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NW Natural Reports Results for the Quarter Ended March 31, 2015

May 5, 2015 6:00 AM EDT

PORTLAND, OR -- (Marketwired) -- 05/05/15 --

  • Consolidated net income was $28.5 million for the first quarter of 2015, or $1.04 per share, compared to $37.9 million, or $1.40 per share, in 2014.
  • First quarter results include a regulatory disallowance for past environmental costs of $15 million pre-tax or $0.33 per share after-tax. Excluding the disallowance, net income was $37.6 million or $1.37 per share.
  • Customer growth rate was 1.3% at March 31, 2015, with 9,100 customers added in the last twelve months.
  • Company's Integrated Resource Plan (IRP) was acknowledged by Oregon and Washington regulators, outlining long-term capital investment requirements based on customer growth and infrastructure needs.
  • Permitting and land acquisition work continues on the North Mist gas storage expansion project.

Northwest Natural Gas Company, dba NW Natural (NYSE: NWN), reported consolidated net income of $28.5 million for the first quarter of 2015, or $1.04 per share. Results for the quarter were impacted by a $9.1 million after-tax charge related to the environmental regulatory disallowance associated with a February 2015 OPUC Order in the Company's Site Remediation and Recovery Mechanism (SRRM) docket. Under the Order, the Company was required to forego collection of $15 million, pre-tax, out of the approximate $95 million of environmental expenditures and associated carrying costs deferred through 2012. As adjusted, consolidated net income for the quarter was $37.6 million, or $1.37 per share, excluding the regulatory disallowance, compared to net income of $37.9 million, or $1.40 per share, for the first quarter of 2014.

"While the first quarter write-down for environmental costs was disappointing, this major decision is behind us, and we now have approval to fully recover prudently incurred environmental costs in Oregon going forward," said Gregg Kantor, President and Chief Executive Officer. "During the quarter, another significant milestone was the acknowledgment of our IRP in both Oregon and Washington, which identifies a number of utility capital investments we will be pursuing over the next several years."

Consolidated Results Consolidated results highlights include:


                                Three Months Ended March 31,
                          ----------------------------------------
                                  2015                2014
                          --------------------------------------------------
In thousands, except per
 share data                Amount   Per Share  Amount   Per Share  $ Change
----------------------------------------------------------------------------
Net income and earnings
 per share                $ 28,486 $     1.04 $ 37,884 $     1.40 $  (9,398)
  Adjustments:
Regulatory environmental
 disallowance, net of
 taxes $5,925(1)             9,075       0.33        -          -     9,075
                          --------------------------------------------------
Adjusted net income(1)
 (Non-GAAP)               $ 37,561 $     1.37 $ 37,884 $     1.40 $    (323)
                          --------------------------------------------------
Utility margin            $130,601            $130,294            $     307
Gas storage operating
 revenues                    5,303               7,835               (2,532)

(1) Regulatory environmental disallowance of $15 million is recorded in
    utility operations and maintenance expense. Adjusted EPS and net income
    are non-GAAP measures based on the after-tax disallowance. EPS is
    calculated using the combined federal and state statutory tax rate of
    39.5% and divided by 27,369 thousand dilutive shares for the quarter.

Net income for the first quarter of 2015 was down $9.4 million compared to the same period last year largely due to the $9.1 million after-tax charge related to the regulatory disallowance. Excluding the charge, results were relatively flat year-over-year with an increase in utility margin and other income, offset by a decrease in gas storage operating revenues and an increase in utility operations and maintenance expense.

Utility Results For the three months ended March 31, 2015, net income from utility operations decreased $7.7 million to $28.3 million, as compared to the same period in 2014. The decrease was driven by the $9.1 million after-tax charge for the regulatory disallowance. Other factors included a $0.3 million increase in utility margin and a $4.0 million increase in other income, which was primarily due to the recognition of interest income from our deferred environmental account balances. These increases were offset by an additional $3.8 million of operations and maintenance expense due to increased compensation costs and other items.

Customer growth. NW Natural's customer growth rate for the trailing 12-month period ended March 31, 2015 was 1.3%. The Company added over 9,000 customers during the trailing 12-month period and now serves approximately 707,000 customers.

Utility Volumes and Margin.


