OREANDA-NEWS. Northwest Natural Gas Company, dba NW Natural (NYSE:NWN), reported earnings per share (EPS) of $0.10 on net income of $2.7 million for the second quarter of 2017, compared to $0.07 per share on net income of $2.0 million for the same period in 2016.

Consolidated net income was $43.0 million, or $1.50 per share, for the first six months of 2017, compared to net income of $38.7 million, or $1.40 per share, for the same period of 2016. Results for the first six months of 2016 included a non-cash disallowance related to the Company's environmental regulatory proceeding and the implementation of the environmental recovery mechanism. Excluding this charge(1) on a non-GAAP basis, EPS for the first six months of 2016 was $1.47 on net income of $40.7 million.

As a reminder, the utility's earnings are seasonal with the majority of its revenues generated during the winter heating season in the first and fourth quarters each year. Overall results for 2017 reflected higher utility segment earnings including additional margin from customer growth and cooler weather in 2017 compared to 2016. These favorable trends were offset by lower gas storage segment earnings primarily from decreased asset management revenues at Mist.

"Results for the quarter were solid. Customer growth continued to increase driven by a good economy, continued conversions, and increased success in the multifamily sector," said David H. Anderson, President and CEO of NW Natural. "We continued to make good progress on the construction of our North Mist Gas Storage Expansion Project — one of the largest projects in our Company's history and a very unique facility that will help facilitate the region's transition to a lower carbon future."

Construction Continues on North Mist Gas Storage Expansion Project
The North Mist Expansion Project is designed to provide long-term, no-notice underground gas storage service to support gas-fired electric generating facilities that are intended to facilitate the integration of more wind power into the region's electric generation mix. Natural gas storage enables electric generation to adjust quickly when renewable energy — like wind and solar — rises and falls. Our no-notice service is designed to allow the local electric company to draw on our North Mist facility to meet its fueling needs and rapidly respond to natural variability in wind generation.

The project remains on track to be in-service for the winter of 2018 with the heaviest construction phase occurring this year. In July we completed drilling all wells, and the compressor station is currently being assembled and tested in preparation for installation later this fall. Finally, construction continues on the 13-mile pipeline connecting the North Mist facility to Portland General Electric's Port Westward electric generating facility with construction expected to be completed later this fall. The estimated cost of the expansion remains at $128 million. The expansion will be rate-based under an established tariff when it is placed into service.

(1) Non-GAAP measure, see reconciliation below.

Second Quarter Results
The following financial comparisons are between the second quarter of 2017 and second quarter of 2016, unless otherwise noted. Individual factors below are presented on an after-tax basis using a statutory tax rate of 39.5%.

Consolidated Results
Consolidated net income increased $0.7 million or $0.03 per share primarily due to higher utility segment results from customer growth and cooler weather in 2017. Offsetting these favorable variances were lower results from our gas storage segment, which reported lower asset management revenues from Mist.

The second quarter results are summarized in the table below:

  Three Months Ended June 30,
  2017   2016   Change
In thousands, except per share data Amount Per Share   Amount Per Share   Amount Per Share
Net income:                
Utility segment $ 2,137   $ 0.07     $ 507   $ 0.02     $ 1,630   $ 0.05  
Gas storage segment 756   0.03     1,439   0.05     (683 ) (0.02 )
Other (164 )     73       (237 )  
Consolidated net income $ 2,729   $ 0.10     $ 2,019   $ 0.07     $ 710   $ 0.03  
Diluted Shares 28,717       27,632       1,085    

Utility Segment Results
Utility segment net income increased $1.6 million or $0.05 per share due to the following offsetting items:

  • a $3.1 million increase in utility margin reflecting strong customer growth and cooler weather in 2017. Weather for the second quarter of 2017 was 1% warmer than average, compared to 42% warmer than average weather for the same period in 2016; offset by
  • a $1.2 million increase in operations and maintenance expense reflecting higher payroll and benefits due to increased headcount, general salary increases, and higher health care costs.

