Q1 2021 Northwest Natural Holding Co Earnings Call

Good morning, and welcome.

And there'll be a natural holding company first quarter 2021 and conference call.

All participants will be in listen only mode.

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After today's presentation there'll be an opportunity to ask questions. Please note that this event is being recorded.

And I'll like to turn the call over to Mr. Keyes Barley IR director. Please go ahead.

Thanks, Nick.

And welcome to our first quarter 2021 earnings call. As a reminder, some of the things that will be said this morning and contain forward looking statements, they're based on managed and interest.

For a complete list of our cautionary statements. Please refer to the language 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. Please note. These calls are designed for the financial community. If you are and investor.

And have additional questions. After the call. Please contact me directly at five O. Three seven to 125 30 News media and May also contact me, we look forward to see and many of you at the American Gas Association Financial Forum and a few weeks. Please also contact me. If you have any questions about the event or meeting with her manage.

Team.

Speaking this morning are David Anderson, President and Chief Executive Officer, and Frank <unk>, Senior Vice President and Chief Financial Officer, David and Frank have prepared remarks, and then will be available along with other members of our executive team to answer your questions with that I will turn it over to David.

Well, thanks, Nikki and good morning, everybody. Thanks for joining us well our year is off to a great start our financial results are solid and we continue to make progress on all key objectives.

We reported net income of $1 $99 94 per share and the first quarter that compares to net income from continuing operations of $1 58 per share for the same period last year, new rates and Oregon drove results at the gas utility along with continued healthy customer growth and improved results from our Interstate storage business.

I'm pleased with all with how all of our systems operated over the winter and specifically during the widespread.

Cold snap and February our extensive resource planning and the value of our gas storage assets were proven once again, our team successfully managed gas suppliers to mitigate the impact of the event on customers and Additionally through a third party, we were able to optimize our gas supply portfolio, capturing asset management revenues, which as a result, but also.

Offset higher gas costs for our customers.

While many areas of the country will experienced significantly elevated bills, our customers are going to clear quite well.

Our commitment to safety and reliability serve northwest natural water customers well in February and also our water utilities operating and Pacific northwest serve customers through the February event without disruption and Texas power outage.

Adjusted and freezing and bursting Python and roughly half of our system, but we were able to restore water service within 24 to 48 hours to all customers.

Now a few notes on the economy, the COVID-19 vaccine and that's been rolled out and all states that we operate economic reports for our region continued to show good recovery and growth and several important areas Oregon's unemployment rate was six 1% and February which is comparable to the national rate.

Single family housing activity remains strong and the Portland Metro region home sales were up seven 4% from 2000, and 'twenty with price growth of about 12% on average and new single family permits issued were up five 7% and Oregon over the last 12 months compared to the prior period.

We continue to see good customer growth, new construction plus conversions translated into connecting over 11000 meters. During the 12 months ended March 31, which equates to a growth rate of one four per cent.

Our water and wastewater utilities also continued to grow strong residential housing construction, primarily and Idaho, Texas and Washington translated into a strong 3% growth rate. We also closed on tuck in acquisitions. This past year, leading to an overall customer growth rate of almost six 6% are actually five.

8% to be exact so with that let me turn it over to Frank to cover the financials and Frank over to you.

Thank you David and good morning, everyone.

I will begin today by discussing the highlights of first quarter 2021 results and conclude with guidance for the year I'll describe earnings drivers on an after tax basis, using the statutory tax rate of 26, 5%.

As a reminder, northwest Natural's earnings are seasonal with a majority of revenues and earnings generated in the first and fourth quarters. During the winter heating months for the quarter, we reported net income of $59 $5 million or $1 94 per share compared to net $48 $3 million or $1 58 per share of net income from continuing on.

Operations for the same period and 2020.

And the gas utility posted an increase of <unk> 19 per share and our other activities contributed an additional 17 cents per share compared to last year.

Higher earnings at the gas utility were primarily related to new rates set in Oregon in November of 'twenty, and 'twenty offset in part by higher depreciation and general tax expense.

Utility margin and the gas distribution segment increased $13 $6 million as a result of the new rates and customer growth, which were partly offset by the $1 $8 million greater loss from the gas cost incentive sharing mechanism as we purchased higher gas price gas during the February cold weather event than was forecasted for the year.

Utility O&M increased $2 $1 million and the quarter, reflecting higher compensation and non payroll expenses depreciation expense and general taxes increased $3 $3 million. In addition to the impact of the higher pre tax income tax expense increased $1 $7 million due to the net effect and the Oregon corporate activity.

Tax and the ongoing amortization of tax benefits from the tax cuts and jobs Act. This impact is largely a timing matter, which will correct over the course of the year with no significant expected effect on net income.

Net income from our other businesses increased $5 $3 million due to $4 $6 million of higher asset management revenues from the weather at that as David mentioned. In addition, other businesses benefited from higher earnings at the water and wastewater utilities from assets, we acquired in Washington, and Texas last year as well as lower expenses at our holding company.

