Q3 2021 Northwest Natural Holding Co Earnings Call
Good day and welcome to the NW Natural holding company third quarter 2021 earnings Conference call. All participants all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one.
On your telephone keypad and Swift and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to MS. Nikki Barley director of Investor Relations. Please go ahead ma'am.
Thank you Scott good morning, and welcome to our third quarter 2021.
As a reminder, some other things.
These forward looking statements.
Just on management's assumptions, which may or may not occur.
Needless to cautionary statements 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 an investor and have additional questions. After the call. Please contact me directly at three seven in Q1, 'twenty Fasteners News media may contact either right on fiber.
610, 70 157.
This morning are David Anderson, President and Chief Executive Officer, and Frank <unk> Senior.
Senior Vice President and Chief Financial Officer, EBITDA and friendship prepared remarks, and then will be available along with other members of our executive team to answer your questions with that I'll turn it over to David Thanks, Nikki and good morning, everybody I'll start today with highlights from the quarter and then turn it over to Frank to cover our financials.
Performance in <unk>.
I'll wrap up the call with a few updates on our strategic initiatives.
The company continues to operate very well during the year.
And as you've seen posted very strong financial results.
We reported net income of $1 24 per share for the first nine months of 2021.
5% increase compared to net income from continuing operations of 80 cents per share for the same period last year.
New rates in Oregon drove results for natural gas facility, along with solid customer growth and higher revenues at our Interstate storage business we.
We also continued to see positive momentum in the local job market and the housing sector.
Employment growth in the Portland Metro area has picked up steam since late last year growing faster than the U S. Throughout most of 2021.
Unemployment rates in the Portland Metro area has declined to 14.4 excuse me, 4.9% in August 2021, compared to the national rate of five 2%.
Single family housing activity remains very strong.
In Portland home sales were up 15% for the first nine months of 2021 compared to 2020 and the average sale price was up 18%.
New single family permits issued were up 29% in Oregon through September this year compared to last year in summary, construction and development remains robust in our region.
This resulted in translated if you will into nearly 12000, new customers connecting to our system over the last 12 months, which equates to a growth rate of 1.5% our water and wastewater utilities also continued to grow.
Strong residential construction, primarily in Idaho, Texas, and Washington translated into a 3% customer growth rate. We also closed acquisitions. This past year, leading to an overall connection growth rate of 5%.
During the quarter, we filed our annual purchase gas adjustment, which was the first time in Oregon included renewable natural gas in October we received approval from both the Washington, and Oregon Commissioners on our P. J E T.
New rates went into effect November one.
Despite these increases customers continue to pay nearly 30% less for their natural gas gas today than they did 15 years ago.
And natural gas continues to maintain its competitive position as a fuel of choice and factored in typical whom we serve natural gas enjoys up to a 60% price advantage over electric and oil firms.
Now an update on our general rate case in Washington, as you May remember, Washington Service territory covers about 12% of our overall customers and about 10% of consolidated revenues in October The commission issued an order approving our multiparty settlement.
Under the multiyear order northwest Natural's revenue requirement increase $5 million on November one and will increase to an additional $3 million on November 1st in 2022.
The order includes several items that mitigate the impact to customer bills as apart as party recognize this remains a very challenging time for customers.
Both years are based on our cost of capital of $6, 814% and rate base would increase the total of $52 $6 million to $247 $3 million.
We continue also to make progress under the landmark, Oregon Senate Bill 98 legislation, which supports renewable energy procurement and investment by natural gas utilities during.
During the third quarter, our request for proposal for additional R&D supply or investments concluded and I'm happy to report we have received a very robust response and are evaluating a number of potential opportunities coming out of this process.
Northwest natural has options to invest up to a total estimated $38 million in four separate R&D development projects that will access biogas derived from water treatment at Tyson foods processing plants construction on our first R&D facility began this fall with commissioning plan early 2022.
<unk>.
To date, we've signed agreements with options to purchase or develop R&D totaling about 2% of northwest natural annual sales volumes in Oregon.
