SOURCE: Northwest Natural Gas Company

Northwest Natural Gas Company

May 03, 2016 06:00 ET

NW Natural Reports Results for the Quarter Ended March 31, 2016

PORTLAND, OR--(Marketwired - May 3, 2016) - Northwest Natural Gas Company, dba NW Natural (NYSE: NWN)

  • Consolidated earnings were $1.33 per share on net income of $36.6 million for the first quarter of 2016, compared to $1.04 per share and $28.5 million for 2015.
  • First quarter results included a regulatory disallowance for past environmental costs of $3.3 million pre-tax, or $0.07 per share after tax, in 2016 and $15.0 million pre-tax, or $0.33 per share after tax, in 2015.
  • Excluding these environmental charges(2), first quarter 2016 net income was $38.6 million or $1.40 per share, compared to $37.6 million or $1.37 per share for 2015.
  • Utility margin increased $6.1 million with the addition of over 10,000 utility customers during the past 12 months, reflecting an annual customer growth rate of 1.5% at March 31, 2016.
  • NW Natural collected $5 million of revenues through the environmental recovery mechanism from customers in 2016 and resolved implementation items for the mechanism with the Public Utility Commission of Oregon's (OPUC) January 2016 Order (2016 Order).
  • The North Mist gas storage expansion project continued moving forward toward a notice to proceed from the project customer later in 2016. In April, the Oregon Energy Facilities Siting Council approved NW Natural's application for an amendment to the Mist site certificate and NW Natural continued the rebidding process for the engineering procurement and construction (EPC) contract.
  • The Company reaffirmed earnings guidance for 2016, which is expected to range from $1.98 to $2.18 per share or $2.05 to $2.25 per share adjusted to exclude the effects of the pre-tax charge of $3.3 million, or $0.07 per share after-tax(1), related to the final environmental implementation order received in January 2016 as described below.

Northwest Natural Gas Company, dba NW Natural (NYSE: NWN), reported earnings per share of $1.33 on net income of $36.6 million for the first quarter of 2016, compared to $1.04 per share on net income of $28.5 million for 2015. Results for both quarters were affected by non-cash charges related to the Company's environmental regulatory proceeding, which was resolved in January 2016. The first quarter of 2016 included a $3.3 million pre-tax, or $0.07 per share after-tax disallowance, from the OPUC's 2016 Order, which related to the Company's compliance filing under the environmental mechanism. The first quarter of 2015 included a $15 million pre-tax charge or $0.33 per share after-tax disallowance from the February 2015 OPUC Order (2015 Order) in the environmental docket. As adjusted to exclude these charges(2), consolidated net income was $38.6 million, or $1.40 per share for the first quarter of 2016, compared to $1.37 per share on net income of $37.6 million for 2015.

"The core utility continued to post strong margins and customer growth," said Gregg Kantor, CEO. "In addition, during the year we accomplished two key objectives: the implementation of the environmental recovery mechanism including the collection of costs under the mechanism and obtained a critical permit for our North Mist gas storage expansion project."

__________________________________
(1)Earnings per share (EPS) calculation based on average diluted shares outstanding of 27.6 million and an income tax rate of 39.5%.
(2) See reconciliation of non-GAAP measures in Consolidated Results section below.

First Quarter Results

Consolidated Results
For the quarter ended March 31, 2016, NW Natural earnings were $1.33 per share on net income of $36.6 million, compared to 2015 results of $1.04 per share on net income of $28.5 million. The increase was primarily due to the non-cash charges related to the environmental regulatory proceeding previously mentioned. Excluding these charges, net income increased by $1.1 million primarily from $6.1 million of higher utility margin attributable to customer growth and gains from gas cost sharing, offset by a $4.6 million decrease in other income related to the recognition of $5.3 million of equity earnings on deferred regulatory asset balances as a result of the 2015 Order in the first quarter of 2015.

