Q3 2020 Northwest Natural Holding Co Earnings Call
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Only about should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After todays presentation, there will be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to Nikki Sparley. Please go ahead.
Thank you Emily good morning, and welcome to our third quarter 2020 earnings call. As a reminder, some of the things that will be said. This morning contain forward looking statements, they're based on management's assumptions, which may or may not occur. In addition, some of our comments today reference non-GAAP adjusted measures breakup we.
A reconciliation of these measures and other cautionary statements. Please refer to the language reconciliation at the <unk>.
Our press release, we expect to file our 10-Q later today I've mentioned this teleconference is being recorded and will be available on our website. Following the call. Please.
Please note. These calls are designed for the financial community. If you are an investor and have additional questions. After the call you may contact me directly at 53721 20, Fivethirty News media May contact Melissa Moore by both three 220 24 36.
Speaking this morning are David Anderson, President and Chief Executive Officer, and Frank Birchmeier, Senior Vice President and Chief Financial Officer, David I'm, Frank have prepared remarks, and then well be available along with other members of our executive team to answer your questions with that I will turn it over to David.
Thanks, Nikki and good morning, and welcome I Hope that's a that's called find you safe and well like all of you. We continue to navigate these unusual times.
In addition to <unk> in September, Oregon dealt with wildfire [laughter], our gas system was resilient minimally impacted but as with any event, we took proactive steps to ensure the safety of our customers and coordinating closely with fire commanders I personally want to thank all of our employees for their hard work here and of course, the first responders for all of their efforts around those unusual times.
Moving to a few economic updates it is important to remember where we started in February before the pandemic started at that time, we had a fundamentally sound sustainable growing economy with record launch a record low unemployment.
Definitely and in our service territories.
As discussed in previous earnings calls.
Coping impact affected the northwest like the rest of the country, but we've seen some economic improvement in recent months for example, oregons unemployment rate was 8% in September essentially matching the national rate that's down from a 14.9% hike in April.
Job growth in Oregon bounce back to positive territory in second quarter, this year and a sustained an upward climb through September.
In the Portland Metro region year to date close home sales were up 3.1% from 2019 with stronger year over year price growth of about 10% boost.
New single family permits issued this year are close to where we were in 2019, that's much better than what was generally expected. This spring.
As a result, we have connected over 13800 meters. During the last 12 months ended September 30, yet and that's 300 more meters than we added this time last year. Our overall customer growth rate is 1.9% for the 12 months ended September and reflects a lower level of customer disconnecting from our system during the pandemic.
Be resumed normal disconnection practices, we will likely see this growth rate decrease a little bit.
Despite the positive trends. We know these are difficult times for some customers. That's why we voluntarily suspended normal collection processes and Disconnections in March.
Since the pandemic began we've been working with the commission staff and stakeholders in all of our states to determine the best way to return to more normal operating practices last couple of months commissions and all of our sites.
Analyze their timelines that allow utilities to resume normal operations. Additionally, the Oregon, Texas, and Idaho Commission's have approved deferral applications on the regulatory front in order was issued in our Oregon General rate case in October.
Approving our previously disclosed all party settlement.
The order includes a 45.1 million dollar increase in our revenue requirement based on a 50 50 cap structure, a return of equity of 9.4% at a cost of capital just under 7%.
In addition, the order reflects average rate base of $1.44 billion.
[noise] four an increase of $242 million compared to the last rate case.
Somebody is on the phone need stuff.
Please.
New rates took effect Nov first and were largely offset by reduced gas costs from our PC a filing.
In Oregon, the combined effect of the rate case, an annual purchase gas adjustment resulted in a two dollar increase to a residential customers monthly bill overall gas bills continue to remain low northwest natural customers are paying about 30 or excuse me, 40% left today for those barrels than they did 15 years ago. In addition in June we pass back a record 17.
Million dollars in stores Bill credits to Oregon gas customers.
I'm proud to report that continue on our legacy of service customers ranked northwest Natural's second in the west among large utilities in the 2020 JD power residential customer satisfaction study. These results are a testament to our customer centric culture, and it's especially gratifying to see customers recurrent recognized.
