NWN
#Thanks, <UNK>, and good morning, everybody.
I'll start today with highlights from the quarter and then turn it over to <UNK> to cover our financial performance.
And then finally, I'll wrap up the call with an update on some of our key projects.
2017 is off to a good start, and our financial results were solid, and operationally, we are making significant headway on our objectives.
For the first quarter, net income increased $3.7 million to $40.3 million.
The utility performed well due to customer growth and the effects of colder weather.
Our region is also off to a good start this year from an economic standpoint.
We continue to see growth and outpaced the nation on many fronts.
Unemployment numbers were favorable, with Oregon posting the lowest monthly unemployment rate since 1976 at 3.8% in March.
This compared favorably to the U.S. national monthly unemployment rate of 4.5%.
Average unemployment numbers in our major population centers, which is mainly Portland and Vancouver, have remained low at 4.5% over the last 12 months.
During that same period, construction in the Portland-Vancouver area was down, with a 5% decrease in single-family permits, but overall remains strong on the heels of a healthy 2016.
In fact, the metro areas posted the highest number of total residential permits issued, that includes both single-family and multi-family permits, since 2007.
Although home sales were down about 4% for the last 12 months after a peak early in 2016, average home prices in the Portland area increased by about 12%.
In our Washington service territory, home sales were up year-over-year, with an increase of about 4%, and home prices increased 13%.
All of this translated to continued, strong customer growth, with the addition of over 12,000 customers in the past year and a growth rate of 1.7%.
As our region and customer base continues to grow, we are focused on several capital projects to ensure the safety and continued reliability of our distribution system.
Our liquefied natural gas facilities at Newport and here in Portland are essential to operations during peak heating days, like the ones our territory experienced this past winter.
A few years ago, we began making improvements in these facilities, and we expect them to be complete next year, with a total investment of about $35 million.
As you may remember, in Clark County, Washington, we had been adding high-pressure distribution lines over the last couple of years to support customers in our fastest-growing community.
We expect to complete our $25 million upgrade in 2019.
This past March, the Oregon Public Utility Commission issued an order after months of collaboration with natural gas utilities in Oregon.
The order allows utilities to request tracker mechanisms for specific investments related to safety.
The order provides high-level guidelines for these requests in the commission's key objectives.
While the order does not guarantee programs would be approved or investments would be tracked in, this framework is an important step in continuing to thoughtfully prioritize safety and reliability investment.
NW Natural, with the support of the Oregon Public Utility Commission, has a legacy of integrated safety programs that have allowed us to ensure the integrity of our distribution system and transmission assets, including the removal of all the cast iron and all the bare steel from our system, making our system one of the most modern in the country.
We look forward to working with the Commission on these programs in the coming months.
Now with that, I'll turn it over to <UNK> to cover the financial results for the quarter.
<UNK>.
Thank you, <UNK>, and good morning, everyone.
I'll start this morning with the quarter results and wrap up with a brief review of cash flows and 2017 guidance.
For the first quarter of 2017, we reported net income of $40.3 million compared to $36.6 million for the same period last year for an increase of $3.7 million.
Results were driven by a $4.3 million increase in utility segment net income, offset by a $700,000 decrease in our gas storage segment.
The utility's strong results reflected a $5.5 million pretax or $3.3 million after-tax increase in margin and a $3 million pretax or $1.8 million after-tax increase in other income, mainly due to the noncash charge taken in 2016 as we closed the environmental cost recovery docket.
These items were offset by higher O&M expense.
The $3.3 million increase in utility margin reflected customer growth and the effects of colder weather.
In total, deliveries increased 26% due to customer growth and colder-than-average weather, with record-breaking precipitation in February and above-average rain in March.
This compared to a warm first quarter in 2016.
Offsetting these positive factors were lower comparative gains from our gas cost incentive sharing in Oregon.
The company and customers continue to benefit from lower actual gas costs than prices set in rates, although the spread has narrowed this year.
For the quarter, our gas storage segment net income decreased $700,000, reflecting lower asset management revenues from Mist as well as higher expenses at Gill Ranch for routine periodic pipeline and compressor maintenance.
We have contracted both our Mist and Gill Ranch facilities for the 2017-'18 gas storage year, which began on April 1.
Our Mist facility remains under long-term contracts at similar prices to prior periods.
At our Gill Ranch facility, we contracted about half of the capacity in firm contracts at slightly higher prices than the prior gas storage year.
But overall, prices have remained below historic level.
The remaining capacity at Gill is under asset management agreements with a third-party and will be subject to market pricing.
For the Gill Ranch facility, we are closely watching for the final gas storage regulation from the Division of Oil, Gas, and Geothermal Resources to be issued, which will help us further assess the cost required to comply with the new regulations and our future investment in this asset.
Moving briefly to cash flows.
For the first quarter, the company generated $145 million in operating cash flow from higher customer receipts due to colder weather, offset by higher gas purchases and income tax payments.
We invested $39 million in capital expenditures, reduced short-term debt by $53 million and paid dividends of about $14 million.
Moving to 2017 financial guidance.
We continue to expect capital expenditures in the range of $225 million to $250 million for 2017, including $80 million to $90 million associated with our North Mist expansion.
The company reaffirmed 2017 guidance today in the range of $2.05 to $2.25 per share.
Guidance continues to assume customer growth from our utility segment, average weather conditions, slow recovery of gas storage market and no significant changes in prevailing regulatory policies, mechanisms or outcomes or significant laws or regulations.
With that, I'll turn the call back over to <UNK> for his concluding remarks.
Thanks, <UNK>.