I am very proud of the progress we made and just frankly, one year to put it into perspective total today wind and solar account for about 11% of our nation's electric supply and that's after decades of investment. So I think we've made good progress in a short period of time with more to come we will continue to take these critical steps to source more and more of them.
Our supply from renewables renewables knowing that this also helps communities close the loop on waste.
In our water business, we're seeing increased business development activity and a robust acquisition pipeline that includes acquiring water utilities around our existing systems. We've closed three tuck in acquisitions this year and expect to close another one soon.
At the same time.
We continue to invest in our existing utilities for example, construction is going well on an upgraded wastewater facility at our son River, Oregon utility.
<unk> like this help our water utilities continue providing safe and reliable service and meet stringent environmental standards.
Support investments at our utilities were filing a general rate.
Island General rate cases is necessary and to date, we have successfully completed rate cases in Idaho, Oregon, and Washington building constructive relationships with our regulators right now we're working through a general rate case, and our largest utility some river here in Oregon, which is moving along nicely.
We continue to see an increased level of business development activity and remain excited about the investment potential for this business, we hope to have more announcements soon.
And finally this morning I'm pleased to report that in the fourth quarter. The board of directors approved a dividend increase making this the 66th consecutive year of annual dividend increases northwest Naturals is one of only three companies on the New York Stock exchange with this outstanding record with that let me turn it over to Frank to cover some more of the financial information.
Thank you David and good morning, everyone.
Ill begin by discussing excuse me I.
I will begin by discussing the highlights of the third quarter and year to date in 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 a net loss of $20 $7 million or <unk> 67 per share compared to a net loss of $18 $7 million or <unk> 61 per share from continuing operations for the same period in 2020.
The increase in net loss over last year was driven by our gas utility, which posted a four cent per share higher loss lower earnings at the gas utility were primarily related to higher operations and maintenance and depreciation expenses, partially offset by new rates in Oregon from a general rate case, which was effective beginning November one 2000.
Utility margin in the gas distribution segment increased $4 $1 million as a result of the new rates in Oregon, and customer growth, which collectively contributed $3 $7 million utility O&M increased $3 $8 million, reflecting higher expenses from information technology upgrades higher lease expense associated with our new head.
Quarters, an operation center and a benefit in the third quarter of 2020 related to recording the year to date Covid deferral dipped.
Depreciation expense and general taxes increased $1 $8 million related to higher property plant and equipment as we continue to invest in our system.
For the first nine months of 2021, we reported net income of $38 $1 million or $1 24 per share compared to net income from continuing operations of $24 $5 million or <unk> <unk> per share for the same period in 2020. The 44 cents per share increase was largely driven by the gas utility, which contributed 31 cents.
With our other businesses contributing 13 cents per share as compared to last year.
Higher earnings at the gas utilities were primarily related to new rates in Oregon and customer growth in the gas distribution segment utility margin increased $26 $2 million higher customer rates and customer growth contributed $27 $3 million. This was partly offset by a loss from the gas cost incentive sharing mechanism has been purchased higher.
This gas during the February 2021, cold weather event.
Utility O&M increased $8 $5 million, driven by higher employee compensation and benefit costs lease expenses for our new operations in headquarters and higher costs related to information technology system upgrades depreciation expense and general taxes increased $7 $3 million net.
Net income from our other businesses increased $3 $9 million largely due to higher asset management revenues from the cold weather event in February.
During the first nine months of 2021 cash provided by operating activities was $182 million, an increase of $31 million compared to last year, we reinvested $204 million into the business most of which was for the gas utility capital expenditures, our balance sheet remains strong with ample liquidity the company rehab.
From 2021 earnings guidance today for net income in the range of $2 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.
For his concluding remarks thanks.
Thanks Frank.
We're taking important steps today to lay the foundation for.
Frankly continued success in the future.
I'm proud to announce that we've also launched the competitive renewable natural gas strategy today and formed a new nonregulated subsidiary northwest natural renewables to execute on that strategy.
