Northwestern Energy Group Inc (NWE) Q1 2012 Earnings Report, Transcript and Summary

Good morning and welcome to the Northwest Natural Gas First Quarter 2012 Earnings Conference Call. (Operator Instructions). And now I would like to turn the conference over to Bob Hess, Investor Relations Director.

Thank you, Keith. Good morning, everybody, and welcome to our first quarter earnings call for 2012. As a reminder as always some of the things that what we said this morning contains 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 SECs filings for additional information. We expect to file our 10Q later today. This teleconference is been recorded, as mentioned, and will be available on our website following the call. 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 CEO 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. Also joining us today are other members of our executive team who are available to help answer any questions you may have. With that short introduction, let me turn you over to Gregg.

Thanks Bob. Good morning, everyone and welcome, thanks for joining us for our first quarter earnings call. As we normally do, I will start this morning with some highlights from what was a solid first quarter and then turn it over to David to cover the financial details. I will end the call today with a look ahead before opening it up for questions. We started the year with President Obama in his State of the Union address talking about the importance of natural gas to the American economy, and from my vantage point I don’t think that potential can be overstated. The abundance of supply and continued drop in natural gas prices has been dramatic and great news for our utility customers in the quarter. In fact, a few weeks ago we filed tariffs with the Oregon Public Utility Commission and the Washington Utilities and Transportation Commission seeking approval to refund about $39 million in gas cost savings to customers, $35 million in Oregon and $4 million in Washington. As you know we would normally pass those savings back to customers in November when we set new rates for the year. But the gas prices we have secured from November of last year to this March were substantially lower than what it is currently set at rates. So given the economy, it makes more sense to get those savings back to customers early. The only other time we have been in this position was in 2009, when gas prices also fell dramatically because of the recession. What makes this year different is that prices are coming down from a much lower starting point. If approved, customers will see the benefit of those lower cost as a credit in their June bills. The company is also benefiting, with $2.6 million…

/> First quarter net income was around $40.6 million or $1.51 per share. This compares to get net income of $40.8 million or a $1.53 per share in 2011. Utility operations in the quarter were flat at approximately $40 million in net income. GAAP storage contributed to net income of around $800,000 compared to $700,000 last year. Turning to operating results, total gas deliveries from the first quarter were 408 million therms compared to 401 million therms last year. The 2% increase over the last year was due mainly to residential and customer growth and higher industrial demand. Weather was approximately 2% warmer than last year, but 4% colder than average. Sales of gas to residential and commercial customers in the quarter were 276 therms, Menthol 1% increase over 2011's 274 million therms. Gas delivery to industrial customers were up 4% to 132 million therms in the quarter compared to 128 million therms last year. Totally utility margin increased 3% to $133 million compared to $129 million last year. Due to a combination of higher margins from residential and commercial customers and an increase in our incentive gas cost savings, our weather and decoupling mechanisms in Oregon adjusted margin up by $2.8 million compared to a margin increase of $2.9 million last year. First quarter results from the company’s regulatory incentive sharing mechanism in Oregon contributed $2.6 million in margin in 2012. That compares to approximately $1 million last year. The difference was based on significantly lower gas prices compared to the prices currently in customers' rates. In Washington, 100% of higher or lower gas prices are passed through to customers. In addition to utility operations, our gas storage segment reported net income of $800,000 for the first quarter, and as I stated earlier, compares to around $700,000 last year.…

