Q1 2024 Northwest Natural Holding Company Earnings Call
Hello, and welcome to the ends up being natural Holdings Company Q1, 'twenty 'twenty full islands co. My name is Natasha and I will be on what the right to such die. If you would like to ask a question on states co P. J site by pressing star one on your telephone keypad.
Now have the pleasure of pads and you I bet, you Hi, Nicky Nicky. Please go ahead.
Nicky: Thank you Natasha good morning, and welcome to our first quarter 2024 earnings call. As a reminder, some things that will be said. This morning contain forward looking statements that are based on management's assumptions, which may or may not occur for a complete list of cautionary statements refer to the language at the end of our press release.
Nicky: 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.
Nicky: 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 503, 70, 125, 30 news media may contact David really outside of those 3610 $71 57.
Nicky: He gave this morning are David Anderson, Chief Executive Officer, and Brody Wilson, CFO, Vice President Treasurer, and Chief Accounting Officer, David and Brody 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.
David Hugo Anderson: Thanks, Nikki and good morning, everyone. This morning, I'll walk through a few financial and economic indicators and some takeaways from our winter peak event that we experienced.
Voting will go through the quarters results and then I'll wrap up with an update on decarbonization activities in our water and renewables company to begin with our financial results are on track for the year and in line with our full year guidance that we issued in February we reported net income was $1 69 per share in the first quarter compared net income of $2.01 per share for the same peer.
David Hugo Anderson: Last year as discussed on the year end call in February results in 2024 reflect a combination of regulatory lag related to our capital investments and inflationary pressures. It's the reason we filed a mortgage on our rate case at the end of 2023.
First quarter 2024 results included higher pension depreciation and interest expense compared to the same period in 2023.
Related to our gas utility service territory, despite seeing some signs of softening Oregon's unemployment rate remains low at four 2% unemployment rates in our water service territories were as low as three 2% at our Rose Valley utility located just outside of Phoenix, Arizona.
Single family building permits posted double digit growth for five of the nine counties.
David Hugo Anderson: Our water utility serve for the 12 months ended March 2024, compared to the same period in 2023 population growth in 2023 was as high as four 7% in Texas, where our Blue Topaz utilities are based and two 1% growth in Yuma, Arizona, where our largest water utilities serve customers collectively.
Our gas and water utility customer base grew one 7% over the last 12 months.
David Hugo Anderson: Essential energy service to our customers at the forefront again this past winter.
David Hugo Anderson: Frigid temperatures severe wind and snow hit the Pacific Northwest region and for about a week in January our region and nation. We're reminded once again of the critical lifesaving energy the natural gas system provides and the long term energy reliability benefits our system delivers to the region northwest Natural's customers relied heavily on our system we hit on.
David Hugo Anderson: New peak day record on Saturday January 13th delivering 8 million kilograms of natural gas to sales customers. That's 100000 times more than our previous record set in December 'twenty, two and about double our average daily winter send out.
David Hugo Anderson: <unk> our own system gas storage facility delivered a new record volume that Sunny Saturday, providing our central support for our entire region's electric and gas energy systems throughout the event.
David Hugo Anderson: I am pleased to report that our employees rose to the occasion and ensure that our system performed well supporting direct use of natural gas in appliances like gas fireplaces water heaters and stoves and generators when the electric system was experienced wide experiencing widespread power outages.
David Hugo Anderson: The highest energy use our northwest natural delivered 55% more energy than local electric providers combined despite decades of investment in renewables the electric system for the United States sourced only 7% of its power that week from wind solar and hydro.
David Hugo Anderson: Climate policies will only be successful if we as a modern society understand and acknowledge the essential role of the gas system provides during these critical events.
David Hugo Anderson: Our disciplined investments in the systems over many decades have resulted in the safe transportation of affordable energy to homes and businesses today.
David Hugo Anderson: That's why we believe the two integrated systems gas and electric each doing what they do best is the right solution. It's the starting point for our climate strategy as we leverage our system already in place in new innovative ways to continue driving down emissions even further.
