8-K: NW Natural Holdings Reports Mixed 2023 Results, Initiates 2024 Guidance

Northwest Natural Holding Company reported a net income of $93.9 million for 2023, while initiating 2024 earnings guidance of $2.20 to $2.40 per share and reaffirming a long-term EPS growth target of 4-6%.

Summary

• Northwest Natural Holding Company (NWN) announced its fourth quarter and full year 2023 financial results.
• The company reported a net income of $93.9 million, or $2.59 per share, for 2023, compared to $86.3 million, or $2.54 per share, in 2022.
• NWN invested $327.3 million in utility systems and added over 15,000 gas and water utility connections in the last 12 months, representing a 1.8% growth rate.
• The company filed an Oregon general rate case requesting a $154.9 million revenue increase to support system investments and cost increases.
• NWN signed agreements for a renewable natural gas (RNG) facility in Washington and reduced residential rates in Oregon by 9% starting November 1, 2023.
• Four water utility acquisitions were completed in 2023, and the company launched a water services business.
• The company increased its dividend for the 68th consecutive year to an annual rate of $1.95 per share.
• 2024 earnings guidance is set between $2.20 and $2.40 per share, with a long-term EPS growth target of 4% to 6% from 2022 through 2027.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the increase in net income for 2023, continued dividend increases, and strategic investments. However, the lower 2024 earnings guidance and increased expenses temper the overall outlook.

Positives

• Net income increased to $93.9 million in 2023 from $86.3 million in 2022.
• The company made significant investments of $327.3 million in utility systems.
• Customer base grew by 1.8% with over 15,000 new connections.
• NW Natural achieved high customer satisfaction rankings for the 20th consecutive year.
• The company secured a 20-year RNG supply agreement.
• Residential rates in Oregon were reduced by 9%.
• The dividend was increased for the 68th consecutive year.
• The company is expanding its water utility business through acquisitions.

Negatives

• The fourth quarter net income for the natural gas distribution segment decreased by $0.6 million.
• Operating expenses increased by $40 million for the year and $9.2 million for the quarter.
• Interest expense increased by $14.3 million for the year and $1.6 million for the quarter.
• Net income from other activities decreased due to higher interest expense.
• 2024 earnings per share guidance is below the long-term growth target due to regulatory lag and increased operating costs.

Risks

• Regulatory lag in the gas utility business model is impacting 2024 earnings.
• Increased operating costs due to inflation and multi-year contract renewals are affecting profitability.
• The company faces risks related to weather patterns, which can impact customer usage and revenue.
• There are potential risks associated with the outcome of the Oregon general rate case.
• The company is exposed to risks related to legal, regulatory, legislative, public health, financial, macroeconomic, geopolitical, growth, strategic, operational, business continuity, technology, and environmental factors.
• The timing and amount of capital expenditures could change based on various factors.

Future Outlook

NW Natural Holdings reaffirmed its long-term earnings per share growth target of 4% to 6% compounded annually from 2022 through 2027, while initiating 2024 earnings guidance in the range of $2.20 to $2.40 per share, which is below the long-term target due to regulatory lag and increased operating costs. The company expects capital expenditures to be in the range of $350 million to $400 million for 2024 and $1.4 billion to $1.6 billion for the five-year period from 2024 to 2028.

Management Comments

• David H. Anderson, CEO of NW Natural Holdings, stated that the company has demonstrated an unwavering commitment to safety, service, and a focus on the future while delivering strong financial performance.
• He also mentioned that 2024 is an important year with substantial investments in gas and water utility systems.
• The CEO expressed confidence in the long-term earnings per share growth target of 4% to 6% from 2022 through 2027.

Industry Context

This announcement reflects the ongoing trends in the utility sector, including investments in infrastructure, the transition to renewable energy sources like RNG, and the expansion of water utility services. The company's focus on customer satisfaction and ethical practices aligns with industry best practices. The regulatory challenges and cost pressures are common issues faced by utilities.

Comparison to Industry Standards

• NW Natural's customer satisfaction ranking by J.D. Power is a positive indicator, placing them among the top performers in the Western United States, similar to other leading utilities like Southern California Gas Company and San Diego Gas & Electric.
• The company's investment in renewable natural gas aligns with the industry's move towards decarbonization, similar to initiatives by companies like SoCalGas and Southwest Gas.
• The expansion into water utilities is a strategy seen in other diversified utility companies like American Water Works and Essential Utilities.
• The requested rate increase of $154.9 million is a common practice for utilities to recover costs associated with infrastructure investments, similar to rate cases filed by other utilities across the country.
• The long-term EPS growth target of 4-6% is comparable to the growth targets of other established utility companies.

Stakeholder Impact

• Shareholders will benefit from the increased dividend and long-term growth prospects, but may be concerned about the lower 2024 earnings guidance.
• Customers will benefit from improved reliability and resiliency of the utility systems, as well as the reduced residential rates in Oregon.
• Employees may see increased job security due to the company's growth and investments.
• Suppliers and contractors will benefit from the company's increased capital expenditures.
• Creditors will be interested in the company's financial stability and ability to repay debt.

Next Steps

• The Oregon Public Utility Commission will review the general rate case filing.
• The company will continue to invest in its gas and water utility systems.
• Construction of the RNG facility in Washington is expected to begin.
• The company will continue to pursue acquisitions in the water and wastewater sector.
• NW Natural Holdings will host a conference call and webcast to discuss the results.

Key Dates

Keywords

natural gas, utilities, renewable natural gas, water utilities, earnings, rate case, customer growth, capital expenditures, dividends, regulatory lag