                                   Three Months Ended
                                       March 31,
                                 ----------------------
Dollars and therms in thousands     2015       2014      Change   % Change
----------------------------------------------------------------------------
Gas sales & transportation
 deliveries                         329,977    406,217   (76,240)      (19)%
Utility margin                   $  130,601 $  130,294 $     307         -%

For the quarter, total gas sales and transportation deliveries decreased 76.2 million therms, or 19%, compared to the same period last year due to warmer weather. Average temperatures in the period were 22% warmer than a year ago and 20% warmer than normal. Despite warmer weather, utility margin for the quarter increased $0.3 million over last year due to customer growth and added rate-base returns on certain investments as well as gains from our gas cost incentive sharing resulting from lower gas prices.

Environmental Site Remediation and Recovery Mechanism (SRRM). As a result of the OPUC Order in the SRRM docket, $15 million of the $95 million in total environmental remediation expenses deferred through 2012 were disallowed. The OPUC found the $95 million to be prudent but disallowed this amount from rate recovery based on its determination of how an earnings test should apply to years between 2003 and 2012, with adjustments for factors the OPUC deemed relevant. The Company recognized the $15 million pre-tax disallowance, or $9.1 million after-tax charge, during the first quarter of 2015. The Company filed the required compliance report on March 31, 2015 with the OPUC demonstrating proposed implementation of the Order. The compliance filing is subject to review and approval by the OPUC and, as a consequence thereof, additional or different implementation procedures could be required, which may, among other things, result in additional impacts to earnings.

Integrated Resource Plan. We received acknowledgment of our recently filed IRP in Oregon and Washington, which outlines long-term capital investments based on projected customer and infrastructure needs. Among other things, the IRP included projected infrastructure projects such as continued refurbishments of the Newport LNG facility in Oregon over the next three years with an expected investment of approximately $20 million and upgrading distribution infrastructure in Clark County, Washington which could total approximately $25 million over the next five years. These and other investments are included in our capital budget plans for 2015 and the next several years. The IRP also discusses various changes to the gas supply resource portfolio and specifically preserves the optionality of participating in both the cross-Cascades and Pacific Connector interstate pipeline projects.

Gas Storage Results For the first quarter of 2015, gas storage net income decreased $1.5 million compared to the same period last year. The decrease was mainly driven by a $2.5 million drop in operating revenues. We contracted capacity for the 2014-15 gas storage year ending March 31, 2015 with shorter-term contracts at lower market prices than in previous years. Gas storage contract prices for the 2015-16 gas storage year are slightly higher, but prices are still significantly lower than the long-term contracts that expired at the of the 2013-14 gas storage year.

Consolidated Operations and Maintenance (O&M) Expense Operations and maintenance highlights include:


                                                 Three Months Ended
                                                     March 31,
                                               ---------------------
In thousands                                      2015       2014     Change
----------------------------------------------------------------------------
Operations and maintenance                     $   54,116 $   35,386 $18,730
  Environmental disallowance                       15,000          -  15,000
                                               -----------------------------
Adjusted operations and maintenance (non-GAAP) $   39,116 $   35,386 $ 3,730

Operations and maintenance expense for the first quarter of 2015 increased $18.7 million compared to last year due to the effect of the $15 million pre-tax charge for the regulatory disallowance and an additional $1.0 million of other expenses related to the Order. Other contributing factors included a $1.9 million increase in compensation and benefit expense including higher wage rates under the new union labor contract, which became effective June 1, 2014, as well as increased health care, pension, and employee incentive costs. The remaining increase was related to non-payroll costs mostly associated with higher system maintenance and safety program costs and costs related to our ongoing growth initiatives.

Other Income and Expense, Net Other income and expense, net highlights include:

                                                 Three Months Ended
                                                     March 31,        Change
                                               ----------------------
In thousands                                      2015       2014
----------------------------------------------------------------------------
Other income and expense, net                  $    5,049 $    1,383 $ 3,666

Other income for the first quarter of 2015 increased $3.7 million. The increase primarily reflects the recognition of $5.3 million related to the equity component in interest income from our deferred environmental expenses as a result of the regulatory Order. In addition, we incurred interest expense of $0.6 million on other deferred regulatory balances during the first quarter of 2015, compared to interest income of $0.6 million for the same period of 2014. The environmental regulatory balance changed from an asset position during the first quarter of 2014 to a liability position at March 31, 2015 as the result of additional insurance proceeds received in 2014.

Cash Flows Cash provided by operations for the first three months of 2015 was $118 million, compared to $220 million for the same period in 2014. The decrease is primarily due to receiving $91 million of environmental insurance recoveries in 2014, which did not recur in 2015 and other working capital changes.

