Q3 2022 Northwest Natural Holding Co Earnings Call
Okay.
Hello, and welcome to the stage and doubling your natural holding company Q3 2022 earnings call.
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I would like to hand over to our host Nikki Bonnie with Andonian neutral holding the floor is yours. Please go ahead.
Thank you Elliot and good morning, and welcome to our third quarter 2022 earnings call. As a reminder, some things that will be said. This morning contain forward looking statements are based on management's assumptions, which may or may not occur.
Complete list of our cautionary statements refer to the language at the end of 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 note. These calls are designed for the financial community. If you are an investor and have additional.
No questions. After the call. Please contact me directly at five O. Three seven to 125 30 news media May contact David Roy upside luxury 610 70 157.
Speaking this morning are David Anderson, President and Chief Executive Officer, and Frank Burkhart, Smart 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 question.
With that I will turn it over to David Thanks, Nikki and good morning, everybody and welcome.
Continue to see strong financial results and expect the year to be in line with the guidance that we previously provided Frank will go through more of the detailed financial results here in a moment.
And I'll walk through some economic indicators and provide a summary of northwest Natural's, Oregon General rate case order I'll wrap up with an update on hydrogen projects at the gas utility and recent news from our water and competitive renewables business.
Turning to a few comments on the economy and our gas utility service territory in Oregon, and Washington, We continue to see strength in employment numbers, while the housing market moderates from its highs in 2021.
Overall, Oregon, it's trending similar to national averages, but we continue to carefully monitor economic conditions.
The labor market remains stable.
In Oregon for example, unemployment was three 8% in September 2022.
As expected single family housing activity is cooling as interest rates rise single family permitting has moderated at the elevated levels in 2021. The median sales price of a home was down about four 7% for the third quarter. This year.
The inventory of homes for sale in the Portland Metro area remains very tight at only $2 two months of supply.
Overall growth is roughly in line with our expectations.
So far we've seen a decline in mixed use multifamily projects, but expect several developments to come online in the fourth quarter. In addition to supply chain issues have put customers conversion projects on a longer runway.
Despite these factors we added nearly 8800 new customers during the last 12 months, which equates to a growth rate of about one 1%.
Our water and wastewater utilities continue to operate in areas that have very solid economic footing.
Rates in our largest water service territories range from two 8%.
The 4% and Texas, we experienced growth across our water utilities with several pockets of outperformance.
This remains an extraordinarily.
Extraordinary market with our water and wastewater utilities, posting nearly 11% organic growth the housing market in Idaho is strong with our false water utility providing 5% growth on.
On a consolidated basis, our water and wastewater utilities grew over 3% over the last 12 months. In addition to this organic growth our recent acquisition of far West and Arizona increased our water customer base by 70% to 61000 customers on a consolidated basis, our collected gas and water utility customer base.
Grew five 3%, including our recent acquisitions.
Moving to a summary of our Oregon General rate case for the gas utility.
In October the Oregon Public utility Commission issued an order approving several several multi party settlements.
Under the order northwest Natural's revenue requirement increase $59 $4 million beginning November one.
This was based on a 50 50 capital structure and ROE of nine 4% and an overall cost of capital of six 8%.
Rate base increased $320 million and now stands at $1 7 billion.
A number of other items were approved as part of the rate case, including full recovery of our Covid deferral enhancements to our low income energy efficiency program. The recovery of our Lexington, R&D facility and a new automatic adjustment clause for new R&D investments during.
During the quarter.
We filed for our annual purchase gas adjustment also in both states, which updates rates for the projected gas cost in the coming year.
In October we received approval from both Oregon, and Washington for those increases new rates for those also went into effect November one.
Despite these recent increases it's important to note that customers are paying less today for their total natural gas service in our area than they did 15 years ago.
With that let me turn it over to Frank to go a little bit deeper into the financials Frank.
Thank you David and good morning, everyone.
I'll begin by discussing the highlights of the quarter and year to date results and conclude with guidance for the year I'll describe the 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 in the first and fourth quarters. During the winter heating months for the third quarter, we reported a net loss of $19 6 million or <unk> 56 per share compared to a net loss of $20 7 million or <unk> 67 per share for the same period in 2021.
That's an improvement in results of <unk> 11 per share.
Quarter over quarter basis, our gas utility provided $300000 of higher earnings related to increased margin and lower pension expense.
Net income from our other businesses increased $800000 for the third quarter of 2022 related to higher asset management revenues offset by higher interest expenses.
For the first nine months of 2022, we reported net income of $38 $4 million or $1 14 per share compared to net income of $38 $1 million or $1 24 for the same period in 2021.