David Hugo Anderson: Voters in our service territory agree with US We survey voters the last five years commissioning the research through a respected independent firm.
David Hugo Anderson: And time again, the data shows that voters want a diversified set of energy solutions, citing reliability and affordability concerns for example, three out of four voters continue to be a natural gas system as essential. This has consistently been the view for the past five years with increasing concerned about power outages, 81% of voters.
David Hugo Anderson: Today say, we need both electricity and natural gas to reliably meet the energy needs.
David Hugo Anderson: We appreciate your voters increasing understanding of the essential role of natural gas system plays in an affordable reliable and Decarbonize energy system with that let me turn over to Brody to cover the financial.
Brody J. Wilson: Thank you David and good morning, everyone I'll begin by discussing overall earnings drivers for 2024 highlights for the first quarter results and conclude with guidance for the year.
Brody J. Wilson: 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.
Brody J. Wilson: Also our segment reporting includes our natural gas distribution or Mgd segment, and other which includes our Interstate storage services and asset management services northwest natural water northwest natural renewables and holding company expenses.
Brody J. Wilson: Before I walk through detailed first quarter results I wanted to outline a few of the financial themes for 2024 as you May remember 2024 is an investment year for us that is setting the stage for future growth.
While we continue to maintain strong credit ratings are solid balance sheet and an unchanged long term earnings growth outlook. Our earnings guidance for 2024 reflects a combination of lag related to our capital investments and inflationary pressures that we are experiencing simultaneously.
Brody J. Wilson: Our gas utility is making necessary investments in safety reliability and technology at record levels.
Brody J. Wilson: The regulatory lag associated with these investments is exacerbated in 2024 due to the increased level of investment and the shorter live nature of high or higher depreciation expense associated with cyber security and technology assets.
Brody J. Wilson: Second our gas utility is contending with inflationary pressures on operating expenses, primarily due to the renewal of several multiyear O&M contracts higher personnel costs.
Brody J. Wilson: Amortization of cloud computing technology investments and higher pension expenses.
Brody J. Wilson: Our team has instituted aggressive cost saving measures to do all we can to reduce costs and operate as efficiently as possible, while maintaining a safe and reliable system.
Brody J. Wilson: To resolve the regulatory lag we filed a gas utility Oregon rate case late last year, we expect new rates will go into effect November one.
Now moving to the first quarter results, we reported net income of $63 $8 million or $1 69 per share for the first quarter of 2024 compared to net income of $71 7 million or <unk> <unk> per share for the same period in 2023.
Brody J. Wilson: Lower earnings at our gas utility drove the year over year decline in results, which is primarily due to the regulatory lag on investments and inflationary pressures we discussed earlier.
Brody J. Wilson: Utility margin increased $5 million, primarily due to customer growth and the amortization of deferrals, partially offset by the effects of warmer weather and lower gains on gas costs.
Brody J. Wilson: Gas utility O&M decreased $3 million, reflecting lower benefit cost and cost saving measures.
Brody J. Wilson: Utility depreciation and general taxes increased $2 $1 million other.
Brody J. Wilson: Other income declined $3 $8 million, primarily driven by higher pension costs.
Brody J. Wilson: And interest expense increased $1 5 million.
Brody J. Wilson: Due primarily to incremental long term debt financing.
Brody J. Wilson: Our other businesses provided a net loss of $1 9 million, which was an increase of $1 6 million compared to the same period last year, primarily due to lower asset management revenues.
Brody J. Wilson: With the overall cost of capital increasing we've remained disciplined in our approach to deploying capital.
Brody J. Wilson: For 2024 cash provided by operating activities was $125 million, we invested $82 million into the business with the majority of the investments for safety and reliability projects and our regulated gas and water businesses.
These were planned and included in our rate case request, our objective remains to keep our balance sheet strong with ample liquidity. The company reaffirmed 2024 annual earnings guidance today for net income in the range of $2 20 to $2 40 per share Guy.
Guidance assumes continued customer growth.
