Q1 2020 Earnings Call
Good morning in welcome to the N.W. natural holding companies first quarter conference call. All participants will be analyst and only mode should he need assistance. Please signal conference specialist by pressing the Starkey followed by zero.
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Now like turn the conference over two Mickey Sparley director of Investor Relations. Please go ahead.
Thank you Brandon good morning, and welcome to our first quarter 2020, Ernie call. As a reminder, some things that will be said. This morning contain forward looking statements are based on management assumptions, which may or may not occur. In addition, seminar comments today reference non gap adjusted measures for a complete reckon for.
Sure these measures and other cautionary statements refer to the language reconciliation at the end of our press release, we expect to pile or 10. Q. Later today has mentioned this teleconference as being recorded and will be available on our website following the call.
Please note piece called are designed for the financial community. If you are an investor and have additional questions. After the call. Please contact me directly at 537 to 125 30 news media may contact Melissa more five or three 220, 24 36 or speaker.
Today are doing this call remotely. So please bear with us if we have any technical difficulties or sound quality issues or pauses as we go on and off me.
He came this morning are gave Anderson, President and Chief Executive Officer, and Frank <unk>, Senior Vice President and Chief Financial Officer, David and prank have prepared remarks, and then we'll be available along with other members of our executive team to answer your questions with that alternate over today, but.
Well, thank you Nicky and good morning, everybody in welcome to our first quarter call.
I hope you are safe and well as we all go through unprecedented times here.
Like you we've adapted to a new normal in the last few weeks as we've limited social interactions and taken every precaution to fight the spread of the Corona virus.
Well continue went to provide essential services to our customers.
Personally I'm very proud of how our company at our employees.
Responded to this event I, especially want to recognize our field personnel for all they are doing to keep our system safe and of course operating reliably.
Oregon, Whereabout, 90% of our gas customers reside a series of progressively restrictive executive orders culminated with the stay at home directive beginning on March 23rd in Washington, Idaho, and Texas, where we have gas and or water operations also.
Implemented various forms of restrictions.
Our natural gas and water utilities, obviously are critical infrastructure. We've continued all essential functions necessary to provide reliable service while following the guidelines set out in the Governor's executive orders by O. shop and of course the C.D.C.
We continue to respond to customer issues emergencies and providing other essential services. In addition, we are performing maintenance and construction on our systems.
Why we can't predict the full economic effects of the the pandemic I see several mitigating factors for business.
Timing wise this executive order consent coincided with the conclusion of the winter heating season.
Portland May continue to require some heating resources in the northwest, but the majority of the sales occur from November through March.
In addition to be in a pure pay play utility business, we benefited from an attractive customer mix.
About 87% of our natural gas margin comes from residential and commercial customers of which a majority already coupled and about 80% of our margin comes from industrial customers. While the remaining 5% primarily come from a fixed fee you regulated natural gas storage arrangement.
Our water utilities are comprised primarily of residential customers and in many cases are entirely residentially based.
At our largest water utility son River.
About 72% of the revenues come from residential customers with 10% from commercial and 18% from irrigation customers.
And finally, we operate with customer affordability in mind and worked very hard to run and efficient organization.
These operating principles, coupled with the decline in natural gas prices have led the natural gas bills being about 40% lower today than they were 15 years ago.
And despite starting from an efficient place.
We're taking steps to further reduce our expenses by tightening spending where possible.
Finally, we are committed to helping the most vulnerable members of our communities. We do this through a variety of programs, including our corporate Philanthropy fund our gas assistance program in several state and federal programs at assist with customer bills. We've also filed a request with regulators to provide our Oregon natural gas customers were there.
Annual June Bill credit.
Related to our revenue sharing mechanism this year that credit equates to a one time.
30% reduction.
In an average monthly residential bill and that's a a record them out by the way.
At this point bad debt levels are essentially in line with previous years will continue to watch collections closely and of course work with any customers, having financial difficulties with that said the closure of small businesses and loss of jobs weighs heavily on our regions as our governors reopen our states. We're hopeful small business can bounce back quick.
Right.
