Q3 2019 Earnings Call
Good day and welcome to the northwest natural holding company's third quarter 2019 conference call in webcast. All participants will be in listen only mode should you need assistance. Please see like conference specialist by pressing the star keep followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you might press Star then one on a touch.
Just on phone to withdraw your question. Please press Star then too. Please note. This event is being recorded I would now like to turn the conference over to Nikki Sparley director of Investor Relations. Please go ahead.
Thank you Ben Good morning, everyone and welcome to our third quarter 2019 earnings call. As a reminder, some other things that will be said. This morning contain forward looking statements. There based on management's assumptions, which may or may not occur. In addition, some of her comments today reference non-GAAP adjusted measures Recomplete record.
Affiliation of these measures and other cautionary statements refer to the language and reconciliation at the end of our press release, we expect to file. Our 10-Q later today as mentioned this teleconference is being recorded and will be available on our website following the call.
No. These calls are designed for the financial community. If you are in Investor and have additional questions. After the call. Please contact me directly at five or three seven to 125 30 News media me contact Melissa more at five Oethree due to zero 20 436.
Game. This morning, our David Anderson, President and Chief Executive Officer, and Brinker cards, Meyer Senior Vice President and Chief Financial Officer.
Even in Frank have prepared remarks, and then we'll be available along with other members of our executive team to answer your question with that I'll turn it over to David Thanks, Mickey and good morning, everyone. The year continues to progress nicely. Both in terms of financial results in the execution of our long term strategy our year to date results.
Strong and position us nicely for a strong full year financial results.
For the first nine months of the year net income was 91 cents per share compared to a dollar six per share for the same period in 2018.
As previously discussed our first quarter results included a one time regulatory pension disallowance of 22 cents per share related to an a god I know, Oregon Commission order.
Excluding that disallowance on an adjusted basis net income increased seven cents per share or $3 million.
$3.6 million were dollar 13 per share for the first nine months in 2019. These results reflect new rights in Oregon, North Mist storage project again gas storage services and customer growth.
Our gas utility continues to grow and that coincides with the momentum in the local job market in housing sector, Oregon's unemployment rate maintain a record low at 4.1%, where the Portland area see an unemployment at 3.9%.
Single family housing permits in the Portland Metro area were up 8.4% year to date compare to the same period last year and multifamily permits increased 10.4%. These factors translating translated into connecting more than 12000, new customers over the last year, resulting in an annual growth rate.
1.6%.
On the regulatory front I'm pleased to report that after 10 months of review with stakeholders, an order was issued in our Washington General rate case.
Our Washington State service territory covers about 11% of our overall customers and represents approximately 10% of overall revenues.
The order provides for a 5.1 million dollar increase in revenues from previous rates based on our we have 9.4% and the cost of capital of 7.2 person, which represents a capital structure, 49% equity, 50% long term debt and 1% short term debt.
Great base in the case increased $46 million to approximately $174 million.
In addition in environmental recovery mechanism was approved allowing recovery of costs associated with Remediating historical manufactured gas sites.
These rates were effective November onest.
Adding to the good news customers rank northwest natural first in the country in the west among large utilities in the JD powers residential customer satisfaction survey.
These results are a testament to our customer centric culture and I'm proud of all of our employees, who make this happen every day.
We also continued to make progress on the sale of the Gill Ranch storage facility in California, We heard late last week that the administrative law Judge recommended the California Public utility Commission approved the sale CP you see approval is the last regulatory step and completing the sale. We do not have a revised schedule from the CPC CP you see yet.
But I am hopeful it can be addressed before year end if approved I would expect to close this transaction late this year or early 2020.
And finally this morning I'm pleased to report than in the fourth quarter. The board approved diminished dividend increase making the 64th consecutive year of annual dividend increases our annual indicated dividend amount is now $1.91 per share. We're proud to be one of only three companies on the NYSE with this growth record with that let me turn it over to Frank the couple of them.
Over some of the financial results Frank Thank you, David and good morning, everyone. I'll begin with a summary of our third quarter and year to date reported financials and then discuss our cash flows in guidance for the year I'll describe earnings drivers on an after tax basis using the statutory rate.
Note that our effective rate was 19% for the third quarter compared to our statutory rate of 26.5%. The main difference is the result of returning excess deferred income taxes related to tax reform to our Oregon customers, we expect a lower effective rate to persist as we continue to provide these benefits to customers as a reminder, northwest natural's.
