NWN
#Thanks, <UNK>.
Good morning, everyone, and welcome to our fourth-quarter and year-end earnings call.
I will start today with highlights from the year, and then I will turn it over to <UNK> <UNK> to cover our 2015 financial performance.
Finally, I will wrap up the call with a look forward.
In 2015, Northwest Natural successfully navigated a number of challenges, while still achieving our key financial and operational goals.
Our financial challenges came early in the year, with Oregon experiencing the warmest winter on record.
The impact was substantially mitigated by our weather normalization mechanism, which has been in place since 2003.
However, we experienced lower volumes and revenues, as about 20% of our customer base is not covered by the mechanism.
In addition, in February 2015, the Oregon Commission approved a mechanism that allows us to recover prudently incurred environment clean up costs allocated to Oregon, associated with our historic manufactured gas operations.
We began collection of our environment expenditures through this mechanism, known as the SRRM, in November of last year.
However, as part of the February 2015 order, the OPUC disallowed environmental expenses totaling $15 million, based on the application of an earnings test for past years, when the Company earned above its allowed rate of return.
As result, we took an after-tax charge of $9.1 million in the first quarter of 2015.
In response to the warm winter, and the disallowance, Management instituted a number of temporary cost-saving measures.
Through these targeted efforts, we reduced budgeted O&M levels by approximately $5 million, or about $0.11 per share.
And I am proud of our employees, whose hard work and commitment allowed us to accomplish this, while still remaining dedicated to exceptional service and safety.
Despite the financial headwinds, our core utility performance remained solid, with higher margin and continued customer growth.
Part of this performance stems from the strength of our region's economy, and you can see that strength in a number of trends, including in-migration and housing growth.
Oregon is experiencing strong population gains, particularly attracting college-educated workers between the age of 25 and 34.
In fact, Oregon ranks sixth in the nation for in-migration of degree holders was are beginning or mid-career.
These young, working age households are considered vital for both regional economic development and longer-term growth.
In the last year, average monthly employment in the Portland/Vancouver Metro area increased by about 35,000 new jobs, equating to an annual employment growth rate of 3.2%, which exceeded the average national rate by more than 1%.
Over the last 12 months, the unemployment rate in the Portland and surrounding Metro areas fell 100 basis points, to 5.3%.
We are also seeing strong housing growth in the Portland/Vancouver area, with a 25% increase in single-family building permits in the last 12 months.
And in the last year, home sales were up about 20% in Portland, and average home prices increased by 6.5%.
In Clark County, Washington, where about 11% of our customers are located, home sales were up 19% for the year, and average home prices were up 8.6%.
All of these factors contributed to a fast-growing Oregon economy.
In fact, Oregon's economic health index rose the most in the nation, through the first three quarters of 2015, according to the latest Bloomberg Economic Evaluation of States report.
These are all good signs our economy continues to move in the right direction.
On the operations front, we had an excellent year, with a continued focus on safety and reliability.
We hit a milestone in the fourth quarter, when we removed the final known bare steel pipe from our distribution system, making our system one of the most modern in the nation.
This achievement was supported by trackers established with the help of the Commission more than three decades ago.
In 2015, we once again reached our emergency response goals of answering 90% of emergency calls within 10 seconds, and responding to damage and odor calls, on-site, within 30 minutes on average.
During the year, we also began several multi-year infrastructure projects, to ensure the continued reliability of our system, and to support customer growth.
These ongoing investments include improvements totaling $25 million at our Newport LNG facility, to modernize that plant.
And $25 million of upgrades are being made to our system in Vancouver, Washington, also over the next several years, to increase pressure levels to support our service territory's fastest growing community.
Safety and reliability, coupled with affordability, making natural gas a very competitive fuel source.
In 2015, we were able to strengthen that position by reducing residential customer rates in Oregon by 7%, and by 14% in Washington.
This rate reduction was a reflection of the lowest natural gas commodity prices we've seen in 15 years.
And finally, for the sixth time in nine years, we posted the highest score among large gas utilities in the West, in the 2015 J.
D.
Power Residential Customer Satisfaction Study.
This also marked the eighth time in nine years of ranking among the top two highest satisfaction scores in the nation.
These results reflect our continued commitment to operate reliably, safely, and with high-quality customer service in the communities we serve.
With that, let me turn it over to <UNK>, to cover our financial results and provide the 2016 guidance.
Thank you, <UNK>g, and good morning, everyone.
Today, I will start with a review of the fourth-quarter results, followed by a discussion of our annual performance, and close with 2016 earnings guidance, including key assumptions for the year.
For the fourth quarter, we reported improved consolidated results, with net earnings of $1.08 per share, or $29.7 million, compared to $1.04 per share, or $28.5 million, for the same period last year.
Consolidated results were driven by higher utility margin and other income, partially offset by increased O&M expense.
