Northwest Natural Holding Company Q1 2023 Earnings Call
And I'll wrap this up after that Frank.
You, David and good morning, everyone I will begin by discussing the highlights of the first quarter 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% for clarification. Our primary segment is the natural gas distribution utility business housed in our subsidiary <unk>.
Northwest natural activities from northwest natural water northwest natural renewables Interstate storage and third party asset management revenues are combined outside of our primary segment had referred to as other.
As a reminder, the gas utilities earnings are seasonal with the majority of revenues and earnings generated in the first and fourth quarters during the winter heating months put.
For the quarter, we reported net income of $71 7 million or $2 <unk> per share compared to net income of $56 $2 million or $1 80 per share for the same period in 2022, an increase of 21 per share our gas utility posted a 25 per share increase in earnings while results from our other businesses.
Declined to four.
Higher earnings at our gas utility were primarily related to new rates in Oregon, and Washington and customer growth.
As a result of these drivers and the amortization of regulatory deferrals approved in the Oregon rate case utility margin increased $29 $3 million yes.
Gas utility O&M increased $8 $7 million or 21%, reflecting higher payroll costs information technology cost contract labor and the amortization of regulatory deferrals related to Covid in two large projects.
Most of the increased costs and the amortization of deferrals were anticipated in the Oregon rate case.
Utility depreciation and general taxes increased $3 $3 million due to higher property plant and equipment investment.
Other income increased $2 $6 million, driven by lower pension costs and interest income while interest expense increased $2 $8 million. Our other businesses provided a net loss of $300000, which was lower than the prior year, primarily due to higher costs, including interest expenses, we continue to invest in our water strategy.
For 2023 cash provided by operating activities was $177 million.
We invested $73 million into the business most of which was for gas utility capital expenditures.
Related to our financings we've been active in the last year issuing both debt and equity we are starting off 2023 with a strong cash position and solid financial Counterparties. Our objective remains to keep our balance sheet strong with ample liquidity to.
The company reaffirmed 2023 earnings guidance today for net income in the range of $2 55 to $2 75 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% compounded annually from 2022 through 2027.
With that I'll turn the call back over to David.
Thanks, Frank moving now to an update on our renewables business as you know through that business, we're focusing on providing cost effective solutions.
The hell of a variety of sectors decarbonize using existing waste streams and renewable energy sources. We continue to look at opportunities across the spectrum that could include owning or contracting renewable natural gas from established facilities acquiring existing projects or developing greenfield projects.
Our main focus is working toward a portfolio of projects that generate income and cash flow growth that's been our overall corporate risk profile.
Good examples our first project.
Under the agreements northwest natural renewables has contracted to invest $50 million in the two facilities that are being developed by <unk> and Ohio commissioning of the first facility is expected later this month with commercial operations expected in late May or early June . The second facility is expected to begin commissioning in roughly six week.
With commercial operations anticipated in late June or early July we contracted to sell the anticipated volumes under long term agreements. We are pleased to see our investment thesis in ABL play out and we'll continue to focus on opportunities in the space.
Turning to northwest natural water since our water strategy began in 2017, we'd grown through more than 25 acquisitions.
We've expanded from only in water utilities in the Pacific Northwest to also invest in a wastewater and broadened our broadening efforts to Arizona and Texas.
Recently, we signed an agreement and are preparing to execute another early next week that will add another opportunity set to our water business and complement the strategy.
Under these agreements northwest natural water is launching a water services business through two acquisitions supporting 15000 connections in Oregon, and Washington, This business will provide operations and maintenance support to water and wastewater system owners and works to create value by leveraging shared personnel technology and expertise for delivery of claw.
<unk> reliable water at a reasonable cost.
We're excited about this opportunity to create long term value by broadening our services expanding our footprint and.
And potentially allowing capital and acquisition investments in smaller systems. These first two acquisitions provide a strong platform that we believe can be scaled in the coming years.
And finally this morning, I am proud of North most natural holdings being named one of 2020 Three's world's most ethical companies by Ethisphere for the second year in a row. This reflects our longstanding commitment to leadership and business integrity through best in class ethics compliance and governance practices.
National Holdings is one of only nine honorees in the energy and utilities industry and all 135 honorees will recognize spanning 19 countries and 46 industries.
In conclusion your company is financially strong and we're in.
We'll continue working on your behalf to execute on the opportunities across all of our businesses.
Thanks again for joining this morning with that operator, we'll open it up for questions.
Yeah.
Absolutely.
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We will cross it briefly ask questions already.
The first question comes from the line of Tate Sullivan with Maxim Group You May proceed.
Hey, Thank you good morning, Oncotype on the King water.
On the King water company acquisition is that in your natural gas service territory.
What parts of Washington, and Oregon.
Yes.
The water company just himself from enhancing the adjustment.
Good morning, Kate.
It's actually located in the Puget Sound region. So it does not have overlap with our gas utility service territory. It is.
In similar geographic geographic areas as our existing water utility business service territory.
Okay, and the water utility business in general if you Bill and get the tariff so to speak on the connections as opposed to the amount of people served by those connections.
Or does it vary by state.
For the water utility business, yes. It is built based on connections.
Based on connection Okay, and then shifting to natural gas customer growth David.
Is the growth more due to conversions still and as opposed to new home construction and the trajectory of the growth seems to seems to be lower or could it possibly pivot back to be a higher rate of growth.
Just on trends, you're seeing for natural gas.
Thanks for the question and.
As we are kind of unique out here that we still have a conversion market that has provided pretty steady results, but overall the customer growth rate has always and in the first quarter comes more from.
New homes overall.
I actually don't have the numbers at my fingertips.
