Northwest Natural Holding Company (NWN) Q1 2013 Earnings Report, Transcript and Summary

Good morning and welcome to the Northwest Natural Gas Company First Quarter 2013 Teleconference. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. And I would now like to turn the conference over to Bob Hess. Please go ahead.

Thank you, Amy. Good morning everybody and welcome to our first quarter earnings call for 2013. As a reminder, as always 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 both the appropriate cautionary statements and also our SEC filings for additional information. We expect to file our 10-Q later today. As mentioned, this teleconference is being recorded and will be available on our website following the call. Please note that these conference calls are designed for the financial community. If you’re an individual investor and have questions, please contact me directly at area code 503-220-2388, media should contact Kim Heiting directly at area code 503-220-2366. Speaking this morning are Gregg Kantor, President and Chief Executive Officer, and Steve Feltz Senior Vice President and Chief Financial Officer. Gregg and Steve have some opening remarks and then will be available to answer your questions. Also joining us today are other members of our executive team including David Anderson, Executive Vice President of Operations and Regulation will be available to help answer any questions you may have. We look forward to see many of you at the upcoming American Gas Association Financial Forum next week, you have any questions about that event please contact me. With that it’s my pleasure to turn the call over to Gregg.

Thanks Bob. Good morning and welcome everyone. Thanks for joining us. Let me start this morning with a summary of the first quarter results and turn it over to Steve Feltz to cover the financial details. I will end with the look ahead before opening it up for questions. As you know, this is the first full quarter we have reported on since the conclusion of last year’s Oregon rate case. And there are few elements of the case affecting the year-over-year comparison that require some explanation. Steve will talk you through the specifics, but at a high level there were two items approves in the rate case that are changing the seasonality of our earnings. Now that our decoupling to full amounts have been incorporated into our base rates, we are going to see those revenues coming in more evenly over 12 months rather than collections more heavily weighted during the winter heating season. Regulators also approved an increased to our fixed charge which moved some expenses out of the volumetric part of customers’ bills. This means we will be collecting those revenues more evenly throughout the year as well. Together, those items had an earnings impact of about $0.11 in the year-over-year comparison for the quarter, but that impact is due to timing and we will see revenues from those billing changes reflected in the next few quarters. Another major item affecting results in the period was lower gas cost savings from our PGA sharing mechanism that we had this time last year. Operationally, there was god news in the quarter O&M was down slightly primarily due to lower bad debt expense and customer growth picked up to 1.1% on a rolling 12 month basis. Overall, we are seeing positive signs in our economy. By the end of last year housing starts and O&M were up by 36% over 2011 levels and housing starts the productivity increased by about 19% by the end of this year. Well, then real estate market is up to a good start in 2013 with existing home sales up 11% and new home sales up 37% compared to this time last year. And you would expect given those sales numbers home prices were also up about 8% the year-over-year comparison. Jobs picture also appears to be ahead in the right direction the unemployment rate and appointment area dropped to 7.7% from 8.1% in March of last year. In addition, two of the state’s biggest employers Nike and Mtel [Ph] have large expansions that mean 100s of millions of dollars of investments and new jobs for the area over the next five years. And we continue to see encouraging momentum in other large commercial and industrial sectors. For example we are currently working with few numbers of companies considering conversions to natural gas and we see new opportunities in a food processing, chemical manufacturing and fabrication segments. From many years industrial also been flat or declining so even a modest uptake in this kind of activity is reason for optimum for economy. But we also recognize this continuous to be slow and delicate recovery. So, we have to wait to see if they can be sustained in the coming quarters. In summery I would say we performed well in the quarter and with slight gains from customer growth in our investment and gas reserves. As well as continued strong management of our O&M cost. With that, let me turn it over to Steve for his report and the financial details. Steve?

