Q2 2019 Earnings Call

Good day and welcome to the end, probably natural Holdings conference call and webcast all participants will be in a listen only mode.

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I would now like to turn the conference over to Nikki Sparley. Please go ahead.

Thank you Chantal good morning, and welcome to our second quarter 2019 earnings call. As a reminder, some of the things that will be said. This morning contain forward looking statements, they're based on management's assumptions, which may or may not occur. In addition, some of our comments today reference non-GAAP adjusted measures for a complete reconciliation of these measures and other cautionary statements refer to the language and reconciliation 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 5.37 to 125 30 News media May contact Melissa Moore at 5.3 to two zero 20 436 speaking. This morning are David Anderson, President and Chief Executive Officer, and Frank Rijkaard, Smyre, Senior Vice President and Chief Financial Officer, David and Frank have prepared remarks, and then we'll be available along with other members of our executive team to answer your questions.

With that I will 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 financial performance.

And then I'll wrap up the call with a look ahead.

We're halfway through the year and have executed very well on our growth initiatives and have posted strong financial results.

For the first six months net income increased 11 cents per share through $1.56 per share compared to $1.45 per share for the same period in 2018.

As previously discussed our this year's first quarter results included a onetime regulatory pension disallowance of 23 cents per share related to an Oregon Commission order.

Excluding that this allowance on an adjusted basis net income increased 34 cents per share or $10.4 million to $52.1 million or $1.79 per share for the first six months of 2019.

These results reflects new rates in Oregon and customer growth.

The regional economy continues to be good and the labor market remains strong unemployment levels in our service territory remain at historic lows.

After sept. After several years of exceptional growth the housing market remained steady in fact over the last 12 months, we could be connected more than 12400, new customers, resulting in a growth rate of 1.7%.

As previously announced in May we placed the north mist gas storage expansion into service. The expansion provides an innovative no notice service that supports Portland General electric as they manage the volatility of the electric grid and integrate renewables North mist is just the latest expansion in a 30 year history of developments at the mist storage field, what began with depleted reservoirs of the 19 eighties has grown into 20 billion cubic feet of storage with this 4 billion cubic feet addition.

MS delivers energy to our region at the most critical times with only a single pipeline serving the region. This facility is essential for reliable gas and electricity service.

Now an update on our Washington rate case, as you May remember, our Washington Service territory covers about 11% of our overall customer count or roughly 10% of overall revenues.

In May we filed a settlement with the commission, reflecting our agreement with all parties on almost all items. One party has disagreed on the decoupling methodology currently used by all other gas utilities in the state.

Under the all party settlement northwest Natural's revenue requirement.

Would increase $5.1 million and it's based on an ROE of 9.4% and a cost of capital of 7.2% rate base would be would increase by two bugs me increased $45.9 million to a total of $173.7 million. We expect an order from the commission. This fall with rates effective November onest with that let me turn it over to Frank to go over the financials, a little bit deeper Frank.

Thank you David and good morning, I'll begin with a summary of our second quarter and year to date reported financials, and then discuss our cash flows and guidance for the year.

As a reminder, northwest Natural's earnings our seasonal with the majority of revenues generated in the first and fourth quarters during the winter heating season.

Also notice that our effective tax rate was 23.4% for the second quarter slightly below our statutory rate of 26.5%. The main difference is a result of returning excess deferred income taxes related to tax reform to Oregon customers, We expect a lower effective tax rate to persist as we continued to provide these benefits to customers.

Ill describe earnings drivers on an after tax basis, using the statutory tax rate of 26.5%.

For the quarter, we reported net income from continuing operations of $2.1 million.

Or seven cents per share compared to a loss of $300000 or one cents per share for the same period in 2018.

The eight cents per share increase is comprised of 14 cents per share increase in the natural gas utility segment.

Partially offset by a six cents per share decline from lower asset management revenues at mist and higher non operating expenses associated with developing the water business.

In the natural gas utility segment margin increased $8.3 million, largely due to higher Oregon rates and strong customer growth, which collectively added $4.6 million storage revenue from the north mist expansion contributed an additional $1.6 million. In addition, lower environmental expenses, coupled with warmer weather contributed $2.2 million.

The 2.1 million dollar increase in other expense was offset by an increase in revenues. This is the result of the Oregon rate case, which froze the pension balancing account and increased customer rates to reflect current Fas 87 expense.