Earnings Guidance for 2015 The Company reaffirmed earnings guidance for 2015 in the range of $1.77 to $1.97 per share. As adjusted, our earnings guidance is $2.10 to $2.30 per share for 2015 excluding the effects of the $15.0 million pre-tax charge, which is equivalent to $0.33 per share after-tax(1), for the regulatory disallowance associated with the OPUC order on the recovery of past environmental cost deferrals. The Company's 2015 earnings guidance assumes continued customer growth from our utility segment, average weather conditions, slow recovery of the gas storage market, and no other significant changes in prevailing legislative and regulatory policies or outcomes.

(1)Impact on earnings per share assumes average shares outstanding of 27.3 million and an income tax rate of 39.5%.

Dividend Declaration The board of directors of NW Natural declared a quarterly dividend of 46.5 cents a share on the Company's common stock. The dividends will be payable on May 15, 2015 to shareholders of record on Apr. 30, 2015. Currently, the Company's indicated annual dividend rate is $1.86 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 disallowance related to the OPUC's 2015 environmental order, which are non-GAAP financial measures. We present net income, EPS, and operations and maintenance expense 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, we believe 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. We use such non-GAAP measures to analyze our financial performance because we believe they provide useful information to our investors and creditors in evaluating our 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 5, 2015 to review the Company's financial and operating results for the three months ended March 31, 2015.

To hear the conference call live, please dial 1-866-267-6789 within the United States and 1-855-669-9657 from Canada. To access the conference replay, please call 1-877-344-7529 and enter the conference identification pass code (10062239). To hear the replay 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," "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, commodity and other costs, customer rates or rate recovery, environmental cost recoveries, allocation of environmental insurance settlement proceeds, levels and pricing of gas storage contracts, gas storage development or costs or timing related thereto, financial positions, capital expenditures, gas reserves and investments and regulatory recoveries related thereto, free cash flow levels, revenues and earnings and 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 our current expectations and assumptions regarding our 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. Our actual results may differ materially from those contemplated by the forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future 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 we undertake 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 about 707,000 residential, commercial, and industrial customers through 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 designed storage capacity of approximately 31 Bcf in Oregon and California. Additional information is available at www.nwnatural.com.



                       NORTHWEST NATURAL GAS COMPANY
                       Comparative Income Statements
                        (Consolidated - Unaudited)

                                              Three Months Ended
                                   -----------------------------------------
In thousands, except per share
 amounts                            03/31/15  03/31/14   Change   % Change
----------------------------------------------------------------------------
Income from operations             $  53,001 $  75,028 $ (22,027)      (29)%
Net Income                            28,486    37,884    (9,398)      (25)

Diluted average shares of common
 stock outstanding                    27,369    27,126       243         1
Diluted earnings per share of
 common stock                           1.04      1.40     (0.36)      (26)

                                             Twelve Months Ended
                                   -----------------------------------------
In thousands, except per share
 amounts                            03/31/15  03/31/14   Change   % Change
----------------------------------------------------------------------------
Income from operations             $ 120,938 $ 143,568 $ (22,630)      (16)%
Net income                            49,294    60,783   (11,489)      (19)

Diluted average shares of common
 stock outstanding                    27,270    27,051       219         1
Diluted earnings per share of
 common stock                           1.81      2.25     (0.44)      (20)