Thank you, Gregg and good morning everyone. Before I start I just like to say what a great privilege this for me to be reporting to you as CFO of Northwest Natural. And although this is my first earnings call manual, I feel comfortable having 30 years with the company and having the benefit of working with some other best in the industry. With that, let me get started on the quarterly financial results. First quarter net income was $38 million, or $1.40 per share, this compared to net income of 40 million, or $1.50 per share in 2012. As Gregg mentioned, results were lower than last year for reasons that need some explanation. According to Tony margin declined 5.9 million, which accounted from most of the decreases compared to last. The margin decline, of course, was partly due to the general rate decreased approved in Oregon, which running those factor in the fourth quarter of 2012. However, the largest impact excluding this quarter’s drop in margin was due to timing changes in base rates in the Oregon rate case. As we discussed in the fourth quarter conference call, there were two changes in the rate case that would result in revenue timing differences as compared to last year. And the impact would be a margin reduction in the first and fourth quarters have margin increases in the second and third quarters. The first of the two items was a changed in the decoupling baseline, which was reset for the first time since 2003. During that 10-year period of time, we’ve been recovering margin losses from declining news for customer, primarily due to decoupling deferral. The second of the fact was the increase in the customer’s monthly charge. This change allows us to recover more of our fixed cost through the higher fixed charge rather than through the volumetric change, which was more seasonal. These two rate changes resulted in a more even spread of revenues and our earnings throughout the year. The impact of the decoupling change on first quarter 2013 was a decreased in margin of 2.4 million, or $0.05 per share. The impact of the higher monthly customer charge was a decreased of 2.8 million, or $0.06 per share. Combined these two changes decreased earnings by $0.11 per share in the quarter compared to last year. Again this year-over-year revenue decreases represent timing differences only and the offsetting increases will be realized in the second and third quarters of the year. Now for more detail review of the first quarter financial results. The utility overall contributed $36 million net income this year down from $39 million in 2012. As mentioned earlier, utility margin decreased 5.9 million with 5.1 million of the timing differences and $700,000 due to the general rate decrease. In addition, margin from the company’s gas cost incentive sharing mechanism in Oregon was positive this quarter, but lower than last year contributing 500,000 in the current quarter compared to $2.6 million a year ago. Probably [Ph] offsetting the margin losses for revenue increases in customer growth of 1.1% for the 12 months end of March 31 up from a tens [Ph] of a percent a year ago plus an increase in the return on our rate based investment in gas reserves. Total gas deliveries in the quarter were 400 million therms compared to 408 million therms a year ago. Gas sales to residential and commercial customers were 269 million therms or 2% below last year. The volume decrease was largely due to weather, which was 3% warmer, partially offset by additional volumes coming from the customer growth. Utility margin revenues from residential and commercial customers was 170 million compared to 121 million a year ago, mainly reflecting the effects of the timing differences and rate decreases discussed earlier, but also partly due to weather. Our weather normalization mechanisms in Oregon adjusted margin downward in the first quarters of 2013 and 2012 based on weather that was colder than average each year. Weather was 3% colder in average this quarter and 4% colder than average last year. Our decoupling mechanism and Oregon ad margin up by 4.4 million in 2013 compared to an increase of $6.7 million a year ago. Decoupling adjustment in 2013 used the lower, the new lower baseline for average use in 2012, but the results are not comparable between the two years. With respect to the industrial sector, gas deliveries totaled 132 million therms this year, which is roughly same volume gases last year. Margins from industrial customers increased 1% over last year, primarily reflecting the addition of new customers and some switching of existing customer’s energies over the natural gas because of the lower prices. What is an important takeaway for us or the positive signs we’re beginning to see with respect to improvements in industrial margins, but we also realized there may be periods of uneven volumes and margins due to seasonality and economic conditions. In the gas storage segment, net income was $1.6 million in the quarter compared to 800,000 a year ago, primarily reflecting revenue increases from Gill Ranch and additional contracted storage capacity and higher revenues from third-party asset management services. Regarding other areas of consolidated financial results, we reported operations and maintenance expenses of $33.8 million in the quarter, which was $600,000 or 2% lower than the year ago. The increase was primarily due to lower utility bad debt expense in the quarter, partially offset by a slight increase in employ payroll and benefit expense. Cash flow provided by operating activities in the first quarter was 1.6 million compared to 114 million last year. The decrease was primarily due to reduction in deferred gas cost savings. Higher gas cost savings at this time last year resulted in midyear refunds to customers, which significantly reduced cash flows in last year’s second quarter. Cash used for investing activities in the quarter was $36 million compared to 38 million in 2012, reflecting ongoing investment requirements in gas reserves and utility plant additions. With regards to regulatory matters, we currently have four ongoing rate issues that were delayed to separate regulatory proceedings from the 2012 rate case. They include a request to our rate treatment for prepaid pension assets, a review of interstate storage sharing mechanism, a decision on whether to allow working gas inventory to be continued as working capital in rate base and our prudency review of environmental expenditures and the related earnings steps for implementing our new environment cost recovery mechanism. We are continuing to work towards resolution of these items by the end of this year or early 2014. Finally, with respect to 2013 earnings guidance, today we are reconfirming our prior guidance in the range of $2.15 to $2.35 per share. This guidance assume the continues for economic recovery, customer growth, average weather conditions, no changes to the recoverability of our regulatory assets and no significant changes in prevailing legislative and regulatory policies or outcomes. With that, I will turn in back over to Gregg.