$200000 increase in net income for the nine months period reflects an improvement at the gas utility of $3 $3 million, while results from our other businesses declined $3 1 million as the prior period benefited from the higher asset management revenues related to the February 2021, cold weather event.
Higher earnings at the gas utility were primarily related to customer growth new rates in Washington, and colder weather in 2022 compared to 2021.
As a result of these factors utility margin increased $6 $6 million.
Utility O&M increased $8 $2 million, reflecting higher levels of contractor and professional services and it upgrades.
Utility depreciation and general taxes increased $1 5 million due to higher property plant and equipment as we continue to invest in our system.
Other income increased $6 $4 million driven by lower pension costs.
For 2022 cash provided by operating activities was $166 million, we invested $257 million into the business most of which was for gas utility capital expenditures. Our credit remaining ratings remained unchanged with a stable outlook that includes northwest Natural's senior secured long term debt rating of double a.
Minus for S&P and <unk> for Moody's our objective remains to keep our balance sheet strong with ample liquidity.
Moving onto financial guidance the company reaffirmed 2022 earnings guidance today for net income in the range of $2 45 to $2 65 per share guide.
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.
We continue to target a long term earnings per share growth rate of 4% to 6% with that I'll turn the call back over to David Thanks, Frank turning to a few updates on our key long term objectives, our long standing core value of environmental stewardship is a driving force behind the choices, we make every day in our operations and employ.
And for the future.
We believe climate change requires rapid innovation and collective action, which is why we're committed to re imagining the role of our system and the fuel that we deliver in September we filed our integrated resource plan, when the Oregon, and Washington commissions outline outlining long range resource plans and pathways to reduce emissions and play.
<unk> incorporates complex modeling to arrive at a variety of scenarios to achieve the lowest cost best options to meet safety reliability and de carbonization needs. We expect these proceedings to conclude next year.
But we are not just planning for the future. We're taking tangible steps forward. Our engineering team has completed 5% hydrogen when tested our Sherwood operations and training center and plans to increase the 10% plus plans in the coming weeks with a goal of 15% by the end of the year pending system and equipment testing results. We're also continuing to work on and I'm excited.
<unk> turquoise hydrogen pilot project to turn methane and the clean hydrogen and solid carbon will be testing. This groundbreaking technology at our Portland operations facility. This project is in partnership with modern electronics and we expect the project to go live in the spring of next year.
For a couple of our commercial customers, we're working on a pilot using carbon X equipment, the equipment captures carbon from existing furnaces boilers to reduce both energy use and greenhouse gas emissions of carbon dioxide carbon dioxide is converted to potassium carbonate, which is blended into soap products. Each unit has the potential to reduce.
Two emissions by nearly 18000 pounds annually.
We're not alone in looking at this equipment has already been installed in a variety of facilities in Canada in Minneapolis.
Several other direct capture technologies are approaching commercialization and we expect adoption rates to continue to grow and are excited to be on the cutting edge of this innovation.
Moving now to an update on our competitive renewable natural gas business that we launched last year as you know through that business. We're focused on providing cost effective solutions to help a variety of sectors decarbonize using existing waste streams and renewable energy sources.
Construction on our first two R&D facilities that we're investing in and are on track to be completed and producing gas in the spring of 2023 as we've discussed in the past, we strive to provide stable and growing gas and water utility earnings while seeking to add growth opportunities that fit our conservative strategy.
Natural gas business represents a significant opportunity for us to add earnings and cash flows and a fast growing market segment at the same time most of our R&D projects are sized right for us to effectively transact.
The recent interest in transaction activity in the LNG space has validated our thesis to enter this business. We believe we have a competitive advantage due to our size, which allows us to be nimble and tailor our approach for each project.
To be excited about the growth potential of this business and look forward to adding new projects and pursuing additional opportunities.
Turning to our water and wastewater utility businesses.
Cited to announce that we closed our largest acquisition to date far west water and wastewater utilities in Yuma, Arizona. These utilities are in a fast growing region, which currently serves approximately 25000 customers.
We also believe there are incremental opportunities to grow our presence in Arizona.
Just this past week, we signed and closed a tuck in acquisition in Idaho, and also signed an agreement for another Washington utility we remain excited about the investment potential for this business also.
And I'm happy to announce we released our 2021 ESG report in late August outlining our progress on some of our most important sustainability initiatives.
And then finally this morning, the board approved a dividend increase for the fourth quarter, making this the 67th consecutive year of annual dividend increases northwest Natural holdings is one of only three companies on the New York Stock exchange with this outstanding record. So in conclusion, we are pleased with where we are for the year, we've got a big quarter coming up and look forward to executing on behalf of <unk>.
Our customers and all of you. Thanks.
Thanks for joining us this morning, and L. A and I think if there's any questions out there we're ready to open it up for those.