Gas Storage Segment Results
Gas storage segment net income decreased $0.7 million or $0.02 per share primarily due to the following factors:

  • a $0.5 million decrease in gas storage primarily from lower asset management revenues from our Mist facility and transportation capacity; and
  • a $0.2 million increase in operating expenses from pipeline and compressor maintenance at our Gill Ranch facility.

Year-to-Date Results
The following financial comparisons are between the first six months of 2017 and the same period of 2016, unless otherwise noted. Individual factors below are presented on an after-tax basis using a statutory tax rate of 39.5%.

Consolidated Results
Consolidated net income increased $4.4 million or $0.10 per share primarily due to higher utility segment results from customer growth and the effects of a colder winter in 2017. In addition, 2016 results were negatively impacted by a non-cash disallowance recorded during the first quarter of 2016 related to the Company's environmental regulatory proceeding and the implementation of the environmental recovery mechanism. Offsetting these favorable variances were lower results from our gas storage segment reflecting decreased asset management revenues from Mist.

The year-to-date results are summarized in the table below:

  Six Months Ended June 30,
  2017   2016   Change
In thousands, except per share data Amount Per Share   Amount Per Share   Amount Per Share
Net income:                
Utility segment $ 42,329   $ 1.47     $ 36,359   $ 1.32     $ 5,970   $ 0.15  
Gas storage segment 817   0.03     2,175   0.08     (1,358 ) (0.05 )
Other (107 )     126       (233 )  
Consolidated net income (GAAP) $ 43,039   $ 1.50     $ 38,660   $ 1.40     $ 4,379   $ 0.10  
Adjustment for regulatory environmental disallowance(1)       1,996   0.07     (1,996 ) (0.07 )
Adjusted net income (non-GAAP)(1) $ 43,039   $ 1.50     $ 40,656   $ 1.47     $ 2,383   $ 0.03  
Diluted Shares 28,722       27,591       1,131    

(1) The 2016 disallowance related to the Company's compliance filing under the environmental recovery mechanism with the total pre-tax charge of $3.3 million recorded in utility other income ($2.8 million) and utility operation and maintenance expense ($0.5 million). The income tax effect of the adjustment was $1.3 million and is calculated using the combined federal and state statutory tax rate of 39.5%.

Utility Segment Results
Utility segment net income increased $6.0 million or $0.15 per share primarily due to the following offsetting items:

  • a $6.4 million increase in utility margin reflecting strong customer growth and the effects of a colder winter in 2017. Weather for the first six months of 2017 was 44% colder than 2016 and 12% colder than average. Offsetting these factors were lower gains from our gas cost incentive sharing mechanism in Oregon;
  • a $2.1 million increase in other income mainly due to the environmental interest disallowance in the first quarter of 2016 as a result of closing out the environmental docket and implementing the environmental recovery mechanism; offset by
  • a $1.7 million increase in operations and maintenance expense reflecting higher payroll and benefits due to increased headcount, general salary increases, and higher health care costs; and
  • a $1.1 million increase in depreciation expense due to planned capital expenditures for system reinforcement, facilities, and technology.

Gas Storage Segment Results
Gas storage segment net income decreased $1.4 million or $0.05 per share primarily due to the following factors:

  • a $1.0 million decrease in gas storage revenues reflecting lower asset management revenues from our Mist facility and transportation capacity; and
  • a $0.4 million increase in operating expenses from pipeline and compressor maintenance at our Gill Ranch facility.

Balance Sheet and Cash Flows
During the first six months of 2017, the Company generated $194.2 million in operating cash flow, invested $94.3 million in capital expenditures, reduced short-term debt by $53.3 million, and paid dividends of $26.9 million.