Our employees and company during this challenging year and finally this morning I'm pleased to report that in the fourth quarter. The board approved a dividend increase making this the 65th consecutive year of annual dividend increases our annual dividend amount is now $1.92 per share we're proud to be one of the only three companies on the New York stock changed with this long record with that.
Let me turn it over to Frank to get a little bit more details of the financials, Brian. Thank you David and good morning, everyone.
I will begin by discussing the financial impacts of cold at 19, and the highlights of the third quarter and year to date results and conclude with guidance for 2020.
David noted the Oregon Commission recently approved a COVID-19 term sheet that outlines the types of revenues and cost that may be recovered. These include P.P.E. bad debt expense financing costs associated with additional liquidity and certain lost revenues direct expense reductions such as lower travel and meals and entertainment are to be netted against.
The deferral Prudency review and recovery of the deferral accounts will be determined that a future proceeding well our business model is resilient, we are experiencing some financial impacts related to the pandemic through September thirtyth, we have incurred an estimated $7 million of incremental costs and lower revenue.
In the third quarter, we recognized a $3.1 million regulatory asset for Oregon costs incurred to date utilities are also allowed to recover late fee revenue that has not been charged to customers since the suspension of normal collection processes. However, this revenue will be recognized in a future period, when we begin to recover the forgone fees to rates at the.
End of September this revenue totaled approximately $1 million in summary of the $7 million of total financial impact as of this as of September Thirtyth, we expect to recover $4.4 million through rates under these orders were 3.1 million deferred in the third quarter. In addition to these deferrals in order to further mitigate the financial effect.
So the pandemic, we initiated temporary cost savings measures, which provided approximately $2 million of savings for the third quarter and year to date.
Switching now to our detailed financial results I'll describe earnings drivers on an after tax basis, using the statutory tax rate of 26.5%. The return of excess deferred income taxes tour, Oregon customers resulted in an effective tax rate of 22.3% also.
Also note that year to date earnings per share comparisons were impacted by the issuance of 1.4 million shares in June 2019, as we raised equity to fund investment in our gas utility.
As a reminder, northwest Natural's earnings our seasonal with 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 $18.7 million or 61 cents per share compared to a net loss of $18.8 million or 61 cents per share for the same.
Period in 2019.
And warmer weather in the first quarter of 2020 compared to the prior year, which collectively reduced margin by $4.8 million utility margin also declined $1.1 million due to lower revenue from late in reconnection fees as we suspended normal collection processes, the remaining $5.2 million decline in utility margin is.
As a result of the March 2019, Oregon order related to tax reform and pension expense with the exception of the first quarter pension Disallowances. This order has no impact on net income as offsetting adjustments were recognized through expenses and income taxes as I will describe.
Utility on M. and other expenses declined $6.4 million during the first nine months of 2020. This.
This decrease is associated with the Oregon order, which resulted in $14 million of additional expense in the first quarter of last year. As previously discussed this was offset by a $6.4 million increase in underlying all of them related to higher compensation costs contractor and professional service as well as moving costs for our new headquarters.
In operations Center. This was partially offset by cost savings measures as I described earlier.
Over the last several years, we have invested in our gas system at historically high levels and we placed the north mist gas storage facility into service as a result, depreciation expense and general taxes increased $7.3 million. Finally utility segment tax expense in 2019 included a $5.9 million benefit related to the.
Implementation of the March quarter with no significant result effect on net income net income from our other businesses increased $900000 from higher earnings from our water and wastewater utilities and lower expenses at our holding company, partially offset by lower asset management revenues.
Associated operating results. These items are reported and discontinued operations with that I'll turn the call back over to David towards concluding remarks. Thanks, Frank while the year is held many challenges we persevered and accomplished many important things in terms of customer service safety and mitigating the pandemic effects at the same time.
<unk>. We're also advancing key long term objectives that includes aggressively pursuing a renewable future and a carbon neutral vision for our gas utility by 2050.
Today with no cast iron or various deal we have one of the tightest systems in the country, we use that tight system to deliver more energy in Oregon than any other utility each year in fact, the existing gas system has provided nearly twice as much energy on a peak heating day as the electric system and.
And yet the use of natural gas and our customers homes and businesses accounts for just 6% of Oregon's greenhouse gas emissions annually at the very efficient delivery of a lot of energy, but we know we could do better which is why we established a voluntary carbon savings goal of 30% by 2035 for emissions from our own operations and our sales customers usage.
