Q4 2019 Earnings Call
Morning are David Anderson.
President and chief executive officer and Frank burkhartzmeyer senior vice president and Chief Financial Officer David and Frank have prepared remarks and then we'll be available along with other members of our executive team to answer your questions with that. I will turn it over to David Nikki and good morning and welcome everybody to our fourth quarter and full-year 2019 earnings Thursday. We close out 2019 or a hundred and sixtieth year in business with very strong financial results and significant progress on our long-term strategic objectives and most importantly we took our commitment to customers by providing them with safe and reliable service.
Earnings per share for from continuing operations is $2.19. But that included a onetime regulatory pension charge of $0.22 per share related to the Oregon commission order. We discussed in previous calls month excluding that disallowance on an adjusted non-gaap basis earnings per share from continuing operations with $2.41 compared to to $2.33 in 2018 bought these results reflect new rates in Oregon and Washington Gas storage service beginning at North missed customer growth and some colder weather in additional fee Revenue earlier in the year. Frank will walk me through the financial results in the detail in a minute. But in summary, we had a very strong year. This financial growth is the product of multi-year efforts Akeem focus on our long-term plan and a proof that small ships do add up three years ago. We went through a comprehensive strategic planning effort that explored different ways different views, excuse me other future and how best to position our company for continued success dead.
our management team thoughtfully
Determine the path to proactively address the evolving needs and priorities of our business. We also validated The Guiding pillars of our business strategy that we live by each day first and foremost safety is Paramount in everything we do that is followed very closely by providing Superior customer service our regulatory relationships and providing a are in providing a constructive approach for all stakeholders is also essential in addition. We must continue to maximize returns and enable growth in our Natural Gas and Water utilities and finally environmental stewardship remains a core value. We can I will strive to leverage our modern system technology in our passion to achieve a low-carbon future executing on these pillars has culminated in many achievements in 2019 and we'll walk through those accomplished in the moment. As you know growth is not always linear and in certain years the focus will be on initiatives set the stage for future growth twenty-twenty for us is such a year all in this morning with a rep.
Going forward as we transfer.
To our next stage of growth on the operations front and 2019 we continue to make significant significant safety and reliability Investments. Our pipeline system is one of the most money Titus systems in the nation and we're working hard to keep it that way in 2019. We began several reinforcement projects to support growth in and around the Portland metro area these projects to be completed in 2020. We're also planning upgrades to our highly valuable. Miss gas storage facility Colder Weather coupled with reduced pipeline capacity from Canada created Supply challenges early in 2019, but we were able to maintain service to our customers and other Utilities in the region the cause of the mid storage field.
Our region has been depending on Miss since the 1980s in this past year. We completed the laser latest expansion North missed the expansion provides an Innovative. No notice service that supports a local utility pole has a manage the volatility of the electric grid in integrate Renewables Miss delivers energy to our region at the most critical times with only a single pipeline serving. Our territory storage will continue to be essential for ensuring reliable service and last year. We also Advanced multiple efforts to harden our infrastructure and Facilities of preparation for natural events, like seismic activity, for example, currently moving to a new operations center that was built to continue functioning after an earthquake. We've also made progress on a master plan to upgrade and retrofit our service facilities with resiliency in mind off second. Only to safety is our Legacy of service. Our customers are Central to Our Success here at Northwest Natural. I'm thrilled to customers once again gave Northwest Natural the highest score in the nation a month.
Natural Gas Utilities in the JD power's residential customer satisfaction study adding to the good news business customers ranked us best in the west. I'm proud of all of our employees who make this additional service happen every day.
We work hard to continue anticipating and meeting our customers needs having a constructive regulatory agenda and a collaborative approach to balancing stakeholder needs is crucial after an extended package as we knew our strategic goals had to be focused on proactive Communications and education with all of our stakeholders due to our robust Capital plan as well as cost pressures. We took the necessary Step at the end of 2019 and filed an Oregon General right case the request includes a revenue increase of 71.4 million dollars based on a fifty-fifty cap structure and Roa of 10% off. The capital of 7.3% and an increase in average rate base of 270 million dollars. The Oregon commission is stakeholders have 10 months to review the case and we expect new rates to be effective November 1st.
We continue to see great economic conditions in our service territory consequently low unemployment translated to income gains for workers across Oregon as average earnings Rose 4% last year. I thought this was the 8th highest employee earnings growth in the nation. The housing market is remarkably strong even after a peek a few years ago in the Portland area single family permits were up 11% of 2019 multi-family permitting permitting recovered from a Slowdown in 2018 Rising 15% year-over-year these factors translated in fact nearly 12,500 new customers over the last year resulting in the growth rate of 1.7% which is one of the fastest among distribution companies in the country.