Earnings are seasonal where the majority of revenues generated in the first and fourth quarters during the winter heating season.
For the quarter, we reported a net loss from continuing operations of $18.5 million were 61 cents per share compared to a loss of $11.1 million or 39 cents per share for the same period in 2018.
The 22 cents per share difference largely reflects three timing issues all of which are offset across 2019.
First the Oregon rate case resulted in both in increasing customer rates and the recognition of greater pension expense.
Well the higher expenses matched by the rate increase over the year, there our quarterly timing differences.
Whereas pension expenses recognized evenly through the year. It has recovered through rates on a volume metric basis. As a result of this difference third quarter 2019, Oh nm and other expense increased $1 million over 2018.
The second time in matter is also the result of the Oregon rate case, beginning this year, we began returning tax reform benefits to customers on a volumetric basis.
However, the company realizes the benefits in alignment with pre tax income as a result of this timing difference tax benefits declined $2 million in the quarter compared to prior period.
Finally, our third quarter 2018 margin benefited from a 2.8 million dollar adjustment to our tax reform deferral estimate that adjustment was not repeated in 2019.
In summary for the calendar year these timing matters essentially offset.
Very pleased with our strong.
Strong financial performance to date.
On a consolidated basis year to date net income from continuing operations was $27 million or 91 cents per year.
Per share compared to $30.5 million or one dollarssix per share for the same period in 2018.
Excluding the $6.6 million pension disallowance adjusted year to date net income from continuing operations was $1.13 per share or an increase of seven cents over 2018.
The seven cents per share increase is the result of 13 cents per share increase in the gas distribution segment, partially offset by a six cents per share decline from lower asset management revenues and expenses associated with the water business.
In the gas distribution segment utility margin increased $23.6 million as higher Oregon rates and customer growth added $5.3 million and colder weather along with higher fee revenue from interruptible customers contributed $3.3 million. We also had our first full quarter gas storage revenues from the north mist expansion, which provided.
An additional $5.3 million.
Finally, as we've discussed in previous quarters, the Oregon order resulted in a 10.6 million dollar increase in utility margin with no significant effect on net income as offsetting adjustments were recognized through expenses and income taxes.
Utility OEM and other expenses increased $23.8 million with the majority related to the Oregon rate case $6.3 million is related to collecting all pension expense through rates and is offset with higher revenues from customer rates.
$7.7 million is the pension does the allowance.
Recorded in the first quarter of 2019 and $9.2 million of the increase was due today what impacts of implementing the March Oregon order, which also were offset by benefits in revenues and tax expense underlying OEM is essentially flat, but for these adjustments depreciation and interest expense increased $5.7 million from.
Additional investment in our system and higher long term debt balances.
Tax expense reflected a $3.7 million benefit related to implementing the March quarter. However, as this offset higher expense there was no significant resulting effect on net income.
As a result of the Oregon General rate case, and tax reform there are lots of moving pieces in the financials, but the underlying drivers are straightforward, we have new rates in Oregon customer growth and north mist is online.
A few notes on cash flow.
For the first nine months of 2019, the company generated $155 million and operating cash flow, we invested $225 million into the business with a $161 million used for gas utility capital expenditures and $56 million for water acquisitions, we continue to expect capital expenditures this year to.
In the range of $230 million to $270 million, our balance sheet remains strong with ample liquidity.
Moving onto 2019 financial guidance as you may recall from our first quarter earnings release GAAP earnings guidance from continuing operations for 2019 is expected to range from $2.02 to $2.22 per share.
Excluding the 22 cents per share disallowance, we remain on track with our adjusted earnings guidance from continuing operations in the range of $2.25 to $2.45 per share.
Guidance assumes continued customer growth average weather conditions and no significant changes in prevailing regulatory policies mechanisms or outcomes or significant laws or regulations.
Finally, this guidance excludes any gain related to the sale of Gill ranch storage facility and associated operating results.
Our reported in discontinued operations with that I'll turn the call back over to David for his concluding remarks.
Thanks, Frank as we discussed last quarter, we're very pleased to be taken a significant step forward in our energy transition with the passage of Oregon built Senate Bill 98, the most aggressive renewable natural gas law in the country. This groundbreaking legislation was signed into law by Oregon Governor Cape round in the summer after months of collaboration with Oregon Senators Michael.
Umbro and Lee buyer and other influence influential environmental leaders across the state.
The bill creates a path for renewable natural gas to become an increasing part of the state's energy supply.