March we took several steps to improve our already strong liquidity position by increasing cash on hand.
As a result, we have over we had over $470 million of cash at court around and continue to maintain large cash balances.
We will continue to closely monitored the markets to in Charlotte quality position remains strong in summary, while we aren't immune from the effects of a recession, we believe our financial strength and low risk business model will serve as well we are obviously living in truly unprecedented times with economic conditions that continue to evolve the full effect.
Most of which continued to be unknown, but it is important to understand where we stood in February at that time, we had a fundamentally sound sustainable growing economy would with a record low unemployment both nationally and in our service territory all of our territories, we're experiencing solid growth.
An example, Oregon was adding nearly 2000 jobs per month through the end of 2019.
Early in the first quarter home prices continue to climb while birdie building permits have stabilized in migration continued to be steady and outpaced the national average.
Through the end of the first quarter, new construction plus conversions translated into connecting over 12400, new customers. During the the last 12 months, which acquainted to a growth rate of about 1.6%.
As our states reopen we will closely monitored the rate of recovery and then sure. We were doing all we can to help.
Well that Frank I will turn it over you to provide some additional details on our first quarter results Frank.
Thank you David and good morning, everyone I will begin with the summary of our first quarter reported financials and then described the key metrics. We're tracking as we monitor the implications of covert 19 on our business and then discuss guidance per 2020.
Earnings drivers will be noted on an after tax basis using the statutory tax rate of 26.5% are effective rate for the quarter was 22.8% as a result of the return of excess differed income taxes to our Oregon customers.
Also note that earnings per share comparisons were impacted by the issuance of 1.4 million shares in June 229 pain as we raised equity to fund investments in our gas utility.
While the pandemic continues to be at the front of our minds are first quarter results were largely on affected by the outbreak for the quarter. We reported net income from continuing operations of $48.3 million or $1.58 per share compared to net income a $43.4 million or $1.50 percent share for the same period.
In 2019.
Last year's results include a regulatory disallowance of 23 cents per share related to an Oregon Commission order.
Quoting that disallowance on an adjusted non gap basis earnings per share from continuing operations was $1.73 for 2019, with the 1.7 million or 15 cent decline largely due to favorable weather and higher asset management revenues in the prior year.
In the gas distribution segment utility margin increased $1.1 million higher customer rates in Washington customer growth and revenues from the North missed expansion project contributed an additional $8.6 million. This was partially offset by warmer weather in 2020 compared to colder than average whether in 2019, which reduced.
Margin by $2.4 million.
The remaining 5.2 million dollar decline in utility margin is a result to the Oregon order related to tax reform and pension expense in 2019 with the exception to the first quarter pension Disallowance. This order had no impact on net income as offsetting adjustments were recognized through expenses, an income taxes as I'll describe in a moment.
Utility O. and M. and other expenses declined $10.5 million in the quarter. This decrease is largely the result of the accounting entries associated with the Oregon order, which resulted in $14 million of additional expense in the first quarter of 2019 as previously discussed.
This was offset by a 3 million dollar increase of underline Oh, and EM, primarily related to pay Roland benefit increases over the last several years, we have invested in our gas system. It historically high levels and we place the north Miss storage facility into service as a result, depreciation expense increased $2.6 million.
Finally prior year utility segment tax expense includes a 4.3 million dollar benefit related to implementing the March order with no significant resulting effect on net income.
Net income from our other businesses declined $1.9 million from lower asset management revenues due to less favorable market conditions.
As a result of the Oregon order and tax reform there are lots of moving pieces in the prior year financials, but the underlying drivers remain straight forward to guess utility benefited from new rates in Washington, solid customer growth and north Mr. Coming online in May 2019. This was partially offset by lower asset management revenues.
No regarding the financial implications of Coke 19 today, the full economic and financial impacts are not yet evident and the timing of of recovery is not clear as day that noted our business does benefit from a favorable customer mix and our decoupling mechanisms. In addition, the executive orders extensively closing our economies in Oregon and Washington.
Went into effect as northwest natural was coming out of the P. Keating season.