Northwest natural renewables is committed to leading the energy transition and providing renewable fuels to the utility commercial industrial and transportation sectors were focused on providing cost effective solutions to help these sectors decarbonize using existing waste streams and renewable energy resources.
We then at the forefront of the energy transition for some time, we led on conservation with the decoupling mechanism and the gas utility sector. We were one of the first to have a voluntary carbon offset program, we prioritized and finished our bare steel and cast iron pipe replacement program well ahead of others and we were also a first mover with our.
<unk> 2016 carbon savings goal, which is unique and ambitious and have not only does it include emissions on our operations, but it includes our customers' emissions too.
Now we're doing the work to help move us toward our vision of becoming carbon neutral utility all of that work has culminated in our firm belief that there is a large and long term need for renewable natural gas.
Central to strategy is the belief that a diversified energy system is more affordable more reliable and importantly, more resilient events in Texas. This past winter were Stark example of the importance of resilience and redundancy the electric and gas systems depend on each other who serve our communities and each system provides different benefits.
In fact by their nature each system complements the other and pensions to begin certain risks with wires above ground deliver renewable electrons and price below ground delivering renewable molecules.
This diversification helps us effectively meet different energy needs and will be even more important going forward as climate change and severe weather posed new risks.
All of this means we're approaching the competitive R&D space awfully, but with confidence we're in the midst of a.
Historic energy transition and the demand for renewable fuels is only going to continue to grow renewables are a clear priority at all levels in our government and importantly customers are demanding renewable energy, including fuels to power their businesses and heat their homes.
Growing number of states have renewable mandates and others have voluntary renewable natural gas tariffs customers across sectors are also focused on this issue in fact, 60% of the Fortune 500 companies have set goals to act on climate crisis, and address energy use and others are fast following.
As a result cost effective R&D demand is expected to exceed supply and the need in the near term with many large scale low cost projects yet to be developed today, the RMG supply equals less than 1% of natural gas utility demand and we project a substantial increase in R&D supply needed to meet voluntary and.
Compliance driven targets instituted by states and utilities.
We see promising investment potential in this area just a few years ago. There were only 50 R&D facilities in North America, and now over 300 and are in operation or under construction with nearly 100 more in development.
Leaders in Europe are utilizing R&D at an aggressive pace with Denmark at nearly 25% of its supply coming from renewable natural gas we.
We believe we are well positioned to help fulfill this need as it aligns with our core competencies, we've used competitive RMG market as a natural extension of our sustainability efforts and believe it offers a broader set of opportunities to lead beyond our service territories.
In the nascent U S market, we have an early mover advantage here with our expertise and credibility as a leader we are an attractive counterparty for developers and feedstock owners seeking a reliable long term strategic partner. Most R&D projects are also sized right for us to effectively transact and to provide meaningful growth.
And cash flow as.
As we discussed in the past, we strive to provide stable growing gas more easily earnings while seeking to add growth that fits our conservative strategy.
The renewable natural gas business represents a significant opportunity for us to add earnings and importantly, cash flows under long term contracts and a fast growing market segment.
As you can see from today's announcement, we've already taken our first steps in our nonregulated R&D strategy, one of which is a 20 year RMG supply agreement that includes a 50 million dollar investment.
We intend to remain disciplined and focused as we assess our other LNG opportunities that support the energy transition and also provide additional growth for the company.
And southern in summary, your company is financially strong and I'm pleased with the progress in our gas and water utilities. We believe the renewable strategy has added additive to our earnings profile, providing us sightlines to incremental.
Opportunities. So thanks for joining us this morning with that Chuck will open the call up to if there's any questions out there yes, Sir we will now begin the question and answer session.
You asked a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Julien Smith with Bank of America. Please go ahead.
Thanks, operator, good morning, everyone. Thanks, David I appreciate it.
Sure.
And congratulations I should add on the announcement here.
