Q3 2024 Northwest Natural Holding Co Earnings Call

Good morning and thank you all for attending the NW Natural Holdings Company third quarter 2024 earnings call.

Rika: My name is Rika and I will be your moderator for today.

All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.

Speaker Change: I would now like to pass the conference over to your host, Nikki Sparley, Head of Investor Relations at NW Natural Holdings. Thank you, you may proceed Nikki.

Nikki Sparley: Thank you. Good morning and welcome to our third quarter 2024 earnings call. As a reminder, some things that will be said this morning contain forward-looking statements. They're based on management's assumptions, which may or may not occur. For a complete list of our cautionary statements, refer to the language at the end of our press release.

Nikki Sparley: We expect to file our 10-Q later today. Following this call, a recording will be available on our website.

Nikki Sparley: 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 503-721-2530.

News media may contact David Roy at 503-610-7157.

Speaker Change: Speaking this morning are David Anderson, Chief Executive Officer, and Ray Kasuba, Senior Vice President and CFO.

Speaker Change: David and Rae 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 Anderson: Thanks, Nikki, and good morning, everyone. The company continues to perform very well, including having a strong third quarter. In 2024, we've been focused on executing on our capital investment plan, regulatory dockets, and growth opportunities with great success.

David Anderson: I'm happy to report the completion of our Oregon gas utility rate case and also the conclusion of three water and wastewater utility rate cases.

David Anderson: Today, I'll cover an update on the economy and the rate cases, Ray will provide an update on our financials, and then I'll close the call with an update on our growth opportunities.

Turning to a few comments on the economy.

David Anderson: Related to our Gas Utility Service Territory, Oregon's unemployment rate remains low at 4 percent, lower than the national average of 4.1 percent in September.

David Anderson: Single-family housing permits were up 13.1% in the Portland metro area on a rolling 12-month basis. Permits are a good indicator of potential future customer growth.

David Anderson: For September, unemployment rates in our water service territories were as low as 2.8 percent.

David Anderson: In six of the nine counties our water utilities serve, single-family building permits posted double-digit growth for the 12 months ended September 2024, compared to the same period in 2023.

David Anderson: Collectively, our gas and water utility customer base grew 1.9% over the last 12 months and topped $875,000 at September 30, 2024.

David Anderson: Moving to an update on our gas and water rate cases, our utilities have continued to make necessary investments in safety, reliability, and technology.

David Anderson: For our water and wastewater utilities, we continue to find these systems need substantial investments to meet current and increasing quality standards and support customer growth.

David Anderson: These are all reasons why, after careful consideration of the effect on customer bills, we decided to file rate cases for our gas utility in Oregon and a number of our water and wastewater utilities.

David Anderson: I'm happy to report we've worked collaboratively with stakeholders in these cases and received constructive orders in nearly all cases.

David Anderson: putting us on track for solid results going forward. That includes orders in three of our five water and wastewater rate cases. A particular note is the order approving the all-party settlements for our largest utilities in Arizona with new rates effective November 1st, 2024.

David Anderson: Concerning the Oregon gas utility rate case in October, the Commission issued an order approving the all-party settlements that we've discussed before.

David Anderson: Under the order, NW Natural's revenue requirement increased $93.3 million. That consisted of $83.7 million related to investments in the system and expenses and $9.6 million for increased depreciation.

David Anderson: The order also included a 50-50 capital structure, a return on equity of 9.4% and a cost of capital of approximately 7.1%.

rate base increase $334 million to $2.1 billion in total.

David Anderson: We're disappointed in the Commission's decision to require Northwest Natural to forego recovery of $13.7 million of rate base related to line extension allowances previously approved in past rate cases.

David Anderson: This will result in a $10.1 million after-tax non-cash disallowance, which will be recognized in our fourth quarter results.

David Anderson: During the quarter, we filed for our annual purchase gas adjustments in both Oregon and Washington, which updates rates for the projected gas costs for the coming year. The result is good news, a 9.4% decline for Washington customers.

David Anderson: In Oregon, the rate case combined with a decline in gas costs resulted in the average Oregon residential customer bill increasing a modest 4.7 percent. New rates went into effect on November 1st.

David Anderson: Overall, I'm pleased that residential customers across our service territory are paying less today for their natural gas service than they did 20 years ago.

