Northwest Natural Holding Company

Good morning and welcome to the NW Natural Holding Company's first quarter conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Nikki Sparley, Director of Investor Relations. Please go ahead.

Thank you, Brandon. Good morning and welcome to our first quarter 2020 earnings call. As a reminder, some things that will be said this morning contain forward-looking statements. They are based on management's assumptions which may or may not occur. In addition, some of our comments today reference non-GAAP adjusted measures. For a complete reconciliation of these measures and other cautionary statements, Refer to the language and reconciliation at the end of our press release. We expect to file our 10Q later today. As mentioned, this teleconference is being recorded and will be available on our website following the call. Please note these calls are designed for the financial community. If you are an investor and have additional questions after the call, please contact me directly at 503-721-2530. News media may contact Melissa Moore at 503-220-2436. Our speakers today are doing this call remotely, so please bear with us if we have any technical difficulties or sound quality issues or pauses as we go on and off mute. Speaking this morning are David Anderson, President and Chief Executive Officer, and Frank Burkhartschneyer, Senior Vice President and Chief Financial Officer. David and Frank have prepared remarks and then will be available along with other members of our executive team to answer your questions. With that I'll turn it over to David.

Well thank you Nikki and good morning everybody and welcome to our first quarter call. I hope you are safe and well as we all go through unprecedented times here. Like you We've adapted to a new normal in the last few weeks as we've limited social interactions and taken every precaution to fight the spread of the coronavirus while continuing to provide essential services to our customers. Personally, I'm very proud of how our company and our employees have responded to this event. I especially want to recognize our field personnel for all they are doing to keep our system safe and, of course, operating reliably. In Oregon, where about 90% of our gas customers reside, A series of progressively restrictive executive orders culminated with the stay-at-home directive beginning on March 23rd in Washington, Idaho, and Texas where we have gas and or water operations also implemented various forms of restrictions. Our natural gas and water utilities obviously are critical infrastructure. We've continued all essential functions necessary to provide reliable service while following the guidelines set out in the governor's executive orders. Biosha, and of course the CDC. We continue to respond to customer issues, emergencies, and providing other essential services. In addition, we are performing maintenance and construction on our systems. While we can't predict the full economic effects of the pandemic, I see several mitigating factors for our business. Timing-wise, this executive order coincided with the conclusion of the winter heating season. April and May continue to require some heating resources in the Northwest, but the majority of the sales occur from November through March. In addition to being a pure play utility business, we benefited from an attractive customer mix. About 87% of our natural gas margin comes from residential and commercial customers, of which a majority are decoupled. and about 8% of our margin comes from industrial customers while the remaining 5% primarily come from a fixed fee regulated natural gas storage arrangement. Our water utilities are comprised primarily of residential customers and in many cases are entirely residentially based. At our largest water utility, Sun River, about 72% of the revenues come from residential customers with 10% from commercial and 18% from irrigation customers. And finally, we operate with customer affordability in mind and work very hard to run an efficient organization. These operating principles, coupled with the decline in natural gas prices, have led to natural gas bills being about 40% lower today than they were 15 years ago. And despite starting from an efficient place, we're taking steps to further reduce our expenses by tightening spending where possible. Finally, we are committed to helping the most vulnerable members of our communities. We do this through a variety of programs, including our corporate philanthropy fund, our gas assistance program, and several state and federal programs that assist with customer bills. We've also filed a request with the regulators to provide our Oregon natural gas customers with their annual June bill credit related to our revenue sharing mechanism. This year, that credit equates to a one-time 30% reduction in an average monthly residential bill, and that's a record amount, by the way. At this point, bad debt levels are essentially in line with previous years. We'll continue to watch collections closely and, of course, work with any customers having financial difficulties. With that said, the closure of small businesses and loss of jobs weighs heavily on our regions. As our governors reopen our states, we're hopeful small business can bounce back quickly. In March, we took several steps to improve our already strong liquidity position by increasing cash on hand. As a result, we have over We had over $470 million of cash at quarter end and continue to maintain large cash balances. We will continue to closely monitor the markets to ensure our liquidity position remains strong. In summary, while we aren't immune from the effects of a recession, we believe our financial strength and low-risk business model will serve us well. We are obviously living in truly unprecedented times with economic conditions that continue to evolve, the full effects of which continue to be unknown. But it is important to understand where we stood in February. At that time, we had a fundamentally sound sustainable growing economy with record low unemployment both nationally and in our service territories. All of our territories were experiencing solid growth. As an example, Oregon was adding nearly 2,000 jobs per month through the end of 2019. Early in the first quarter, home prices continued to climb while building permits had stabilized. In-migration continued to be steady and outpaced the national average. Through the end of the first quarter, new construction plus conversions translated into connecting over 12,400 new customers during the last 12 months, which equated to a growth rate of about 1.6%. As our states reopen, we will closely monitor the rate of recovery and ensure we are doing all we can to help. With that, Frank, I will turn it over to you to provide some additional details on our first quarter results. Frank?

