NWN
#Thanks, <UNK> and good morning everyone, and welcome to our second quarter earnings call, and my first call in my new role.
It is an honor to be speaking to you this morning as Northwest Natural CEO, and I am pleased and humbled to be the 12th CEO appointed by the Board.
I would like to take a moment and personally thank <UNK>g Kantor for his nearly 20 years of service and especially his leadership over the past seven and a half years as CEO.
He has been a great mentor, partner, and friend during this transition.
We all wish him the best in his well-deserved retirement.
Turning to the quarter, I'll start with some highlights and <UNK> <UNK>, our CFO, will cover the financials, and finally, I'll close with an update on our North Mist project.
Financial performance this quarter was steady with earnings per share at $0.07.
An uptick in our gas storage revenues and strong customer growth nearly offset the impact of extremely warm weather in the second quarter.
In fact, this quarter was our second warmest on record.
On a year to date basis, earnings per share was $1.40 per share.
That's up $0.28 over last year.
The major piece of this story was our environmental regulatory proceedings and the non-cash charges incurred in both the first quarter of 2015 and 2016.
While these charges were disappointing, we have begun collections from customers and believe the environmental mechanism provides a good path forward for all stakeholders.
This is even more critical as the EPA moves towards selecting an environmental cleanup plan for the Portland Harbor.
Currently, the EPA is targeting a decision by January next year.
Outside of the environmental charges, our year to date results reflect strong customer growth, cost of gas incentive gains, and higher gas storage results.
Now, moving to the economic indicators for our region.
Oregon continues to add jobs as the labor force grows.
In June, the labor force hit an all-time high of around 2.1 million workers.
The state has reached a milestone in terms of recovery and expansion.
In fact, Oregon has added enough jobs to regain all the losses during the great recession.
This was no small task.
In 2010, at the height of the recession, the gap between potential employees and available jobs hit 170,000 individuals or 10% of the workforce.
Today, not only have we regained those jobs, but more importantly, our job growth is keeping pace with our strong population growth.
Our service territory in Southwest Washington has also experienced a strong recovery.
As you know, job growth coupled with a strong housing market continues to signal a robust economy here.
Single-family construction permits rose sharply over the past 12 months, with a 21% increase in Oregon statewide permits and a 22% increase in the Portland/Vancouver metro area.
These were the highest increases in single-family building permits since June of 2007.
And over the last year, home sales were up about 11% of the Portland area, with average home prices increasing by about 9%.
We are seeing similar permit trends in our Washington service territory, where about 11% of our customers are located.
The expansion of the economy coupled with a very competitive price position drove customer growth.
In the past year, we have added over 10,500 new customers, which equates to a 1.5% growth rate.
A majority of this growth stems from new single-family construction, as well as a steady stream of conversions.
We now are honored to serve over 718,000 customers.
Combined with this healthy economy is a strong preference for natural gas.
In fact, a recent Market Strategies International Survey found in our market, nine out of ten homebuyers would pay $50,000 more for a home equipped with a natural gas heating and appliances, an amazing statistic, frankly.
A similar multi-family study showed 80% of Portland area renters paying average rent prices or above also prefer amenities such as cooktops, water heating, and of course fireplaces.
Whether renting or buying, consumers prefer natural gas for its affordability, performance, and efficiency.
In fact, our customers are paying less for their natural gas now than they did 15 years ago, another amazing statistic.
And recently, these low gas prices, coupled with the benefits from our asset management activities, allowed us to refund nearly $30 million to customers this summer.
With that, let me turn it over to <UNK> to cover the financial details for the quarter.
<UNK>.
Thank, you <UNK>, and good morning everyone.
Starting with consolidated results for the second quarter of 2016, we reported consolidated net income of $0.07 per share or $2 million compared to $0.08 per share or $2.2 million for the same period last year.
The quarter's results reflected utility customer growth and higher gas storage revenues, offset by an increase in O&M expenses, and a net decrease in utility margin from significantly warmer weather than the prior year.
For the first six months of 2016, we reported consolidated net income of $1.40 per share or $38.7 million, compared to $1.12 per share or $30.7 million for the same period last year.
Year to date results were largely driven by non-cash regulatory environmental charges.
As <UNK> mentioned, we worked through our environmental docket in 2015 and early 2016, which resulted in a mechanism that allows us to recover prudently incurred environmental cleanup costs, allocated to Oregon for our legacy manufactured gas plants.
Although virtually all the environmental costs were deemed prudent, the commission disallowed $9.1 million of after tax costs in 2015 due to over earning in years past.
An additional $2 million after tax in the first quarter of 2016 was also disallowed, primarily related to accrued interest on the original disallowance.
Excluding these charges, on a non-GAAP basis, net income was $1.47 per share or $40.7 million for the first six months of 2016, compared to $1.45 per share or $39.8 million for the same period last year.
This $0.02 EPS increase is the result of some larger offsetting drivers.
First, strong utility margin contributed $0.10 and our gas storage segment added $0.08 to net income.