Last year, we engaged in a comprehensive, strategic planning effort for our utility business.
That effort continued to emphasize our commitment to safety and reliability as our top priority.
It also resulted in the development of 5 core strategies that will shape our focus in the coming years.
They include continuing to provide superior customer service and meeting the evolving needs and expectations of our customers; enabling core utility growth; furthering a constructive regulatory agenda; continuing to attract and retain a talented workforce; and effectively positioning our company for a low-carbon future.
As part of that strategy work, we've had a team focused on identifying new areas where we can proactively reduce emissions.
We're calling this our low-carbon pathway initiative, and one area of focus is putting our pipeline system to work in new ways.
To that end, I'm excited to report that in April, we announced our first renewable natural gas project for the city of Portland, what the city announced as its single largest climate action project to date.
For its part, the city will build a renewable natural gas production facility to recover, convert and claim biogas from the city's largest wastewater treatment plant to our pipeline quality standards.
Once clean, the renewable natural gas will be delivered through NW Natural's existing pipeline system to serve heavy-duty vehicles.
Under the agreement, NW Natural will build and maintain the compressed natural gas vehicle fueling station, allowing us to earn a regulator return for that investment under an existing tariff.
We expect the station to be operational by the end of 2017.
While our investment will be modest for this initial project, it is noteworthy due to its aggressive reduction in greenhouse gas emissions.
In fact, the city notes this single project will cut emissions by 21,000 tons annually.
We are proud to be helping our city close the loop on waste and take advantage of our modern distribution system in new and exciting ways.
It's our hope that this is the first of other renewable natural gas projects to come.
Finally, let me give an update on our North Mist Expansion Project.
As we discussed, the North Mist project will support grid reliabilities by supplying innovative, no-notice storage service to Portland General Electric that can be drawn on at any time, balancing the variability of additional renewable power on the electric system.
The estimated cost of North Mist is $128 million, and includes development of a new reservoir of 2.5 Bcf, a compressor station and pipeline.
In the first quarter, we finished construction of the primary well pad and cleared the compressor station site.
We also received a crucial approval for delta pressure from the Department of Geology and Mineral Industries, allowing us to store the necessary amount of natural gas in the reservoir.
In the coming months, we will build ---+ we will be drilling the remaining wells and constructing the compressor station and pipeline.
We expect most of the construction on the project will be complete this year, with plans for it to be in service for the winter of 2018.
When the expansion is placed into service, the investment will immediately be rate-based under an established tariff schedule that has already been approved by the Oregon Public Utility Commission.
Overall, I feel very good about the opportunities in front of us.
We remain focused on working with policymakers and customers to continue providing value for both our communities and investors.
Before we take questions, I would also like to say how pleased I am to have Frank Burkhartsmeyer join our executive team as Senior Vice President and Chief Financial Officer on May 17.
Frank comes to NW Natural with a wealth of experience in the energy industry and an impressive and varied career.
Most recently, Frank was President and CEO of Avangrid Renewables.
I am confident Frank will be a great addition to our team.
I would also like to thank <UNK> for all of his work as Interim CFO these past months, and congratulate him on his promotion to Vice President and Treasurer, in addition to his roles as Controller and Chief Accounting Officer.
Thanks again for taking time this morning with us.
And Ryan, we'll open it up for Q&A at this point.
Yes, it's a good question, <UNK>.
The North Mist is a wonderful asset in the Northwest.
As you know, there's not a lot of underground storage in Northwest.
So to have an ability for us to expand and provide additional storage, you have the scarcity value.
So it's all about location, location, location.
So North Mist is one of those opportunities.
Gill Ranch is in a little bit of a different situation.
Obviously, the Northern California market right now, if you look at them, the market numbers that the markets are charging for storage, it's indicating we're in an oversupplied market.
I think you know our thesis has been long-term, that California, as they continue to add more and more renewables, will need additional gas storage to kind of balance.
But at this juncture, the market is clearly telling all of us we're oversupplied.
We'll see what happens going forward along that front.
We've got a lot of things that are changing in the California market.
We've got the new regulations coming out that <UNK> referenced.
The DOGGR regulations are going to be coming out.
We'll have to see how the market prices those and what happens there.
And then I think we're also going to be hopefully learning information this week from PG&E.
They're having a public meeting about storage in their rate case dynamics.
So maybe there'll be some additional information that will be coming out of that meeting that will be beneficial or, at least, help identify the area.
But with the North Mist project, it's about location, location, location.
So I think that asset is perfectly positioned, not only for this opportunity, but maybe even opportunities in the future.
With Gill Ranch, we're just going to have to see the supply of storage or the demand for storage go up, in my opinion.
No, it's actually a little bit less, <UNK>.
When we're in this kind of variable pricing market that we're in, when we look at contracting, first off, most of our contract in the short term in nature.
Anyways, we've got a couple that are very long-term contracts, but we ---+ the bad news is we're in an oversupplied market, which is dropping pricing.
So we want to make sure that we don't contract that in for the long term.
So last year, we actually contracted a little bit larger capacity still in short term.
What we're doing this year is we're holding a little bit back for our optimizer to take advantage of the markets.
So we're hoping that the results will be a little bit better as a result, but it's a little bit less than it was last year.
Well, thanks, Ryan.
This is <UNK>.
Thanks, everybody, for joining us this morning.
If you have some other questions, give <UNK> a call, and we will hopefully also be seeing a lot of you here in a couple of weeks at the AGA Financial Forum.
So let us know if you need to meet with us.
I think we've got a pretty full schedule right now, but we'd be happy to see if we can do something.
Again, thanks, everybody, and have a great day.