We know putting renewable natural gas on our system is one of the most effective ways to reduce emissions.
In August the Oregon Commission opened the docket to begin rule, making on this law they've laid out an expedited process that is scheduled to conclude by July of 2020.
We are in the early stages of these initiatives and I look forward to a growing portion of supply coming from renewables and moving quickly on the opportunities in this market.
We are laser focused on providing our customers with innovative solutions that derive climate that beds at a reasonable cost and do not negatively impact reliability of the overall energy system.
Turning now to the water side of the business I'm very pleased with the success of our water strategy. We initiated the strategy two years ago with small transactions close to our natural gas service territory here in the northwest and have grown to operate nine utility serving customers in the three state northwest area.
Our disciplined approach has worked well we began with solid transactions that were financially manageable, ensuring good execution, confirming our understanding of the regulatory process and allowing our team to gain experience.
Our acquisition strategy in the Pacific Northwest continues in October we signed an agreement to purchase a some kt of water and wastewater utilities in Washington State. This high end resort community attracts residents from Seattle and serves about 2800 connections. We are happy that happy to add another resort community to our water family.
As I've grown confident in our teams abilities, we broadened our focus to include opportunities west of the Mississippi.
Our first opportunity is in Texas for a water utility serving about 3500 connections and Conroe, Texas.
This community is part of the larger Houston Metropolitan area, which is vibrant and has and historically as boasted one of the highest growth rates in the country.
Texas is a key growth area in the United States, its economy business environment and growth, making an attractive region. The core population centers in Austin, Dallas and Houston continue to post some of the highest population and housing growth rates in the United States.
With a strong business culture, and constructive regulatory environment and numerous privately owned water companies. We believe Texas is the right place to continue growing our water business.
We also continue talking and utilities around our existing footprint. Our other pending acquisitions are examples of this rollup strategy.
Last quarter last quarter, we highlighted our first municipal transaction Taylor mountain water and sewer district near Idaho Falls.
We also closed on two privately owned water utilities in the quarter Lane territory earlier, this month and up to more utilities pending in that area.
We will continue to target other utilities adjacent or near our footprint. Obviously this now includes Texas, which greatly increases our pool of opportunities.
Acquisitions are projected to be accretive in the first full year of operations.
Altogether, we have now committed nearly $110 million of investment into the water sector. Once we close these outstanding transactions will serve approximately 62000 people through nearly 25000 connections.
I remain excited by the growth potential that bit of this business. We continue to find good opportunities to add additional assets to this platform platform through acquisition, but are also finding good organic investment opportunities to put capital to work and our current portfolio.
Im very pleased with the strong results posted year to date are best in class customer satisfaction results and our continued progress on our strategic plan, especially as it really relates to our water platform.
I look forward to a strong fourth quarter and continue to execute on these opportunities for years to come.
Thanks, again for taking time to join US This morning with that Ben I think we're ready to open it up to questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then to at this time, we'll pause momentarily to assemble our roster.
Our first question comes from Chris Ellinghaus with Siebert Williams Shank. Please go ahead.
Hey, guys.
Hi, good.
Can I ask you David to talk a little bit high level about the renewable side.
Once the.
Implementation dockets or works its way through.
What's your sort of thought process in terms of the timeframe that you might start to see investment opportunities and would you be interested in things as far down the chain is.
Supply or electrolysis for hydrogen and that sort of thing.
I think and more pipes.
Yes, I appreciate the question, Chris I think for those of the phone I think the first thing is to make sure Buddy understand that when you look at our residential and sales customers. They represent about 5% of the state submissions and are in Oregon, and Oregon in General has very low emissions, but we do believe there are going be opportunities to lower that even further and to make sure that we do that.
Along the line that you are talking about the rulemaking is in process ride. So we don't really have all items that we need to kind of work through this but the log clearly sets.
The the ability for us to probably invest around in terms of revenue increases around $30 million, it's about 5% of revenues as with the bill highlights now whether that ends up being straightforward purchases, Chris or it results in our revenue requirement from investment opportunities, that's yet to be determined from Mike.
Perspective, strategically I think it's important to get as much.
Renewable natural gas on the system as quickly as possible on in that might start off with purchases. We will obviously worked with a few see not going through this this rule, making process, but in the futures to see if theres opportunities on the investment side.
But the key for us is to get that renewable natural gas flowing and renewable natural gas as you as you mentioned.