David Anderson: With that, let me turn it over to Ray. Thank you, David, and good morning, everyone. I'll begin by discussing overall earnings drivers for 2024, highlights for the third quarter and year-to-date results, financing needs, and conclude with guidance.

Ray Kasuba: As a reminder, Northwest Natural's earnings are seasonal, with the majority of revenues and earnings generated in the first and fourth quarters during the winter and heating months.

Also, our segment reporting includes our natural gas distribution segment.

Ray Kasuba: The activities from Northwest Natural Water, Northwest Natural Renewables, Interstate Storage, and Third Party Asset Management revenues are combined outside of our primary segment and referred to as OTHER.

Ray Kasuba: Before I walk through detailed third quarter results, I wanted to emphasize a couple financial themes for 2024. As you may remember, 2024 is an investment year for us that is setting the stage for future growth.

Ray Kasuba: Our initial earnings guidance for 2024 reflected a combination of lag related to our capital investments and inflationary pressures that we are experiencing simultaneously.

Ray Kasuba: To resolve the regulatory lag, we filed an Oregon Gas Utility Rate Case.

Speaker Change: As David mentioned, the recent order for that case and new rates position us well to achieve our long-term earnings guidance.

Speaker Change: Now moving to third quarter results, which were stronger than we projected.

Speaker Change: Relative to last year, we reported a net loss of $27.2 million, or $0.71 per share for the third quarter of 2024, compared to $23.7 million, or $0.65 per share for the same period in 2023.

Speaker Change: Lower earnings at our gas utility drove consolidated results driven by regulatory lag on investments and inflation pressures.

Utility margin remained consistent with the prior year.

Speaker Change: Gas utility O&M increased 1.3 million dollars reflecting higher payroll and benefits costs from additional staffing in key areas and pay increases for union employees under the new contract that began on June 1st this year.

Utility depreciation and general taxes increased 3.6 million dollars.

Speaker Change: Other income and expenses net declined 4.6 million dollars mainly driven by lower interest income from a reduction of invested cash and higher pension costs.

Speaker Change: Our other businesses' net income increased $2.8 million due to higher gas storage revenues and higher water and wastewater utilities' net income compared to the same period in 2023.

Speaker Change: For the first nine months of 2024, we reported a net income of $33.9 million, or 88 cents per share, compared to net income of $49.2 million, or $1.37 per share for the same period in 2023.

Speaker Change: Lower earnings at our gas utility drove consolidated results with similar themes as we noted for the quarter. Regulatory lag on investments and inflationary pressures.

A few more details on gas utility results.

Speaker Change: Utility margin remains stable from last year with an increase of $900,000.

Speaker Change: Gas utility O&M decreased $2.5 million, reflecting lower employee benefit and contractor expenses related to cost savings measures, partially offsetting this with higher payroll and information technology costs.

Speaker Change: Utility depreciation and general taxes increased 8.1 million dollars due to higher property plant and equipment investment.

Speaker Change: Other income and expense net declined $12.6 million mainly from higher pension costs, but also lower interest income and equity allowance for funds used during construction.

Our other businesses had stable results year over year.

Speaker Change: We've remained disciplined in our approach to deploying capital and are focused on maintaining our strong credit ratings and a solid balance sheet.

Speaker Change: For 2024, cash provided by operating activities was $220 million. We invested $326 million into the business with the majority of the investments for safety and reliability projects in our regulated gas and water businesses.

These were planned and included in our rate case requests.

Speaker Change: I'm happy to report that we've completed our financing needs for 2024. Related to equity, we issued $90.4 million in 2024 through the ATM program to support the business. And we're done issuing through the ATM for the year.

Speaker Change: We see modest equity and debt financing needs in 2025, with equity issuances at a lower level next year compared to 2024.

Speaker Change: For long-term debt issuances, we expect to issue $60 million at the holding company and $75 million at the gas company in the coming 12 months.

Speaker Change: Part of the issuance at the gas company will cover a $30 million maturity in 2025.

Speaker Change: The company reaffirmed 2024 GAAP earnings per share guidance in the range of $1.94 to $2.14 and adjusted earnings per share guidance in the range of $2.20 to $2.40 on a non-GAAP basis, excluding the regulatory disallowance from the Oregon general rate case.