Interest expense increased $1.2 million, primarily from higher commercial paper balances this past winter.

On a consolidated basis year to date net income from continuing operations was $45.5 million or $1.56 per share compared to 41.

$41.7 million or $1.45 per share for the same period in 2018.

Excluding the $6.6 million pension disallowance adjusted year to date net income from continuing operations was $1.79 per share or an increase of 34 cents over 2018.

The 34 cents per share increase is comprised of 40 cents per share in the natural gas utility segment, partially offset by a 6% per share decline from lower asset management revenues and expenses associated with growing the water business.

In the natural gas distribution segment utility margin increased $22.9 million, largely due to higher Oregon rates and customer growth, which added $13.9 million.

Furthermore, gas storage revenues from the North mist expansion provided an additional $1.6 million.

Finally, as a result of the Oregon order margin increased $5.2 million with no effect on net income as offsetting the adjustments were recognized through expenses and income tax as disclosed in the first quarter.

Utility owned them and other expenses increased $20.3 million with approximately $18 million related to the Oregon rate case.

$4 million of the increase resulted from freezing the pension balancing account and is offset with higher revenues from customer rates $14 million of the increase was due to day one impacts of implementing the March quarter as described on the first quarter call.

As a result of the March order there are lots of moving pieces in the financials, but the underlying drivers are straight forward, we have new rates in Oregon and customer growth.

A few notes on cash flow for the first six months of 2019, the company generated $155 million in operating cash flow.

We invested $153 million into the business with $91 million used for gas utility capital expenditures and $56 million for water acquisitions.

On a net basis financing activities provided $47 million in cash for the first six months.

We issued $140 million of long term debt at the gas utility and another $35 million at northwest natural water.

In addition, we issued $93 million of equity in June .

We completed these financings to support our ongoing construction program at northwest natural repay short term debt balances and for general corporate purposes, our balance sheet remains strong with ample liquidity.

Moving on to 2019 financial guidance as you may recall from our first quarter earnings release, our GAAP earnings guidance from continuing operations for 2019 is expected to range from $2 in two cents to $2.22 per share.

Excluding the 23 cents per share disallowance, we remain on track with our adjusted earnings guidance from continuing operations in the range of $2.25 to $2.45 per share.

Guidance assumes continued customer growth average weather conditions and no significant changes in prevailing regulatory policies mechanisms or outcomes or significant laws or regulations.

Finally, this guidance excludes the expected gain.

Related to the sale of the Gill ranch storage facility and associated operating results. These items are reported in discontinued operations with that I'll turn the call back over to David for his concluding remarks, thanks, Frank turning now to the water side of the business. We hit an important milestone in may with the close and purchase of the Sun water Sun River water utility our largest water transaction today.

Sun River is one of the states or longest standing and oldest resort communities in central Oregon, our water utility and wastewater company their serve a combined 9400 connections. The acquisition is projected to be accretive in the first full year of operations in June we entered into an agreement to acquire our first municipally owned water and wastewater utilities from the Taylor Mountain water and sewer district, located near Idaho Falls. Although this is a small acquisition. It is a clear example of the benefits of our roll up strategy, while growing our existing footprint opportunities and other water sectors are unfolding that allow us to continue growing in a disciplined and measured manner.

Through water acquisitions like these were adding an earnings stream that has a low risk and strong cash flow profile much like our regulated natural gas utility. So far we've committed nearly $70 million of investment in the water sector and once we close all outstanding transactions will serve approximately 47000 people through 18000 connections in Oregon, Washington, and Idaho.

We're working on closing a few smaller water transactions and integrating all these businesses into our platform, we'll continue pursuing targets west of the Mississippi.

I remain very excited by the potential growth in this business.

As we've discussed before we have a commitment to help reduce greenhouse gas emissions emissions and the communities we serve.

Each year northwest natural delivers more energy in Oregon than any other utility gas or electric for a modest carbon footprint.

The use of natural gas in our customers' homes and businesses accounts for just 5% of Oregon submissions.

But we know we can do even better which is why we launched an initiative called our low carbon pathway and effort that includes a voluntary carbon savings goal of 30% by 2035.

We have identified new opportunities to reduce emissions using our existing infrastructure one of the most modern and tightest pipeline systems in the nation.

That includes working with customers on energy efficiency exploring cutting edge technologies like power to gas and including renewable natural gas in our supply mix.