Brody J. Wilson: Average weather conditions and no significant changes in prevailing regulatory policies mechanisms or outcomes or significant changes in laws legislation or regulations.
Brody J. Wilson: In our earnings release, we have also provided our expectations regarding the quarterly distribution of consolidated earnings.
Brody J. Wilson: We continue to target a long term earnings per share growth rate of 4% to 6% compounded annually from 2022 through 2027.
Brody J. Wilson: With that I'll turn the call back over to David.
David Hugo Anderson: Thanks Brody.
David Hugo Anderson: Turning to our gas utilities, we continue to work on de carbonization of initiatives.
David Hugo Anderson: Related to renewable natural gas, we issued a request for proposals in April to solicit offtake bids that RFP closes in mid may for hydrogen we have several pilots in motion first our project with modern hydrogen has been commissioned and is actively capturing carbon from our pipeline through our prior pyrolysis process. This solid carbon.
David Hugo Anderson: To assist with sequestered and can be used in secondary markets like asphalt for the production of tires will continue to test the equipment over the coming months to fully understand this technology next steps will include assessing applications for our industrial customers, who are eager to explore cost effective de carbonization solutions.
David Hugo Anderson: Right now our hydrogen blending project at our assured Sherwood operations and training center is demonstrating that the 20% blend level can be used without issue. We've been at this for a few years now testing hydrogen blends at different levels and all with positive results, which is important data to help us prepare for future opportunities for broader system blood.
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David Hugo Anderson: As we reported last quarter. We're also supporting the pilot project in Eugene, Oregon that will examine ground source heat pump systems, coupled with natural gas backup heating we view this as a great way to support peak heating needs, while reducing emissions.
David Hugo Anderson: Washington State Policymakers think this too in February of 2024 House Bill 21, 31 was passed supporting utilities, establishing thermal energy networks like brand source heat pumps with $25 million available to gas utilities to cover the incremental cost of the system I am pleased to see this level of support in the Pacific.
David Hugo Anderson: Northwest as a proving ground for innovative energy solutions.
David Hugo Anderson: We believe these kinds of hybrid solutions had great promise and we're excited to be at the forefront we will keep you updated on our progress.
David Hugo Anderson: Turning to water, we continue to execute on our growth strategy. While we continue to manage a robust acquisition pipeline. We are staying focused and disciplined as we seek the right opportunities to create value.
David Hugo Anderson: In 2024, we're also working hard to refresh rates at multiple water companies. So far for rate cases are in process, including for our largest utility in Arizona and we expect to file additional rate cases. Later. This year. These cases. These cases are mainly related to capital investments as we continue to find these systems need substantial investments.
David Hugo Anderson: To meet current and increasing quality standards and to support customer growth.
David Hugo Anderson: Moving onto renewables as you know through that business, we're focused on providing cost effective solutions to help over a variety of sectors decarbonize using existing waste streams and renewable energy sources. Our first project is an investment of two facilities with <unk> that is designed to convert Atlanta, Hawaii gases to renewable natural gas.
David Hugo Anderson: Construction was completed on both the facilities last year and the raw gas production is at the expected levels. However, there is a technical issue with the conditioning equipment. Our partners technical teams to lead new equipment will resolve this issue and are installing that right. Now testing then will be completed and if everything goes according to plan <unk> expects both facilities.
David Hugo Anderson: To be online and ready to begin commercial operations later this summer.
Finally, this morning, I'm proud of northwest Natural holdings being named one of 2024 world's most ethical companies by Ethisphere for the third year running.
David Hugo Anderson: This reflects our longstanding commitment to leadership and business integrity through best in class ethics compliance and governance practices.
Northwest Natural holdings is one of only eight honorees in the energy and utilities industry and all 136 honorees will recognize spanning 20 countries in 44 industries and.
In conclusion your company is financially strong and will continue working on your behalf to execute on the opportunities across all of our businesses. So thanks for joining us this morning, Natasha when you're ready, we'll open it up for questions.