We have maintained a strong balance sheet and taken significant steps to ensure liquidity in order to further mitigate the potential effects on our customers and the business, we're examining additional cost cutting measures across the business.
While the resilience of our business model and the initial timing of the event are beneficial we are closely monitoring several key factors first we are tracking customer losses that result from businesses closing their doors and to date, we have not seen a significant increase.
Second as we voluntarily and temporarily stopped charging late fees for non payment in March we are monitoring the loss of this revenue and bad debt expense, we have applied for regulatory deferrals to recover costs of this nature.
For reference in 2019 late fees and bad debt expense total $2.5 million as of March 31, 2020 are metrics remained in line with prior periods.
We also continued to watch closely the levels of customer growth in demand as noted are decoupling mechanisms provide some protection against a decline in usage today, we reaffirm guidance for continuing operations in the range of $2.25 to $2.45 per share and guided toward the lower end of the range due to put.
<unk> implications from cope at 19 guidance also assumes continued customer growth average weather conditions and no significant changes in prevailing regulatory policies mechanisms or outcomes or significant laws legislation or regulations. In addition, this guidance excludes any gain related to the sale of guilt ranch in.
Associated operating results. These items circuit reported in discontinued operations.
Finally, we continue to monitor the impact of covert 19 on our capital programs. At this time, we do not expect a material changing our capital expenditure range of 240 million to $280 million. While we are anticipating some reduction in expenditures related to customer acquisition. The majority of our cat pyxis maintenance in nature.
Include some large projects that have already begun with that altering the call back over to David for his concluding remarks.
Thanks Frank.
Why we continue to focus on our day to day operations were also advancing key long-term objectives. At this time. It appears that all of our utility commissions are moving key dockets Ford made the transition the virtual won't work environments like the rest of us.
Frankly, I commend the commissioners and the staff and the under the customer groups for contingent continuing to work.
Well under less than ideal conditions.
As we discussed in prior quarters, we're very pleased to be taking a significant step forward in our energy transition, where the passage of Oregon's groundbreaking renewable natural gas legislation.
Over the last several months, we've been working closely with the Oregon Commission on a rule, making and at the end of March a draft set of rules were issued.
And we are currently engaged in the formal comment process with the commission.
I'm excited with the progress of our renewable team that are renewable team has made and the great strides that they're making in 2020.
We're pleased to help communities take advantage of our modern distribution system, and new and exciting ways that pragmatically address climate change.
I'm also very proud of the progress we may building, our water utility business. So far this year with clothes for transactions, including our first in Texas cumulatively, we've invested nearly $110 million in the space.
Operationally the water utilities are performing well embed the pandemic, we've implemented incident command the business continuity plans across these companies and we've leveraged our natural gas expertise to provide centralized resources and planning.
As well as provide a larger stronger balance sheet the ability of our water utilities to work together during the crisis further validates this roll up strategy.
During 2020 or team will be integrating the utilities, we've already purchased and assess the maintenance and cap x. needs of those businesses. We continued to believe in the strong investment potential of this industry as aging infrastructure needs to be replaced and I remain excited by the growth opportunities ahead and other areas.
Our company has weathered many things in the last 162 years and I'm confident in our ability to handle the challenges at hand, I continue to stand behind our commitment to customers to provide safe and reliable service and I believe in our regulated business strategy and the resilience of this team.
We will continue executing on her in a strategy.
And look forward to more success as we look forward in the in the coming near.
Brandon Thanks for taking time with this this morning, and we'll open it up for questions.
Thank you we will now be getting the question and answer session to ask a question you may pressed star than one on your Touchtone phone.
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At this time, we will paused momentarily to assemble our roster.
Our first question comes from Pete Sullivan with maximum please go ahead.
<unk> good morning, Thank you.
Collapse, it with with the extra with the cash scroll down to cash.
As at the end of the last quarter is part of your comments on the lower end <unk> guidance or their costs related clap.
<unk> <unk> target the banks and I understand why.
But apologize if you come to know that earlier.
Yeah, I'll just I'll start and then Frank if you if you want to get more details obviously when you. It was via a commercial paper in and pulled down a bank lines.
