Northwestern Energy Group Inc (NWE) Q4 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to the Northwest Natural Gas Fourth Quarter and 2011 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Bob Hess. Please go ahead, sir.

Thank you, Laura. Good morning, and welcome to our full year and fourth quarter earnings call for 2011. As a reminder, some of the things that will be said this morning contain forward-looking statements. They are based on management's assumptions, which may or may not come true, and you should refer to the language at the end of our press release for the appropriate cautionary statements and also our SEC filings for additional information. We expect to file our 10-K later today. This teleconference is being recorded and will be available on our website following the call as mentioned. Please note that these conference calls are designed for the financial community. If you are an individual investor and have questions, please contact me directly at 1(800)422-4012, extension 2388. Speaking this morning are Gregg Kantor, President and Chief Executive Officer; and David Anderson, Senior Vice President and Chief Financial Officer. Gregg and David have some opening remarks and then will be available to answer your questions. With that brief introduction, let me turn you over to Gregg.

Thanks, Bob. Good morning, everyone, and welcome. Thanks for joining us for our fourth quarter and year-end review. I'll begin today by providing an overview of 2011, and then turn it over to David to provide the financial details for the period and the year. And then, finally, I'll wrap it up with a look forward. Last year, we made progress on many fronts, from safety and service to the Encana gas reserves purchase. Our company finished the year stronger than it started. In one area, however, the news wasn't as good. In the second quarter, we announced a onetime after-tax charge of $4.4 million related to a retroactive change in Oregon's utility tax law. Including that charge, the company posted earnings of $2.39 per share. While the earnings impact of this repeal was disappointing, we believe the elimination of Senate Bill 408 is in the best interest of our customers and the company over the long run. The new law reverts back to having utility income taxes considered by state regulators in each rate case, a practice consistent with other utilities across the country. Last year was a good reminder of what this company does well. We manage through unexpected challenges while finding added value for customers and shareholders. It wasn't a perfect year, but I'm pleased with all that was accomplished. For example, in 2011, we were able to lower customer rates for the third consecutive year due to lower gas prices, resulting in about a 20% rate decrease in Oregon and about a 26% decrease in Washington over the last 3 years. Customer growth came in at just under 1% despite challenging housing market conditions, and we continue to post industry-leading customer satisfaction ratings. In fact, for the fifth consecutive year, Northwest Natural scored among the top…

Thanks, Gregg, and good morning, everybody. Let me start with full-year results for the period ended December 31. Net income was approximately $64 million or $2.39 per share. This compares to net income of $73 million or $2.73 per share in 2010. Our utility operations contributed $61 million of net income compared to $66 million in 2010. The major factor contributing to this decline was a $50 million reduction in utility net operating revenues or what many people call utility margin from utility tax legislation, which includes a $7.4 million of charge taken in the second quarter of 2011, plus the $7.7 million getting recognized in 2010. Senate Bill 408 was the Oregon utility tax legislation which was repealed in 2011 with a retroactive impact that affected amounts earned in 2010. This utility margin loss was partially offset by an $11 million margin gain from residential and commercial customers, driven by colder weather and customer growth. Gas storage contributed net income of $4 million in 2011 compared to $6 million in 2010, and that decline is due primarily to lower storage values. Operating results from our non-utility investments and activities in 2011 resulted in a net loss of $0.02 per share compared to net income of $0.01 per share in 2010. The difference primarily reflects a pre-tax charge of $1.3 million related to a partial write-down of the company's investment in the Palomar pipeline project. As mentioned before, Oregon's gas utilities, including Northwest Natural, are subject to an annual earnings review to determine if the utility is earning above its allowed return on equity. In our case, if utility earnings exceed the ROE threshold from the last rate case, the company is required to defer 33% of the amount above that level for refund to customers in the following year.…

Thanks, David. Given what we've covered this morning, I think it's fair to characterize the landscape we've been operating in. It's a unique mixture of challenges and opportunities. Abundant natural gas supplies and lower prices have been good for utility customers and, frankly, for the company's satisfaction ratings. But lower and less volatile prices have driven storage values down, creating a challenging environment for our storage business. On the positive side, we've been pleased with the performance of our Gill Ranch facility in its first full year of operation, and we remain on track to reach our share of the design capacity of about 15 Bcf by the end of this year. Today, we are meeting our contracting plan for this year at Gill Ranch. In fact our capacity is almost all contracted out. And I would also say that the team has done a very good job of managing the facility's operating cost. Certainly, storage values today aren't where we'd like to see them, but given the projected demand for gas to serve electric generation in the West, we believe in our strategy and the value of storage over the long term. Looking forward into 2012, our focus on the storage business will remain consistent, execute on our operating plans and identify new commercial opportunities that take advantage of the growing reliance on natural gas, also this increasing dependency on gas for power generation in the Northwest that continues to drive the need for the Palomar pipeline. Last year, the Palomar team withdrew its FERC application, and at the same time, we announced plans to file a new application reflecting changes to the project. This year, our goal is to continue to work with Northwest utility to consolidate the region's effort around a single integrated solution using a shorter…

[Operator instructions] And our first question is from Dan Fidell of U.S. Capital Advisors.