Looking at our segment results, for the quarter, our utility segment net income increased $1.1 million, based on a $2.6 million increase in utility margin, and a $1.8 million increase in other income, offset by a $2.4 million increase in O&M expense.
The utility margin ---+ the increase in utility margin was predominantly driven by customer growth, with over 3,300 new meter sets installed in the fourth quarter, which is nearly 1% higher than the prior year.
In addition, utility margin benefited from the gas cost sharing gains, as a result of lower actual gas prices than rates in Oregon ---+ in the Oregon purchased gas adjustment mechanism.
Utility O&M for the quarter increased, primarily reflecting higher incentive compensation, retirement and healthcare costs.
During the quarter, our gas storage segment earnings improved slightly, reflecting some positive trends.
Our Mist gas storage facility continues to perform well, and operating results remain strong and comparable to the prior year.
Gill Ranch realized an uptick in revenues, reflecting higher contract prices for both firm and optimization contracts.
Additionally, operating expenses decreased, as we managed the business to a lower cost structure, which we expect to benefit from in 2016.
Also in December, we redeemed the remaining Gill Ranch note, prior to its November 2016 scheduled maturity.
Turning to our annual consolidated results, net income was $1.96 per share, or $53.7 million, compared to $2.16 per share, or $58.7 million, in 2014.
As previously discussed, the Company recognized a non-cash, after-tax $9.1 million environmental disallowance, related to the February 2015 SRRM order.
This charge was reported as O&M expense in the first quarter of 2015.
Excluding this charge, consolidated earnings were $2.29 per share, or $62.8 million, an increase of $0.13 over 2014.
Annual results were largely driven by higher utility margin and other income, offset by increased O&M expense.
For the year, utility net income increased $3.9 million, excluding the impact of the $9.1 million charge.
Higher net income was largely driven by a $5.3 million increase in utility margin, a $6.6 million increase in other income, and a $2.4 million decrease in interest expense.
Offset by a $7.2 million increase in O&M expense, and a $1.8 million increase in depreciation expense.
In November, we began collecting revenues from customers through the environmental mechanism, or SRRM.
For 2015, these collections totaled $3.5 million, and are included in operating revenues, with the corresponding offset for the amortization of environmental regulatory assets.
For the year, utility margin increased, primarily driven by strong customer growth, with the addition of more than 9,700 customers, and gains from our gas cost incentive sharing mechanism.
These increases were offset by lower margin from customers not covered by weather normalization, as the region experienced exceptionally warm weather.
The $6.6 million increase in utility other income was primarily due to the recognition of equity earnings on deferred environmental expenditures, as a result of the February 2015 order.
Excluding the regulatory disallowance, utility O&M expense increased over last year, primarily due to an increase in compensation and benefit expense, which included higher employee incentive compensation, retirement and healthcare costs, as well as a new union labor contract that was effective June 2014.
In addition, non-payroll expense increased from higher professional service and the insurance costs.
In the second half of 2015, management implemented a number of temporary cost saving initiatives, to mitigate the unplanned effects of warm weather and the disallowance.
These targeted initiatives resulted in approximately $5 million, or $0.11 per share, of O&M savings.
While these measures helped the Company meet its 2015 financial targets, they're unsustainable, and we do not plan to continue them in 2016.
Utility interest expense decreased $2.4 million over the last 12 months, with the redemption of $40 million of debentures, without re-issuance.
For the year, net income for gas storage improved, mainly due to a reduction in operating expenses, reflecting lower repair and power costs at our Gill Ranch facility, as well as permanent expense savings I previously mentioned.
Despite improvement in the fourth quarter, gas storage annual operating revenues declined, as a result of higher contracted storage prices in the first quarter of 2014.
In addition, interest expense increased, reflecting the early redemption of the Gill Ranch note.
Cash flow from operating activities declined $31 million compared to last year, due to over $100 million of environmental insurance recoveries in 2014, offset in part by the decrease in cash flows, from changes in deferred gas cost balances.
Now, I would like to briefly mention two regulatory updates.
In January 2016, we received an order from the OPUC resolving all open matters in our SRRM docket.
The order confirmed recovery environmental costs allocable to Oregon rate payers under the SRRM, and disallowed interest earned on the original $15 million charge from the February 2015 order.
As a result, we recognized a non-cash $3.3 million pretax charge in January 2016.
Also, we continually assess our business and economic environment, to determine the need for future rate cases.
Based on rate-based growth since our last Oregon rate case, in November 2012, and increases in operating expenses, we are evaluating the need to file an Oregon general rate case within the next 12 to 24 months, and a potential Washington rate case some time thereafter.
Moving to 2016 guidance, capital expenditures are expected to range from $155 million to $175 million, including approximately $15 million of capital expenditures associated with our North Mist expansion.