The first quarter results are summarized in the table below:

     
     
    Three Months Ended March 31,
    2016   2015    
In thousands, except per share data   Amount   Per Share   Amount   Per Share   Change
Net income:                              
  Utility segment   $ 35,852   $ 1.30   $ 28,335   $ 1.04   $ 7,517
  Gas storage segment     736     0.03     114     --     622
  Other     53     --     37     --     16
Consolidated net income   $ 36,641   $ 1.33   $ 28,486   $ 1.04   $ 8,155
Adjustments:                              
  Regulatory environmental disallowance, net of taxes ($1,304 and $5,925)(1)     1,996     0.07     9,075     0.33     (7,079)
Adjusted consolidated net income(1)   $ 38,637   $ 1.40   $ 37,561   $ 1.37   $ 1,076
Utility margin   $ 136,664         $ 130,601         $ 6,063
Gas storage operating revenues     5,369           5,303           66
                               
                               
   (1)   Regulatory environmental disallowance of $3.3 million in 2016 is recorded in utility other income and expense, net ($2.8 million) and utility operations and maintenance expense ($0.5 million). Regulatory environmental disallowance of $15.0 million in 2015 is recorded in utility operations and maintenance expense. Adjusted EPS and net income are non-GAAP financial measures based on the after-tax disallowance. EPS is calculated using the combined federal and state statutory tax rate of 39.5% and 27.6 million and 27.4 million diluted shares for the quarters ended March 31, 2016 and 2015, respectively.
       
       

Utility Results
For the first quarter ended March 31, 2016, utility operations contributed $1.30 per share on net income of $35.9 million, compared to $1.04 per share on net income of $28.3 million for 2015. The primary factors contributing to the $7.5 million or $0.26 per share increase in utility net income were as follows:

  • a $6.1 million increase in utility margin due to customer growth and an increase in gas cost incentive sharing gains;
  • a $14.7 million decrease in operations and maintenance expense due to the $15 million regulatory disallowance charge taken in the first quarter of 2015; and
  • a $7.8 million decrease in other income due to a $2.8 million interest write-off as a result of the 2016 Order and the recognition of $5.3 million of equity earnings on deferred regulatory asset balances in 2015 as a result of the 2015 Order previously mentioned.

Customer Growth. NW Natural achieved a customer growth rate for the trailing 12-month period ended March 31, 2016 of 1.5%, with the Company serving over 718,000 customers at quarter end.

Utility Volume and Margin. The following table presents key utility margin metrics:

     
     
    Three Months Ended March 31,
            Favorable/(Unfavorable)
(Dollars and therms in thousands)   2016   2015   Change   % Change
Gas sales and transportation deliveries     372,549     329,977     42,572     13 %
Weather (in heating degree days)     1,585     1,481     104     7  
Utility operating revenues   $ 250,104   $ 256,306   $ (6,202 )   (2 )
Less: Cost of gas     108,411     125,705     17,294     14  
    Environmental remediation expense     5,029     --     (5,029 )   --  
Utility margin(1)   $ 136,664   $ 130,601   $ 6,063     5 %
                           
                           
(1)   In November 2015 the Company began collecting revenues from customers through the SRRM. These collections are included in utility operating revenues and are offset by the amortization of environmental liabilities presented in the environmental remediation expense line in the operating expense section of the income statement. Utility margin provides a key metric in assessing the performance of the utility segment.

The increase in deliveries for the first quarter of 2016 compared to 2015 was mainly due to higher residential and commercial volumes reflecting weather that was 7% colder than a year ago, although weather was 15% warmer than average, and the region experienced exceptionally warm weather during the quarter for the second year in a row. The impact of weather on utility margin is substantially mitigated by the Company's Weather Normalization Mechanism. Therefore despite the warm weather, utility margin increased $6.1 million primarily due to the following:

  • a $3.4 million increase from customer growth, additional loads from commercial customers on higher rate schedules, and increased rate-base from certain investments; and
  • a $2.4 million increase in gains from the gas cost incentive sharing mechanism as a result of lower gas prices than those estimated in the Purchased Gas Adjustment (PGA).