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Our first question comes from Chris <unk> from Cyber Williams Your line is open.
Hey, everybody how are you.
Good.
Can you give us a little more color on you know you talked about this a new hydrogen project, but can you give us a little color on sort of what's your broader aspirations are for hydrogen.
Yeah, I think as we've been very vocal and we believe that there are different products can go through our pipeline and if youre going to decarbonize.
Obviously, the first thing you work on his energy efficiency. The second thing is renewable natural gases from biogenic resources like.
Wastewater and landfill, but then we also do believe like Europe has been doing for a period of time here, putting in hydrogen on the system and there's different forms of hydrogen and this area as well.
<unk> for Green hydrogen and that's the purpose of testing what level of mix that we can put into the system and frankly replicate what theyre doing in Europe , and that really allows us to decarbonize whats already a very clean product flowing through the pipeline even further so.
The main focus is on the utility I do believe long term, Chris theres going to be other investment opportunities for companies.
Especially after the inflation reduction act was passed there was tremendous funding.
From Congress to push hydrogen forward, which is which is a good outcome.
And the you talked about the consolidation that's been taking place and RMG do you see that is enhancing our speeding up development or your ability to transact or do you think some of these transactions maybe has a temporary slowing effect.
Well I think overall the transaction show that people see the same thesis that we're seeing that this is important and if we really are going to address climate change we have to we have to get more renewable natural gas on the systems I think a lot of people are trying to gain footholds and it's really good that we've already established a small piece.
And we're not going to try to compete against these bigger guys, but it does allow us to focus in and it's just you know.
Chris I would call it a reaffirmation that we're on the right path here.
It's a competitive market, we believe that we can compete in it just because of our size very much like what we're doing in water.
We can we can transact and be a little bit more nimble than maybe the big guys are doing so I.
I don't know if that answers your question or not.
Sort of my next question does that mean, you think some of these behemoths oil and gas companies coming into the space.
That means they're going to be looking for the larger transactions and that'll leave maybe some of the smaller stuff more available to you than maybe some of the public <unk> companies would would have and in retrospect.
That is exactly what we're what we believe will happen and it may it makes sense. If if these bigger companies spend a lot of time on the smaller projects I I'm not sure. The returns are going to be what they want them to be and this is very similar to what we're seeing in the water sector.
Right.
And lastly, you talked about having some additional transactions in water. What's your thought process or what are you seeing in the water business. Today are you seeing a pretty active environment.
Yeah, why don't I get our president of water to answer there Justin.
Thank you.
We're seeing a pretty steady pipeline of activity.
In the water space, it's very difficult to predict those larger transactions that will occur from time to time, but a pretty steady flow of tuck in acquisitions that we mentioned earlier on the call that just assigned to you in the past week and one in Washington, and one in Idaho, and Thats pretty indicative of what we're seeing out there just building on our existing.
Physicians are that as larger.
New markets.
New market related acquisitions become available.
We execute on that.
Okay.
One last thing can you can you give us a little color on how you see the RMG tracker working from the rate case.
Okay.
Hey, Chris it's Frank.
Good to hear from you.
Yeah. The RMG tracker. This is where we are able.
Able to invest in renewable.
Well gas assets and put them into rate base and the way it'll work is pretty straightforward. We will invest we will close we will build bring it online and then we will incorporate it into rates each November 1st with the <unk>.
When we update rates for the PGA, so there's a little bit of lag, but it's a in between rate cases, we can pick it up in rates every year. So to the extent, we can if theres opportunities, we would optimize that a little bit as they came online.
Have a little bit of lag within a year, depending upon when they are ready to begin producing area.
Chris If you remember our bare steel and cast Iron replacement program. That's how it worked as we would make the investment for the year and then every November one which is when we update the gas portion of our bill.
Rates will be adjusted to reflect the.
The increase in rate base and the associated costs.
Right.
It's limited by the revenue percentage.
Yes, we still under SB 98 still have that.
5% of our revenue requirement per year, which works out 35 plus million dollars of incremental cost.
Yes.
We still have quite a bit of room to continue to invest in renewable natural gas at the gas utility.
Okay, great. Thanks, so much for the detailed appreciate it.
Thanks, Chris.
As a reminder, still ask any further questions. Please press star one on your telephone keypad now.
Our next question comes from Selman <unk> from Stifel. Your line is open.
Thank you.
Let me just start off on Orange G. There in just a few follow ups. So you referenced in your comments that you have two that are coming online in early 'twenty three but maybe you could just talk about the outlook for additional projects in how quickly they could come online.
Yeah, we're we're actively so Mike coda, because our president of the renewables business based out of Michigan and he's got a team that is actively looking at projects.