NORTHWEST NATURAL GAS COMPANY
Consolidated Balance Sheets (Unaudited)                     March 31,
In thousands                                            2015        2014
----------------------------------------------------------------------------
Assets:
Current assets:
  Cash and cash equivalents                          $    5,218  $   17,929
  Accounts receivable                                    68,531      87,264
  Accrued unbilled revenue                               30,076      33,515
  Allowance for uncollectible accounts                   (1,363)     (2,235)
  Regulatory assets                                      67,702      27,834
  Derivative instruments                                    658      15,846
  Inventories                                            69,289      33,469
  Gas reserves                                           19,112      21,990
  Income taxes receivable                                 2,000           -
  Deferred tax assets                                    13,491       4,915
  Other current taxes                                    17,271      13,595
                                                     ----------- -----------
    Total current assets                                291,985     254,122
                                                     ----------- -----------
Non-current assets:
  Property, plant, and equipment                      3,017,754   2,939,760
  Less: Accumulated depreciation                        883,254     868,257
                                                     ----------- -----------
    Total property, plant, and equipment, net         2,134,500   2,071,503
  Gas reserves                                          125,187     134,894
  Regulatory assets                                     348,421     285,046
  Derivative instruments                                    117       1,078
  Other investments                                      68,614      67,288
  Restricted cash                                         3,000       4,000
  Other non-current assets                               10,577      12,453
                                                     ----------- -----------
    Total non-current assets                          2,690,416   2,576,262
                                                     ----------- -----------
    Total assets                                     $2,982,401  $2,830,384
                                                     =========== ===========
Liabilities and equity:
Current liabilities:
  Short-term debt                                    $  156,200  $   32,600
  Current maturities of long-term debt                   40,000      80,000
  Accounts payable                                       62,904      89,201
  Taxes accrued                                          17,755      34,146
  Interest accrued                                       10,427      11,144
  Regulatory liabilities                                 24,263      37,686
  Derivative instruments                                 23,242       1,191
  Other current liabilities                              35,950      38,069
                                                     ----------- -----------
    Total current liabilities                           370,741     324,037
                                                     ----------- -----------
Long-term debt                                          621,700     661,700
                                                     ----------- -----------
Deferred credits and other non-current liabilities:
  Deferred tax liabilities                              523,929     489,108
  Regulatory liabilities                                326,424     308,858
  Pension and other postretirement benefit
   liabilities                                          235,516     147,733
  Derivative instruments                                  1,117          96
  Other non-current liabilities                         118,059     119,376
                                                     ----------- -----------
    Total deferred credits and other non-current
     liabilities                                      1,205,045   1,065,171
                                                     ----------- -----------
Equity:
  Common stock                                          376,656     366,560
  Retained earnings                                     418,003     419,109
  Accumulated other comprehensive loss                   (9,744)     (6,193)
                                                     ----------- -----------
    Total equity                                        784,915     779,476
                                                     ----------- -----------
    Total liabilities and equity                     $2,982,401  $2,830,384
                                                     =========== ===========



NORTHWEST NATURAL GAS COMPANY                           Three Months Ended
Consolidated Statements of Cash Flows (Unaudited)            March 31,
In thousands                                              2015       2014
----------------------------------------------------------------------------
Operating activities:
  Net income                                           $  28,486  $  37,884
  Adjustments to reconcile net income to cash provided
   by operations:
    Depreciation and amortization                         20,111     19,589
    Regulatory amortization of gas reserves                5,255      2,981
    Deferred tax liabilities, net                          5,918        205
    Non-cash expenses related to qualified defined
     benefit pension plans                                 1,509      1,278
    Contributions to qualified defined benefit pension
     plans                                                (2,630)    (2,800)
    Deferred environmental (expenditures), net of
     recoveries                                           (3,315)    83,252
    Non-cash regulatory disallowance of prior
     environmental cost deferrals                         15,000          -
    Non-cash interest income on deferred environmental
     expenses                                             (5,322)         -
    Other                                                    900        603
    Changes in assets and liabilities:
      Receivables                                         29,193     23,216
      Inventories                                          8,543     27,200
      Taxes accrued                                        6,724     26,824
      Accounts payable                                   (26,550)    (1,671)
      Interest accrued                                     4,348      4,041
      Deferred gas costs                                  13,074    (14,049)
      Other, net                                          17,005     11,579
                                                       ---------- ----------
    Cash provided by operating activities                118,249    220,132
                                                       ---------- ----------
Investing activities:
  Capital expenditures                                   (27,135)   (25,588)
  Utility gas reserves                                    (1,860)   (19,681)
  Other                                                       49       (191)
                                                       ---------- ----------
    Cash used in investing activities                    (28,946)   (45,460)
                                                       ---------- ----------
Financing activities:
  Common stock issued, net                                   700      1,400
  Change in short-term debt                              (78,500)  (155,600)
  Cash dividend payments on common stock                 (12,688)   (12,456)
  Other                                                   (3,131)       442
                                                       ---------- ----------
    Cash used in financing activities                    (93,619)  (166,214)
                                                       ---------- ----------
Increase (decrease) in cash and cash equivalents          (4,316)     8,458
Cash and cash equivalents, beginning of period             9,534      9,471
                                                       ---------- ----------
Cash and cash equivalents, end of period               $   5,218  $  17,929
                                                       ========== ==========

