May 4, 2012
Operator
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.
Robert Hess
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.
Robert Hess
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.
Gregg Kantor
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.
Gregg Kantor
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.
Gregg Kantor
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.
Gregg Kantor
The company is also benefiting, with $2.6 million in pretax margin during the quarter from our gas cost sharing mechanism in Oregon. It's worth noting that in the period we also filed a request with the OPUC to provide Oregon customers with an additional $9 million credit associated with our missed interstate storage sharing mechanism, bringing the total going back to Oregon customers in June to $44 million.
Gregg Kantor
In the quarter, residential and commercial customer growth held steady at just under 1% over last year while industrial customer demand increased 4% and with gas prices reaching 10-year lows our competitive position against oil and electricity keeps improving. We believe this increase in gas deliveries to industrial customers reflects a slight improvement in the economy.
We have added a few new customers in the porous product segment and with the significant price advantage of natural gas of oil, we expect to see asphalt plants and other businesses converting over to gas in the second and third quarters.
Gregg Kantor
We have also seen a bit of good news in the non-utility storage business during the period. With a mild winter across most of the U.S.
gas storage levels are at all-time highs. Despite producers pulling back on production, prices have fallen to about $2 improving the spread between near term prices and those for next winter.
This gives us the opportunity for better than expected storage optimization results.
Gregg Kantor
Finally, a quick update on our Encana reserves purchase, I am pleased to report drilling continues to move forward as planned, gas is flowing and we are on track, for a total of 24 new wells this year. In the quarter our cumulative investment in gas reserves reached about $70 million which means we have completed about 28% of the approximately $250 million in total investment.
With that, I will turn it over to David to give you more detail on the quarter and on the status of the Oregon Rate Case and the then I will come back to end the call with my prospective on the case. David?
David Anderson
/> 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.
David Anderson
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.
David Anderson
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.
David Anderson
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.
David Anderson
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. Results reflect an increase in revenues at our Gill Ranch storage facility in California which were partially offset by lower revenues from contract stores and asset management services at our Mist storage facility in Oregon.
David Anderson
Overall gas stores margin increased $1.4 million to $6.7 million for the first 3 months of this year compared to $5.3 million in the same period last year. Operations and maintenance costs for the first quarter of the year were $3 million higher than last year.
The primary reasons for this increase were higher utility payroll costs related to an increase in field employees, higher employee benefit cost, and other administrative cost increases.
David Anderson
Utility bad debt expense as a percent of revenues was very low at below 1% at 0.23% for the 12 months ended March 31st. Cash provided by operations in the first quarter was $114 million compared to $108 million last year.
The increase was driven mainly by temporary differences in deferred gas cost saving and other working capital changes.
David Anderson
Cash requirements for investing activities totaled approximately $38 million and that's up from $26 million last year, with most of the increase reflecting the company's investment of $17 million in gas reserves.
David Anderson
Now for an update on our Oregon rate case. In February I provided an overview of our rate request which included an overall rate increase of $43.7 million or approximately a 6% increase for customers over current rates.
Other items addressed in the revenue requirement are increased safety, pension and other O&M cost and increased rate-based amounts.
David Anderson
The overall rate increases calculated on a total revenue requirement of $743 million assuming a Oregon net rate base of approximately $984 million. Our proposed return on equity is 10.3% with an overall rate of return of 8.28%.
David Anderson
Separate from the revenue increase request, the company is also proposing a mechanism to address environmental cleanup expenses related to legacy manufactured gas plant operations that could result in an additional 1% to 3% rate increase and on an insurance recovery and ultimate project cost.
David Anderson
Further dockets scheduled late yesterday, several parties involved in Northwest Natural's general rate case filed their direct testimony. In its testimony the Oregon Public Utility Commission staff recommended a revenue requirement reduction of approximately $10.7 million compared to our requested $43.7 million increase.
Staff case is based on a 9.2% return on equity and reductions to various operations and maintenance expenses and capital additions that we requested.
David Anderson
This result is not totally unexpected as we are very early on in the process. Needless to say, we strongly disagree with the recommendations made and will be filing testimony rebutting these recommendations in June.
David Anderson
As with all rate case proceedings, Northwest Natural and the parties have the opportunity to engage in settlement discussions regarding any or all parts of the issues involved in the case. At this point, our positions are fairly far apart.
Again, this is not unusual at this early stage of the proceeding. As a result we are unable at this time to predict the outcome of this rate proceeding or to predict which if any issues will be presented to the Oregon public utility commission as a part of the contested proceeding or as part of a settlement proposal.
David Anderson
Key upcoming dates in the case include a further settlement conference later this month, various rounds of testimony through August 9th, followed by a hearing and commission examination scheduled for August 23rd and 24th. Further activities will take place in September with a target day for a commissioned decision on October 22nd with new rates effective on November 1st of this year.
We will also update our PGA, or Purchase Gas Adjustment Mechanism, November 1st. We have been taking advantage of the current low price gas environment and are locking up very low prices for our customers.
As a result I am cautiously optimistic that any rate increase from a rate proceeding will be largely offset by a lower PGA mechanism.
David Anderson
Turning to our 2012 earnings guidance we have reaffirmed guidance today to be in the range of $2.35 to $2.55 per share. This guidance assumes a continued weak economic recovery and customer growth, normal weather conditions, ongoing benefits from improvements to our cost structure and no further significant changes and prevailing legislative and regulatory policies or outcomes.
David Anderson
With that, I'll turn it back over to Gregg to wrap things up before we take questions.
Gregg Kantor
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.
Gregg Kantor
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.
Gregg Kantor
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.
Gregg Kantor
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.
Gregg Kantor
With that, let me say thanks again for joining us today and I'll open it up for questions. Operator?
Operator
[Operator Instructions). And the first question comes from Spencer Joyce from Hilliard Lyons.
Spencer Joyce
First question here, the guidance range, that's still [indiscernible] any rate case impact?
David Anderson
/> 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.
Spencer Joyce
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?
David Anderson
/> 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.
Gregg Kantor
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.
Spencer Joyce
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.
David Anderson
/> 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
[Operator Instructions] We have a question from John Hanson [ph] from Praesidis.
Unknown Analyst
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?
David Anderson
/> 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
[Operator Instructions]
Gregg Kantor
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.
Operator
Thank you. This concludes today's teleconference.
You may now disconnect your phone lines. Thank you for participating and have a nice day.