Speaker Change: Guidance assumes continued customer growth, average weather conditions, and significant changes in prevailing regulatory policies, mechanisms, or outcomes, or significant changes in laws, legislation, or regulations.

Speaker Change: We continue to target a long-term earnings per share growth rate of four to six percent.

With that I'll turn it over to David

David Anderson: Thanks, Ray. Now, a quick update on our growth opportunities. First, at Northwest Natural Water, we've closed the Putman Infrastructure and ICH acquisition, adding customers in Idaho, Oregon, and California.

David Anderson: Importantly, this acquisition provides a pipeline of growth, entry into the recycled water business, and brings Tom Putman to our team as president of Northwest Natural Water.

David Anderson: Moving to an update on Northwest Natural Renewables and our two landfill R&G facilities with EDL.

David Anderson: Both facilities are online and reached substantial completion in the third quarter. Under our agreement with EDL, we closed on the first project in September and expect to close on the second project by the end of the year. That sets us up well for 2025 and a full year of revenues and cash flows.

David Anderson: I want to emphasize our renewable strategy and these investments are not based off the RIN or LCFS credits.

David Anderson: The volumes from R&G facilities are contracted under long-term, primarily fixed-price offtake agreements that we have contracted with investment-grade counterparties.

David Anderson: We've had a strong year of execution and are well positioned to continue delivering on our financial and strategic objectives.

David Anderson: I am proud of the accomplishments across all three of our growing businesses.

David Anderson: To summarize, we've reached constructive completion of the Oregon general rate case. This was critical. The gas utility is on track to earn a strong return on its invested capital.

David Anderson: Second, the water and wastewater utilities have a robust growth trajectory with both organic and acquisition opportunities. Importantly for water, we've worked with regulators to recover crucial safety investments and provide a strong foundation for earnings.

David Anderson: And finally, I'm excited that Northwest Natural Renewable's first project is up and running, generating revenues and cash flows.

David Anderson: We've accomplished a lot in a short amount of time. I want to thank the team for all they've done here. They have worked hard to execute on the initiatives for 2024. Thanks for joining us this morning. With that, I'll open it up for questions. Operator?

David Anderson: Thank you David. We will now begin the question and answer session. If you would like to ask a question please press star followed by one on your telephone keypad.

Thank you. Thank you. Thank you.

David Anderson: If you change your mind at any time, please press star then two.

Speaker Change: We have the first question on the phone lines from Chris Ealinghouse with Seba Williamshank. Please go ahead when you're ready.

Hey everybody, and welcome.

Can you sort of...

Speaker Change: elaborate on the final order not only the disallowance give us any color you could give us there but

Speaker Change: In trying to interpret the margin from the case, obviously you can exclude the DNA component, but are there any other major sort of deductions from the revenue increase that are non-margin enhancing?

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Speaker Change: Some government affairs expenses that the commission was looking at and then also that line extension allowance that I mentioned in my prepared remarks, but other than that.

Speaker Change: Everything kind of came in place that was in line with the settlements, which included an increase in depreciation and amortization expense, which, as you know, is a cash flow impact, not necessarily an earnings impact. Is that responsive, Chris? Is that where you're going?

Chris Ealinghouse: Yeah, and you brought up the government affairs part. I actually was kind of happy with that given what the parties...

Chris Ealinghouse: positions where I could certainly see them take a more hardline tack on that. So, what was your impression of the sort of three-quarters recovery part of that?

Speaker Change: Well, obviously, we feel that we should have had all of it recovered. We tracked that time very carefully, you know, whether it's being charged to the holding company or the other subsidiaries. But in the end, Chris, you take what you can get here. So thank you.

Right.

Speaker Change: And as far as the disallowance goes, I sort of got where they were coming from in some ways.

Speaker Change: you know, a recoverable rate base item, does that tell us anything about where the Commission's at today and, you know, how do you adjust going forward?

Speaker Change: Yeah, it's a good question, Chris, and I will tell you that we were very disappointed.

Speaker Change: In that portion of the order, and especially looking back as you were referred to.

Speaker Change: You know, going forward, we're just going to have to make sure that we're putting processes in place that are very, very careful in terms of what costs come up about when we look at a line extension. And just so you know.