These gains were almost entirely offset by a significant decrease in other income related to the 2016 environmental disallowance and equity earnings recognized in 2015 ---+ in the first quarter of 2015 ---+ that did not recur in 2016.
Shifting to our segment results, for the second quarter, the utilities segment net income decreased $1.7 million.
Based on a $1.3 million decrease in utility margin, a $900,000 increase in O&M expense, and a $700,000 decrease in other income.
The decrease in utility margin was driven by significantly warmer weather than last year, offset by customer growth, and rate based returns on certain tracked investments.
Total utility volumes delivered this quarter decreased 7% over the second quarter of 2015, due to the impact of 21% warmer weather than the prior year.
Utility margins are largely but not entirely protected from the impact of weather to the Company's weather normalization mechanism in Oregon.
We saw the benefits of this mechanism for the second year in a row, as the region experienced 42% warmer than average weather in the second quarter of 2016.
Utility O&M for the quarter increased $900,000, primarily reflecting higher contractor and professional service costs.
Utility other income decreased $700,000 as a result of lower interest earned on regulatory assets.
For the first six months of 2016, utility segment net income increased $5.8 million based on higher utility margins of $4.7 million and O&M expense decreasing $13.8 million.
These positive drivers were offset by other income decreasing by $8.5 million.
Utility margins for the year to date period reflected strong customer growth and rate-based returns on certain tracked investments, as well as an increase in gains from gas cost incentive sharing, as the Company and customers benefited from lower actual gas costs than prices set in the PGA.
Although weather for the six months ended June 2016 was comparable to the prior year, with only five fewer heating degree-days, deliveries increased 5% to the comparatively colder weather in the first quarter of 2016 during our peak heating season.
Utility O&M for the first six months decreased $13.8 million, primarily reflecting the previously mentioned $15 million environmental disallowance, offset by an increase in contractor and professional service costs.
In the second half of 2015, management instituted a number of temporary cost saving natures.
Through these targeted efforts, we reduced budgeted O&M levels by approximately $5 million or $0.11 per share last year.
We have been gradually resuming normal operating expense levels in the first half of the year, but expect to fully reach our footprints in terms of headcount and non-payroll costs by year-end.
As mentioned, utility other income decreased $8.5 million in the first six months as a result of the $2.8 million 2016 environmental disallowance, along with $5.3 million of equity earnings recognized in 2015 when we received the original order.
For the quarter, our gas storage segment net income increased $1.5 million, reflecting higher asset management and firm revenues at both our Gill Ranch and Mist storage facility.
Gill Ranch also had lower operating expenses as a result of lower power costs and managing the business to a lower cost structure at the end of 2015.
We also saved $400,000 in interest expense by redeeming the Gill Ranch note in the fourth quarter of 2015.
For the first six months, gas storage net income was $2.2 million compared to just $28,000 for the prior year.
We saw improvements in operating revenues at both facilities and a reduction in operating expenses at Gill Ranch.
Cash provided by operating activities increased $32 million compared to last year, primarily due to inflows from net deferred taxes, reflecting the extension of bonus depreciation and beginning cash collections under the environmental mechanism.
Cash used in financing activities increased $27 million.
As we leveraged our strong operating cash flows to reduce short-term financing by over $117 million in 2016, compared to a reduction in short and long-term debt of $84 million in the prior year.
Finally, the company reaffirms 2016 earnings guidance today in the range of $1.98 to $2.18 per share, which includes the $3.3 million pretax or $0.07 per share after tax charge from the January 2016 order.
Excluding the charge, on a non-GAAP basis, our guidance range is $2.05 to $2.25 per share.
With that, I'll turn the call back over to <UNK> for his concluding remarks.
Thanks, <UNK> and I'd like to close with a brief update on our North Mist Storage expansion project.
As you may remember, this project is an expansion of our Mist storage facility in Oregon and will provide storage services to PGEs generating plants at Port Westward.
The project includes a new reservoir, providing up to 2.5 billion cubic feet of available storage, an additional compressor station, and a new pipeline.
You may recall in April, we received approval for the amendment to the Mist site certificate from the Oregon Energy Facility Siting Council, better known as EFSC, which was a critical permit needed to move forward on the project.
In May, we launched an RFP to capture the best terms and pricing for the engineering, procurement, and construction portion of the project.
We received final bids in June and are working closely with PGE to evaluate proposals and select a preferred vendor.
We hope to finalize that selection soon.
At the same time, we are competing ---+ completing a full project estimate, including an update EPC contract, well drilling and financing costs, and obtaining a few final permits.
We continue to work closely with PGE to obtain a notice to proceed and anticipate a notice this fall, after receipt of additional permits.
Achieving that milestone will allow the project to remain on track for an in-service date during the winter of 2018/2019.
And finally, this morning, I would like to say it's a privilege to lead this 157-year-old company.
Like those before me, I am deeply committed to operating a safe and reliable system in an environmentally responsible manner, and providing exceptional service to our customers.
I am also dedicated to partnering with regulators to productively meet the energy needs of our communities while creating solid value for our investors.
I believe we are well positioned for the future and could not be more proud of our employees.
