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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-K 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.
Well, years come and go but 2020, as we all know, was unforgettable.
The pandemic affected many aspects of our daily lives, and I'm proud of the way our employees pulled together to provide our customers with superior service.
We successfully navigated a number of challenges while still achieving our key financial and operational goals.
We reported net income from continuing operations of $2.30 per share for 2020.
That's driven by solid performance at the gas utility and a strong contribution from our new platform of water utilities.
On the gas operations front, our field crews successfully handled everything from wildfires to restoring service in several towns over Christmas to navigating COVID, social unrest, etc.
Just a few weeks ago, our employees in the natural gas system once again rose to the occasion and provided a reliable service through an extreme weather event.
Our storage facilities and overall hedge positions worked to mitigate the amount of gas purchased on the spot market and helped to minimize the impact to our customers' bills.
This was incredibly important as prices, as everybody knows, spiked across the country from the widespread cold snap.
Our balance sheet remains strong with ample liquidity.
In 2020, we also executed on one of the largest capital programs in the Company's history aimed at supporting reliability.
We continue to operate one of the most modern and tightest systems in the nation, a system that has no cast iron and no bare steel.
In 2020, we invested over $270 million in our natural gas infrastructure.
From an economic perspective, 2020 was truly unprecedented.
Prior to the pandemic, we had a very fundamentally sound sustainable growing economy with record low unemployment both nationally and in our service territories.
We continue to see economic recovery and steady growth in several important areas.
Portland's unemployment right now is 6.1% in December, actually, essentially matching the national rate that's down from a 14.9% high in April.
Single-family housing activity remains strong.
In the Portland metro region, home sales were at 8.3% from 2019, with price growth of about 12%.
And new single-family permits issued last year were up 4% compared to 2019 levels.
At Northwest Natural, we continue to see good customer growth.
New construction plus conversions translated in connecting over 13,000 meters during the last 12 months ended December 31.
Our overall customer growth rate as a result was 1.5% for the same period, based on this strong single-family home construction, partially offset by the loss of some commercial customers due to the pandemic.
The rollout of vaccines is expected to ease pandemic related restrictions and allow businesses to reopen.
Still, we know these are difficult times for some customers and we've worked very closely with commissions, staff and stakeholders to determine the best way to return to normal business practices.
We've agreed to timelines for resuming collection processes and continue to evaluate the parties what makes sense for customers given the economic conditions, while also providing financial assistance and payment plans to vulnerable customers.
Enhancing the system includes a bill forgiveness program and working with the Oregon Legislature to provide additional funding for bill relief.
Through a variety of programs and agencies, we've provided over $4 million to over 10,000 households to pay their bills and stay warm during the last heating season.
We also donated about $1 million to nonprofits in our communities and initiated a special COVID-19 employee giving campaign.
For Oregon, previously approved new rates took effect on November 1 last year.
Gas bills continue to remain low.
Our customers are paying about 40% less today for their bills than they did 15 years ago.
In addition, in June, we passed back a record $17 million in storage bill credits to Oregon gas customers.
Safety, reliability and affordability make natural gas a preferred fuel source.
Eight out of 10 homeowners in our service territory prefer natural gas according to a study conducted in December 2020.
There's a strong recognition that natural gas is affordable, efficient and preferable to electricity for heating and cooking.
In fact, over 80% of respondents said they would pay $50,000 more for a home that has gas amenities over an all-electric home.
Customers also showed their appreciation by ranking Northwest Natural second in the West among large utilities in the 2020 JD Power's residential customer satisfaction survey.
And then finally, our Board approved the dividend increase in the fourth quarter back in 2020, the 65th consecutive year of annual dividend increases.
We are proud to provide the return to shareholders and be one of only three companies on the NYSE with that long record.
I will begin by discussing the financial impacts of COVID-19 and the highlights of the fourth quarter and full year 2020 results and then conclude with guidance for 2021.
In 2020, our utility commissions approved COVID deferrals and term sheets that outlined the types of revenues and costs that may be recovered.
These include PPE, bad debt expense, financing costs associated with additional liquidity and certain loss revenues.
Direct expense reductions 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 in future proceedings.
While our business model is resilient, we are experiencing some financial impacts related to the pandemic.
Through December 31, we incurred an estimated $10 million pre-tax of incremental costs and lower revenues due to the effects of COVID-19.
Of this, $4.8 million were deferred to regulatory accounts.
In addition, $1.3 million of late fee revenue that has not been charged to customers since the suspension of normal collection processes will be recognized in a future period when we begin to recover the foregone fees through rates.
The remaining $3.8 million that cannot be recovered through rates are primarily due to lower natural gas utility margin from customers that stopped service and slightly lower usage from customers that are not decoupled.