Speaker Change: When you look at a single-family household in a new-build situation, we tend to spend around $2,000.

Speaker Change: per household. The allowance now is going to be $1,440. So we just need to make sure that we absolutely are very tight to that $1,440 number so that we don't have this issue popping up. But I will...

Speaker Change: Reemphasize, Chris, I'm very disappointed in the commission. Number one, taking a stance, but also looking back as they did and we'll, we'll take that into account with things that we do going forward.

Speaker Change: in sort of their position there. Have you got any clarifying thoughts on, you know,

Thank you.

Speaker Change: Another good question, Chris. We had laid out in the filing that we would like to discuss going forward, having multi-year rate cases. We then

Speaker Change: very successful in Washington state on that regard. And it's proven beneficial not only to the company, but to the commission likes it too. We are still trying to interpret the order, Chris, to be very honest with you. And we'll talk to the commission on exactly what they would like going forward.

Speaker Change: It appears that they want to kind of study it further when you read the order, and we'll just have to kind of work through those processes as we continue to work with them to try to get to what we hope is ultimately multi-year rate cases being approved going forward.

Speaker Change: Okay, so you would agree that it was very unclear what they really want?

I would like more clarity, correct.

Thank you.

Speaker Change: The quarter was really strong in the other segment. Can you give us any color on what components were really good there? And was there any RNG contribution at all?

Yeah, let me turn it over to Ray.

Ray Kasuba: Yep, yep, you're right in pointing out the the other was was was stronger than the last year Q3. Majority of that is related to our storage operations as well as some favorability in water as well.

Speaker Change: Okay, great. All right, thanks for the details. I appreciate it, everybody.

Thanks Chris.

Hmm.

Speaker Change: Thank you. As a reminder it is staff followed by one to ask any questions and we now have Samer and Akyol with SIFO.

Thank you. Good morning.

Speaker Change: You characterized this as being an investment year, and so I'm really just sort of trying to think about next year and how you would think about that going forward in relationship to this year. Should we expect elevated capex again next year? Or should that maybe roll over?

Speaker Change: Yeah, so let me start, then I'll turn it over to Ray to kind of tackle the CapEx. This year, as you recall, when we released guidance earlier this year, was a little unique in terms of...

Speaker Change: the level of regulatory lag that we were experiencing, not only from the capital.

Speaker Change: infusion, a lot of it IT related which have shorter depreciation lives.

Speaker Change: but also the impacts of inflation. But on a capex basis, we still have a very strong...

Speaker Change: opportunities in frankly all of our segments and maybe I'll turn it over to Ray to kind of talk a little bit more about that going forward.

Ray Kasuba: Yeah, as you know, our historic practice is to provide guidance for the year in our February call, so you can expect more details there. I think you heard in our prepared remarks today

Ray Kasuba: A key piece of that, though, is that we reaffirmed our four to six percent.

Ray Kasuba: long-term EPS growth rate. However, from a CapEx standpoint, I think you can expect something pretty close to 2024 or maybe a little bit lower for 2025, but we'll provide more details on our next earnings call.

Speaker Change: Gotcha, and then can you just maybe discuss sort of the outlook for, you know, continued acquisitions on the waterfront?

Speaker Change: Yeah, we're still seeing quite a few opportunities. We're now in five states. Almost all of our activities has been focused on the private, six states, excuse me now, with entry into California, with on the private side of the equation. Maybe I'll just turn it over to Justin, give a little bit more color on what you're seeing out there.

Justin: Yeah, happy to answer that question. I mean, we continue to have a fairly robust pipeline of opportunities. It's a lot of smaller tuck-in acquisitions around our existing service territories. And as you know, those service territories have been expanding. So with that expansion, it opens up more opportunities to us.

Justin: So we'll continue to see a fairly steady, I think, run rate of smaller acquisitions on the water side.

All right, thank you very much.

Thanks, Alan.

Speaker Change: Thank you. I would like to now hand it back to David for any final remarks.

Thank you.

Speaker Change: Thank you all for joining the MW Net 2 Holdings Company 3rd Quarter 2024 Earnings Call. I can confirm today's call has now concluded. You may now disconnect from the call and please enjoy the rest of your day.