We continue to grow our name.
Natural Gas Utilities, but we also know from our strategic planning process that we wanted to add another business with a stable conservative risk profile. We believe the water and wastewater utility sector fit this criteria perfectly fine so far, we close 9:00 Water and Wastewater transactions and just two years and we have regulatory approval in hand for the tnw transaction in Texas. And I expect that to close any day off cumulatively we've committed nearly 110 million dollars in this space and we continue to believe in the strong investment potential of this industry as aging infrastructure needs to be replaced. I'm proud of development team and the momentum we built that will allow us to execute on the long-term opportunities in this sector.
Since 2016 or a compound annual growth rate for EPS is 4% this growth allowed our board of directors to increase our dividend for the 64th consecutive year our annual indicated dividend $1,000.91 per share and we are proud to provide this returned to our shareholders and be one of only three companies on the New York Stock Exchange with this long record environmental stewardship is a long-standing you here at Northwest Natural and a 2016. We began pursuing our low-carbon path light setting a voluntary goal of 30% carbon emissions savings by Twenty 35% which requires us to lie down and innovate. I'm excited to report that we are on track to reach that goal. Although we are starting from a very low level just 5% of Oregon's emissions come from our sales customers. We know we can do more money. That's why 2019 was a significant year with the passage of landmark, Oregon Senate Bill. Ninety-eight. We now have another path for renewable natural gas to become an increasing part of the States energy dead.
Put in renewable natural.
Gas on our system is one of the most effective ways to reduce emissions in 2019. We also send a team abroad to learn about the Innovations and renewable natural gas and renewable hydrogen our meeting a government governmental entities utilities and private companies across Europe confirmed that we're on the right path. It also validated the investment that we've already begun making in our own backyard. I look forward to a growing portion of our supply coming from renewable and moving quickly on the opportunities in this market. I'm really proud of all that we've accomplished in 2019 and the last several years on our long-term objectives and there's more to come but with that. Let me turn it over to Frank and cover more details in the financials, right? Thank you David and good morning everyone. I'll begin with a summary of our fourth quarter and annual report adults and then discuss our cash flows and guidance for 2020. I'll describe earnings drivers on an after-tax basis using the statutory tax rate of 26.5% note that are effective birth.
was 16.2% for
2019 as a result of returning excess to fruit income taxes related to tax reform to our Oregon customers looking forward. We expect the effective tax rate to be approximately 23 months as we continue to provide these benefits to customers also note that quarterly and annual earnings per share comparisons were impacted by the issuance of 1.4 million shares in June 2019, as we're able to fund investment in our gas utility for the fourth quarter. We reported net income from continuing operations of 38.3 million dollars for a dollar twenty six per share compared to net income a 36.8 million or a dollar twenty cents per share for the same period in 2018.
The one point six million dollar increase in net income is a result of a 5.4 million dollar contribution from our Natural Gas Distribution segment partially offset by a 3.9 million dollar lower contribution or other businesses the Gas Distribution margin increased 5.1 million dollars from customer growth new customer rates and revenues from the north dismissed facility, which began operations in 2019 is higher margin was partially offset by a 2.4 million dollar increase in operations and maintenance expense primarily related to higher payroll and benefit costs in addition depreciation expense increased 1.5 million dollars due to higher investments in our system and income tax expense declined 4.5 million dollars as a result of returning tax reform benefits to Oregon customers off.
From our other business has declined three point nine million dollars primarily due to lower Asset Management revenues, the prior-year results included higher revenues from in October 2018 Canadian pipeline and sent home during the full year results on a Consolidated basis 2019. Net income from continuing operations was 65.3 million dollars or $2.19 per share compared to six seven point three million dollars or $2.33 per share in 2018, excluding the 6.6 million dollar pension disallowance. We've discussed previously net income from continuing operations was $2.41 per share or an increase of $0.08 / 2018. The $0.08 per share increase is the result of a 27% increase in the Gas Distribution same partially offset by a 19% decline from our other businesses in the Gas Distribution segment utility margin increased twenty eight point seven million dollars as higher customer rates customer growth and wage.
Just from the north missed expansion added thirteen point.
Five million dollars in addition colder weather along with higher fee revenue from interruptible customers contributed an additional two point seven million dollars. The remaining twelve point two million dollar increase in margin is a result of the March 2019 Oregon order related to tax reform in pension expense with the exception of the first quarter pension disallowance disorder has no impact on my life as offsetting adjustment for recognize through expenses and income taxes as I'll describe in a moment while utility o&m and other expenses increased twenty six point four million dollars. The increase in under-age was only two point two million dollars. The rest of the increases are associated with accounting for the Oregon order. There are three drivers of this increase first is actual pension expenses now collected in Cusco pension expense increased eight point four million dollars second the day one accounting impacts of implementing the March ordered increased expense by nine point two million dollars offset by higher revenues and lower wage.