============================================================================
Supplemental disclosure of cash flow information:
  Interest paid                                        $   5,399  $   7,502
  Income taxes paid                                            -          -
============================================================================



                        NORTHWEST NATURAL GAS COMPANY
                      Financial Highlights (Unaudited)
                            First Quarter - 2015


In thousands,
 except per
 share amounts,
 customer, and
 degree day data  Three Months Ended           Twelve Months Ended
                      March 31,                     March 31,
                   2015       2014    Change    2015         2014     Change
---------------- ---------- ---------        ------------ -----------
Operating
 revenues        $261,665   $293,386   (11)% $  722,316   $  774,043   (7)%

Operating
 expenses:
  Cost of gas     125,705    155,201   (19)     335,994      386,140   (13)
  Operations and
   maintenance     54,116     35,386    53      155,712      138,242    13
  General taxes     8,732      8,182     7       29,957       29,406     2
  Depreciation
   and
   amortization    20,111     19,589     3       79,715       76,687     4
                 ---------- ---------        ------------ -----------
  Total
   operating
   expenses       208,664    218,358    (4)     601,378      630,475    (5)
                 ---------- ---------        ------------ -----------
Income from
 operations        53,001     75,028   (29)     120,938      143,568   (16)
Other income and
 expense, net       5,049      1,383    265       5,599        5,532     1
Interest
 expense, net      10,481     11,542    (9)      43,502       45,587    (5)
                 ---------- ---------        ------------ -----------
Income before
 income taxes      47,569     64,869   (27)      83,035      103,513   (20)
Income tax
 expense           19,083     26,985   (29)      33,741       42,730   (21)
                 ---------- ---------        ------------ -----------
Net income       $ 28,486   $ 37,884   (25)  $   49,294   $   60,783   (19)
                 ========== =========        ============ ===========

Common shares
 outstanding:
  Average
   diluted for
   period          27,369     27,126             27,270       27,051
  End of period    27,332     27,132             27,332       27,132

Per share
 information:
  Diluted
   earnings per
   share         $   1.04   $   1.40         $     1.81   $     2.25
  Dividends
   declared per
   share of
   common stock     0.465      0.460               1.85         1.84
  Book value per
   share, end of
   period           28.72      28.73              28.72        28.73
  Market closing
   price, end of
   period           47.95      44.01              47.95        44.01

Capital
 Structure, end
 of period:
  Common stock
   equity            49.0%      50.2%              49.0%        50.2%
  Long-term debt     38.8       42.6               38.8         42.6
  Short-term
   debt
   (including
   amounts due
   in one year)      12.2        7.2               12.2          7.2
                 ---------- ---------        ------------ -----------
  Total             100.0%     100.0%             100.0%       100.0%

Utility
 operating
 statistics:
Customers, end
 of period        707,472    698,372   1.3%     707,472      698,372   1.3%
Utility volumes
 (therms):
  Residential
   and
   commercial
   sales          206,817    274,156            553,564      677,398
  Industrial
   sales and
   transportatio
   n              123,160    132,061            463,186      475,060
                 ---------- ---------        ------------ -----------
Total utility
 volumes sold
 and delivered    329,977    406,217          1,016,750    1,152,458
Utility
 operating
 revenues:
  Residential
   and
   commercial
   sales         $240,912   $270,002         $  643,350   $  686,886
  Industrial
   sales and
   transportation  20,526     21,512             73,006       71,367
  Other revenues    1,406      1,477              3,912        4,002
  Less: Revenue
   taxes            6,538      7,496             17,879       19,237
                 ---------- ---------        ------------ -----------
Total utility
 operating
 revenues         256,306    285,495            702,389      743,018
  Less: Cost of
   gas            125,705    155,201            335,994      386,140
                 ---------- ---------        ------------ -----------
Utility margin   $130,601   $130,294         $  366,395   $  356,878
                 ========== =========        ============ ===========
Degree days:
  Average (25-
   year average)    1,855      1,855              4,240        4,240
  Actual            1,481      1,890   (22)%      3,383        4,365   (22)%
Percent colder
 (warmer) than
 average weather      (20)%        2%               (20)%          3%

Investor Contact:
Nikki Sparley
Phone: 503-220-4211 ext. 5857
Email: [email protected]


Media Contact:
Melissa Moore
Phone: 503-220-2436
Email: [email protected]

Source: Northwest Natural Gas Company



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