Environmental Site Remediation and Recovery Mechanism (SRRM). Under the environmental recovery mechanism, the Company has the ability to recover past deferred and future prudently incurred environmental remediation costs allocable to Oregon, subject to an earnings test. As part of the implementation of the mechanism, the OPUC issued the 2015 Order requiring NW Natural to forego collection of $15 million of approximately $95 million in total environmental remediation expenses deferred through 2012. As a result, the Company recognized a non-cash $9.1 million after-tax charge in operations and maintenance expense in the first quarter of 2015. Also, as a result of the 2015 Order, the Company recognized $5.3 million pre-tax of interest income related to the equity earnings on deferred environmental expenses.

During 2015, the Company continued to work with the OPUC on a number of outstanding implementation items related to the mechanism, and in January 2016 the OPUC issued the 2016 Order resolving the open matters in the docket. The 2016 Order confirmed recovery of environmental costs allocable to Oregon under the mechanism, established an Oregon allocation factor of 96.68%, and disallowed deferred costs related to the previous charge of $15 million. As a result of the 2016 Order, the Company recognized a non-cash $3.3 million pre-tax charge, or $2.0 million after-tax, of which the majority is reflected in other income and expense.

Gas Storage Results
For the quarter ended March 31, 2016, the Company's gas storage segment reported net income of $0.7 million or $0.03 per share, compared to net income of $0.1 million for 2015. The first quarter of 2016 results reflected stable storage segment revenues as well as lower operating costs and interest expense at the Gill Ranch facility.

Consolidated Operations
Operations and Maintenance Expense.
Consolidated operations and maintenance expense for the quarter ended March 31, 2016 was $38.9 million, compared to $54.1 million for 2015. The $15.2 million decrease was primarily due to the $15 million pre-tax charge associated with the 2015 Order on the recovery of past environmental cost deferrals taken during the first quarter of 2015.

Other Income and Expense, Net. Other expense was $2.3 million for the first quarter of 2016, compared to other income of $5.1 million for the same period in 2015. The $7.4 million year-over-year decrease was primarily due to the recognition of $5.3 million of equity earnings from deferred environmental expenses in the first quarter of 2015. The Company recognized the equity earnings of these deferred regulatory asset balances as a result of the 2015 Order. In addition, the 2016 Order resulted in a write-off of $2.8 million of interest in the current quarter. 

Cash Flows
Cash provided by operations was $146.1 million for the first quarter of 2016, compared to $118.2 million for 2015. The main factors contributing to the $27.9 million increase were an increase in net income of $8.2 million; an increase of $17.4 million in net deferred tax liabilities from the enactment of bonus depreciation; and $5.0 million from collections under the environmental recovery mechanism.

2016 Earnings Guidance
The Company reaffirmed earnings guidance today in the range of $1.98 to $2.18 per share or $2.05 to $2.25 per share adjusted to exclude the effects of the pre-tax charge of $3.3 million or $0.07 per share after-tax(1), related to the 2016 Order. The Company's 2016 earnings guidance assumes customer growth from the utility segment, average weather conditions, sustainable operations and maintenance expense levels and normal inflationary increases, slow recovery of the gas storage market, the impact of the five-year extension of bonus depreciation resulting from the enactment of the Federal Protecting Americans From Tax Hikes Act of 2016, and no significant changes in prevailing legislative and regulatory policies, mechanisms, or outcomes.

(1)EPS calculation based on average diluted shares outstanding of 27.6 million and an income tax rate of 39.5%.

Dividend Declaration
The board of directors of NW Natural declared a quarterly dividend of 46.75 cents per share on the Company's common stock. The dividends will be paid on May 13, 2016 to shareholders of record on April 29, 2016. The Company's indicated annual dividend rate is $1.87 per share.