Just a question, I guess, in terms of the fiscal '12 guidance number. Can you maybe just talk a little bit about the deltas you see for both the low end and the high end of the guidance range?

Yes, Dan. This is David. Obviously, probably the -- I would put it in 3 buckets. One would be the amount of gas cost savings or cost that we have right now. It does look like we are in the saving method, with gas prices being lower than we have set in our last PGA. The second piece of that would be storage values overall and how that plays out through the period of time. And then the third item would be the outcome of the rate case. The right case, I think Gregg mentioned in his remarks, should be done in rates in place November 1. And what we have -- obviously, that's only 2 months of revenue, but assuming what the outcome of that could have an impact either plus or minus on that guidance range or in that guidance range, the $0.20 guidance range.

Okay, great. And just for clarification, you are or you're not including any assumption for the outcome of the rate case for the 2012 guide?

The 2012 guidance, since it has a fairly -- so there's only 2 months in there, Dan. We're basically just assuming no impact from the rate case from the guidance.

Okay, great. And then in terms of the storage as we look into 2012, is there an assumption there for continuing falloff of kind of the initial startup cost, I guess, improvement on cost into '12?

Yes, that's correct. And we saw that in the fourth quarter. If you look at the fourth quarter numbers period-to-period, the O&M costs from the Gill Ranch facility are down, and there's really no different assumption on the storage pricing going forward other than a minor increase overall. So if the economics are better or storage pricing is better, that would be upside. Or if it's the other side, it would be a little bit of a downside.

Okay, great. Maybe just a final question from me switching topics just to the Encana and a potential layer on with commodity prices very cheap here. I was just wondering if and how that affects your potential timing to maybe go for a second round, maybe another 10% layer into the overall supply picture.

Dan, this is Gregg. Well, our first mission is to make sure that the current deal is working well, and so far, it has been. But we feel like we've got to put some time between the beginning of this first layer and the possibility of a second layer. You also need to have a tax appetite, which is important for the benefits of customers in the next deal. But I will tell you, we are -- we continue to look at it. I wouldn't expect anything this year, though, in the way of another layer. But we are continuing to look at it. And as you point out, gas prices are down. And if they continue to stay there, we will continue to look at layering in some -- an additional layer of gas reserves.

Yes, Dan, the tax appetite is an important comment because a lot of the economics or the IDCs and things like that, we get to take advantage of on the drilling side. And the real unknown right now, well, if the current administration is going to have another level of bonus depreciation. And as you know, utilities have been taken advantage of bonus depreciation for a while here. And I think most utilities would say we don't want anymore, and this utility would be in that camp. So that's one of the unknowns out there right now, because we couldn't take advantage of all the tax appetite that another transaction could bring because of our NOL situation. But we can probably in another year, depending on whether bonus depreciation goes forward or not.

Sure. Very last question. Just do you have a number for CapEx guide for '12?

We're probably a little over $100 million, rough number for us. I mean, obviously, the major capital expenditures are done with the Gill Ranch facility. So we're back into a little bit more of a normal mode. We do have some CapEx related to some investments we're making for some pipe and things like that. But we're a little bit over $100 million in a general sense.

[Operator Instructions]

It looks like we have James Bellessa.

This is actually Mike here with Jim. I have a couple of questions for you. I noticed that you're expecting Gill Ranch to be operating at or near its full capacity about a year earlier than anticipated. Can you give us any color as to where operations were in 2011?

Well, I've got Dave Weber here who is operating the facility. You don't get the full capacity of the storage reservoir that first year of operations. As you're injecting and pulling out, you're continuing to push the water out of the reservoir. So I've forgotten right now what -- we started the facility at in a way of Bcf capacity.

We went from 9 to 13, and now we're at 15.

Yes, we went from 9 to 13, and now we're headed towards 15.

All right. Great. I also wanted to ask you, in terms of pension expense, what are your expectations going into 2012 compared to last year?

Yes. First thing I will say is pension expenses are going up. This is Steve Feltz, sorry. But we do have a pension balancing account. So what you won't see is the increase in pension expenses in the O&M cost because we actually defer that into a regulatory account for future recovery. The balancing account works where what's included in the rates will be above or below that. And eventually, it will balance out, we expect, in 6 to 7 years.

So, I mean, to be more specific here, from an income statement perspective, Michael, you're really not going to see much difference because of this balancing account. We will be making contributions to the plan to bring it up, which we're looking at around $30 million of contributions. So the balancing account protects the income statement. We still have contributions we need to make to the plan from a cash flow perspective.

We show no further questions at this time. I'll turn the conference back over to management for closing remarks.

Okay. Well, thank you, all. I know this was a busy morning for other companies reporting, so we really appreciate you spending the time with us. And we'll be seeing you in a month ahead. Thanks for tuning in. Bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.