Cash provided by operating activities was $137 million or an increase of $32 million compared to last year.

We reinvested $64 million into the business most of which was gas utility capital expenditures, our balance sheet remains strong with ample liquidity.

From an earnings perspective, the ongoing effects of COVID-19 are largely limited to commercial customer disconnects and slightly lower usage from non decoupled customers as well as late fee revenues that will be recognized at a future date, when we began recovery.

And as David noted commercial customer accounts remained steady during the first quarter, even as we began normal collection practices. Furthermore, we have a good risk had a good response to past due notices with a substantial reduction and delinquent balances. We will continue to closely monitor usage levels and commercial customer losses and be disciplined and cost management.

We are pleased to note that 97% of our commercial and industrial customers are current with their bills.

The company reaffirmed 2021 earnings guidance today for net income and the range of $2 and $42 60 per share guidance.

Guidance assumes continued customer growth average weather conditions and no significant changes in prevailing regulatory policies mechanisms or outcomes or significant changes in laws legislation or regulations.

With that I will turn the call back over to David for his concluding remarks.

Thanks, Frank well, our business model allows us to adapt to unforeseen challenges such as the coronavirus pandemic and the most recent weather event, while also delivering on our commitments to all of our stakeholders. Our decisions are guided by our long standing core values and those values and form our environmental social and governance goals and actions.

And I'll walk you through just a few of our priorities and progress first is safety is our greatest responsibility to our customers our employees and the communities, we serve and the 19 eighties and northwest natural proactively created a pipeline replacement program with our public utility commissions and by 2015, we have replace all of our cast iron and bare steel pipe.

We're one of the first local distribution companies to completely remove those legacy pipelines and today as a result operate one of the most modern and tightest systems and the nation, but we remain vigilant for example, we perform safety inspections on our transmission system at nearly three times the rate required by federal and state regulations.

Our long standing core value of environmental stewardship is also a driving force behind the choices, we make every day and our operations and planning for the future. We believe climate change requires rapid innovation and collective action, which is why we're committed to re imagine and the role of our system and the fuel we de lever and.

And 2016, we established a 30% carbon savings goal to be achieved by 2035, starting from a $2 15, a total of 2015 baseline. This goal is for our own operations and importantly, they use. It also includes the use of natural gas by our customers and I want to underscore. This is a this is a very unique and aggressive voluntary goal.

And as compared to others and has been a catalyst for us to leave beyond our walls by building public policy coalitions that support innovation and new thinking.

One example of that is a groundbreaking Oregon Senate Bill 98, which allows us to procure renewable natural gas, including hydrogen for our customers here in Oregon. This law goes further than any other current law and the U S by outlining goals for adding as much as 30% renewables on the system by 2050 I'm proud to report that we made good progress on our <unk>.

Carbon savings goal and results through 2020 show, we are on track to meet or exceed the original target and.

Energy efficiency contributed nearly half of the savings achieved with our voluntary carbon offset program also providing significant savings and finally, our producer emission screening tool allows us to prioritize purchases from lower and many producers and also contributed to the goal.

The benefits were reaping today are from programs and efforts that we began many years ago.

And good reminder, that having a vision and a commitment to pursue it as critical to realizing significant change which is why we're not stopping there.

We believe we can leverage renewables and our existing modern system along with other innovations to further decarbonize our system. Our vision for it is to be carbon neutral energy provider by 2050.

We know the current tools for driving to carbon neutrality, but this year, we're modeling multiple scenarios to better understand the different pathways. While we expect this analysis to evolve over time, having a start to specific roadmaps and options will allow us to begin advocating for additional policy support and putting programs and people in place for long term success.

We know our customers and communities value finding the right environmental solutions, along among many other priorities, which is why we monitor customer satisfaction and carefully to inform our work and I am pleased to report. This is an area. Our employees continue to itself last year northwest natural scored second and the west for large utilities and the J D.

Power gas utility residential customer satisfaction study and were named a customer champion champion by Escalade after placing second in the nation, among electric and gas utilities and their most recent study and <unk>.

Finally, just a few weeks ago northwest natural was also named and environmental champion among 140 of the largest utilities and a national study by Cogent and I am so proud of customers' recognition and recognition of our dedication and leadership in this area and I'm extremely proud of our employees.

Now a few items on our water utilities as part of our focus to build a healthy growing water business, we regularly invest and infrastructure improvements such as pipe replacements, new wells and execute on multi year plans for larger upgrades and 2020, we work to upgrade technology across our water platform, making it possible to proactively detect and fix.

Issues that caused service interruptions to build a culture of safety, we began implementing consistent safety standards and trainings across all locations. All of this preparation came into play and with good results.

20 of our water systems experienced no COVID-19 related service interruptions and as I mentioned, our employees and Texas were able to quickly get systems back up and running during the February 2020 one winter event.