Presentation of Results
In addition to presenting the results of operations and earnings amounts in total, certain financial measures are expressed in cents per share or exclude the after-tax regulatory charges related to the Orders implementing the SRRM in 2015 and 2016, which are non-GAAP financial measures. The Company presents net income and EPS excluding the regulatory disallowance along with the GAAP measures to illustrate the magnitude of this disallowance on ongoing business and operational results. Although the excluded amounts are properly included in the determination of these items under GAAP, the Company believes the amount and nature of such disallowance make period to period comparisons of operations difficult or potentially confusing. Financial measures are expressed in cents per share as these amounts reflect factors that directly impact earnings, including income taxes. All references in this section to EPS are on the basis of diluted shares. The Company uses such non-GAAP financial measures to analyze its financial performance because it believes they provide useful information to its investors and creditors in evaluating its financial condition and results of operations.

Conference Call Arrangements
As previously reported, NW Natural will conduct a conference call and webcast starting at 8 a.m. Pacific Time (11 a.m. Eastern Time) on May 3, 2016 to review the Company's financial and operating results for the first quarter ended March 31, 2016.

To hear the conference call live, please dial 1-866-267-6789 within the United States and 1-855-669-9657 from Canada. International callers can dial 1-412-902-4110. To access the conference replay, please call 1-877-344-7529 and enter the conference identification pass code 10083970. To hear the replay from Canada, please dial 1-855-669-9658 and from international locations, please dial 1-412-317-0088.

To hear the conference by webcast, log on to NW Natural's corporate website at nwnatural.com.

Forward-Looking Statements
This report, and other presentations made by NW Natural from time to time, may contain forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "anticipates," "assumes," "intends," "plans," "seeks," "believes," "estimates," "expects" and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements regarding the following: plans, objectives, goals, strategies, future events, investments, customer growth, weather and its impacts, environmental remediation cost recoveries, levels and pricing of gas storage contracts, gas storage development or costs or timing related thereto, financial positions, operation and maintenance expense, capital expenditures, free cash flow levels, revenues and earnings and the timing thereof, dividends, effects of regulatory disallowance, performance, timing or effects of future regulatory proceedings or future regulatory approvals, regulatory prudence reviews, effects of regulatory mechanisms, including, but not limited to, SRRM, and other statements that are other than statements of historical facts.

Forward-looking statements are based on the Company's current expectations and assumptions regarding its business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. The Company's actual results may differ materially from those contemplated by the forward-looking statements. The Company cautions you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future operational or financial performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed by reference to the factors described in Part I, Item 1A "Risk Factors", and Part II, Item 7 and Item 7A "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosure about Market Risk" in the Company's most recent Annual Report on Form 10-K and in Part I, Items 2 and 3 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures About Market Risk", and Part II, Item 1A, "Risk Factors", in the Company's quarterly reports filed thereafter.

All forward-looking statements made in this report and all subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are expressly qualified by these cautionary statements. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. New factors emerge from time to time and it is not possible for the Company to predict all such factors, nor can it assess the impact of each such factor or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements.

About NW Natural
NW Natural (NYSE: NWN) is headquartered in Portland, Ore., and provides natural gas service to more than 718,000 residential, commercial, and industrial customers through approximately 14,000 miles of mains and service lines in western Oregon and southwestern Washington. It is the largest independent natural gas utility in the Pacific Northwest with $3.0 billion in total assets. NW Natural and its subsidiaries currently own and operate underground gas storage facilities with storage capacity of approximately 31 Bcf in Oregon and California. Additional information is available at nwnatural.com.