Thanks, David. Let me wrap up with a few comments on our rate case. Having been close to regulation in one way or another for more than 2 decades, I can tell you that where we stand in the case at this point is not unusual. Early in most rate cases, whether in Oregon or across the country, it's not uncommon for commission staffs or customer advocacy groups that stake out pretty aggressive positions. That said, we are ready to address their positions in our rebuttal testimony that will be filed in June. For example, one clear area of disagreement is on ROE. If you look at the last case settled in Oregon it was Idaho Power earlier this year at 9.9% ROE. Needless to say, we think staff's position and testimony is not consistent with previous orders. As David said, we have settlement discussions planned with Oregon staff and customer advocates in May and settlement of some of all of the issues may be possible, but in the end we know we managed our business well over the last decade. We believe our proposal is reasonable and we are ready to make our case to the commission. I believe by any measure we have done what is expected of us. We stayed focused on providing a safe reliable system and high quality service, and we've done it while effectively managing our cost and our rates for customers. And most importantly the feedback we receive from customers validates that we've executed well. For the second time in 3 years our business customers ranked us number one in the western region for customer satisfaction in the annual JD Power and Associates Study which we just recently received. As you know we have ranked 1 or 2 in the JD Power Residential survey for a number of years going as well. This is recognition we don’t take for granted. In fact I'd say this kind of customer support actually energizes us to find new innovations like the Encana transaction designed to be wins for both customers and shareholders. Given where gas prices are today, we believe there are untapped opportunities where natural gas can play a bigger role from both a consumer savings and environmental standpoint, and we continue to look for those opportunities from infrastructure to energy efficiency where we can align our customer and company interest with public policy priorities. With that, let me say thanks again for joining us today and I'll open it up for questions. Operator?

[Operator Instructions). And the first question comes from Spencer Joyce from Hilliard Lyons.

First question here, the guidance range, that's still [indiscernible] any rate case impact?

/> Well the rates are going to be in effect on November the first and so you will have two months which we do get a little bit load impact there. So we're not really anticipating any material impact from the rate case either negative or positive in those numbers.

Got you. Also wanted to talk about the O&M expense uptick a little bit here. Looks like that was considerably bigger than we were modeling. Did that come in unexpectedly high for you guys or can you just give a little color there? Were they potentially some exceptional raises that maybe will impact this year and we should look for a moderation and the out years? Any sort of clarity you can give there?

/> Some of the increases were planned, some of them were timing. We have been hiring additional field employees and so that is a permanent difference and so I wouldn’t expect a 10% overall O&M increase every quarter, but we had some IT expenditures that came in earlier than we anticipated but in general, I do anticipate the O&M to be up a little bit more than past years because of hiring practices, especially the employees and related to safety-type issues and things like that.

Yes, we've got both safety and some service issues. Really we're trying to prepare the company for some of the requirements that are coming out of the new pipeline safety act that passed in January.

One last little question here. On the storage side, looks like results were relatively flat year-over-year. No major issues there. My only question was, was there any increased capacity or scope of operations potentially due to the guild ranch build-out that would basically give us a bigger asset pool to work with this quarter as opposed to the year ago.

/> Yes, when you look at the results, the guild ranch entity did perform a little bit better and that is related to increased capacity but also some other operations. It was essentially offset by a little bit lower results for the quarter out of our mist field but in general, our guild ranch storage facility is basically at full capacity, which is ahead of where we anticipated it when we first got into this a couple years ago.

[Operator Instructions] We have a question from John Hanson [ph] from Praesidis.

I apologize, I cut out for a moment on the call, but did you discuss on the rate case what the settlement possible dates or process is going forward here or at least some other kind of process information on the rate case?

/> That's fine, what we're looking at is in about the third week of May as the next scheduled settlement conference and I guess it’s the 22nd, 23rd if I recall correctly, and then the testimony—we'll have various rounds of testimony going back and forth through August 9. We'll have our hearing, assuming we go that far on all or part of the issues with the commission on August 23rd and 24th, and September will be further activities. We're expecting a decision from a commission October 22nd so that everything can be built into rates by November 1st.

[Operator Instructions]

Okay, if there are no more questions, thanks for joining us today and hope to see all of you at the AGA Financial Forum in Phoenix. Take care.

Thank you. This concludes today's teleconference. You may now disconnect your phone lines. Thank you for participating and have a nice day.