Cash provided by operations was enhanced by higher customer receipts due to the comparatively colder weather especially in the first quarter of 2017 offset by higher gas purchases. Cash outflows from investing activities increased $35.0 million in the first six months of 2017 compared to the same period in 2016 primarily due to higher capital expenditures from the North Mist Gas Storage Expansion Project. Cash outflows from financing activities decreased $56.4 million primarily due to lower short-term debt and commercial paper balances and repayments.

2017 Earnings Guidance
The Company reaffirmed 2017 earnings guidance today in the range of $2.05 to $2.25 per share. This guidance assumes customer growth from our utility segment, average weather conditions, slow recovery of the gas storage market, and no significant changes in prevailing regulatory policies, mechanisms, or outcomes, or significant laws or regulations.

Dividend Declared
The board of directors of NW Natural declared a quarterly dividend of 47 cents per share on the Company’s common stock. The dividend will be paid on August 15, 2017 to shareholders of record on July 31, 2017. The Company’s indicated annual dividend rate is $1.88 per share.

Conference Call and Webcast
As previously reported, NW Natural will host a conference call and webcast today to discuss its second quarter and year-to-date 2017 financial and operating results.

Date and Time: Wednesday, August 2  
  8 a.m. PT (11 a.m. ET)  
     
Phone Numbers: United States:   1-866-267-6789
  Canada: 1-855-669-9657
  International:       1-412-902-4110
     

The call will also be webcast in a listen-only format for the media and general public and can be accessed at nwnatural.com under the Investor Relations tab. A replay of the conference call will be available on our website and by dialing 1-877-344-7529 (U.S.), 1-855-669-9658 (Canada), and 1-412-317-0088 (international). The replay access code is (10110143).

About NW Natural
NW Natural (NYSE:NWN) is headquartered in Portland, Ore., and provides natural gas service to more than 730,000 residential, commercial, and industrial customers in western Oregon and southwestern Washington. NW Natural and its subsidiaries currently own and operate 31 Bcf of underground gas storage capacity in Oregon and California. Additional information is available at nwnatural.com.

 

Presentation of Non-GAAP Results
In addition to presenting the results of operations and earnings amounts in total, certain financial measures exclude the after-tax regulatory charge related to the regulatory order implementing the SRRM in 2016, which are non-GAAP financial measures. We present 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, 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 to EPS are on the basis of diluted shares. We use such non-GAAP financial 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.

NORTHWEST NATURAL
Consolidated Income Statement and Financial Highlights (Unaudited)
Second Quarter 2017
      Three Months Ended     Six Months Ended     Twelve Months Ended  
In thousands, except per share amounts, customer, and degree day data   June 30,     June 30,     June 30,  
2017   2016 Change 2017   2016 Change 2017   2016 Change
Operating revenues $ 136,238     $ 99,183   37 % $ 433,561     $ 354,712   22 % $ 754,816     $ 678,558   11 %
                                     
Operating expenses:                                    
  Cost of gas   53,005       20,871   154     196,616       129,282   52     327,922       268,706   22  
  Operations and maintenance   38,546       35,962   7     78,966       74,901   5     154,039       142,995   8  
  Environmental remediation   2,611       1,893   38     9,565       6,922   38     15,941       10,435   53  
  General taxes   7,564       7,438   2     16,589       16,122   3     31,005       30,022   3  
  Depreciation and amortization   21,355       20,413   5     42,440       40,807   4     83,922       81,389   3  
  Total operating expenses   123,081       86,577   42     344,176       268,034   28     612,829       533,547   15  
Income from operations   13,157       12,606   4     89,385       86,678   3     141,987       145,011   (2 )
Other income (expense), net   958       513   87     1,839       (1,796 ) (202 )   3,092       (233 ) (1,427 )
Interest expense, net   9,717       9,718       19,593       19,454   1     39,267       41,074   (4 )
Income before income taxes   4,398       3,401   29     71,631       65,428   9     105,812       103,704   2  
Income tax expense   1,669       1,382   21     28,592       26,768   7     42,538       42,024   1  
Net income $ 2,729     $ 2,019   35   $ 43,039     $ 38,660   11   $ 63,274     $ 61,680   3  
                                     
