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Text: They are based on management's assumptions, which may or may not occur.
In addition, some of our comments today, reference non-GAAP adjusted measures.
We expect to file our 10-Q later today.
As mentioned, this teleconference is being recorded and will be available on our website following the call.
Please note these calls are designed for the financial community.
Like all you, we continue to navigate these unusual times.
In addition to COVID in September.
Oregon dealt with wildfires.
Our gas system was resilient minimally impacted, but as with any event, we took proactive steps to ensure the safety of our customers and coordinated closely with fire commanders.
Moving to a few economic updates.
It is important to remember where we stood in February before the pandemic started.
At that time we had a fundamentally sound sustainable growing economy with record -- record low unemployment, both nationally and in our service territories.
As discussed in previous earnings calls COVID impacts affected the Northwest like the rest of the country, but we've seen some economic improvement in recent months.
For example, Oregon's unemployment rate was 8% in September essentially matching the national rate.
That's down from a 14.9% high in April.
Job growth in Oregon bounce back to positive territory in the second quarter of this year and is sustained an upward climb through September.
In the Portland metro region, year-to-date closed home sales were up 3.1% from 2019 with stronger year-over-year price growth of about 10%.
New single-family permits issued this year are closed to where we were in 2019.
That's much better than what was generally expected this spring.
As a result, we have connected over 13,800 meters during the last 12 months ended September 30th and that's 300 more meters than we added at this time last year.
Our overall customer growth rate is 1.9% for the 12 months ended September and reflects a lower level of customer disconnecting from our system during the pandemic.
As we resume normal disconnection practices we will likely see this growth rate decrease a little bit.
Despite the positive trends, we know these are difficult times for some customers.
That's why we voluntarily suspended normal collection processes and disconnections in March.
Since the pandemic began, we've been working with the commission, staff, and stakeholders in all of our states to determine the best way to return to more normal operating practices.
The last couple of months commissions in all of our states have finalized their timelines that allow utilities to resume normal operations.
Additionally, the Oregon, Texas, and Idaho commissions have approved deferral applications.
On the regulatory front, an order was issued in our Oregon general rate case in October approving our previously disclosed all-party settlement.
The order includes the $45.1 million increase in our revenues requirement based on a 50/50 cap structure, a return of equity of 9.4% and a cost of capital is just under 7%.
In addition, the order reflects an average rate base of $1.44 billion or an increase of $242 million compared to the last rate case.
Somebody on the phone needs to mute, please.
New rates took effect on November 1st and were largely offset by reduced gas costs from our PGA filing.
In Oregon, the combined effect of the rate case and annual purchase gas adjustment resulted in a $2 increase to a residential customers monthly bill.
Overall gas bills continue to remain low, Northwest Natural customers are paying about 30% or excuse me 40% less today for their bills than they did 15 years ago.
In addition, in June we passed back a record of $17 million in storage bill credits to Oregon gas customers.
I'm proud to report that continuing our legacy of service customers ranked Northwest Natural second in the West among large utilities in the 2020 J.D Power Residential Customer Satisfaction Study.
These results are a testament to our customer-centric culture and especially gratifying to see customers recognized our employees and company during this challenging year.
Our annual dividend amount is now $1.92 per share.
We're proud to be one of the only three companies on the New York Stock Exchange with this long record.
I will begin by discussing the financial impacts of COVID-19 and the highlights of the third quarter and year-to-date results and conclude with guidance for 2020.
As David noted, the Oregon Commission recently approved a COVID-19 term sheet that outlines the types of revenues and costs that may be recovered.
These include PPE, bad debt expense.
financing costs associated with additional liquidity and certain lost revenues.
Direct expense reduction, such as lower travel and meals and entertainment are to be netted against the deferral.
Prudency review and recovery of the deferral accounts will be determined at a future proceeding.
While our business model is resilient we are experiencing some financial impacts related to the pandemic.
Through September 30th, we have incurred an estimated $7 million of incremental cost and lower revenue.
In the third quarter, we recognized a $3.1 million regulatory asset for Oregon costs incurred to date.
Utilities are also allowed to recover late fee revenue that has not been charged to customers since the suspension of normal collection processes.
However, this revenue will be recognized in the future period when we began to recover the foregone fees through rates.
At the end of September, this revenue totaled approximately $1 million.
In summary of the $7 million of total financial impact as of September 30th, we expect to recover $4.4 million through rates under these orders with $3.1 million deferred in the third quarter.