In order to further mitigate the financial effects of the pandemic, we initiated temporary cost savings measures which provided approximately $3.5 million of savings in 2020.
In summary, the total P&L impact of COVID in 2020 was $1.6 million.
Turning to our detailed financial results.
Note, I'll describe earnings drivers on an after-tax basis using the statutory tax rate of 26.5%.
Also note that year-to-date earnings per share comparisons reflect the successful issuance of 1.4 million shares in June 2019 as we raised equity to fund investment in our gas and water utilities.
As a reminder, Northwest Natural's earnings are seasonal with a majority of revenues and earnings generated in the first and fourth quarters during the winter heating season.
For the quarter, we reported net income from continuing operations of $45.8 million or $1.50 per share compared to $38.3 million or $1.26 per share for the same period in 2019.
The gas utility posted an increase of $0.19 per share related to new rates in Oregon beginning November 1, 2020, offset in part by higher depreciation and general tax expense and the impacts of COVID-19.
Contribution from our other businesses increased $0.05 per share from the water assets we acquired in Washington and Texas and lower expenses at the holding company.
Utility margin in the gas distribution segment increased $11.5 million from the benefit of new rates in Oregon and customer growth, partly offset by the effects of COVID-19.
Utility O&M decreased $500,000 in the quarter, reflecting cost savings efforts.
I am proud of our employees whose hard work and commitment allowed us to accomplish this while still providing exceptional service.
Depreciation expense and general taxes increased $2.9 million related to the ongoing investment in our system.
For the full year 2020, we reported net income from continuing operations of $70.3 million or $2.30 per share compared to net income of $65.3 million or $2.19 per share for 2019.
2019 results included a regulatory disallowance of $0.22 per share related to an Oregon Commission order on tax reform and pension expense.
Excluding that disallowance on an adjusted non-GAAP basis, earnings per share from continuing operations was $2.41 for 2019.
The $0.11 per share decline is largely due to year-over-year growth in expenses, the effects of COVID and the positive effects of weather and pipeline constraints on 2019 results.
In the gas distribution segment, utility margin increased $11.3 million.
Higher customer rates in Oregon and Washington, customer growth and revenues from the Northwest expansion project contributed an additional $21.5 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 2019, which collectively reduced margin by $4.5 million.
Utility margin also declined $1 million due to lower revenues from late fees as we suspended normal collection processes.
The remaining $5.2 million decline in utility margin is a result of the 2019 Oregon order.
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 in a moment.
Utility O&M and other expenses declined $5.4 million.
This decrease is associated with the Oregon order which resulted in $14 million of additional expense in the first quarter of 2019, as discussed previously.
This was offset by a $6 million increase in underlying O&M related to higher compensation costs, contractor and professional service expenses as well as moving costs.
This was partially offset by the management driven cost savings measures I described earlier.
Pension expenses, included in other expense, increased $2.8 million.
However, this expense is now recovered in rates.
Over the last several years, we have invested in our gas system at historically high levels.
As a result, depreciation expense and general taxes increased $10.2 million.
Finally, utility segment tax expense in 2019 included a $5.9 million benefit related to the implementation of the Oregon order, with no significant resulting effect on net income.
Net income from our other businesses increased $2.2 million from higher earnings from the wastewater, water and wastewater utilities and lower expenses at our holding companies, partially offset by lower asset management revenues.
A note on capex.
We invested $294 million into the business, with $273 million of gas utility capital expenditures and $38 million for water acquisitions.
Our balance sheet remains strong with ample liquidity.
With regards to the ongoing effects of COVID-19, approximately 97% of our commercial and industrial customers are current with their bills.
Nonetheless, we have seen some commercial customers go out of business and shut off their meters as they have been negatively impacted.
We will continue to monitor -- closely monitor usage levels and commercial customer losses.
We will also continue to be disciplined regarding cost management in an effort to mitigate these circumstances.
Moving on to 2021 financial guidance.
Gas utility capital expenditures for the year are expected to be in the $280 million to $320 million range, including significant projects related to system reinforcement, resource center renovations across our service territory and technology upgrades.
The Company initiated 2021 earnings guidance today in the range of $2.40 to $2.60 per share.
Guidance assumes continued customer growth, average weather conditions and no significant changes in prevailing regulatory policies, mechanisms or outcomes or significant changes in laws, legislation or regulations.
While the past year held challenges, our focus remains the same: providing superior customer service, maximizing returns from our strong and growing regulated natural gas utility and diversifying our business by investing in the water sector.
We made progress on that last front with the sale of two investments that were no longer central to our strategy.
