept another important commitment in 2006. We took key steps to leverage our expertise and grow the company in ways that complement and benefit our core business. First, we completed another phase in the development of our Mist underground gas storage facility, expanding its capacity to serve the interstate market. This segment continues to deliver excellent results. Gas storage revenues last year increased by 33 percent and contributed 21 cents per share to earnings.
On another front, we partnered with TransCanada to explore the feasibility of constructing a new pipeline across Oregon. If built, the Palomar pipeline will increase the reliability of the region's gas infrastructure and could be extended to serve any liquefied natural gas terminal that may be built on the Columbia River. We see the pipeline as an important new link in the transmission system serving our customers, one that offers NW Natural a new avenue for earnings growth.
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