In addition to these deferrals in order to further mitigate the financial effects of the pandemic, we initiated temporary cost-savings measures which provided approximately $2 million of savings for the third quarter and year-to-date.
Switching now to our detailed financial results.
I'll describe earnings drivers on an after-tax basis using the statutory tax rate of 26.5%.
The return of excess deferred income taxes to our Oregon customers resulted in an effective tax rate of 22.3%.
Also note that year-to-date earnings per share comparisons were impacted by the issuance of 1.4 million shares in June 2019 as we raised equity to fund investment in our gas utility.
As a reminder, Northwest Natural's earnings are seasonal with a majority of revenues generated in the first and fourth quarters during the winter heating season.
For the quarter, we reported a net loss from continuing operations of $18.7 million or $0.61 per share compared to a net loss of $18.5 million or $0.61 per share for the same period in 2019.
The gas utility posted a decline of $0.08 per share related to higher depreciation and general tax expense, partially offset by the recognition of the regulatory deferral asset for COVID-19 which I discussed earlier.
This decline in the gas utility was offset by an increased contribution from our water business as we acquired assets in Washington and Texas and lower expenses at the holding company.
In the gas distribution segment, utility margin declined $300,000 as the benefit of customer growth and higher rates in Washington was slightly more than offset by a decrease in revenues from late charges and reconnection fees and slightly lower usage from the industrial and large customer use -- large commercial customers that are not decoupled.
Utility O&M increased $700,000 in the quarter as we incurred higher compensation and non-payroll expenses, partially offset by the cost savings measures and deferral of expenses related to COVID-19.
Depreciation expense and general taxes increased $2.4 million related to ongoing investment in our system.
Finally, interest expense for the quarter decreased $1.2 million as we deferred interest incurred to increased cash balances in March.
For the first nine months of 2020, we reported net income from continuing operations of $24.5 million or $0.80 per share compared to net income of $27 million or $0.91 per share for the same period last year.
Last year's results included a regulatory disallowance of $0.22 per share related to an Oregon Commission order.
Excluding that disallowance on an adjusted non-GAAP basis, earnings per share from continuing operations was $1.13 per share for 2019.
The $0.33 per share decline is largely due to year-over-year growth in expenses and the effects of COVID.
In the gas distribution segment, utility margin declined $100,000.
Higher customer rates in Washington, customer growth, and revenues from the North Mist expansion project contributed an additional $10.4 million.
This was offset by lower entitlement and curtailment fees related to pipeline constraints in 2019 and warmer weather in the first quarter of 2020 compared to the prior year, which collectively reduced margin by $4.8 million.
Utility margin also declined $1.1 million due to lower revenue from late and reconnection fees as we suspended normal collection processes.
The remaining $5.2 million decline in utility margin is a result of the March 2019 Oregon order related to tax reform and pension expense.
With the exception of the first quarter pension disallowance, this order has no impact on net income, as offsetting adjustments were recognized through expenses and income taxes, as I'll describe.
Utility O&M and other expenses declined $6.4 million during the first nine months of 2020.
This decrease is associated with the Oregon order, which resulted in $14 million of additional expense in the first quarter of last year as previously discussed.
This was offset by a $6.4 million increase in underlying O&M related to higher compensation costs, contractor and professional service as well as moving costs for our new headquarters and operation center.
This was partially offset by cost savings measures as I described earlier.
Over the last several years we have invested in our gas system at historically high levels and we placed the North Mist gas storage facility into service.
As a result, depreciation expense and general taxes increased $7.3 million.
Finally, utility segment tax expense in 2019 included a $5.9 million benefit related to the implementation of the March order, with no significant resulting effect on net income.
Net income from our other businesses increased $900,000 from higher earnings from our water and wastewater utilities and lower expenses at our holding company, partially offset by lower asset management revenues.
A few notes on cash flow, for the first nine months of 2020, the company generated $149 million in operating cash flow.
We invested $227 million into the business with $193 million of primarily gas utility, capital expenditures, and $38 million for water acquisitions.
We continue to expect capital expenditures this year to be in the range of $240 million to $280 million.
Our balance sheet remains strong with ample liquidity.
Now regarding the ongoing financial effects of COVID-19.
In summary, our third quarter results are in line with our expectations and we have clarity regarding the recovery of cost in Oregon and late fee revenues.
