The Numbers Don’t Add Up For NW Natural

Low growth, climate concerns undercut need for system expansion

 

No matter what metric you look at, the long-term outlook for growth at NW Natural is becoming increasingly uncertain.

A review of the Portland company’s integrated resource plans (IRPs) since 2011 shows that the company has steadily reduced expectations for future customer growth. IRPs are state-mandated, long-term projections of a utility’s demand growth and supply requirements. Expectations of future customer growth are a key driver of utility revenue as more customers require more investment in delivery infrastructure, which, in turn, is added to the company’s rate base, generating returns for decades to come. In 2011, NW Natural projected that residential customer growth would rise by 2.2% annually; its latest plan, an update to the 2018 IRP released March 1, 2021, puts growth expectations at just 1.3% a year. 

That difference may not seem significant, but it is. A growth rate of 2.2% would lead to a doubling of the company’s residential customer base in 31 years, requiring earlier decisions about infrastructure upgrades to meet new demand. An increase of 1.3% annually, on the other hand, pushes the doubling time out to almost 54 years, reducing the need for early expansion investments.  Moreover, Washington’s regulatory agency has reduced its line extension allowance (i.e., new gas line subsidy) in half and advocates in Oregon are similarly encouraging the Oregon Public Utility Commission to revisit the gas line extension allowance, making it less generous or perhaps eliminating it altogether. Both states’ legislatures have recently passed programs regulating greenhouse gas emissions, including from gas utilities.

Another measure trending against NW Natural is the company’s forecast for firm sales on the peak demand day during the winter. This forecast plays a key role in utility investment decisions, and regulatory approvals since no utility commissioner wants to be held responsible for a gas shortfall on the coldest day of the year. The problem for NW Natural is that growth in this measure has been slipping steadily into the future. 

This graphic, from the company’s 2016 IRP, illustrates the lack of growth. In 2014, NW Natural projected its peak day demand would hit 1.2 million dekatherms in 2032-2033. Two years later, the company said peak demand wouldn’t hit that level until 2036. And in its latest forecast, the company has pushed the growth still further down the road, telling regulators that its peak day demand won’t hit the 1.2 million dekatherm mark before the end of the forecast period in 2038. Interestingly, this latest projection bends the curve, making it possible the company’s single day firm peak demand may never reach 1.2 million dekatherms.

The flattening growth in the company’s peak demand forecasts has major implications for future expansion. Put simply, there will be less justification to continue building out the system, and regulators will be more confident they won’t be risking supply shortages by questioning plans for new resources. Coupled with the slowdown in long-term peak demand growth, the company’s 2018 update projects only a small near-term gap in available resources, making it likely enhanced efficiency measures and/or demand side management measures could meet that projected need instead of moving to expand physical supplies and distribution resources.

 

One of the reasons for this flattening demand growth is shown in the company’s forecast for heating degrees days (HDDs) in its largest market, the city of Portland. In the 2018 IRP update, NW Natural projects that HDDs will decline steadily through 2050, dropping about 17% to roughly 2,000 HDDs. That certainly will help cap annual gas demand and make it easier to meet peak demand through efficiency and DSM options instead of system expansion.

Another metric looming for NW Natural is included in Oregon’s recently enacted Climate Protection Plan, which looks to cut greenhouse gas emissions from natural gas and transportation by 90% by 2050. The program covers the three Oregon natural gas distribution companies, NW Natural, Avista Utilities and Cascade Natural Gas. Under the program, annual greenhouse gas emissions at each utility will be capped at a steadily declining level. The program includes an interim reduction goal of 50 percent by 2035. According to data from the Oregon Department of Environmental Quality, NW Natural’s carbon dioxide equivalent emissions (CO2e) averaged 5.75 million metric tons from 2017-2019; going forward it will be required to cut its CO2e emissions to 2.88 million metric tons by 2035 and to just roughly 566,000 metric tons by 2050. Growth under those terms is going to be difficult to come by.

In tandem with this statewide initiative, a number of communities in NW Natural’s service territory are pushing efforts to transition to all-electric buildings. Multnomah County, where Portland is located, passed a measure requiring the use of electric appliances in new and remodeled municipal buildings. Eugene, the state’s second largest city, is considering requiring all-electric buildings in residential and commercial buildings as early as 2023. Salem enacted a  climate action plan prepared for the city that suggests banning new gas hookup would help meet its greenhouse gas reduction goals. The plan, which has not yet been endorsed by the city council, suggests instituting the ban in three to five years. Together, these city-led efforts highlight a key point: Growth on NW Natural’s system is likely to be limited, at best, in the years to come.

A final concerning metric for NW Natural: It already is underperforming its peers on the stock market, even before the full impact of the company’s various numerical headaches is felt. On Feb. 17, 2020, just before the pandemic began in full force, the company’s stock closed at $76.64 per share; it closed on Jan. 17, 2022, at $47.54, down 36.8%. An index tracking the company’s peers also tumbled at the pandemic’s onset, but it has done better since, although it is still down 15.7%. And, of course, the S&P 500 has come roaring back since the pandemic began, rising 32.3%. In other words, there are better investment opportunities available.

The equation for NW Natural has changed. Easy growth defined the 2010s, but that era is over. Now, company leadership must solve a much harder problem: How to reconcile running a fossil fuel company in a climate concerned world. The answer may be unsolvable.