We're also staying focused on supporting our water utilities with a comprehensive analysis and assistant stern rate cases and in 'twenty.

And we filed three rate cases, and have already concluded one of those and Idaho at.

At the same time, we continue to acquire and water utilities and expanding our water family I continue to remain very excited about the investment potential and the growth opportunities and this business. Thanks.

Thanks for joining us this morning, and with that Nick I think we're ready to open it up for anybody that has any questions.

Okay.

Yes.

Thank you well now begin the question and answer session baskets quack and treat press star one on your Touchtone phone.

And then a speakerphone please pick up your handset before pressing the keys.

Your question. Please press Star then two.

And this time, well pause momentarily to assemble our roster.

First question comes from political Arc of Bank of America. Please go ahead.

Hey, good morning, everyone and thanks for taking my question.

Good morning low.

So first on <unk> I'm wondering if you've identified any additional investments under SB and 98 at this point are.

And you include a small placeholder and your Capex plan, but how are you thinking about the outside here given some of the market trends that we're seeing and how does this play into your long term rate base and and earnings growth and so any color here would be super helpful.

Yeah, we've we've already made good progress already with the Tyson opportunity that we announced.

A couple of months ago, but just from fell from them and you're on the phone why don't you take this one.

Yeah happy to take the.

Question and it's a very good question Theres, a lot of activity going on and the R&D space.

And we have a line of.

Discussions and our team is engaged in and around both investment and procurement opportunities for R&D and we expect that will continue.

To make bold investments and sign off take agreements as we decarbonize our product we don't have anything that we can specifically announce today, but we do expect that activity here will continue.

Got it okay.

And just on the Washington, and regulatory front and now the Governor recently signed multi year rate plan and legislation. So I'm wondering how you're thinking about your ongoing rate case and and future rate cases there.

Yeah, we are right in the middle of a rate case as you just as you just indicated and.

And the multiyear aspect is an important piece of that Marty do you want to I think youre on the line do you want to say anything about the multiyear aspects of the.

The plans.

Sure.

Our filing does include and multiyear plans.

It was that may transparent from the commission before we file they they were encouraged by our approach.

And I would say that right now we as noted from that filing yesterday and we are in negotiations for settlement.

And the dockets been amended to allow for a.

Finalization of that from women and we're hopeful that we can reach settlement and then with all the parties.

Yes.

Understood Great. That's all I had thanks, so much for the time.

Okay.

Thank you and again if you have a question. Please press Star then one.

Our next question comes from Al Monaco and Stifel. Please go ahead.

Thank you good morning.

Good morning.

And in your press release, you referenced sort of $1 million of non recoverable COVID-19 costs. So it's kind of a two part number one is with things opening back up when do you think you get beyond those costs and then number two.

Should we kind of expect that to then eventually just get eaten up by inflation pressures, you're seeing and if you could maybe discuss where you are seeing inflation pressures.

Yeah, Frank do you want to cover some of the numbers.

You bet.

Yeah. So the the main effect that we've seen and the first quarter is really more of the opportunity we have.

Commercial customers, we continue to add commercial customers, but we continue.

During the last year, we lost some commercial customers who were a couple of thousand down from where we would expect to be so the primary impact and the first quarter was really the margin that we don't that we don't get because we don't have those customers now at the beginning of the year. So that's that's the majority of that we also have the impact of <unk>.

<unk> fees that.

We are able to defer these missing late fees, but were not able to recognize them yet because we don't yet have a recovery mechanism. So they'll show up and revenues in the future.

When we have that mechanism, but but right now.

There is revenue associated with that that we just can't recognize so those are the real opportunities that we're missing and the first quarter I would say as opposed to any particular expense. There is a little small amount of increase and bad debt, but that's all deferred we have a very solid deferral mechanism for almost all of the costs. So it's really the margin.

And Thats missing and then this inability to recognize late fees until we have a recovery mechanism.

As regards inflation I would just comment that you see inflation and your capital costs.

Do have an impact there and to some extent salaries and benefits to the economies, it's not necessarily so evident at the moment, but over the last few years of course, Oregon, and Washington had been desirable places a job growth was strong. So you definitely saw that impact there and as well as your regular benefits health care and those sorts of things.

Alright, and then you also just.

In terms of industrial customers you gave that number.

That was current can you also get that same.

A number for the residential.

You know I should be able to sell them and I don't have that number at my fingertips, Nicky might be able to pull that number on the residential customer count and apologize I just don't have that at hand.

No worries and that's all I had thanks.

Okay.

Yes.

Thank you.

And for a question answer session and I'll turn the conference back over to Mr. David Anderson for closing remarks.

Alright, and Nick. Thank you. Thank you again, everybody for taking time this morning to to to be with US. We look forward as Nicky said the meeting with many of you at the American Gas Association Financial Conference and a few weeks. If you have any questions and it keeps the person needing to get a hold of so again. Thank you and this concludes the conference.

Okay.

Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.