Finally we recorded the six points.
Six million dollar pension disallowance in the first quarter over the last two years. We have invested in our gas system at historically high levels as a result depreciation expense increased 4.2 million dollars in addition interest expense increased 3.3 million dollars from higher long-term debt and Commercial paper balances in the first half of 2019. Finally utility segment tax expense incurred. If I point four million dollar benefits related to implementing the March order with no significant effect resulting effect on net income that income from our other business has declined 5.3 million dollars project management revenues decreased from a combination of less favorable market conditions and an increase in the portion of these revenues that is shared with customers following the Oregon rate case in addition the water utility business had higher wage costs during 2019.
As a result of the Oregon General rate case in tax reform there are lots of moving pieces in the 2019 financials, but the underlying drivers remained straightforward the gas utility benefited from new rage in Washington solid customer growth as well as weather and some fee revenues and North missed came online in 2019. This was partially offset by lower Asset Management revenues and costs relating to go in the water business a few notes on cash flow for 2019 The company generated $185 million dollars in operating cash flow. We invested $304 into the the business with 242 million dollars of gas utility Capital expenditures and leasehold improvements as well as $57 of water acquisition cash provided by financing activities with $115 as we issued debt and equity in June 2019. Our balance sheet remains strong with ample liquidity.
regarding 2020
Financial guidance gas utility Capital expenditures for 2020 are expected to be in the $230 to $270 range including significant projects related to system reinforce equipment Replacements at missed Resource Center Renovations across our service territory and Technology upgrades these Capital Investments coupled with higher forecast expenses from the new Union contract with disabilities rent as well as payroll and Technology costs supported our decision to file the organ rate case with rates affected in November of this year.
Consistent with these business drivers the company initiated 2020 earnings guidance today for continuing operations in the range of $2.25 to $2 and twenty four $2.45 per share. Our guidance assumes continued customer growth average weather conditions and no significant changes in prevailing regulatory policies mechanisms or outcomes or significant laws legislation or Thursday. Finally this guidance excludes. Any game related to the sale of the guild Ranch storage facility and Associated operating results. These items are supported and discontinued operations with that. I'll turn the call back over to David for his concluding remarks. Thanks Frank our efforts last year. I have built momentum for the initiatives will advance in 2020 as we discussed. We're very pleased be taking a significant step forward in our energy transition with the passage of organs groundbreaking renewable natural gas legislation and 2020 will also be executing on several other priorities relay.
to our low-carbon pathway
Separately in ahead of the legislation three local renewable natural gas projects are being developed on our system that will interconnect and produce RNG that is roughly equivalent to 2% of our sales volumes would expect to complete these projects in the coming year in Washington State under house bill 1257. We are developing a voluntary tariff that would allow us to directly purchase renewable natural gas on behalf of our washing the customers that opt into the program. We're working on a similar tariff in Oregon and are excited to offer renewable options to our customers.
We are reaching across our entire value chain to achieve apartment savings after several years of analysis and preparation. We are using internally produced proprietary first-of-its-kind program to analyze the methane emissions from our Upstream providers. Now, we can prioritize natural gas purchases to even a greater extent from the most responsible lowest emitting producers and we can do this wage paying more for the gas. I'm excited with the progress are available team has made and the great strides. I know they'll take in 2020. We're pleased to help communities take advantage of our distribution system in new and exciting ways that pragmatically address climate change another key priority in 2020 will be growth for the natural gas utility. That means focusing on high-quality customer service including executing on several technology projects that will enhance internal processes and customers mobile experience.
These investments will help ensure seamless interactions with our customers and support continued.
Completing our capital projects will be a top priority this year. These are necessary Investments to support the safety and reliability reliability of the system and we'll be working very closely with organ Regulators over the coming months to ensure they have the information needed to review the general rate case and put new rates into effect on November 1st. And finally our water utilities and acquisition strong will continue to be an area of focus. Our disciplined acquisition approach has worked very well. We will continue to identify targets for Roll-Ups Acquisitions in areas. We've already established an exam opportunities across the country. I believe Texas is one of those key growth areas its economy business environment and growth making an attractive region. The core population centers in Austin Dallas is Justin continue to post some of the highest population and high hand the housing growth rates in the nation.
