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Northwest Natural (NYSE: NWN)
Q4 2023 Earnings Call
Feb 23, 2024, 11:00 a.m. ET
Welcome and Opening Statements
Operator
Greetings to all participants as we delve into the Northwest Natural Holdings Company Q4 2023 earnings call. Prepare for a narrative weaved with financial insight. Let’s introduce our host, Nikki Sparley, director of investor relations, orchestrating this melodic symphony of financial discussions.
Nikki Sparley — Director, Investor Relations
Welcome, everyone, to our fourth-quarter 2023 earnings call. Brace yourselves for forward-looking projections, delicately balanced on management’s assumptions. Our roadmap for the year ahead hints at a tapestry of challenges and triumphs. The crescendo of our 10-K filing later today promises to reveal our financial fortitude in the market’s stormiest seas.
Guidance and Financial Insights
David Anderson — Chief Executive Officer
Salutations to all tuned in. Ponder with me as we dissect the intricate tapestry of 2024. Earnings growth resembles a lively tango – intricate steps intertwined with investment effervescence. Prepare for a tale of credit ratings, sturdy balance sheets, and a 4%-6% earnings bloom on the horizon. However, our 2024 earnings forecast holds a mirror to reality – a blend of recovery lag and inflationary headwinds.
Our gas utility’s relentless safety and tech investments reach crescendo levels. The recovery lag, an intricate dance of capital investments and depreciation jigs, paints a novel narrative. Inflationary winds tickle our operating expenses, kindled by multiyear O&M contracts and cloud tech amortization. This confluence spurred us to pen an Oregon rate case, navigating these perilous waters of operational cost.
Our team dons the financial armor, slicing costs and boosting efficiency amidst the storm. The Oregon rate case marks a battlefront – a 10-month adjudication journey destined to reshape the landscape. The looming rate hikes bear a dual-faced coin. On one side, a revenue hike ushers in a golden era for investments. On the flip side, customers squirm at potential bill adjustments.
Yet, a ray of hope twinkles amidst the tempest. Residential customers savor a 9% drop in rates, a luxuriant oasis amidst the financial dunes. As we steer through gas utility’s labyrinth, our water utilities demand their moment in the limelight. Capital investments trickle into water utilities, buoyed by a melody of structural upgrades and community support.
Focusing on the Future
2024 unfurls as a construction zone, a symphony of growth nurtured amidst recovery lag’s tendrils. Northwest Natural Renewables elevates the narrative, converting landfill gases to renewable gold. We gaze ahead at a landscape marked by investment fervor and financial resilience, bracing for a market dance akin to a waltz of cautious optimism.
The Gas Industry’s Bumpy Ride to Success
Technical Hurdles and Future Prospects
Raw gas volumes are flowing as anticipated for two significant projects, signaling positive movement in the industry. However, full commissioning has been stalled by a technical glitch with conditioning equipment. Fortunately, after exhaustive troubleshooting sessions in the past year, our partners have unraveled the mystery behind the remaining issues, paving the way for the facilities to come online later this year. The $25 million investment per facility will only be unlocked once full commercial operations are achieved.
Revenue Expectations and Long-term Growth
On the bright side, revenue and cash flows are projected to kick in swiftly post-commissioning, driven by long-term fixed-price agreements with investment-grade partners. Despite the present setback, the future looks promising with unwavering commitment to this venture and a keen eye for substantial long-term growth opportunities. Yet, the current state of affairs leaves much to be desired. Initial earnings projections for 2023 and the full swing in 2024 now hang in the balance due to the operational delay.
New Leadership Sparks Optimism
Turning the tide, a fresh wave of excitement washes over our renewables company with the appointment of Anna Chittum as the new president. With a quick and impactful start, there’s immense confidence that Anna and her team will navigate through the start-up turbulence deftly and explore uncharted growth territories efficiently.
Spurring Growth Amidst Challenges
Reflecting on 2023, it was a colossal rollercoaster ride for Northwest Natural, replete with triumphs and tribulations. Amid market challenges, the company surged ahead, securing second place for customer satisfaction among major utilities in the western U.S. Expansions in gas and water utilities, inauguration of a new renewable natural gas facility under Oregon legislation, and strategic acquisitions underscored a year of resilience and innovation.
Financial Performance and Growth Trajectory
Financially, 2023 witnessed a notable upswing with net income reaching $93.9 million or $2.59 per share, a substantial leap from the previous year’s $86.3 million or $2.54 per share. Elevated earnings were buoyed by increased revenues from Oregon rate revisions, customer influx, and prudent cost management practices.
Path to Long-term Earnings Growth
Despite the lingering challenges of 2024, largely rooted in the regulated nature of the utility sector, strategic actions have been deployed to mitigate future hurdles and spur sustainable growth. Resolutely upholding a legacy of ethical operations, dividend increments for the 68th consecutive year, and an unwavering commitment to maintaining robust financial health exemplify the company’s steadfast march towards future prosperity.