His numerous items, it's obviously a gas from landfills and wastewater facilities like the one we did here with Portland.
And.
Dairies, but it also includes what I'm really excited about as the new technologies out there that you mentioned this power to gas and Thats using excess electricity generation, which we are abundant here at certain times of the year because of our hydro situation in our wind generation to create hydrogen and we can put hydrogen on the system and in fact this is not really new technique.
LNG they've been doing a Europe for a period of time.
And we look forward to trying to do that here in fact, we're working on a pilot project with the city of Eugene right now so all that being in place, it's an exciting opportunity I.
I would love to have more investment opportunities, but strategically the most important thing to US right now is to get more decarbonize gas on the system and then long term, we'll see whether the investment opportunities play out or non hopefully that makes sense.
Sure when would you imagine I of course this will go through the implementation docket, but when you imagine that if you were just to make a street purchase of some renewable gas it that way.
Be offset in the in the math that the legislature.
Left you with in terms of the percentage of revenues.
Yes, the legislature went the way, though the way they set it up as they they allowed us to increase rates by 5% too.
Get renewable natural gas on the system, that's either through purchase or through investment. So it's not I'm trying to make sure I understand your questions not really an offset so if we bought $2 million of RMG on the open market there would still be $30 million of revenue requirement that could be spent on something else, whether its direct purchases or invest.
What that translates back up to a revenue requirement. So it makes sense.
I would just thinking in terms, if I bought $2 million worth of renewable gas that replaces 2 million of other gas. So on a philosophy really net net.
That is if that is true that it would replace the other the other gas sorry, I misunderstood your question.
So.
Can now can also asked this texas acquisitions or opens up a new horizon for the water acquisition strategy can you give us any sense of what you're seeing in other locations in terms of the opportunity set is it is.
Robust as what you've seen so far in the Pacific Northwest.
It's it's a great question, we are looking western Mississippi as we've been articulate in to you guys for good nine months now what was really attractive about Texas is just the size of the population.
And how many private water companies there are there. So the opportunity set is it's very good so that was that caught our attention. Initially it and you can kind of see what we've been doing in the northwest is once we enter into a new area I'd like to use the word that it's a beachhead for us pardon pardon the pun.
But it allows us to do tuck in acquisitions around that so very similar to what we did in Idaho, both up and core delay in and around Idaho falls and I suspect that most of our near term efforts and attention will be focused on doing that in Texas.
We continue to look up the other states right now, but I think at this juncture, Chris the most of the focus is on Texas.
As we as we try to build out that platform.
Okay and you also have done your.
First municipal system are you seeing.
A lot of opportunities on the Muni side.
The Muni side takes a little bit longer to workout.
I will tell you the more near term opportunities are on the private side, but I think once you start I think the nice thing that we've been able to accomplish in two years is established herself as a water player and thats an important step.
To where you know when we come in now we're not seeing as a gas utility work water utility and that includes the regulator. The regulator clearly sees that we are a good long term owner of these assets and it's also been good for the sellers on the municipal side that is something that we continue to work on hand have resources working on that that just.
Usually the little bit longer lead time and every.
Every city every municipality has different issues that it's trying to solve so the Taylor situation than we had was one that was right next door with small and they needed they needed somebody like us to come in and take over we will be prepared to do that especially in the footprint that we have right now, but I do believe long term municipalities are very important part of the long term growth strategy.
Especially as you look at states that have fair value legislation that will be a dynamic that we will continue to push hard but right now most of the efforts on the private side gross.
Are you seeing more as your name gets out there more than private side coming to you at this point.
I think Thats, a fair thing to say and I think the other side of this is.
When you when you have 160 year old at utility that usually is number one two or three in the in the country with customer satisfaction numbers, it's clear that we that the sellers.
Appreciate selling the somebody that understands the business and then I think we're also getting good feedback from the regulators in the three states and I suspect, Texas to that they understand the value of the utility utility owning these assets versus private individuals.
Okay. One last question.
I know it will be awhile before water might potentially become a reportable segment, but as you get to the more critical mass in terms of dollars invested and having more and more acquisitions complete their first year.
How do you envision sort of.
Providing more benchmarks to us to sort of keeping an eye on how the water business is progressing.
Yes, it's a great. It's a great question and I think as we as we gain momentum and we gained size I mean, we do have $110 million invested the courseware 3 billion dollar asset company. So you will in the future when we when we get the scale, you'll see segment information.