But it usually runs around 60% is new growth and 40% is conversions and that's probably roughly correct, but we can get back with you with the exact breakdown.
And then I think it was the prior quarter you talked about I mean, a good permit environment, but I mean can you talk about just Cortland area General is there any.
Population Flater, you've seen good population trends.
Can you just talk about I mean or the outlook more around 1% going forward.
Yes, we are.
The permitting activity is still.
Fairly decent but we just we don't.
We don't know how thats going to play out and tell you I mean, obviously when you the country is experiencing higher interest rates and the fed just moved rates yesterday.
That should slow things down a little bit and we're expecting that and so if it wouldn't surprise me at all if we're in this 1% growth rate for a period of time.
As we work our way through this but.
On the population side and things like that nothing really to report on that on that front.
That would really kind of make you say that the growth rate is going to be materially different than what we reported in the first quarter.
Okay. Thank you did and then lastly, I think you said earlier with it in an organic customer growth rate with the water utilities collectively up three 9% or was that with acquisitions as well.
Yes, so a couple of numbers here organically for water it was three 9%.
And and if you include all the gas and the water together, including acquisitions, our total customer growth was four 6%.
Okay.
Okay. Thank you all.
You bet. Thank you.
Thank you.
The next question comes from the line of Robyn I call cycle you May proceed.
Thank you.
Good morning, So just taking a look at sort of the king water company.
Can you just talk about.
Is it a big roll up opportunity in front of you do you see that is similar to the utilities, we're going to be able to go out and acquire a bunch of.
Sort of the maintenance side of the equation.
Yes, Selman this is Justin and I will take that question.
We view this as a nice starting point for our platform for water services and really the water services strategy is a bit different than our utility strategy.
Allows us to enter into contracts and drive margin for our business in a market that we haven't necessarily been able to access historically so serving.
Homeowners Association small utility districts municipally owned utilities that arent necessarily acquisition targets per se for our utility business.
We view these first two acquisitions as a nice starting point for continuing to expand organically with these businesses I don't think that.
The rollout strategy is exactly the same for the services business as it is.
For our utility business, because it's more of a competitive nonregulated sector. So.
Hope that answers your question I think the nice thing.
As you've seen.
As <unk> seen for us we've kind of gone from <unk>.
<unk> focus on the water utility side, then we expanded into the wastewater side now on the services business. It's been just a very nice evolution. The other thing that I really like about the services business as it is.
It's going to provide steady earnings and revenues, even though its unregulated operation because typically.
Once you get the relationship you maintain those for a long period of time and so it's exciting and I think I think the horizon for this is its good for us as we look forward.
Got it so just kind of going back to the nonregulated nature of it can you maybe just talk about what returns you anticipate getting I presume a premium too.
Water.
<unk>, but.
Any comment you can make there.
Yes, the return profile with a little bit healthier I would say then.
Regulated water utility business, but it's still a relatively low margin business roughly 10% profit margin business. So yes, it's a little bit different in nature. It doesn't have the regulatory lag and that kind of thing.
It is very.
It is very sticky in terms of really fairly high renewal rates for the contracts that that these businesses have as long as you are providing good customer service and continuing to add value to these customers and the contracts tend to get renewed and we really like that aspect of the business.
So.
Just on the de Carbonization front, let me just ask you guys didn't mention hydrogen so I'm just kind of curious what's going on there.
Yes, we're still very focused on it I might have Tim kind of give a little bit of update on what we're doing especially with where we were on the on our Sherwood testing facility.
Good morning.
Continuing and you may recall, we've been testing different Glenn that hydrogen at Sherwood facility.
215%, we are stepping into 20% by the end of the year, we've been really pleased with the testing both on the <unk>.
Our equipment, but also on the end use appliances.
We're also piloting as some different technologies, we have a modern electron pilot.
That we're conducting.
It's getting finished now over at our Central facility. This is a technology that that basically produced at a pre combustion technology that produces hydrogen and solid carbon.
Carbon has been used in secondary markets like tires or app.
And so we're really excited about it we've lined up some participants there.
We're also looking at another technology.
And your NDA that basically.
Sort of a flavor of the two are quite hydrogen, but it's really a good fit for existing buildings, where youre, capturing a flue gas and then creating a liquid carbon that then also.
Applicable to secondary markets like concrete so.
From our perspective, there is a lot of.
A lot of innovation and R&D that is happening and the carbon capture and utilization. We're seeing technology that we think have a lot of flexibility.
Can be quite indifferent kinds of areas or facilities on our system. So.
A lot going on we're also participating in.
Several national and International consortium is around hydrogen and learning a lot there so more to come that that's that that's the report.
Got it.
And then.
On the R&D.
What's the outlook for others coming online.
So the facilities.
In terms of the regulated utility we're going to continue to.
Push efforts there we can do another facility at our types of projects that we're evaluating now.
The focus for US settlement is to get as much decarbonize product as we can on our pipeline whether that's through.
Owning and building.
Or contracting so I think youll see more.
More areas there and then in our unregulated business, we continue to look for opportunities across the country.
Whether it's opportunities like our <unk> or greenfield or just buying facilities outright.
Got it.
That does it for me thank you.
Thank you Colin.
Thank you Barry no additional questions waiting at this time I would now like to pass the conference over to David Anderson for closing remarks.
Well. Thank you very much Joe Kido for for facilitating this and thank you everybody that was on the call as always if you have some investors have questions. Please reach out to Nikki and if youre going to be at the AGM financial Forum.
Later this month, we'd love to see you there. So please step in and if you need to set up an appointment call Nikki for that too.
That will conclude the call. Thank you.
That concludes the NW natural holding company Q1 2023 earnings call. Thank you for your participation you may now disconnect your lines.