Thanks, Steve. Without question, our key objective of this year is successful resolution of the outstanding rate case items. As Steve said, we expect to get a decision on the majority of these dockets, late this year or early next year. However, one important regulatory development that has occurred is related to our system integrity program. This tracker allows us to recover capital cost related to the pipeline integrity work up to a certain amount in share. It’s been instrumental and helping us to make significant system safety improvements to keep up with the federal requirements. We just signed a stipulation with the OPUC to modify our tracker to increase the amounts we can recover in rates. On commission approval of this new agreement, over the next two years will track into rates up to $29.7 million including nearly all of our bare steel replacement by the end of 2015. Also on the regulatory front, I am pleased to report we are putting the final touches on a utility tariff we plan to file within the next several weeks to provide customers high pressure gas service for CNG vehicle refueling. As you have heard me say before, I was seeing growing interest in CNG vehicles from local fleet owners, company said no, that natural gas is about half the cost of gasoline or diesel and produces up to 30% fewer carbon emissions. At the same time, like most states, Oregon has little in the way of refueling infrastructure. We hope this proposal will be the first step in addressing that challenge and allowing local companies to take advantage of low cost natural gas for transportation. In the months ahead our team will be working through the regulatory process with the OPUC and customer advocates and we will keep you posted. Finally this morning, let me give you a quick update on our mix storage expansion to support PGE’s gas fired plant at Port Westward. Since our last call, we started the initial work on several components of the projects. Our team is preparing a request for the Oregon PUC for regulatory approval on the rate structure for the storage services associated with this expansion. We are also working on a former request to the Energy Facility Sitting Council of Oregon to confirm the permitting process for the project. And we are conducting environmental field studies and preparing more detailed engineering design. As we have indicated, this project will require development of the storage wells, a compression station and additional pipeline facilities. At this point, we are targeting to have it in service in 2016. As you can tell we have a lot of work ahead with the remaining rate case items and the opportunities for growth that are presenting themselves. These are exciting times to be in the natural gas industry, and transportation and our storage expansion to residential and industrial convergence we are going to make – we intend to make sure we capitalize on the opportunities created by abundant low cost natural gas. And with that I’ll open it up for questions.

[Operator Instructions] Our first question comes from Michael Bates with D. A. Davidson. Michael Bates – DA Davidson: Hi. Good morning, guys. Couple of my questions for you. Earlier in your prepared remarks you mentioned that you are working with some lumber companies considering conversion to natural gas. Can you give us little bit of commentary around that? How the timing might work around those conversions and potential impact on utilities earnings?

I really I can’t, I think it’s important to know these are our financial decisions that these industrial customers are going to make. And we are never sure for certain that actually convert. I would say again our industrial – we don’t have large margins on the industrial side and probably one of the most important science of industrial growth really is the repel of that they have for us when you talk about hiring people who are building houses and buying houses and the housing market for us and the commercial repel effect of these industrial loads is really important to our bottom line. But it really at this point difficult for me to tell you any given timing or any given financial impact on the bottom line for us. Michael Bates – DA Davidson: All right. Understood. Also O&M take downward relative to the last year. Can you give us a little more color on, what the change was and how sustainable that shift might be going forward?

Again Steve. The largest contributor that decline this quarter was a lower bad debt expense, we have been – we have adjusted our reserve because our collection rate has been very positive we’ve been trending downward for a while now and it’s really appears to be sustained improvement in the reserve balance. So we actually took an adjustment downwards so didn’t benefited O&M expenses, but I would say that, we did see a slight uptick in O&M expenses, but very minimal, because our employ counts are up slightly over the last year, and since our pay role up a little bit as well as benefit cost – related benefit cost, but generally speaking O&M seems to be in that 1% to 2% range. Right now, it’s down 2%, but I think that was largely during the side of bad debt expense adjustment. Michael Bates – DA Davidson: All right. And my final question, you’ve laid out these four issues that are currently being reviewed by the commission in Oregon you said that you expect them to be results either this year or early next year. Can you give us some color on – is there any way you would know which of these issues would be first priority for the commission – the order – it was we would get a resolution?

I can give you a little bit of color on it. Taking off more than the working gas inventory account balances, we just filed our testimony I think within the last couple of days actually on that one, so it’s just getting started. I’m somewhat optimistic about that one, I’m not sure that’s going to take terribly long, but it could go through most of the remaining parts of the summer, into the fall, that kind of thing. The prepaid pension, which is an important one for us is probably the most complicated. It involves other utilities, all the other utilities in Oregon, and I think that’s the one that’s likely to take the longest. We’re briefing for example, whether pieces of it will be separated into parallel processes or separate sequential processes, it’s just looking like that one as the one that could take late into the year or early into next year. The discussion about interstate storage revenue sharing, we had some even started yet. So I think that one is kind of again late in the year. And then the one that’s probably the farthest along is the site remediation and recovering mechanism, the earnings test issue. Thoroughly to tell where that ends up, but I would say I think that’s probably the one that will potentially come out first, maybe late summer, early fall, that kind of thing. Michael Bates – DA Davidson: Thank you very much.

No other questions here. I know we’re going to see a lot of you at the financial forum next week. We hope to see and take your questions then as well, and travel safely everyone. So unless there is any other questions, we’ll close it off.

I show no other questions, so this concludes today’s conference. Thank you for attending. You may now disconnect.