Two years and I'm pleased to report we're on track to meet or exceed this goal in 2019, we achieved 21% of the savings needed to meet this golf that's equivalent to removing over 60000 cars from the road. So far savings from have come from three main areas first energy efficiency is the fastest and cheapest way to reduce emissions and <unk>.
Long standing priority for northwest natural.
Back in 2002, we were one of the first gas utilities in the country to obtain a decoupling mechanism, which supports the energy efficiency move second or carbon offset program also plays a vital role and was a strong contributor to the savings and 2007 northwest natural was the first standalone gas utility in the country to offer.
Offer customers a voluntary program that allows them to offset some or all of their carbon emissions from natural gas use and finally, we have also harvested carbon savings from them implementing emission screening tools for our gas purchases. We believe we are the first gas utility to use EPA data to calculate the relative emissions intensity of gas producers and producer off.
<unk> and we use that information to prioritize purchases from the most responsible producers now.
Now several years into our carbon goal, we see more ambitious savings are possible, we understand more about RMG and hydrogen hydrogen today and now have and we know has policy support with a groundbreaking Senate Bill 98 in Oregon. We also have the advantage of seasonal storage with one of the only stores facilities in the Pacific Northwest.
Conventional natural gas storage is very valuable in our area and it can be used for renewable molecules in the future. In fact at 20 billion cubic feet are missed underground storage facility is equivalent to about 6 million megawatt hours of electricity storage. That's about a two trillion dollars battery at today's prices and many times larger than the biggest lithium battery.
<unk> in the world.
What we had what what we in the industry need. However, now is continued policy support to help get these renewable solutions to scale and we're certainly not alone in our thinking about the future role of the gas system, how to leverage all of its advantages in new ways. We're having these discussions with peers here in the United States and there is a much bigger focus on RMG and hydrogen coming.
Out of Europe, and Canada as well.
I'm excited about the recent steps northwest natural has already taken we have several viable contracts worth pursuing as a result of the RFP. We issued in July for renewable natural gas in October we sign an Mou to explore development of a renewable hydrogen facility.
The collaborative the collaborative includes an electric utility in our region and abominable and the <unk> Environmental Foundation.
Another long term objective is growing our water and wastewater utility businesses, although our acquisition paces slow due to the pandemic, we continue to see good growth and investments in our existing platform. We continue making contacts in the industry and are working hard to expand our footprint I remain excited about the investment potential for this business.
None of this work is easy and there are no shortcuts, but each year, we set goals, we make strides and we moved over closer to achieving our vision. So again, thanks for joining us this morning with that Emily will open it up for questions.
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Our first question comes from Richard.
At Bank of America. Please go ahead.
Hey, guys does that does.
Does it actually Harry on for Richard.
Thanks for taking a question.
So starting up you talked about pirating, that's from your water utilities and <unk> contributing to the quarter rather segment increased.
Eight eight cents.
A year could you provide some more details around the earnings composition of.
That other segment and as it pertains to your water utilities and over the longer term do you think we could see.
The water utility essentially growing faster than the gap WC business.
Thanks Richard.
Harry Carey sorry, it's Frank here, Yeah of course, we don't get break out the water utility segment as a stand alone and you have some of the optimization and holding company costs in there, but the primary driver quarter over quarter was the acquisition of the additional.
Washington, and Texas asset that we announced earlier so that was the driver I think thats, where we haven't announced any more acquisitions from that point, so what you're seeing their year to date is pretty good representation of of what's going on third quarters, a good quarter for the water business, It's a high usage period. So.
So the year to date number in there as representative I think.
There has been a little bit of softening year over year on some of the optimist optimization as well and we always because business development cost kind of can go up and down depending on the level of activities, you'll see a little bit of volatility in there.
The only thing I'll add to that is one of the things that the thesis on our water is proving out is that once we've acquired these assets, where you're finding number one a lot of them do have a good solid growth underlying at that number two is we are seeing additional investment opportunity.
And we've kind of laid that out and and our IR deck. So the rate base broke is proving to be beneficial. So to your point about earnings growth going forward, we're seeing as being a very nice match to our underlining gas utility that continues to have good investment opportunity overall. So if the thesis is playing out as we had hoped along that from.