 
 
NORTHWEST NATURAL GAS COMPANY
Financial Highlights (Unaudited)
First Quarter - 2016
                         
                 
In thousands, except per share amounts, customer, and degree day data   Three Months Ended
March 31,
      Twelve Months Ended
March 31,
   
2016   2015   Change   2016   2015   Change
Operating revenues   $ 255,529   $ 261,665   (2)%   $ 717,655   $ 722,316   (1)%
                                 
Operating expenses:                                
  Cost of gas     108,411     125,705   (14)     310,011     335,994   (8)
  Operations and maintenance     38,939     54,116   (28)     142,344     155,712   (9)
  Environmental remediation     5,029     --   -     8,542     --   -
  General taxes     8,684     8,732   (1)     30,233     29,957   1
  Depreciation and amortization     20,394     20,111   1     81,206     79,715   2
  Total operating expenses     181,457     208,664   (13)     572,336     601,378   (5)
Income from operations     74,072     53,001   40     145,319     120,938   20
Other income and expense, net     (2,309)     5,049   -     389     5,599   -
Interest expense, net     9,736     10,481   (7)     41,794     43,502   (4)
Income before income taxes     62,027     47,569   30     103,914     83,035   25
Income tax expense     25,386     19,083   33     42,056     33,741   25
Net income   $ 36,641   $ 28,486   29   $ 61,858   $ 49,294   25
                                 
Common shares outstanding:                                
  Average diluted for period     27,560     27,369         27,453     27,270    
  End of period     27,493     27,332         27,493     27,332    
                                 
Per share information:                                
Diluted earnings per share   $ 1.33   $ 1.04       $ 2.25   $ 1.81    
Dividends declared per share of common stock     0.4675     0.465         1.87     1.85    
Book value per share, end of period     29.35     28.72         29.35     28.72    
Market closing price, end of period     53.85     47.95         53.85     47.95    
                                 
Capital structure, end of period:                                
  Common stock equity     51.5 %     49.2 %         51.5 %     49.2 %    
  Long-term debt     36.4     38.5         36.4     38.5    
  Short-term debt (including amounts due in one year)     12.1     12.3         12.1     12.3    
  Total     100.0 %     100.0 %         100.0 %     100.0 %    
                                 
Operating statistics:                                
Customers - end of period     718,009     707,472   1.5%     718,009     707,472   1.5%
Utility volumes - therms:                                
  Residential and commercial sales     242,874     206,817         606,785     553,564    
  Industrial sales and transportation     129,675     123,160         464,399     463,186    
Total utility volumes sold and delivered     372,549     329,977         1,071,184     1,016,750    
Utility operating revenues:                                
  Residential and commercial sales   $ 237,672   $ 240,912       $ 641,595   $ 643,350    
  Industrial sales and transportation     17,664     20,526         68,633     73,006    
  Other revenues     1,411     1,406         3,919     3,912    
  Less: Revenue taxes     6,643     6,538         18,139     17,879    
Total utility operating revenues     250,104     256,306         696,008     702,389    
  Less: Cost of gas     108,411     125,705         310,011     335,994    
    Environmental remediation expense     5,029     --         8,542     --    
Utility margin, net   $ 136,664   $ 130,601       $ 377,455   $ 366,395    
Degree days:                                
  Average (25-year average)     1,871     1,855         4,240     4,240    
  Actual     1,585     1,481   7%     3,562     3,383   5%
Percent colder (warmer) than average weather     (15)%     (20)%         (16)%     (20)%    
                                 
                                 
             