Common shares outstanding:                                    
  Average diluted for period   28,717       27,632       28,722       27,591       28,322       27,519    
  End of period   28,662       27,550       28,662       27,550       28,662       27,550    
                                       
Per share information:                                    
Diluted earnings per share $ 0.10     $ 0.07     $ 1.50     $ 1.40     $ 2.23     $ 2.24    
Dividends declared per share of common stock   0.47       0.4675       0.94       0.9350       1.8775       1.8675    
Book value per share, end of period   30.19       29.04       30.19       29.04       30.19       29.04    
Market closing price, end of period   59.85       64.82       59.85       64.82       59.85       64.82    
                                     
Capital structure, end of period:                                    
  Common stock equity   54.6 %     51.7 %     54.6 %     51.7 %     54.6 %     51.7 %  
  Long-term debt   41.5       36.8       41.5       36.8 %     41.5       36.8 %  
  Short-term debt (including amounts due in one year)   3.9       11.5       3.9       11.5 %     3.9       11.5 %  
  Total   100.0 %     100.0 %     100.0 %     100.0 %     100.0 %     100.0 %  
                                       
Utility segment operating statistics:                                    
Customers - end of period   730,968       718,191   1.8 %   730,968       718,191   1.8 %   730,968       718,191   1.8 %
Utility volumes - therms:                                    
  Residential and commercial sales   113,869       82,625       441,392       325,499       725,115       592,344    
  Industrial sales and transportation   120,774       110,308       260,890       239,983       496,681       463,887    
Total utility volumes sold and delivered   234,643       192,933       702,282       565,482       1,221,796       1,056,231    
Utility operating revenues:                                    
  Residential and commercial sales $ 117,296     $ 82,509     $ 397,573     $ 320,181     $ 681,782     $ 606,185    
  Industrial sales and transportation   14,791       10,972       33,694       28,636       64,444       62,467    
  Other revenues   1,168       1,102       2,543       2,513       3,842       3,890    
  Less: Revenue taxes   3,160       2,448       10,989       9,091       19,009       17,290    
Total utility operating revenues   130,095       92,135       422,821       342,239       731,059       655,252    
  Less: Cost of gas   53,005       20,871       196,616       129,282       327,922       268,706    
  Environmental remediation expense   2,611       1,893       9,565       6,922       15,941       10,435    
Utility margin, net $ 74,479     $ 69,371     $ 216,640     $ 206,035     $ 387,196     $ 376,111    
Degree days:                                    
  Average (25-year average)   691       691       2,546       2,562       4,240       4,256    
  Actual   684       403   70 %   2,853       1,988   44 %   4,416       3,453   28 %
Percent (warmer) colder than average weather   (1 )%     (42 )%     12 %     (22 )%     4 %     (19 )%  
                                       