Plus we also did a long term issue wants that was planned.
Anyway, so that was the long term if she wants was already built in and I think that we did the 30 you a 30 year if she wants to at the lowest.
Interest rate, we've ever done as a company on the bank lines, Yes, there is a little bit of cost for Kerry, but it's fairly minimal it must scheme of things Frank do you want to add anything to that.
No I don't have any detail to add to that we will continue to monitor the both our local economy and you know the behavior of banks and the commercial paper market right now we love having the.
The guaranteed liquidity that we have but it it has a modest cost of course, we we reinvested it small rate, but we we try to minimize that costs, but right. Now we think it's relatively cheap insurance and we consider that cost when we look at our or the the rest of the year.
<unk> well it Oh yen intended on that last item I'll just tell you. We we don't plan to hold the cash for the entire year, we're just gonna monitor things here closely.
And when when it appears that we're all on better floating here, we'll we'll go back and and and return the cash.
Okay understood you, David Duke operated under the water utility now for a little bit.
Acquisition strategy a couple of years can you what <unk> there has there been key differences.
Tween operating utility water utility services are natural gas businesses.
It's a good question Tate actually there's a lot of similarities to be honest with you in terms of you should be obviously, good hopefully with the regulatory environment you ought to be good with customer service.
Obviously on the construction side and and putting infrastructure in place there's a lot of synergies between the two well we have found during this pandemic, though is that it's it's highlighted some additional benefits here.
At least from my perspective as it relates to the water companies they've been able to take advantage of our supply chain process. So all of US have been you know like the rest of the country trying to get additional P.P.E.N. and.
Those type items for our men and women that are in the field and I think a lot of the smaller water companies would've had a much more difficult time.
Doing that if they have not been associated with us I think they're also enjoying being.
Being part of a company with a strong balance sheet.
And then I think the last thing I would say is I I think we've we've brought.
A business continuity and an incident command the structure to those utilities that has allowed them to respond very well to this event and then also Justin his team are doing a great job, but putting longterm plans together and being much it'd be and very focused on what these entities need.
We do and then ultimately when we do those those capital investment. So some broad comments for me take on that point.
<unk>. Thank thank thank you for those.
Oh.
Thank you.
Our next question comes from me Grodsky. Please go ahead.
Good morning.
Good morning, our color.
Color onto thousand 20 capital program, they expect any change.
Impact of Cavatt 19.
Frankie want to take the lead on that one.
Sure good morning, Okay.
Yeah, we've done bottoms up review of all of our Capitol programs going down basically you know to the to the project level.
And we we monitor them very closely with our project managers to you know to flag up any concerns that it might be around permitting or.
Execution issues and.
We we'll continue to monitor that very closely but you have to remember you know about 50 per cent of our projects or safety and reliability, 20%. This year, a little bit heavier than usual as technology, we've got some facilities.
And then about 24 per cent growth and when we look through it at that level. At this time, we we do not have significant concerns. We in fact feel very confident at this moment that we will stay within our guidance range for the year now we'll have to watch this as a you know as the economy unfolds.
But we're feeling very good about our ability to deliver on that plan right now.
That's very helpful and you applied for regular.
Three covered covet 19 expenses.
<unk>.
Impact on their earnings.
Yeah I got this is David it's unclear at this time I mean, we're just we're really up the early stages of this but.
The way deferrals workout in general as you go back in at a later date and work with the regulator on some form or fashion up recovery.
Or other methods, so little bit early right now to be kind of guessing the timing of that.
Thank you.
As a reminder, if you would like to ask a question. Please press Star then one.
This time there are no further questions I would like to turn the conference back over to David Anderson for any closing remarks.
Well. Thank you Brandon. Thank you everybody for joining the called a day I think everybody knows that the A.G.A. financial Forum, obviously is not going to happen in person, but there is a virtual forums. So if you would like to be part of that and and the talk with US Nikki Sparley is the person.
To get a hold of and with that thank you for taking the time of day and I'll I'll end the way dog a dead. Please be safe. Thank you.
The conferences now concluded. Thank you for attending today's presentation you may know disconnect.
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