In August, we sold our interest in the Trail West pipeline project, and in December we completed the sale of the Gill Ranch storage facility in California.
Proceeds from the sales are expected to be reinvested in our gas and water businesses.
This past year reinforced our decision to build a water and wastewater utility platform and highlighted the value we bring and can create in this sector.
Our water and wastewater utilities experienced organic customer growth of almost 3%, 2.8% to be exact, over the 12 months ended December 31, 2020.
We also completed infrastructure improvements and filed our first water utility general rate case.
Although COVID temporary slowed acquisition -- temporarily closed acquisition activity -- slowed -- excuse me, temporarily slowed acquisition activity, we were still able to add a water and wastewater utility in Washington to our portfolio and made our first acquisition in Texas.
And we continued to make smaller acquisitions within our existing footprint while pursuing new expansion opportunities.
I remain -- I continue to remain very excited about the investment potential in this business.
Another key pillar of our strategy is aggressively pursuing a renewable future and working to decarbonize our gas utility system.
Before I take you through our approach, it's important to remember our starting point.
Northwest Natural serves about 74% of the residential square footage in our service territory and meets 90% of our space and water heat customers' energy needs on our coldest days, yet the emissions associated with that use accounts for only 6% of Oregon's total greenhouse gas emissions.
In the Northwest, the gas and electric system have concurrent peaks in the winter.
The gas system delivers about twice as much energy during the peak than the electric system, with even more capacity available.
This advantage positions us well to help drive decarbonization in the region in a way that ensures reliability and affordability.
And, as we have seen in recent weeks, one can never underestimate how important reliability is during the winter.
Let me walk you through three components of our vision of carbon neutrality by 2050.
First, we intend to continue to pursue aggressive energy efficiency to lower energy usage.
In the past 40 years, the number of residential natural gas customers in the US has grown by almost 90%, but demand has remained flat, which is a testament to the industry and how well they foster continued efficiency.
Our residential customers today use half of the amount of natural gas that they used in 1970 despite consistent growth in the average size of homes and more clients as per home.
Second, we're striving to integrate renewable natural gas from a variety of waste streams into our system.
The technical potential of RNG supply in Oregon alone is estimated to be nearly 50 billion cubic feet, about the same amount as all of the residential gas throughput in our state.
Nationally, early estimates show about 14 trillion cubic feet of technical potential or about 88% of all throughput.
Clearly, there's vast technical potential.
Now we need to collectively focus on getting as much as we can to market economically.
We also see the potential for hydrogen being added to the pipeline.
We believe there are three applications for -- of hydrogen from the power to gas process, blended, methanated and dedicated hydrogen systems.
We also envision the possibility of blue hydrogen, made from natural gas and paired with carbon capture, utilization and storage as playing a role in the US gas system.
And we're watching Europe, Canada and Australia efforts -- Australia's efforts in this area.
In 2019, Northwest Natural sent a technical team to Europe to meet with government agencies, think tanks and gas companies.
And we learned a lot about new technologies, projects and policy.
It was clear Europe was many years ahead of the US and they're thinking about the gas networks system and the role of green molecules in the energy transition that we're all going to go through.
Once [Phonetic] they realize gas infrastructure, which is already in place, is a huge advantage, and one great example of this is storage.
The natural gas infrastructure is built to provide long duration energy storage that doesn't degrade.
It can store RNG and methanated renewable hydrogen today in existing facilities.
And when we think about decarbonization strategies across the energy sector, the fact that the infrastructure already exists and has significant cost advantages is incredibly important in my opinion.
For example, Northwest Natural has 20 billion cubic feet of underground storage today.
That's equivalent to storing about 6 million megawatt hours of renewables.
In today's cost, that would be about a $2 trillion lithium battery.
And this is where policy is key to helping us leverage our existing infrastructure in new ways and accelerate our region's decarbonization efforts.
In Oregon, we have Senate Bill 98, the first of its kind renewable natural gas legislation that sets 30-year targets for gas utilities to procure R&D and renewable hydrogen for customers.
We just announced our first RNG investment under the bill and are actively working on more.
Northwest Natural has started hydrogen blending testing in our training facility, and we're working with Eugene Water And Electric Board in Oregon to propose a project that would include methanated hydrogen for our system.
We're excited about these early steps and are committed to pushing for solutions that include system resilience as part of the energy transition.
Now, more than ever, it's clear to us how critical our gas infrastructure is to furthering our collective climate goals, while also ensuring energy system diversification and reliability for the communities we serve.

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q4 earnings per share $1.50 from continuing operations.
initiated 2021 earnings guidance in range of $2.40 to $2.60 per share.
nw natural capital expenditures for 2021 are expected to be in range of $280 million to $320 million.

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