For the five-year period ending 2020, we estimate utility capital expenditures to range from $850 million to $950 million, excluding any potential future gas reserve investments.
This range also includes $125 million of CapEx for our North Mist expansion.
At this time, we expect cash savings from the extension of bonus depreciation to total approximately $90 million through 2019.
We are evaluating the impact of this extension on the mix and profile of our investments.
Our CapEx range does not include any potential additional capital investment that may result from this evaluation.
We currently do not anticipate the need to issue equity until 2018, with the completion of our North Mist expansion.
In addition, we are utilizing open market purchases for a dividend reinvestment program, as well as certain share-based compensation programs.
The Company initiated 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 after-tax, charge from the January 2016 order.
Our adjusted guidance range, excluding the charge, is $2.05 to $2.25 per share.
With that, I'll turn it back over to <UNK>g for his concluding remarks.
Thanks, <UNK>.
As we turn to 2016, we continue to focus on our regulatory agenda, and on growing our Company.
On the regulatory front, we were pleased to reach conclusion on the implementation of our environmental mechanism, with the Commission's order this January.
Although the additional charge in 2016 is disappointing, this was a complex docket, and we believe the mechanism provides a good path forward for all stakeholders.
This year, we will continue working with the Commission, and other gas utilities in Oregon, on the policy docket exploring commodity hedging.
This includes what role gas reserves could play in a balanced natural gas supply portfolio.
We've also been working with the Oregon Commission and stakeholders on a carbon solutions program under Oregon's greenhouse gas reduction legislation.
As we've discussed before, Senate Bill 844 allows the OPUC to incent natural gas utilities to undertake projects that will reduce emissions.
Our first proposal was submitted in June, and is designed to further the use of combined heat and power in Oregon.
We filed our last briefs a few weeks ago, and expect a decision from the commission in the next few months.
On the customer growth side, we are working hard on expanding our multi ---+ our market share in the multi-family housing sector.
As I mentioned, the Portland area housing market has seen an upturn, particularly in multi-family apartments.
To further our efforts, we have created a cross-functional team to evaluate every aspect of the apartment rental market, a market that is typically underserved with natural gas.
Results of a recent market study show that 80% of renters in Portland prefer natural gas amenities.
This shows a clear GAAP between what renters want and what's available, and we've begun developing a comprehensive marketing program targeting apartment developers.
We view rental apartments as an untapped growth opportunity, and a priority segment for us, moving forward.
Now, let me give you a quick update on the potential expansion project at our underground storage facility in Mist, Oregon.
As you know, in 2014, we received approval from Portland General Electric to move forward with the permitting and land acquisition work required for the expansion project.
The project would provide no-notice storage services to PGE's natural gas-fired generating plants at Port Westward.
It would include a new reservoir, providing up to 2.5 billion cubic feet of available storage, an additional compressor station, and a new pipeline.
Last April, we submitted an application to the Oregon Energy Facility Siting Council, for an amendment to our existing Mist site certificate, a step required to support the expansion.
In early October, we held an open house with the local community near the expansion site, and received positive feedback from attendees.
And then, on March 5, just a few weeks ago, the Department of Energy published a proposed order.
A public comment process on that order will end on March 7, just a few weeks from now.
If there are no challenges to the proposed order, through the comment process, we could receive the EFSC permit approval later this spring.
And currently, we are in the process of rebidding the EPC portion of the project.
Following the approval of the permit and the rebidding process, we expect to receive a notice to proceed from Portland General later this year.
We continue targeting an in-service date during the 2018, 2019 winter season.
A target that depends, of course, on the permitting process and construction schedule.
And the current estimated cost of the project is approximately $125 million.
Over many years, Northwest Natural has demonstrated the careful planning essential to finding and retaining the talent necessary to drive success.
Detailed succession plans are an integral part of the Company's business activities, and this past year, the benefits of that were clearly visible.
I'd like to mention two key changes.
First, in June of last year, <UNK> <UNK> joined the Management team as CFO, and was also recently named Treasurer.
And second, this past December, I announced my retirement at the end of 2016, and that David Anderson would be promoted to Chief Executive Officer, effective August 1.
I will be working with the Board, in an advisory role, until the end of December.
A smooth transition at the top is critical, but as important is developing the talent for succession at key positions across the Organization.
And that has been a long-held commitment at Northwest Natural, one that, in my opinion, is the true mark of a Board and a Management team with foresight.
David is an excellent example of this talent.
He is a strong leader, and he brings great experience and a diverse skill set to the CEO position.
I'm confident our Company will be in good hands, going forward.
With that, thanks for joining us this morning, and now I will open it up for questions.
Looks like people are ready for the weekend, I guess.
Thank you, everyone.
Thank you again for your interest in our Company, and for taking the time out this morning to listen in.
And have a great weekend.