Across the country Selman this is everything from a landfill opportunities too.
Two dairies and things like that and even potential contractual arrangements.
So it's up a.
Little.
About all the information I can give to you right now there is a lot of projects that we're looking at in terms of development and things like that then of course also trying to line up customers for the product. So it's still early stages. We've just started this business.
But I think what you'll you'll hear us do probably early next year is provide a little bit more on what we see in terms of the marketplace and then how we're attacking the market, but his team is actively looking at various projects around the country.
Got it and then just flipping over to carbon capture maybe you could just explain that a little bit more on exactly where your participation is going to be in in that.
On the transportation side or actually on the capture side could you just help me understand that a little bit better.
Jim do you want to go.
Yeah, why don't I start with the Carbonite.
Project.
How are.
David.
Displacing conventional gas with R&D and clean and renewable hydrogen and we also do believe carbon capture.
Nation of sequestration youre going to be really important and I think and you see that reduction.
The reduction.
And some of that funding flowing.
So we have two projects.
Yeah.
It's one where we're partnered with some of our bigger commercial customers.
And it's basically the equipment design kit.
Existing natural.
<unk> furnaces and planners it reduces the energy isn't that it captures the carbon dioxide exhaust from those appliances and then it's converted in terms of caffeine carbonate and that can then be used in a secondary market to create.
This is just one example of this technology, we know that it is being piloted and as David mentioned in Minneapolis, and in Canada that we're really excited about it and as he mentioned it it has the potential to reduce emission annually by 18000 pounds per unit.
And it's very small you can you know at this point that you can put it on a variety of.
Tomorrow at town.
And it allows them to meet.
Individually on with that.
The other project that we're really excited about it.
Like hydrogen methane pyrolysis project.
With modern electronic.
Followed in the news there was a lot of excitement about Turk like hydrogen because it has potential to be one of the lowest cost and low carbon fuel and.
On a laptop that 1 billion dollar projects that theyre getting BLE funding on this technology for our project.
We are anticipating that this kind of equipment and it created that really have the flexibility to be located in a variety of areas on our system.
It would allow us to produce distributed hydrogen wherever whenever we need it.
And so we're learning the pilot we wanted to prove out the technology, we're really interested in the pipeline and were part of a consortium North American other utilities.
That are sort of sharing the learnings on these kinds of Thailand.
And part of high decline, which is an international hydrogen consortium again looking both at these kinds of technologies, but also and work on our hydrogen blending and David mentioned a cornerstone.
We are we are exploring a lot of different avenues, and I think it's a reflection of the first fatality.
Hydrogen for it gas networks, but also on carbon.
Carbon capture opportunity.
Do you see opportunities to deploy inside the utility it outside the utility or would it be all.
Outside the utility.
I think the focus for US right now what Kim was talking about is inside the utility I think one of our.
I think it is one of our main goals is to Decarbonize, our gas utility and we even have a net zero.
Our view that we can get there by 2050 and this would be part of that process. The more we learn about it just like we learned about orange in the utility business I think it will also provide investment opportunities outside of the utility, but right now the focus is inside the utility.
Got it.
Very helpful. Thank you and then.
Just last one for me Oh, an a M.
Seem to come in lower than we were expecting and I was wondering if there was anything there you could talk about maybe just the way this shapes up for the fourth quarter relative to taking a look at the first two quarters of the year.
Okay.
Have had some initiatives underway. This year. So I'm. It's a great question of course too we've been I'd say slow slowly doing back sales and we've been monitoring and trying to keep a bit of a lid on unnecessary or not let's say mandatory cost expenditures during the year and I think.
Youre seeing a little bit of that dampening the trajectory.
We're up at the utility about 8% for the year, which is really not too far from where we expect it to be I think you know our view is it'll kind of level off for the rest of the year.
We're kind of on track, where we thought we would be for the year, but it's really so far what we've been it's been driven by is some inflation in our contract work.
And then it maintenance and cloud costs, but it's I'd say just in general it's in line with where we would expect it to be but just kind of reflecting a little bit extra management action to keep it a little dampened from maybe where you were expecting it to be.
Yeah.
Alright, Thank you very much.
Thanks Ellen.
This concludes our Q&A I'll now hand over to David Anderson, President and CEO for final remarks.
Thanks, Elliot and thanks, everybody for joining US obviously, if you have any questions I get a hold of Nikki or media get a hold of David Roy.
As a as Nikki send her prepared remarks, we know it's a busy day.
And hope all the.
I hope you get out there and vote will talk to you soon thank you.
Today's call is now concluded we'd like to thank you for your participation you may now disconnect your lines.
Uh huh.
Yeah.
Okay.
Right.
Okay.
Yes.
Okay.
Okay.
Uh huh.
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