Their service ethic and unwavering commitment to the safe and reliable delivery of natural gas is second to none.
Thanks again for taking the time this morning to join us, and with that, Zelda, I'll open it up for questions.
Yes, <UNK>, we're always in discussions with customers and as you indicated, we're fairly short in our contract book.
So if there is any improvement in price, as we would hope to capture that.
As you saw spreads in the market this last year, they did increase.
Some of that might have been driven a little bit by Aliso Canyon, but a lot of it was probably more driven by weather and the front end of the curve dropping to the full storage prices.
Frankly, it's starting to look like that's setting up again of the coming year but who knows But we're in contact with all those individuals and nothing to report at this time in terms of additional contracts to ---+ as a result of that.
Our share was a little over 200.
I'm looking at my controller.
Sorry, you can't hear him.
Net book is around $200 million right now, <UNK>.
So remember, we have 16 Bcf out there and about five of that is for the interstate market.
And so as we go forward, there will be opportunities for other customers there.
But for related to the expansion, the 2.5 Bcf, right now that is solely for PGE and there's ability if others want to kind of sign up for it.
But at this juncture, they're the only customer that has signed up for it.
Good to speak to you this morning.
Environmental remediation charge ---+ we didn't have an environmental remediation disallowance, if that's what you're talking to.
That was recorded in the first quarter and it was a gross of $3.3 million, $2.8 million impacted interest expense and roughly half a million impacted our own end line.
And that's what was reflected in this quarter, the first quarter of 2016 when we received the final order on our environmental remediation.
And correspondingly, in the first quarter of 2015, we recognized a $15 million gross disallowance on environmental charges, $9.1 million after tax, with the issuance of the order in Q1 2015.
So we had, Q1 to Q1, we had charges of both in 2016 and 2015.
Does that answer your question.
Yes, we continue to ---+ we continue to have environmental expenditures each quarter, which are put onto our balance sheet and we recognize an interest or carrying cost on those on our balance sheet.
In addition, we are collecting in-rates currently charges environmental recoveries of our accrued balances of environmental each quarter, and you'll see that for the full year.
<UNK>, we've been accruing every quarter when the liability moves.
So what was really, even though we had to take some of the charges, as you pointed out, we now have a mechanism in place in Oregon for basically full recovery of our environmental cost.
The exposure would have (inaudible) that they're not prudent, just to be blunt, but that would be an issue that we would not ---+ we would anticipate not having.
But between a standard revenue addition each year, and then also there was a balancing account in case that revenue per year is not enough.
And so essentially, you get recovery fairly quick at the expenditures.
So it's overall positive for the Company and credit positive for the Company for us to be able to kind of ---+ to move forward on the environmental expenditures we have, and also have recovery of those as those move forward.
I guess the factors really are on re-contracting the facility at Gill Ranch, as well ---+ is your question focused on Gill Ranch or our storage segment in total.
So as you know, we have ongoing optimization activities and asset management activities that are 5 VCF of interstate storage (inaudible) missed.
So those can fluctuate with market demand over time but we generally recognize pretty sustained demand.
Pricing tends to be very good there.
We do have some long-term contracts there.
So the Mist doesn't tend to be volatile year-over-year or period over period.
Gill Ranch, as we've mentioned, tends to operate under shorter term seasonal contracts, which are renewed annually.
We have some ---+ a modest amount of multi-year or two year contracts, but we end re-contracting that regularly under shorter-term contracts.
And that will be subject to the impacts of the California marketplace.
<UNK> had mentioned that Aliso Canyon may be impacting demand for storage, as does weather, as the need for storage either increases or is impacted by weather and seasonal demand.
Well, <UNK>, I think any time you're a utility, you're directly tied to the service area that you have the obligation and honor, frankly, to serve.
And what I was trying to indicate is that the economic factors in the region are doing very well right now.
And that tends to be a fairly decent predictor of whether they're going to be building new houses, new multi-family type operations, whether new commercial type opportunities are coming.
No guarantees in life, obviously, as you go through this, but they're all positive indicators that typically means that the region is growing and therefore, that typically translates into customer growth.
<UNK>, this is <UNK>.
Nothing new on that front right now.
I will tell you we're making very good progress there.
I think Kim Heiting, our chief marketing officer, has done a fantastic job of just kind of identifying the opportunity here and working with the builders, getting awareness.
We have seen some increase in this market.
Haven't done anything on the regulatory front right now.
I think what's most important for us is to try to figure out if we can do this outside the regulatory environment, and then as we go forward, if we need to file a tariff to address some of the issues that we've talked about before, we will.
But right now, we're just focused on seeing if we can work directly with builders and trying to capture as much of that growth as we possibly can.
That is an area that is very important to us because what we're seeing going forward, especially with housing prices and rent prices, there's probably pent up demand for more multi-family.
So I'm very excited that we're addressing this market and I'm hopeful we can make a good stab at getting a large market share of that market too.
Well, thank you, Zelda.
I appreciate everybody joining us this morning.
If you have any questions, give <UNK> a call.
Otherwise, we'll talk to you soon.
Have a great day.