Got it that high to here.
I guess turned back to your gas utility peanut.
In about a month or so into four Q how are things.
Things trending into the peak winter heating season, and the face of Covid here.
B a critical quarter for you guys absolutely to execute guidance.
Sandy update on trends heading into winter heating season, but would be helpful.
Yeah, I mean, obviously like all the country, we're experiencing the covid effects and so there are some businesses and customers are having trouble and that's the good news of the commission work you through the various term sheets on how we.
How we get back to normal over a period of time, which most of that will occur in the first quarter. So we continue to watch things closely but we're getting into the winter heating season for us which is important.
The good news is the right cases done are PGA is done so that all of that is in place.
Which is which is a driver for some of those results and of course, whether will be even though we're weather normalized and most of our territory. There is there are still out.
An impact from whether users there so.
It seems to be again, we've seen some impacts from Covid I think more will have to walk very carefully but.
It also I.
I think it's real critical to see what happens at the national level with a way of a stimulus program that comes out of Congress like we did with the first one the greatly help businesses and individuals, but we were really hairy, it's kind of going along to what we've seen on plan that we've seen some customers obviously having trouble.
But as we continue and we're still seeing the housing market being frankly fairly strong.
It's.
It's it's it's just it's just interesting so I don't know if that goes directly answers your question, but.
Think we're about as well prepared as we possibly can be.
Got it makes sense.
Sneak and one more question.
RMG.
T that issued just any update their on how discussions are trending.
And does this relate to the renewable hydrogen project you.
You you talked about in the press release this morning.
Let me have sham tackles over Tim hiding.
One of our senior vps tackle the.
The hydrogen and then Justin <unk> on the phone I'll have him give a little bit of an update on the RMG.
RSP count Yeah. Good morning, Yeah. So we recently announced our R&D team project with Eugene ladder and electric born in mind about Environmental Foundation as David mentioned.
Is really an exciting demonstration project and we're helping at that can be up to a 10 megawatt project. The plan is to use access renewable strength.
Leo.
And our person at that project would be to use <unk> from and local industrial team machinate that renewable hydrogen and then fluid into our system.
We're we're viewing this is an important part of our evolution around hydrogen.
We're still kicking partners that we have is tight collapsed and we put together a technical team. They are starting on on their their plan for the project.
In parallel to that we haven't team added our training center, arguing and sure hydrogen blending work blending up to 5% and too bad and isolated system that we've created.
We're really pleased with the with the testing how far in going into this year, we're going to be testing, 5% land on any of your equipment at that facility. So between the Eugene project and kind of our on hydrogen blending testing.
We're very excited about.
We're all victims evolving and relaxing what's going on in Europe, and Canada very constantly so I'll turn it over at adjusting to maybe touch on the status of the RFP.
Yeah. Thanks, Harry the RFP was we received a robust response to our proposed are RFP back in September and it's a little too early to announce exactly where that's going to head as we continue to conduct due diligence on on.
Some of the responses, we received and negotiate agreements, but we do expect that it will result in.
Some contracts that we execute for for renewable natural gas and in parallel with that we continue to.
Evaluate investment opportunities through through <unk> 98 to invest directly in renewable natural gas projects.
So we expect over time, we'll end up with US a portfolio of some some.
Renewable gas purchase agreements and then some direct investments that we make into renewable natural gas and I think your question around whether or not the hydrogen project was was <unk>.
Separate are related to our RMG RFP.
It is there are two separate projects they are related only in that they they both.
We'll have a meaningful impact on our carbon savings goal.
But they are two separate projects and work streams within the company.
Got it that's all I have thank you guys.
Thanks Richard.
Well it looks like there is no more questions in the queue. Emily. So we'll we'll go ahead and shut it down here I know everybody's really busy watching election results in getting ready for our other conferences.
Really want to thank you for joining us today. If you do have follow up questions. Please reach out to Nikki.
<unk> indicated she'll be happy to to go into additional details to help you understand the quarter and the year of the day, but with that Emily will close call down everybody. Please be safe and again. Thank you for your time today.
This conference has now concluded. Thank you for attending today's presentation you may now disconnect.