Natasha: Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
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Speaker Change: We will take off last question from Selman <unk> of Stifel.
Speaker Change: Your line is now ask Anthony go ahead.
Thank you good morning, Kelvin looking forward looking forward to seeing you guys at HCA.
Selman: Just two quick questions for me since we're going to be getting together, but just can we go back to the other income or expense.
Selman: Im looking at this and probably for Brody.
Anthony: A loss of $1 $1 million can you just go through that a little bit on what impacted that.
Speaker Change: Sure if you're looking quarter over quarter or if you are looking at the 12 months.
Speaker Change: A couple of things hitting that line item. So on the 12 Rolling 12 months that you might see in the earnings release in that number would have been the gains we had in closing out the sale of our.
Speaker Change: Gill Ranch settlement that we had hit us in Q2 of last year, and then on a year over year period here. Some of those other income costs for us include.
Speaker Change: Some of that.
Speaker Change: Water operating cost don't.
Speaker Change: Fall into O&M can flow through there so some of the.
Speaker Change: Cost around handling some of the water.
Speaker Change: Wastewater there as well.
Speaker Change: And then we had some pension costs flowing through that number as well. So I think the biggest movement quarter. If you do Q3 Q1 to Q1 is going to be pension driving that number for us this year and we kind of highlighted that as one of the factors impacting overall earnings for 2024 is pension <unk>.
Speaker Change: Going up for the year.
Speaker Change: Got you so thinking about that similar then into Q2 and Q3 before you get some rate relief in Q4.
Speaker Change: I think that's fair yes.
Speaker Change: Fair statement, Okay, alright, great.
Speaker Change: Then.
Speaker Change: David for you and I just wanted to.
David Hugo Anderson: Maybe you could just talk a little bit about.
David Hugo Anderson: How the conversations went with S&P.
David Hugo Anderson: I guess the downgrade on the outlook.
David Hugo Anderson: Could just.
David Hugo Anderson: Talk a little bit about that.
David Hugo Anderson: Yes, I'll, probably turn it over to Brian, but I will tell you our relationships with both agencies that we use S&P and Moody's are good we have very fulsome discussions with them at least twice a year and they are in contact with Brody and Nikki on a regular basis Brody why don't I turn it over to you to give a little bit of background on the move that S&P made at the holding company level. Yes. Thanks for the question So youll recall.
Brody J. Wilson: Last year, we got the holding company rated for the first time by S&P and at the time got an a plus rating at the holding company, which matched our gas utility and gave a negative outlook overall to both businesses. So they have been watching that our overall consolidated <unk> to debt number.
Brody J. Wilson: Or what's sort of at their threshold level right around that 13% I think it fell slightly below on a consolidated basis at the end of last year. So they were looking at that closely.
Brody J. Wilson: Ultimately they decided to downgrade the consolidated holding company.
<unk> held the gas utility steady and in fact put the gas utility on stable outlook moving forward. So we maintained our a plus rating with S&P at the gas utility they did drop the holding company down to a and kept it on a negative outlook and that's really this financial metric pressure that we have there with some of the data.
At the holding company on a consolidated basis, but continue to have really good conversations with them felt like their view on our gas utility was really strong and we saw that reflected in the stable outlook and the maintaining of the rating at the gas utility level.
Brody J. Wilson: It's fair to say, it's not unusual to have the holding won't be one notch below.
Brody J. Wilson: Also.
Speaker Change: Yes, okay, great I appreciate that and look forward to seeing you guys here shortly.
Speaker Change: Thanks Selman.
Speaker Change: We have nice I have a question I would like to turn the call back to David.
Well, thank you Natasha and thank you everybody for joining us and as someone with just indicated here in a couple of weeks, we'll we'll see hopefully a lot of you down in California at the American Gas Association Financial Forum do you have any questions reach out to Nikki otherwise, we look forward to seeing you there or catching up with you in the future.
Speaker Change: Great day everybody.
Speaker Change: This concludes today's call. Thank you for joining you may now disconnect your lines.
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Speaker Change: Okay.