But we'll we'll try to do more in our Investor relations materials to make sure that you guys understand but at this juncture, Chris we're trying to build a business.
And our assumption of them foreign thing is too is to get more assets under management, and then for Justin and Brody, which of the two that are running this company. There. They are putting plans in place for additional capex because each one of these have opportunities to expand their investment footprint. So I think we're in the early stages here, but I definitely hear your question and.
And hopefully in the future not so distant future will be be able to provide more guidance along that front.
Great I appreciate the color.
Thanks, Chris.
Our next question comes from Ada.
Some may grows with you BS. Please go ahead.
Good morning.
Good morning.
Cash growth looks like it's slowed modestly to 1.6% in free Q could you. Please discuss what are your expectation for customer growth going forward and.
Do you think there is any impact potential building electrification trend on the west coast.
Yes on the trailing 12, I think the actual numbers, 1.62%. So it did did drop a little bit on a trailing 12 basis, we've been consistently seeing around that 1.6 or 1.7% for.
Quite a bear that a time here.
And we have a lot of multifamily projects that will be coming on pretty soon.
So I think.
It's kind of hard always to focused customer growth has and you got to you have asked are we going to have a recession or we're not going to have a recession. The great thing is our product is very attractively priced and.
People want gas so it's a high value add product that they want to put in place. So I think a lot of those factors, including the economic information.
That we shared with you in the transcript in terms of how many new housing permits are in things like that bode well for continued good customer growth.
Whether that ends up being a 1.6 number or a little bit lower little bit higher it's a little bit hard.
I'd have to up to kind of a forecast that on the electrification.
Discussion that you mentioned, obviously, there is theres quite a bit of that discussion going on throughout the country.
As you saw the activities down in California, one of things that we've been trying to make sure that all of our local officials understand as the value of the natural gas system and again I think also I think gas systems are going to be a little different by what territory. Your end. Obviously, we are we have long cold weather and if you really want to.
To quote unquote, electrify everything you're actually going to increase the carbon footprint for many years to come because frankly.
Youre going to be using natural gas no matter, what youre going to either use natural gas directly which we believe is the right thing to do especially as you add renewables.
Or you're going to use it in gas fired generation because the renewable portfolio can handle the.
The peak periods like it needs to so theres discussions everywhere.
And we'll continue to be part of that but it's our focus right now to make sure all of our elected officials all the city councils all of our jurisdictions understand why the gas system exist ones here for and how we can achieve the climate change goals at our governor and the state want to achieve.
Thank you for taking my question.
Our next question comes from Sarah Akers with Wells Fargo. Please go ahead.
Hey, good morning.
Good morning, Sarah.
Oh sure your latest thoughts.
Timing of the next Oregon rate case, and maybe talk through some of the key drivers the of the need there.
Yes. This is David I'll start and then maybe I'll hand, it over to Frank to cover some of the Capex obviously.
Results year to date have been strong.
As we indicated and we're in a good position for strong results for the year, but with that said, we've also been making substantial investments in the system.
And we are seriously contemplating right now.
Filing.
Another Oregon rate case, very soon and it's really driven driven by that investment profile that we see and Frank you might just describe a little bit of that from a capex perspective, you bet.
Larry you know our historic average capital expenditure was more in the range of $160 million, we were up a little bit last year and then this year, we've got 230 to 270 as our guidance.
So at this sustained level of course, we'd be facing lag and we don't want to to endure that for too long a lot of this investment will come.
Online be in service here over this period. So it's really as David said, it's looking like we'll we'll need to consider rate case.
Late this year early next year and Sir just a reminder, our practice in the past as.
We really like to up.
To update rates at the same time that we do our pj's, which for Oregon, and Washington, Obviously, we're talking about Oregon here. Since we just finished Washington, I don't want to I don't want in further there is a Washington rate case right behind this but.
It would still probably be.
The right thing to do its update rates in the same times the PJ if thats. The fact that probably means if we do decide to file a rate case it will be late late this year.
Alright, thank you.
[noise].
Showing no further questions. We will conclude our question and answer session I'd like to turn the conference back over to Mr., David Anderson for any closing remarks.
Ben Thank you and thank you for everybody for participating on the call obviously Mickey is available for questions.
Just to kind of repeat where I started off we started the year really strong.
You can see that in the year to date results. You can also season. The trailing 12 results that were in a good place where we need to be by year end. So Ben. Thank you everybody. If you have any questions. Please call Nikki and thanks for joining us today.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.