Q2 2021 Northwest Natural Holding Co Earnings Call

Good morning, and welcome to the and W. Natural holding company Q2, 2 for 2021earnings conference call all participants will be in a listen only mode.

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Please note. This event is being recorded I would now like to turn the conference over to Nikki <unk> barley director of Investor Relations. Please go ahead.

And you Danielle good morning, and welcome to our second quarter, 2020.1.

As a reminder, and things.

And that this morning for.

And based on me.

Which may or may not occur for a complete list for cautionary statements referred for language.

We expect to file our 10-Q later today and I've mentioned this teleconference is being reported.

And 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 and final 3.7 in Q1 'twenty factors.

And beyond.

And this morning, David Anderson.

And then president and Chief Executive Officer for free.

And for parts of their 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 and to your question.

With that I will turn it over to David.

Thanks, Nikki and good morning, and welcome we're halfway through the year and have posted strong financial results and continue to make good progress on our growth initiatives.

We reported net income of $1.92 per share for.

For 6 months of this year compared to net income from continuing operations last year and $1.41 per share.

New rates and Oregon drove results for natural gas utility along with continued healthy customer growth.

For negative financial impacts.

Higher revenues at our Interstate storage.

For for our region show, a continued steady recovery and growth in several areas unemployment rates and for the Metro area and have declined to 5.3% for the 12 months ended may 2021.

Lastly, and 2015, that's lower than the national unemployment rate of 5.9%.

We're also seeing recovery and some of the sectors hardest hit by Covid restrictions for example, and the foodservice sector, Oregon has regained about half of the jobs lost through June 2020, and.

And the accommodation for Lockheed sector, we've regained nearly a third of those jobs.

Family housing activity remains very strong and the Portland Metro region home sales were up 39% for the first 5 months of 2020, 1 compared to 2020 with the median sales price of over 20%.

New single family permits issued were up 26% and the Portland Metro area through May of this year compared to prior periods and.

And recently released population growth day to day that showed.

Net migration to Oregon, and the Portland Metro area through July 1.

This coupled with strong price signals and a relatively stable demand for single family homes are expected to continue spring development activity and our region.

For the quarter these trends translated into solid customer growth, new construction plus conversions translated into connecting over 12000 meters. During the 12 months ended June 30, which equates to a growth rate of 1.6%.

Our water and wastewater utilities also continued to grow strong residential housing construction permits and construction, primarily and Idaho, and Texas and Washington translated into a 4% customer growth rate. We also close tuck in acquisitions this year, leading to an overall customer growth rate of 6%.

Now and update on northwest Natural's General rate case and Washington.

And as you May remember, our Washington Service territory covers about 12% of our overall customers and represents about 10% of revenues for the company and July we filed a multiparty settlement with the commission for reflecting our agreement on all items and the case under the multiyear settlement northwest natural revenue requirement would increase $5 million.

Beginning this november 1st and increase an additional $3 million and number of November 1st.

2022, and the settlement includes several items that mitigate the impact to customer bills and all parties recognize this remains a very challenging time for customers both years and based on our cost of capital of about 6.8% rate base would increase a total of 50, almost $53 million and the quaint now for $247.3 million.

Yeah.

We expect and order from the commission that's all.

With rates and we go into effect as I mentioned November 1 and with that let me turn Robert frankly over some more details for the quarter and the year to date financial information and Brian. Thank you, David and good morning, everyone on.

And 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 a net loss of $700000 or <unk> <unk> per share compared to.

Net loss of $5.1 million for 17 cents per share from continuing operations for the same period and 2020.

The improvement over the last year was driven by our gas utility, which posted an increase of 16 <unk> per share higher earnings at the gas utility for primarily related to new rates set in Oregon, and beginning November 1 and 2020 customer growth and approximately $1.4 million for COVID-19 costs incurred in Q2, 2020 that were subsequently deferred for a regular.

Tori asset in the third quarter.

Utility margin and the gas distribution segment increased $8.5 billion as a result, and the new rates and customer growth, which collectively.

Collectively contributed $7 million utility O&M increased $2.6 million, reflecting higher benefits and non payroll expenses depreciation expense and general taxes increased $2.3 million, while interest expense decreased $800000.

For the 6 months first 6 months of 2021 we reported net income from $58.8 million or $1.92 per share compared to net income from continuing operations of $43.1 million or $1.41 per share for the same period and 2020.