Going into the heating season, 96% of our commercial and industrial customers are current with their bills.
Nonetheless, we know that some categories of commercial customers have been negatively impacted and we continue to closely monitor usage levels and commercial customer losses.
We will also continue to pursue the cost savings measures under way to mitigate these circumstances.
Today, we reaffirm guidance for continuing operations in the range of $2.25 per share to $2.45 per share and guided toward the lower end of the range, due to the potential implications from COVID-19.
The guidance also assumes continued customer growth, average weather conditions, and no significant changes in prevailing regulatory policies, mechanisms or outcomes or significant laws, legislation, or regulation.
Finally, this guidance excludes any gain related to the sale of Gill Ranch and associated operating results.
These items are reported in discontinued operations.
While the year has helped many challenges we persevered and accomplished many important things in terms of customer service, safety, and mitigating the pandemic effects.
At the same time, we're also advancing key long-term objectives, that includes aggressively pursuing a renewable future and a carbon-neutral vision for our gas utility by 2050.
Today with no cast iron or bare steel, we have one of the tightest systems in the country.
We use that tight system to deliver more energy in Oregon than any other utility each year.
In fact, the existing gas system has provided nearly twice as much energy on a peak heating day as the electric system, and yet the use of natural gas in our customers' homes and businesses accounts for just 6% of Oregon's greenhouse gas emissions annually.
That's a very efficient delivery of a lot of energy, but we know we can do better, which is why we established a voluntary carbon savings goal of 30% by 2035 for emissions from our own operations and our sales customers' usage.
Two years in I'm pleased to report, we're on track to meet or exceed this goal.
In 2019, we achieved 21% of the savings needed to meet this goal.
That's equivalent to removing over 60,000 cars from the road.
So far savings from -- have come from three main areas.
First, energy efficiency is the fastest and cheapest way to reduce emissions and a long-standing priority for Northwest Natural.
Back in 2002, we were one of the first gas utilities in the country to obtain a decoupling mechanism, which supports the energy efficiency move.
Second, our carbon offset program also plays a vital role and was a strong contributor to the savings.
In 2007, Northwest Natural was the first stand-alone gas facility in the country to offer customers a voluntary program that allows them to offset some or all of their carbon emissions from natural gas use.
And finally, we have also harvested carbon savings from implementing emission screening tools for our gas purchases.
We believe we are the first gas utility to use EPA data to calculate the relative emissions intensity of gas producers, producer operations, and we use that information to prioritize purchases from the most responsible producers.
Now several years into our carbon goal, we see more ambitious savings are possible.
We understand more about RNG and hydrogen today and now have and we now have policy support with the groundbreaking Senate Bill 98 in Oregon.
We also have the advantage of seasonal storage with one of the only storage facilities in the Pacific Northwest.
Conventional natural gas storage is very valuable in our area, and it can be used for renewable molecules in the future.
In fact, at 20 billion cubic feet, our Mist underground storage facility is equivalent to about six million-megawatt hours of electricity storage.
That's about a $2 trillion battery at today's prices and many times larger than the biggest lithium battery in the world.
What we had --what we and the industry need, however, now is continued policy support to help get these renewable solutions to scale.
And we're certainly not alone in our thinking about the future role of the gas system, how to leverage all of its advantages in new ways.
We're having these discussions with peers here in the United States and there is a much bigger focus on RNG and hydrogen coming out of Europe and Canada as well.
I'm excited about the recent steps Northwest Natural has already taken.
We have several viable contracts, we're pursuing, as a result of the RFP we issued in July for renewable natural gas.
In October, we signed an MOU to explore the development of a renewable hydrogen facility.
The collaborative includes the electric utility in our region and a Bonneville and the Bonneville environmental foundation.
Another long-term objective is growing our water and wastewater utility businesses.
Although our acquisition pace is slow due to the pandemic, we continue to see good growth and investments in our existing platform.
We continue making contacts in the industry and are working hard to expand our footprint.
I remain excited about the investment potential for this business.
Now that this work is easy and there are no shortcuts, but each year we set goals, we make strides and we move closer to achieving our vision.

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northwest natural holding q3 loss per share $0.61 from continuing operations.
q3 loss per share $0.61 from continuing operations.
northwest natural - reaffirmed 2020 gaap earnings guidance from continuing operations in range of $2.25 to $2.45 per share and guided toward lower end of range.

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