Thank you, David, and good morning to everyone. I will begin with a summary of our first quarter reported financials and then describe the key metrics we are tracking as we monitor the implications of COVID-19 on our business and then discuss guidance for 2020. Earnings drivers will be noted on an after-tax basis using the statutory tax rate of 26.5%. Our effective rate for the quarter was 22.8% as a result of the return of excess deferred income taxes to our Oregon customers. Also note that earnings per share comparisons were impacted by the issuance of 1.4 million shares in June 2019 as we raised equity to fund investments in our gas utility. While the pandemic continues to be at the front of our minds, our first quarter results were largely unaffected by the outbreak. For the quarter, we reported net income from continuing operations of $48.3 million or $1.58 per share compared to net income of $43.4 million or $1.50 per share for the same period in 2019. Last year's results include a regulatory disallowance of 23 cents per share related to an Oregon Commission order. Excluding that disallowance, on an adjusted non-GAAP basis, earnings per share from continuing operations was $1.73 for 2019, with the $1.7 million or $0.15 decline largely due to favorable weather and higher asset management revenues in the prior year. In the gas distribution segment, utility margin increased $1.1 million. Higher customer rates in Washington, customer growth, and revenues from the North Mist expansion project contributed an additional $8.6 million. This was partially offset by warmer weather in 2020 compared to colder than average weather in 2019, which reduced margin by $2.4 million. The remaining $5.2 million decline in utility margin is a result of the Oregon order related to tax reform and pension expense in 2019. With the exception of the first quarter pension disallowance, This order had no impact on net income as offsetting adjustments were recognized through expenses and income taxes, as I'll describe in a moment. Utility O&M and other expenses declined $10.5 million in the quarter. This decrease is largely the result of the accounting entries associated with the Oregon order, which resulted in $14 million of additional expense in the first quarter of 2019 as previously discussed. This was offset by a $3 million increase of underlying O&M, primarily related to payroll and benefit increases. Over the last several years, we have invested in our gas system at historically high levels, and we placed the North Miss storage facility into service. As a result, depreciation expense increased $2.6 million. Prior year utility segment tax expense includes a $4.3 million benefit related to implementing the March order with no significant resulting effect on net income. Net income from our other businesses declined $1.9 million from lower asset management revenues due to less favorable market conditions. As a result of the Oregon order and tax reform, there are lots of moving pieces in the prior year financials, but the underlying drivers remain straightforward. The gas utility benefited from new rates in Washington, solid customer growth, and North Mist coming online in May 2019. This was partially offset by lower asset management revenues. Now, regarding the financial implications of COVID-19. Today, the full economic and financial impacts are not yet evident, and the timing of a recovery is not clear. As David noted, our business does benefit from a favorable customer mix and our decoupling mechanisms. In addition, the executive orders extensively closing our economies in Oregon and Washington went into effect as Northwest Natural was coming out of the peak heating season. We have maintained a strong balance sheet and taken significant steps to ensure liquidity. In order to further mitigate the potential effects on our customers and the business, we are examining additional cost cutting measures across the business. While the resilience of our business model and the initial timing of the event are beneficial, we are closely monitoring several key factors. First, we are tracking customer losses that result from businesses closing their doors, and to date we have not seen a significant increase. Second, as we voluntarily and temporarily stopped charging late fees for nonpayment in March, we are monitoring the loss of this revenue and bad debt expense. We have applied for regulatory deferrals to recover costs of this nature. For reference, in 2019, late fees and bad debt expense totaled $2.5 million. As of March 31, 2020, our metrics remain in line with prior periods. We also continue to watch closely the levels of customer growth and demand. As noted, our decoupling mechanisms provide some protection against a decline in usage. Today we reaffirmed guidance for continuing operations in the range of $2.25 to $2.45 per share and guided toward the lower end of the range due to potential implications from COVID-19. Guidance also assumes continued customer growth, average weather conditions and no significant changes in prevailing regulatory policies, mechanisms or outcomes or significant laws, legislation or regulations. In addition, this guidance excludes any gain related to the sale of Gill Ranch and associated operating results. These items are reported in discontinued operations. Finally, we continue to monitor the impact of COVID-19 on our capital programs. At this time, we do not expect a material change in our capital expenditure range of $240 million to $280 million. While we are anticipating some reduction in expenditures related to customer acquisition, the majority of our CapEx is maintenance in nature and includes some large projects that have already begun. With that, I'll turn the call back over to David for his concluding remarks.