The 51 cent per share increase was largely driven by the gas utility which contributed 35.

With our other businesses contributing 16 cents per share as compared to last year.

Similar to the quarter to date results higher earnings at the gas utility were primarily related to new rates, and Oregon customer growth and $1.8 million and COVID-19 related costs that were subsequently deferred and the third quarter of 2020.

And the gas distribution segment utility margin increased $22.1 million higher customer rates, and Oregon and customer growth contributed $22.6 million. This was partly offset by a $2.1 million greater loss from the gas cost incentive sharing mechanism as we purchased higher price gas during the February cold weather event.

Total O&M increased $4.7 million, driven by higher employee compensation and benefits cost lease expenses for our new operations and headquarters building and higher professional services fees.

Depreciation expense and general taxes increased $5.5 million.

Net income from our other businesses increased $4.7 million largely due to higher asset management revenues from the cold weather event in February.

During the first half of 2021 cash provided by operating activities was $193 million or an increase of $31 million compared to last year, we reinvested $128 million into the business most of which was for gas utility capital expenditures, our balance sheet remains strong with ample liquidity the company reaffirmed 2021 and earnings.

<unk> today for net income in the range of $2 and 40 to $2.60 per share 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'll turn the call back over to David.

Thanks, Frank turning to a few updates on our law, our key long term objectives, our long standing and I do mean longstanding core value of environmental stewardship is the driving force behind the choices, we make every day and our operations and and planning for the future. We believe climate change requires rapid innovation and collective action, which is why we're committed to re imagine the role.

Our system and the fuel we'd look and 2016, we established a 30% carbon savings goal to be achieved by 2035, starting from a 2015 baseline. This goal is not only for our own operations. Importantly, it also includes the use of our natural gas by customers and.

And I'm happy to and as we released our 2020 ESG report earlier. This week I hope you've seen it and reported them were ahead of our target savings and are on track to meet or exceed that goal.

I want to underscore this is a very unique and aggressive voluntary and golar has been a catalyst for us to lead beyond our walls by building public policy coalitions that support innovation and of course nut and 91 example of that is the groundbreaking for Oregon Senate, Bill 98, which allows us to procure renewable natural gas, including hydrogen for our customers.

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.

We continue to make progress into the legislation by signing an agreement with element markets to purchase RMG to date, we've signed R&D agreements boxes to purchase or develop RMG totaling about 2% of northwest natural annual sales volume and origin, which is enough to heat 36000 homes. We feel good about the progress we've made and a short time.

There's more to do but the 200 and perspective today wind and solar account for about 11% of our nation's electric supply and that's after decades of investment so to be a 2% and a short period of time and our system. I think we're I think we're moving quite well and addition last month muscles natural initiated a request for proposal for additional R&D.

Purchased for investment opportunities, we expect that RFP to close later this model now more than ever it is clear to us how critical our gas infrastructure as to furthering our collective climate goals, while also ensuring energy system diversification and reliability and of course resiliency for our communities.

By putting RG R&R on our existing system, our modern existing systems, we can achieve both resilience and importantly de carbonization.

Now and update on the water utility business.

We're seeing increased business development activity and robust acquisition pipeline now with Covid restrictions have basically lifted that includes tucking and water utilities around our existing systems, which are located and Oregon, Washington, Idaho and of course, Texas, which we expect to close 2 of our outstanding and the pending sales.

And the third quarter and another 1 and by the end of the year.

At the same time, we continue to invest and artists are existing facilities and June after extensive planning we broke ground on a new wastewater facility and our son River, Oregon facilities. The facility will be equipped with the latest technologies and equipment for treating wastewater meeting stringent environmental guidelines and helping some river continue to.

Provide safe reliable and of course cost effective service and support investments and our water business, where final and general rate cases and necessary to date, we've completed rate cases, and Idaho, Oregon, and Washington building constructive relationships with our regulators and those states and achieving results that promote future investment and growth.

We and specifically I remain excited about the investment potential and this business segment. Thanks for joining us. This morning with that Danielle I think we're ready to open it up for questions that there are any.

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Ladies and gentlemen, so much good morning, how are you guys.

So I guess a couple of questions real quick can you just maybe expand O&M this quarter, which came in higher and I heard.

Let's sounded like employee and 1 time expenses, but can you maybe just shed a little more color there.

You bet Salma Hayek and good morning, and.