At the same time. Our team is working hard to efficiently integrate the ways the water and wastewater utilities. We've already purchased and assess the maintenance and investment needs of those physicists. I remain very excited by the bulb potential of this business in summary. We have accomplished a lot since we rolled out our strategic plan three years ago. Our leadership team and employees have worked hard. None of our success could have happened without their dedication as we enter our hundred sixty first year in business. We will continue to address challenges and execute on the opportunities ahead of us. It is a truly a very exciting time to be in the energy in the YouTube app. Thanks for taking time to join us this morning. And with that Grant will open it up for Q&A.
We will now begin the question-and-answer session.
Question. You may press start then one on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press start then to at this time momentarily to assemble our roster.
The first question comes from Chris with Seibert Williams, please go ahead everybody. How are you?
Good morning, Frank if you got the 2019 water acquisition cost Sandy.
Yes, but we don't we don't disclose particular water acquisition costs. I wasn't thinking about the individual Capital cost. I was thinking about the just the transaction costs. We we don't disclose the particular transaction costs that level of detail. Okay. Have you got a better sense at this point what you think the timeline is for renewable natural gas Investments.
This is David. We're going to we're going to try to do as much as we possibly can. We've now we basically have two Avenues to do that. The organ i r p clearly recognizes that we can purchase renewable natural gas through that process. And then again the Senate Bill 98, which is the most aggressive RNG bill in the country. It gives us another platform to do that and we'll continue long strides in Washington as we look forward so kind of hard right now to put in a number on it. But if you think about this we've been at this a very short period of time and our first project was was was with the city of Portland which ended up being the their number one climate action, uh ever project that they've ever been part of and for us already be at a point where we can get 2% of our sales throughput with oranges, you know, a couple of years of work here. I'm very encouraged that you'll see more coming down the pike.
Okay, have you got any current thoughts on the sale and and how that's proceeding?
For us to close that transaction the good news is we've received all regulatory approvals. So now we're just working with the buyer and doing the typical, you know in the process of these things, you know getting the the t's crossed and the I's dotted to fund I would expect that uh to be completed by the end of March. Okay, great Frank as far as the game goes. Can you just sort of give us some color and what headwinds you see for sort of a flat 2028 question Chris if you look at 2019 p.m. We benefit a little bit from some weather and the incident on the Enbridge pipeline earlier this year. So I would start by saying the midpoint of our guidance about you know in the long range is probably our normalized level for this year. And of course, we don't assume any benefit from weather or anything like that in in twenty-twenty on the positive side for earning wage.
to expect to have us
Customer growth the full year of North missed and and a little bit of contribution from the water business. But what really drives us into this guidance range is contingent of our Capital program. We are investing at a higher level. So, you know depreciation is running it was up 2019. It'll be up a bit more in 2020. We had issued Equity last year. So now he's got a full year with those ninety million shares outstanding and then quite importantly there is a number of onm pressures as we move forward and it's a big part of why we filed the rate case, um, in addition we're investing in more and more technology right now. A lot of that comes with o&m right now. We need to add some people around cyber security and some other technology advances. We're putting in place Thursday. We got a new labor Accord with our Union employees, which is increasing salaries and benefits. We have a tight job market, which also just drives up salary Club.
it's in the region and then we've got
New facilities were moving into a new Operation Center which has which has a lease associated with it's a higher than the than the building that we're in right now. So all of those things are driving, um, o&m up which we will get in which we've got in this rate case as well as a higher level of depreciation I'd say and then just the the typical lack of an accelerated or elevated Capital program. Okay, great. Thanks wage guys. Appreciate it.
The next question comes from August in the sky with UBS, please. Go ahead. Good morning. Could you please provide details rep higher than previously discussed long-term capex and how that is impacting your risk-based growth as well as how do you plan to funded? Is there a need for Equity issuance on ATM? Great. Great. Thanks Olga. This is Frank. I'll take that the the main change from our prior program. There's a couple of couple of significant projects one is we will be putting more money to work in our midst facility. There's some there's some things as a large di Hai that needs to be replaced and and some other equipment up there that has just outlived its life and am moving forward on that. In addition. We have a number of large technology Investments. We are Erp system. Our customer information systems are all getting quite quite old and we've been updating a strategic
land around r r i
And we're starting to move forward on that and between them we're adding over the five-year period about a hundred and fifty million. There's a few other things that are driving that as well but as we get better and better line of sight off on some of these large infrastructure projects, we decided to put them into our Capital forecast. They don't we have a band of four to six percent on rate base growth over the. This doesn't change that band at all. It's just within that it's not that that huge of a change it it's just additional regarding financing costs at the level that we're investing now, August 4th. We will be in for eight cases more often. We were in two years ago. We're in now because of of this largely because of this investment cycle will have to stay pretty close to a fifty-fifty capital structure over that time. We will home access the capital markets. We raise the equity last year. That was a big raise for us. We were looking ahead, you know, we know that and we're also investing in water companies so over time we will have to continue to a club
The capital markets we can't be specific about.