Financial Guidance and Operational Insights
Looking ahead, Northwest Natural remains steadfast in its commitment to 4% to 6% long-term earnings-per-share growth, anchored by a solid base year in 2022. With Brody Wilson taking the stage to provide financial insights, the company’s seasonal earnings pattern and segment reporting nuances shed light on the intricate financial fabric underlying the organization’s growth trajectory.
Northwest Natural Holdings: Steadfast Growth Amidst Infrastructure Investments
Record Cash Flow and Strategic Investments
In 2023, Northwest Natural Holdings saw a record-breaking $280 million in cash flow from operating activities, a testament to their commitment to enhancing safety, reliability, and technology. The company invested $327 million in their systems, with almost 90% dedicated to the gas utility. An additional $8.5 million was allocated for water and wastewater acquisitions.
Strong Financing and Capital Structure
Northwest Natural Holdings maintains robust liquidity and credit ratings, with an A+ rating from S&P for their holding company. Capital structure remains at 50% equity and 50% long-term debt, aligning with regulated norms. Looking ahead to 2024, the gas utility is poised to invest between $350 million to $400 million in key projects like meter modernization and technology upgrades. Water utility capex is set at approximately $40 million.
Regulatory Lag and Growth Initiatives
The company is prepared for regulatory lag, having filed rate cases to support their substantial capital investments. While near-term earnings may face pressure, these investments are vital for long-term profitability. Northwest Natural Holdings anticipates a decline in earnings for 2024 due to regulatory factors but projects a solid 4% to 6% annual growth in earnings per share from 2022 to 2027.
Decarbonization Efforts and Operational Excellence
Amidst a shifting energy landscape, Northwest Natural Holdings remains committed to balancing reliability, affordability, and sustainability. Their gas utility system played a crucial role during a recent winter storm, setting new records in energy delivery. The company’s disciplined investments over the years have established them as a powerhouse, supporting communities with reliable energy.
Northwest Natural Holdings’ proactive approach to infrastructure, finance, and sustainability positions them for continued growth and resilience in the evolving energy sector.
Northwest Natural Holding Company: A Glimpse Into Their Sustained Growth and Forward-looking Initiatives
The renewable natural gas (RNG) industry is abuzz with anticipation as Northwest Natural Holding Company secures exclusive rights to construct a groundbreaking RNG facility at WM’s landfill in East Wenatchee, Washington. The envisaged facility is poised to commence generating RNG by late 2025, promising a robust 20-year supply once operational.
Expanding Footprint and Commitment to Decarbonization
Northwest Natural Holding Company is charting new territory with its third RNG facility investment, marking its inaugural venture into the Pacific Northwest. The company’s unwavering dedication to advancing decarbonization efforts underscores a commitment to innovation and environmental stewardship.
From Water Utilities to Wastewater Services
What began as a foray into water utilities in 2017 has blossomed into over 30 strategic acquisitions, culminating in a significant presence in wastewater services. The recent establishment of a water services company in 2023 aligns seamlessly with Northwest Natural’s overarching water acquisition strategy, propelling the company into the upper echelons of privately owned water utilities in the United States.
Driving Growth Through Strategic Acquisitions
Northwest Natural Holding Company’s ascent to prominence is punctuated by a meticulous approach to consolidation, marked by conscientiousness, discipline, and resourcefulness. Each acquisition has been a building block in constructing a robust business framework, emphasizing the indispensable role of patience and foresight in an industry rife with fragmentation.
Embracing Operational Excellence and Sustainable Investments
The company’s relentless pursuit of operational excellence is evident in its endeavors to professionalize acquired systems, fortify safety protocols, elevate customer service standards, and implement strategic capital expenditure initiatives. This dedication has seen a meteoric rise in property, plant, and equipment assets, underscoring a commitment to delivering clean and secure water and wastewater services to customers.
Fostering Long-Term Value and Resilience
While regulatory lag may impede short-term progress, Northwest Natural Holding Company remains resolute in its belief that sustained investment is the linchpin for long-term customer and investor gratification. The company’s diversification strategy, accentuated by astute acquisitions and prudent investments, underpins its unwavering focus on fortifying earnings and cash flow dynamics for long-term sustainability.
Looking Ahead with Confidence and Determination
The future holds both challenges and opportunities for Northwest Natural Holding Company in 2024. Despite regulatory headwinds, the company’s leadership team and employees are unequivocally committed to steering the company towards a trajectory of success in the coming years. By reiterating their long-term earnings-per-share growth rate, the company affirms its confidence in navigating the complexities of the evolving marketplace with resilience and foresight.
Q&A Session Highlights:
The recent earnings call brought forth insightful queries from industry analysts, shedding light on strategic moves and operational nuances. Analysts delved into topics ranging from rate cases and facility timelines to earnings projections, showcasing a keen interest in Northwest Natural Holding Company’s growth trajectory and strategic roadmap.
Despite the challenges posed by regulatory dynamics and operational timelines, the company’s leadership exuded confidence and poise, reassuring stakeholders of their unwavering commitment to operational excellence and sustained growth. As Northwest Natural Holding Company forges ahead with its vision for a greener future, investors and industry enthusiasts alike are poised to witness a transformative journey marked by innovation, resilience, and unwavering dedication to environmental conservation.