Gas storage segment operating statistics:                                    
Operating revenues $ 6,088     $ 6,992     $ 10,629     $ 12,361     $ 23,534     $ 23,081    
Operating expenses   4,489       4,112       8,424       7,756       16,798       15,238    
NORTHWEST NATURAL            
Consolidated Balance Sheets (Unaudited)     June 30,
In thousands     2017     2016
Assets:            
Current assets:            
  Cash and cash equivalents   $ 20,854     $ 5,463  
  Accounts receivable     31,908       23,353  
  Accrued unbilled revenue     13,896       14,175  
  Allowance for uncollectible accounts     (845 )     (570 )
  Regulatory assets     37,504       49,004  
  Derivative instruments     1,530       7,445  
  Inventories     57,666       66,171  
  Gas reserves     16,072       15,707  
  Other current assets     13,419       21,312  
    Total current assets     192,004       202,060  
Non-current assets:            
  Property, plant, and equipment     3,333,668       3,146,631  
  Less: Accumulated depreciation     973,084       932,179  
    Total property, plant, and equipment, net     2,360,584       2,214,452  
  Gas reserves     92,020       108,286  
  Regulatory assets     348,284       344,969  
  Derivative instruments     162       3,541  
  Other investments     68,885       67,868  
  Other non-current assets     3,215       1,968  
    Total non-current assets     2,873,150       2,741,084  
    Total assets   $ 3,065,154     $ 2,943,144  
Liabilities and equity:            
Current liabilities:            
  Short-term debt   $     $ 152,800  
  Current maturities of long-term debt     61,991       24,987  
  Accounts payable     95,761       57,756  
  Taxes accrued     6,906       6,237  
  Interest accrued     5,966       5,793  
  Regulatory liabilities     28,041       27,300  
  Derivative instruments     4,734       3,471  
  Other current liabilities     31,683       35,289  
    Total current liabilities     235,082       313,633  
Long-term debt     658,118       570,045  
Deferred credits and other non-current liabilities:            
  Deferred tax liabilities     577,176       554,400  
  Regulatory liabilities     359,205       341,259  
  Pension and other postretirement benefit liabilities     219,718       219,049  
  Derivative instruments     3,466       474  
  Other non-current liabilities     146,960       144,285  
    Total deferred credits and other non-current liabilities     1,306,525       1,259,467  
Equity:            
  Common stock     444,058       388,967  
  Retained earnings     428,049       417,857  
  Accumulated other comprehensive loss     (6,678 )     (6,825 )
    Total equity     865,429       799,999  
    Total liabilities and equity   $ 3,065,154     $ 2,943,144  
NORTHWEST NATURAL            
Consolidated Statements of Cash Flows (Unaudited)     Six Months Ended June 30,
In thousands     2017     2016
Operating activities:            
  Net income   $ 43,039     $ 38,660  
  Adjustments to reconcile net income to cash provided by operations:            
    Depreciation and amortization     42,440       40,807  
    Regulatory amortization of gas reserves     8,031       7,647  
    Deferred income taxes     22,170       27,022  
    Qualified defined benefit pension plan expense     2,615       2,737  
    Contributions to qualified defined benefit pension plans     (7,250 )     (6,120 )
    Deferred environmental (expenditures) recoveries, net     (6,817 )     (5,521 )
    Regulatory disallowance of prior environmental cost deferrals           3,273  
    Amortization of environmental remediation     9,565       6,922  
    Other     1,268       2,121  
    Changes in assets and liabilities:            
      Receivables, net     86,065       87,271  
      Inventories     (3,537 )     4,525  
      Income taxes     (5,243 )     3,710  
      Accounts payable     (22,063 )     (17,141 )
      Interest accrued           (80 )
      Deferred gas costs     15,325       (9,295 )
      Other, net     8,623       13,022  
    Cash provided by operating activities     194,231       199,560  
Investing activities:            
  Capital expenditures     (94,318 )     (62,153 )
  Other     (404 )     2,453  
    Cash used in investing activities     (94,722 )     (59,700 )
Financing activities:            
  Repurchases related to stock-based compensation     (2,034 )     (1,042 )
  Proceeds from stock options exercised     1,309       5,374  
  Change in short-term debt     (53,300 )     (117,235 )
  Cash dividend payments on common stock     (26,919 )     (25,677 )
  Other     (1,232 )     (28 )
    Cash used in financing activities     (82,176 )     (138,608 )
Increase in cash and cash equivalents     17,333       1,252  
Cash and cash equivalents, beginning of period     3,521       4,211  
Cash and cash equivalents, end of period   $ 20,854     $ 5,463  
                   
Supplemental disclosure of cash flow information:            
  Interest paid, net of capitalization   $ 18,011     $ 18,124  
  Income taxes paid (refunded)     9,081       (7,900 )