And the.

In the first half of the year, what we've really seen grow there and this is as expected and part of the reason we filed the rate case, and Oregon and of course, the rate case and Washington.

In addition to and I think it grew about 7.5% through the first 6 months compared to last year and.

I'd say about a third of that growth was it just payroll and benefits just typical a little bit of head count, but mostly just regular salary and benefit growth. We do have a new lease on the headquarters and operations Center here, which is another third of it and then the last third was really split between we and with most companies. We've had moved to some cloud based solutions and I T and.

Those are more subscription or contract as opposed to capital. So we're seeing some increase there and then you know that.

A bit of debt and that around the company, but really 2 thirds 3 quarters of our payroll benefits the new headquarters lease and then some of these cloud based <unk> cost and interest.

Other things that are too small for accounting.

Fair enough appreciate debt and then just turning to the R. N G and I know you guys have.

Some more <unk>.

Rfps out there. So I'm just curious what goes into your vetting process, because we're seeing a lot of new people are a lot of new companies that are this business and so when you think about who you are going to procure from can you just maybe play out a few of your criteria and then also.

Broadly speaking it comes from either agriculture or landfill. So do you have a preference I understand it's a molecule at the end of the day, but is there any preference between those 2 thanks.

I'll start off and then I'll turn to adjusted and I think strategically what everybody needs to understand is we're doing all we can to procure as much renewable natural gas to decarbonize, what's going through the pipeline and so whether that includes investment opportunity, which obviously is beneficial but even purchase opportunities like the 1 that we mentioned and.

And the announcement this week, but without adjusted you want go into little bit more detailed and someone's question and assure.

Sure I mean the.

The number 1 thing we're trying to do is get cost effective renewable natural gas for our customers.

We have the flexibility to occur.

Acquire that or procure and from a variety of locations and a variety of sources and in many ways.

We are somewhat agnostic about that and we do have a rigorous methodology that we've established with our regulators about how we calculate the incremental cost to our customers. So it's not just purely kind of a notional dollar amount and a contract. There's a lot that goes into that as we think about sort of avoided costs and compliance costs.

Transportation cost and and various other things so theres a whole host of criteria and it goes into our rfps, but at the end of the day, we are trying to.

Fire or procure the most cost effective R&D for our customers that we can.

Got it and then.

No.

Yes sources are agnostic as well so.

And we are.

Tyson announcement, obviously that that partnership is focused on food processing facilities and the waste streams related to that.

We also have had and we'll be looking at wastewater treatment facilities landfill gas opportunities and other agricultural operations.

And so it's a we're fairly agnostic when it comes to feed.

Stock as well.

Understood. Thank you for all that and and the last 1 for me just.

Any update on in terms of the exploitation Glenn with hydrogen.

Yeah, Jim why don't you kind of touch base on that 1.

Good morning, Yeah Me and me.

And you need to work with E band and electric utility and Eugene and their clothing and on the process.

For the land and then we're also looking at different technology.

We are exploring and back in addition, with AT&T and that warehouse and and looking at me.

And making this a hydrogen blending project because we're starting to get and inquiry from industrial customers really interested and blending.

And the work continues and we're making progress as a pilot with that and we want to make sure that.

And when we file that.

Enter and.

And it felt like party for and the program net net we're ready to gas and Marty I think it's also a good settlement at the national level that and other.

Other current infrastructure Bill has language in there for hydrogen along with a bunch of other stuff for the $3.5 trillion dollar infrastructure Bill. So we'll say we're just in the Senate right now and we'll see where that goes but that appears to be a big piece of it and not yet I think that will help spur the hydrogen.

And in this country, which which I and a G a support and my Doctor Adler.

Did you aren't blending and our own.

And Tony and certainly to Oregon, and we have 5% blending tasks and.

Our team and and creating.

Creating and and uptake and that blending of our time.

And at the end of next year, and we expect heavy and serving the entire facility out there right now or start shipping and couple of building and testing equipment and that work continues and cloud.

Awesome. Thank you so much.

Hi, Selman.

And there are no further questions I would like to turn the call and.

Turn the conference back over to David Anderson for closing remarks.

Alright, well, thank you Danielle and thanks for everybody for joining us today and.

As always if you want to dive deeper into it you know Nicky as far at least the person to contact and she'll help you out. Thank you everybody.

The conference has now concluded bogey for general today's presentation you may now disconnect.