Orange a more fully so perhaps just at the outset, if you could talk a little bit more about how you're thinking about returns and profiles, especially if you think about 'twenty 'twenty. Four is you get those first projects all that up and going on a run rate basis, but also how does this impact your long term earnings growth trajectory, obviously, you've got a three to five per cent out there.
How are you thinking about this as being additive and when do you think about kind of rolling that out if you will.
Yeah, I'll start off here and then I'll turn it over just to give a little bit more details on what we're seeing out there, but we're just now getting into this we see as I mentioned in my prepared remarks, we see a lot of opportunities here.
And it's and I think all of those are going to be additive to the earnings profile going forward and I'll, let Frank talk a little bit more about that we will be sharing more information in the coming months as we roll this out but now let me turn it over to Justin first I'll kind of give a little bit more information on what he's seeing there.
A little bit more meat on the bump.
Thanks, David.
Yes, we will be updating you in the coming months on EPS impacts Julian I appreciate the question.
We believe we are developing and securing RMG at prices that are well below market. If you look at kind of where.
Youre seeing recent pricing on brands and L. CFS values, but certainly also in.
Other areas, where there is long term contracts such as the CPUC that recently recommended at a price of 17 70 per M of Btu.
And subject to a first tier approval and their Biomethane program. So.
There's a wide range of values out there in the market and we are confident that.
That the RMG, we are developing and securing will enable us to capture some margin there, but we'll be updating you in the coming months on the specific EPS impacts and growth targets.
Got it.
Let me put it this way is there any parameters or framework that you would think about sort of capping out the size of this program to be 10% of earnings I think any kind of heuristics that you're thinking about maybe driven by credit considerations or otherwise when you think about how far you want to ask Jen and we're not really prepared at this time to kind of talk about that but like we've done with water we would not have.
Into this if we didn't think we could grow in scale.
And we're still focused on doing that with water weed.
We've done one contract on the R&D side here, we do have some other line of sight ones that we're looking at moving forward, but I.
I do expect us to be additive to the 3% to 5% earnings growth that we see going forward and I think some of the prices adjustment just gave out for that.
Support that and again, well, we'll put a little bit more meat on the bone for you as we as we move forward on this but at this juncture.
A little early to say, whether it's going to be 10% or 20%, but.
But we do see.
Do see lots of targets lots of opportunities and we wouldn't be in this for one or two off type transactions.
Fair enough last question here real quickly. If you can you mentioned the SP 98 in Oregon here.
And talking about the RFP here.
Can you talk a little bit about the opportunities that could come out of that.
You said, you're still evaluating but kind of frame that as well here and I get that there's a parallel process here, but I'm curious that relative to the competitive what kind of opportunities could exist out of 98.
And so I really appreciate the question because we are we are very focused on doing R&D and the utility to does not mean that we're not focused on the utility side of the equation to continue to move that the carbonation de carbonization process further and frankly, we see enough opportunities out there for both the the unregulated and regulate.
Justin do you want to give a little bit more information on the <unk>.
Assess internally on the on the utilities on yeah, and we mentioned our projects with with Tyson a little bit earlier in the call. Our first project is working its way through the regulatory process now.
And we expect Sir.
Have a little bit more visibility on that in the coming months.
We have three additional projects with Tyson that.
We anticipate moving forward as well and all of those are going through the utility and the SP 98 process the procurement contracts that we've.
That we've approved as well are also.
Through SP 98, effectively.
The first two were already approved through the PGA at just just a couple of weeks ago asked it was great to see that progress the announcements year around our competitive RMG strategy is really a reflection of the broader opportunity that we see we are well on track to meet the targets set out under SB 98 for.
<unk>, our own fuel suppliers here in Oregon, and we see a broader opportunity.
Out there in the market frankly across the country.
To decarbonize, not just our own gas utility, but other customers as well whether they're in the utility.
Commercial industrial and transportation sectors. So.
More details to come but we are excited about the opportunities here.