I mean in part because the timing of some of these Investments, you know, we can't can't be that specific. But also it's just not our practice to be super specific about when exactly will access the month but we do need to stay close to that 50 50 50 50 capital structure for our utility. It makes sense recently approved. Are we in Oregon was 9.4% What is the risk that based on the same interest rate environment that are we would actually be lower and how that would impact the requested driven you I'll get this is David. I mean you always you always have that risk as we go through and you know, I think Oregon as well as Washington have have both been very pragmatic commissions when it comes to our weeds. I will tell you the latest are we I think is from the Vista in Oregon. They got nine four. So the most recent data point along that line is 94 so we would we would hope for a number not lower than that, but obviously Our Testimony actually supports a number of higher than 9/4 but dead.
More more to come as we work our way.
Thank you, and lastly in nineteen. You formed renewable resources theme, what are the opportunities and challenges that the team has experienced so far and see ahead to meet the Compaq renewable goals and Portugal and renewable natural gas.
Yeah, let me adjust himself from an kind of take that one. You want to go ahead and address that question. Yeah, sure. So our renewable team is focused on basically getting and securing long-term natural gas supplies, uh to benefit our customers. Uh, we formed that team shortly after SB 98 past which is really the orangey enabling legislation. Um, that that gives us the opportunity to invest in our energy through the utility. Um, they are focused right now on developing a pipeline of Supply opportunities and getting the money making in place with with commission staff and our other stakeholders and we expect that as the as the year moves on we will start to see actual results in and bought a specific projects that we are identifying to bring onto our system.
Perfect. Thank you for taking my question.
You mentioned. Thank you.
The next question comes from Napleton with Maxim group, please. Go ahead. Hi. Thank you. Good morning. Maybe it's jumping the gun a little bit. But I think in previous presentations you've put in your five year strategic plan including EPS growth of 3 to 5% Is that under review or do you still have that Target for the next five years? And if so, what is the base EPS number for that Target with you? This is David. I'll take that one say yes that is still the plan and and The Five-Year Plan still exist right now. As always we we tweaked obviously a Big Driver of that underlying EPS growth is dead. Yeah the rate based on the capex that Frank just went through since 2016, which is kind of the base year that I look at cuz that's when I kind of took over this role. We produced caterer at 4% off. So I think we're right in the band that you're talking about and barring some kind of unforeseen situation going forward. It could be anything from recessions to other type items. I would suggest that the three to five is still an appropriate level for us dead.
Okay.
Thank you. Thank you for following and Frank. I see in the and I think you did it last year too with your release you disclosed the Natural Gas Distribution EPS number. So in nineteen that was $226 vs Thurs 241 number, I mean strategically the three to five percent growth is is it on the 241 or the 226 number? I don't remember us giving a specific Natural Gas Distribution from this Northwest Natural Holdings is how I would describe it just week without one guidance ban, of course water has not been a real contributor to that in in that. Um the way I would look at that 325 range that we put out was we were assuming the midpoint of our 2019 guidance. So 235 issue was the as I say was the normalized number for 2019 if I were to normalize for weather and and some pipeline optimization benefits that we were able to harvest.
Okay, great. And then there was a couple comments in the press release about maintenance water capex. But what are I mean? Have you started regulatory reviews or or the process to get approval for growth capex or replacement capex or where do you stand with that? This is paid and and we can we can get into a little bit of detail. Obviously when we when we acquire these things Judd who's the president of water company takes the lead along with Brody Wilson to CFO the water company to look at the five year plans afoot frankly five year plans in place for these entities and and you know, sometimes those entities have page and sometimes they don't and as we go through that and then along that line is when the you need to kind of go into the regulator to to get certain reimbursements for that. It's usually a couple of years after you acquire one of these and it wouldn't surprise me at all. If you start seeing some of those take place and of course our first one was in Idaho and I think you'll see you'll see activities as we as we play out going forward in that state and wage.
We look forward.
Okay. Thank you, David. All right. Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to David Anderson for any closing remarks Grande. Thank you. Thank you everybody for joining us off on this Monday. Again. It's always if you have follow-up questions. Nikki is your point person and we look forward to talking to you soon. Thank you.
The conference has now concluded thank you for attending today's presentation. You may now disconnect.