             
NORTHWEST NATURAL GAS COMPANY            
Consolidated Balance Sheets (Unaudited)   March 31,     March 31,  
In thousands   2016     2015  
Assets:                
Current assets:                
  Cash and cash equivalents   $ 4,321     $ 5,218  
  Accounts receivable     69,066       68,531  
  Accrued unbilled revenue     36,393       30,076  
  Allowance for uncollectible accounts     (1,376 )     (1,363 )
  Regulatory assets     61,524       67,702  
  Derivative instruments     1,960       658  
  Inventories     60,581       69,289  
  Gas reserves     16,420       19,112  
  Income taxes receivable     --       2,000  
  Deferred tax assets     --       13,491  
  Other current taxes     23,311       15,921  
    Total current assets     272,200       290,635  
Non-current assets:                
  Property, plant, and equipment     3,115,854       3,017,754  
  Less: Accumulated depreciation     919,187       883,254  
  Total property, plant, and equipment, net     2,196,667       2,134,500  
  Gas reserves     111,145       125,187  
  Regulatory assets     351,390       348,421  
  Derivative instruments     452       117  
  Other investments     67,490       68,614  
  Restricted cash     --       3,000  
  Other non-current assets     2,689       3,638  
    Total non-current assets     2,729,833       2,683,477  
    Total assets   $ 3,002,033     $ 2,974,112  
Liabilities and equity:                
Current liabilities:                
  Short-term debt   $ 164,900     $ 156,200  
  Current maturities of long-term debt     24,980       39,994  
  Accounts payable     57,407       62,904  
  Taxes accrued     10,256       17,755  
  Interest accrued     9,671       10,427  
  Regulatory liabilities     35,596       24,263  
  Derivative instruments     17,313       23,242  
  Other current liabilities     42,100       35,950  
    Total current liabilities     362,223       370,735  
Long-term debt     569,745       613,417  
Deferred credits and other non-current liabilities:                
  Deferred tax liabilities     550,731       523,929  
  Regulatory liabilities     346,761       326,424  
  Pension and other postretirement benefit liabilities     221,291       235,516  
  Derivative instruments     1,237       1,117  
  Other non-current liabilities     143,090       118,059  
    Total deferred credits and other non-current liabilities     1,263,110       1,205,045  
Equity:                
  Common stock     385,232       376,656  
  Retained earnings     428,691       418,003  
  Accumulated other comprehensive loss     (6,968 )     (9,744 )
    Total equity     806,955       784,915  
    Total liabilities and equity   $ 3,002,033     $ 2,974,112  
                 
                 
               
               
NORTHWEST NATURAL GAS COMPANY              
Consolidated Statements of Cash Flows (Unaudited)     Three Months Ended March 31,  
In thousands     2016     2015  
Operating activities:              
  Net income   $ 36,641   $ 28,486  
  Adjustments to reconcile net income to cash provided by operations:              
    Depreciation and amortization     20,394     20,111  
    Regulatory amortization of gas reserves     4,075     5,255  
    Deferred tax liabilities, net     23,353     5,918  
    Qualified defined benefit pension plan expense     1,311     1,509  
    Contributions to qualified defined benefit pension plans     (2,900 )   (2,630 )
    Deferred environmental (expenditures) recoveries, net     (2,665 )   (3,315 )
    Regulatory disallowance of prior environmental cost deferrals     3,273     15,000  
    Interest expense (income) on deferred environmental expenses     --     (5,322 )
    Amortization of environmental remediation     5,029     --  
    Other     1,169     900  
    Changes in assets and liabilities:              
      Receivables     22,242     29,193  
      Inventories     10,115     8,543  
      Taxes accrued     7,729     6,724  
      Accounts payable     (14,537 )   (26,550 )
      Interest accrued     3,798     4,348  
      Deferred gas costs     8,519     13,074  
      Other, net     18,592     17,005  
    Cash provided by operating activities     146,138     118,249  
Investing activities:              
  Capital expenditures     (30,054 )   (27,135 )
  Other     24     (1,811 )
    Cash used in investing activities     (30,030 )   (28,946 )
Financing activities:              
  Common stock issued, net     1,999     700  
  Change in short-term debt     (105,135 )   (78,500 )
  Cash dividend payments on common stock     (12,823 )   (12,688 )
  Other     (39 )   (3,131 )
    Cash used in financing activities     (115,998 )   (93,619 )
Increase (decrease) in cash and cash equivalents     110     (4,316 )
Cash and cash equivalents, beginning of period     4,211     9,534  
Cash and cash equivalents, end of period   $ 4,321   $ 5,218  
               
Supplemental disclosure of cash flow information:              
  Interest paid, net of capitalization   $ 5,232   $ 5,399  
  Income taxes paid     (7,900 )   --  
               
               

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