Sorry to keep going I, just want to clarify what you said there a moment ago should we expect some kind of holistic update come early next year, the formula like an analyst day or something because I mean, I hear you that you're running parallel elaborate but they sound like they they sort of come to a conclusion at roughly the same time.
But whether it's the credit or the competitive or even the regulated RG opportunities.
Yes, I will continue.
We're trying to say is we're in the early stages on the unregulated side and we'll continue to keep you up to speed as we grow this and as we as we move forward no analyst day planned at this time, but I do anticipate additional information being shared with everybody as we continue to make progress here.
Got it alright, well listen best of luck on these new efforts.
Thank you very much every day.
Yeah.
The next question will come from Tate Sullivan with Maxim Group. Please go ahead.
Alright.
A couple follow up questions on the Orange acre the unregulated strategy and what what led you to ADL and roughly how many R&D projects have they already done in the U S. If you can't share that.
Justin you want to.
Yeah happy to share that so <unk> is actually there are an Australia based.
Global leader in renewable energy they have a portfolio of landfill gas assets here in the United States that I believe is a well over a dozen.
Projects.
These.
These first two wells.
Were really attracted to us just because of the scale and the overall cost profile that that that that leads to.
And <unk> ads as a partner is also very attractive to us they are very experienced in this space.
There's other opportunities to work with them, we believe in the future and.
And so far in the relationship that we've developed.
It's very constructive and cooperative and we have very aligned views on the market.
And our strategic objectives.
Okay, and understanding that more details to come but will you I mean can this focus similar to your water strategy in multiple states are you focusing on specific regions.
We see this as really a national strategy Theres Theres RMG supplies to be had all around the country.
And.
And so we don't see this as limited to any specific region with our water strategy. We really started in the Pacific northwest and an expanded from there and have been very selective, particularly as it relates to individual states and regulatory considerations in those states with RMG, it's a little bit broader.
Because some of those considerations just just arent arent as applicable.
But I wanted to emphasize we're approaching this competitive R&D strategy thought.
Awfully and with discipline and we're looking at acquiring and developing our LNG projects. Once key permits in feedstock and lease agreements are in place and ensuring that design and construction costs are fully understood.
And that risks are appropriately allocated through contracts. So when we're talking about how big this business could get it's really a function of the risk profile and how we will be able to manage that going forward.
Importantly, we want to make sure that we build a diverse portfolio of projects that have long term fixed price contracts and limited exposure to the volatile ran a L. CFS credit markets to ensure that stable and predictable cash flows consistent with the rest of our businesses over the long term.
Okay. Thank you and I think there are some examples in the market about pipeline leaning away from the landfills to offtake area, but.
Assuming that is what your first two projects at the El might involve can you you mentioned funding your investments one commercial once commercial operations take place is this usually what E. Mail has done with their projects is that funding initially for the pipeline coming from ADL.
How should I look at that.
No I think the agreement that we have with E. D. L. A somewhat unique and it's unclear that this will be replicated in exactly the same way for other projects that we pursue and I think this is just a function of kind of the nature of these projects, where <unk> was at with them and where we were at with our with our investment commitment.
Attractive for us because we are going to wait until the projects are constructed and ready for that commercial operations to begin before we actually fund.
Our portion.
So it has a lot of sort of risk allocation features that we find attractive.
Okay, well, thank you and congratulations on the new strategy and great wording onto the significant opportunity and look forward to hearing more thank you.
I appreciate it.
Again, if you have a question. Please press Star then one our next question will come from Selman <unk> with Stifel. Please go ahead.
Thank you.
Good morning.
So just a quick follow up on E D L.
Are you guys.
Only looking at landfill or should we expect to see this may be extended over to dairy or.
Yes, it's a great question.
These first two projects our landfill projects. There are some attractive features we believe around landfill.
RMG and in a lot of that is really just related to the cost profile.
The cost profile for for certain dairy and other agricultural projects, sometimes it is just a higher underlying.
Operational costs and in overall capital costs relative to the volumes of R&D Youre able to produce so while we are looking at a variety of feedstocks, that's what sort of led us to these initial.