Thanks, Frank. While we continue to focus on our day-to-day operations, we are also advancing key long-term objectives. At this time, it appears that all of our utility commissions are moving key dockets forward and have made the transition to virtual work environments like the rest of us. Frankly, I commend the commissioners and the staffs and the customer groups for continuing to work well under less than ideal conditions. As we discussed in prior quarters, we're very pleased to be taking a significant step forward in our energy transition with the passage of Oregon's groundbreaking renewable natural gas legislation. Over the last several months we've been working closely with the Oregon Commission on rulemaking and at the end of March a draft set of rules were issued and we are currently engaged in the formal comment process with the Commission. I'm excited with the progress of our renewable team that our renewable team has made and the great strides that they're making in 2020. We're pleased to help communities take advantage of our modern distribution system in new and exciting ways that pragmatically address climate change. I'm also very proud of the progress we've made building our water utility business. So far this year, we've closed four transactions, including our first in Texas. Cumulatively, we've invested nearly $110 million in this space. Operationally, the water utilities are performing well amid the pandemic. We've implemented incident command and business continuity plans across these companies, and we've leveraged our natural gas expertise to provide centralized resources and planning as well as provide a larger, stronger balance sheet. The ability of our water utilities to work together during the crisis further validates this roll-up strategy. During 2020, our team will be integrating the utilities we've already purchased and assess the maintenance and CapEx needs of those businesses. We continue to believe in the strong investment potential of this industry as aging infrastructure needs to be replaced. And I remain excited by the growth opportunities ahead in other areas. Our company has weathered many things in the last 162 years and I'm confident in our ability to handle the challenges at hand. I continue to stand behind our commitment to customers to provide safe and reliable service and I believe in our regulated business strategy and the resilience of this team. We will continue executing on our strategy and look forward to more successes we look forward in the coming year. So with that, Brandon, thanks for taking time with us this morning and we'll open it up for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Tate Sullivan with Maxim. Please go ahead.

Good morning, Tate. Good morning. Thank you. With the cash drawdown, the cash you increased as of the end of the last quarter is part of your comments on the lower end of your 20 guidance. Are there costs related to maintaining that cash balance or have you already returned it to the banks? And I understand why you would have pulled it, but I apologize if you commented on that earlier.

Yeah, I'll start, and then Frank, if you want to give more details. Obviously, it was via commercial paper and pull-down of bank lines, plus we also did a long-term issuance that was planned anyway, so the long-term issuance was already built in, and I think that we did the 30-year issuance at the lowest Thank you for joining us today.

And Tate, on that last item, I'll just tell you we don't plan to hold the cash for the entire year. We're just going to monitor things here closely.

and when it appears that we're all on better footing here, we'll go back and return the cash.

Okay, understood. David, you've operated some of the water utilities now for a little bit since announcing the acquisition strategy a couple of years. Has there been key differences? Can you highlight between operating the water utilities versus your natural gas businesses?

It's a good question, Tate. Actually, there's a lot of similarities, to be honest with you, in terms of you should be obviously good, hopefully, with the regulatory environment. You ought to be good with customer service. Obviously, on the construction side and putting infrastructure in place, there's a lot of synergies between the two. What we have found during this pandemic, though, is that it's highlighted some additional benefits here, at least from my perspective, as it relates to the water companies. They've been able to take advantage of our supply chain process. So all of us have been, like the rest of the country, trying to get additional PPE and those type items for our men and women that are in the field. And I think a lot of these smaller water companies would have had a much more difficult time doing that if they had not been associated with us. I think they're also enjoying being part of a company with a strong balance sheet. And then I think the last thing I would say is I think we've brought a business continuity and an incident command structure to those utilities that has allowed them to respond very well to this event. And then also Justin and his team are doing a great job of putting long-term plans together and being very focused on what these entities need, how we do them, and then ultimately Our next question comes from Agazmi Grotsky. Please go ahead. Good morning.

Could you provide more color on 2020 capital program? Do you expect any changes to cap the impact of COVID-19?

Frank, you want to take the lead on that one?

Sure. Good morning, Aga. Yeah, we've done a bottoms-up review of all of our capital programs going down basically to the project level. and we monitor them very closely with our project managers to flag up any concerns that it might be around permitting or other execution issues. And we will continue to monitor that very closely, but you have to remember about 50% of our projects are safety and reliability, 20% this year, a little bit heavier than usual is technology. We've got some facilities and then about 24% growth And when we look through it at that level, at this time, we do not have significant concerns. We, in fact, feel very confident at this moment that we will stay within our guidance range for the year. Now, we'll have to watch this as the economy unfolds, but we're feeling very good about our ability to deliver on that plan right now.

That's very helpful. And you applied for regulatory deferrals to recover COVID-19 expenses. When do you expect potential decisions and impact on earnings?

Yeah, Aga, this is David. It's unclear at this time. I mean, we're really at the early stages of this, but the way deferrals work out in general is you go back in at a later date and work with the regulator on some form or fashion of recovery or other methods. So a little bit early right now to be kind of guessing the timing of that.

Thank you, and stay safe.

As a reminder, if you would like to ask a question, please press star, then 1. This time there are no further questions. I would like to turn the conference back over to David Anderson for any closing remarks.

Well, thank you, Brandon. Thank you, everybody, for joining the call today. I think everybody knows that the AGA Financial Forum The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.