Which is why we're excited that Oregon Senate Bill 98 was recently signed into law by our Governor Kate Brown.

This groundbreaking legislation creates a path for renewable natural gas to become an increasing part of the state's energy supply.

R&D is a zero carbon resource produced from organic materials, like food, agriculture, and forestry waste wastewater or landfills.

That can be added into the existing natural gas system.

All forms of R&D are supported in the law, including renewable hydrogen which can also be put into our system.

Since Bill 98 enables utilities to acquire R&D on behalf of Oregon customers and goes further than any other law by outlining goals for adding as much as 30% R&D into the state's pipeline system by 2015.

The law allows up to 5% of utilities revenue requirement to be used to cover the incremental cost of renewable natural gas.

Currently that equates to about $33 million annually for northwest natural.

Gas utilities are also allowed to rate base interconnections with the gas system and could include R&D facilities in rate base, if that is the lowest cost option for customers.

Besides reducing the carbon intensity of whats going through our pipes R&D as a great way to help our communities solve their waste problems and create a potential revenue source for them.

We believe there are many reasons to pursue our Angie and there is a good supply of it in fact, the Oregon Department of Energy released a report in 2018 that showed nearly 50 billion cubic feet of R&D technical potential and our state that's equivalent to all of Oregons annual residential gas throughput.

Next steps for the law include working with the Oregon Utility Commission in the coming months on the rulemaking process that process is expected to be completed by the summer next year.

While we are in the early stages of these initiatives I look forward to continuing to work with our regulators and other stakeholders on furthering these initiatives innovative solutions that provide climate benefits to our customers at reasonable costs.

In summary, we have made substantial progress on all major initiatives in the first half of 2019, we look forward to continuing to execute on our growth opportunities in the second half of this year and for years to come. Thanks again for taking time to join US This morning, and with that Sean tell I think we're ready to open up for questions.

Thank you we will now begin the question and answer session.

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At this time, we will pause momentarily to assemble our roster.

Thank you. Your first question comes from Sarah Akers Wells Fargo go ahead place rents are.

Hey, good morning.

Just a question on the cadence of EPS. This year looks like the midpoint of 19 guidance implies an annual increase of about a dime and as you said you are up 34 cents year to date. So order it would have been negative drivers in the back half of the year that are expected to drive EPS down over 20 cents or so versus last year second half.

Hi reserves Frank Good morning, Yeah, There's a couple of things that that are different this year than last year and.

One way to think about it is it with tax reform in the rate case last year. So until we got our rate case done it wasn't exactly clear how we would return the benefits of tax reform to customers over what.

Kind of phasing so in the third quarter when we got rates that we were able to finalize our or you know the credit back. So we had been reserving throughout the year or accruing throughout the year, our expectation, which met in fact, we had probably accrued a little bit faster that benefit to the customers in the first two quarters, and then were able to reverse some of that in the third quarter.

So our third quarter impact from tax reform was dampened last year versus this year. So we expect in the non heating quarters. This year to be normal and you'll see a greater effect from tax reform in the third quarter than you did last year.

In addition, you will recall that part of the rate case was that we reduced our sharing percentage on interstate storage. So last year in the second half and in between the Enbridge account of end to end up.

Better optimization opportunities for the customer we had a bit more interstates.

Storage benefit than we would expect this year.

And then finally, we just have some expenses that will come through it's not straight across through the year will be relocating to our new headquarters got to move some servers et cetera. So theres. Some additional expense in the second half that we didnt have in the first half and I'd say that really captures it but as you'll recall Q3 is our.

You know our absolute non heating quarter, and thus you really see the effect of the shaping of tax reform in the non heating quarters, and Q3 would be the big quarter for them.

Got it thanks, and then any updated thoughts on the timing of the next rate case filing in Oregon.

Yeah. That's a good question, we we completed the work has an Oregon last year.

And we are evaluating right now.

The next the next level rate case, we continue to make substantial investments into the system.

And are also looking forward in relation to what expenses look like et cetera, So probably have a little bit more information on that at year end or by year end, but at this point, we're in the evaluation mode right now.

Okay. Thanks, a lot.

Thanks Sarah.

Thank you. This concludes our question answer session I would now like to turn the conference back over to David for any closing remarks.

Joe and thanks, everybody for joining us this morning as always if you have any questions or follow up please reach out to Nicky.

And with that we'll conclude the call have a great day.