I will also say given our strategy, which is which is really focused on on a low risk profile.
Assuring that we can.
Get.
Long term contracts for four these RMG supplies in the nonregulated business.
It's unlikely that we will have as many dairy projects simply because the folks that are out there investing in dairy projects today are monetizing those values in the L. CFS markets primarily.
And those markets are just they're a little bit more volatile.
And introduce an element of risk that isn't really where we're focused right now.
Appreciate that.
And then.
You also referenced sort of 2% of your <unk>.
Yes, you are delivering now is RMG, how high do you expect to take that over time.
Well, we've signed up agreements and have investments in place to get to 2% that'll happen in the near term.
And I think the limits you want to talk about the R&D Senate Bill 98 level at least the current legislation.
The Senate Bill 98 lays out voluntary targets for for our engine volumes in between now and 2025, it's 5% of our Oregon sales volume.
After 2025 and up to 2030, it's 10% and.
So those are sort of the targets that have been laid out there those are targets that we feel we can.
We feel confident we'll be able to achieve.
And there may be.
Additional volumes that we'll be able to get to over time, as we develop more and more cost effective R&D and as this market matures.
Good I appreciate that and then just always is.
To me.
Any update on hydrogen.
Didn't want to get a little bit there.
We're continuing to work with the project and that we.
You know signed an Mou in Eugene Oregon.
We then partner that we're working with <unk> they had.
Acquiring the land and we hired a consultant <unk> started that scoping out the equipment understanding kind of the.
The cost drivers are so we're trying to line that are filing for.
Funding.
Yaron, Oregon Anderson potential legislation and all 824, then allow natural gas utility to invest in projects that reduce greenhouse gas emissions.
We're also working and interested to secure funding three of the low carbon resources in Michigan.
Over 100 million dollar fund in an organization.
Partnering with gas Technology Institute.
<unk>.
On the balance being in investing in Atlanta initial technology. So.
And Theres learn work that we're doing and that the project is moving forward as you know.
I recall at San <unk>.
Our lending project that were focused on demonstrating hydrogen plants from the Fas wind solar or high Chow from the electric utility and Eugene and blending it directly into our system.
At the project at our engineering team, that's working on it and beginning that.
Technical work to understand where in the system.
Let me aware of the molecule.
And we haven't really tight plan in parallel with trying to secure the funding.
I think what's also important settlement is what's going on in D. C. Right now in the House reconciliation Bill.
He is right in the midst of that both Republicans and the Democrats are supporting.
<unk> has strong support for hydrogen in the bill So that's encouraging because that's some of the policy stuff that we need to have as an industry.
To kind of help that move forward and in fact HCA is also trying to work to see if we can get renewable natural gas opportunities and that bill so but to have both sides of the aisle really supporting <unk>.
Hydrogen that's that's a good sign for the country in general how it plays out specifically out here.
Yet to be determined other than what Jim just talked about but that's encouraging I think everybody is recognizing that hydrogen is.
As a as a real.
Solution, if we're going to solve this climate change.
Problem that we have is as the world.
One other comment and then working with our peers at ETE and in Canada. I mean, you may have heard there was that study that came out of the European Union in summer of 'twenty One nation.
It gets to hydrogen backbone analysis that demonstrated.
It's roughly 70%.
And gas and construction labor hydrogen and try to realize that.
A good chunk of that.
<unk> set out we're analyzing that information and beginning the work to think about here in North America, how do we start running and connections to our system and think about.
Developing a similar plan here.
And and I'm really excited about that.
Mark.
Great. Thank you very much.
Thanks Selman.
This concludes our question and answer session I would like to turn the conference back over to David Anderson for any closing remarks. Please go ahead Sir.
Well. Thank you Chuck and thank you everybody I know, it's a Friday and I know, it's a busy Friday. Thank you for the time.
If you have additional information you want you all know that Nikki is Farley is your point contact and we'd be happy to have any follow up. So just give her bus everybody have a great weekend. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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