Q2 2022 Northwest Natural Holding Co Earnings Call

Dollars also want to 50, 50 cat structure and are we a 9% and an overall cost of capital of 7%. It also included a rate base increase of 337 milliondollars since the Li rate case, for a total rate base of $1.77 billion.

In June we raised that that had multipart related to a number of small items including recoty of our code ferall. We expect an order from commission on the Co rate cated this fall with rates effective to November first with that, money are over Frank to cover more of the details of the quarter, right? Thank you, David. Good morning everyone. I will begin by discussing the highlights of the quarter and year to date results and concludive of guidance for the year. I'll describe earnings drivers on an after tax basis, using statutory TA rate of 26% as a reminder. Northwest natural earnings, our seasonal, with a majority of revenues and earnings generated in the first fourth quarter during the winter heating months. For the second quarter we reported net income of $1.7 million or five cents per share, compared to a net loss of $7 thousand or two centsper share to the same period in 2021 , an increase in seven cents per share. The improvement over last year was driven by our gas utilities, which posted an increase of five cents per share. Higher earnings that the gas utility were primarily related to higher margin and lower pension expense.

Utility margin in the gas distribution segment increased $2.3 million as a result of customer growth and new rates, which collectively contributed one point seven million.

Utility will have increased $3 million, reflecting higher contractor costs for safety and reliability projects, professional services and information technology costs. Other income increased $2.1 million, primarily from lower pension expense, reflecting higher returns and lower interest costs.

Net income from our other businesses increased $9 thousand for the second quarter of 2022 due to higher asset management revenues and lower business development costs.

For the first six months of 2022, we reported net income of $58 million, or a dollars 77 per Sha.

Compared to net income of 58 mpoint $8 million or dollar 92 for the same period in 2021. The 15 cent decrease in earnings per share is largely the result of the additionance of two point nine million shares of common stock on April first.

The $8 thousand decline in net income for the six -month period reflects an improvement in gas utility net income of $3 million, while the results from our other businesses declined $3.8 million, as the prior period benefited from the higher asset management revenues related to the February 2021 cold weather events.

Higher earnings of the gas utility were primarily related to customer growth, new rates in Washington and colder weather in 2022. as a result of these factors, utility margin increased $6.1 million. Utility oedadd increased $6.5 million, reflecting higher levels of contractor and professional services, and information technology upgres.

Utility depreciation and general taxes increed eight thousand dollarsdue to higher property plant equipment as we continue to invest in our system. Other income increased $3.9 million, driven by lower pension costs.

For 2022: cash provided by operation activities, with $197 million. In line with the prior year, we invested $17 million into the business, most of which was for the gas utility capital expenditures.

Related to our financing cash flows. We had two successful transactions on April . First, we completed an equity offering with approximately $14 million of proceeds to support our growing business.

In July we executed a private placement bond agreement for the gas utility.

We plan plan to close $14 million transaction and take the proceeds on September thirtieth.

I'm pleased with our ability to access the markets and take this financing risk off the table. Last quarter, moies and SMP both reviewed the gas utility and reaffirred ratings and stable outlook that includes Northwest natural senior secured long-term debt rating of doua minus for ssmp and a two per moodies. Our objective remains to keep our balance sheet strong with ample liquidity.

Moving on to financial guidance, the company reaffirmed 2022 earnings per share guidance for net income- sorry, in the range of $2 and 45 cents to $2 and 65 cents per share.

Guidance systems continue customer growth, average weather conditions and no significant changes in prevaily regulatory policies, mechanisms or outcomes, or significant changes in law of legislation or regulation. We continue to target a long term earnings per share growth rated of four cent to 6%. With that'll turn the call back over to David. Well thankice, Frank. We continue to to focus on the future, matain sound investments today that will support sustainable growth for tomorrow. As we asshared for over the last few years, our engineering team has conducted 5% Hydro new blland tests at one of our service centers are shtwaway operations and fraining center- with a goal to increase our blending and increment up to 15% actually headending systems and equipment test results. We've all been participating and industry Bu partners that shif, such as high ready and the low carb resources and this is initiative to shareiffindings testing information.

In parallel with these efforts, we continue to work collaborately with Eugene water and electric forard and autonbeil environmental foundation on the soping of a one megatalwatt power to gas facility. This project has been designed to blend 5% clean hydrogen into a dedicated section of our Eugene just distribution, serveving the system, serving about 2500 customers.

But the benefits go well beyond our EG customers. This partnership with EUM will provide hands-on experience in the generation of, distribution and storage of clean hydrogen across organs, increasingly independent gas and electric grouids interdependent choosing. We've already begun preliminary operage with various stkeholder groups representing the lowcal community regulatory staff, elected officials, industry groups and customer advocates.

In July .

We fil request open OCC up public utility mission Oregon to recovery costs of the projects under citizel 844. this law is innovative in eing to Oregon supporting the actutility projects that are designed to reduce freeennhouseced SaaS emissions.

Have approved. This Eugene project could be oran's first clean hydrogen production facility serving to serv, demonstrates the applications of this first atile energy source and the important role that will play in the carbonizing both the gas and electrro systems.

In July we also announced a mostthosstangeialist partnering with modern electron on an exciting turquoise hydrogen pilot project. To turn to methane, its clean hydrogen and solid margin, we'll be testing this groundbreaking technology of our Portland operations facility.

The innovative process is designed to produce hydrogen and solid carbon using only natural gas of air as inputs and to not use any electricity water for consumable catalysts.

It's an incredibly sustainable and flexible way to producing hydrogen and is payable as a potential to allows to clean produce clean hydrogen whenever And whenever needa CV cargonize our system and potentially a variable costs. It also produces valuable by products that can be used makekes, Tier and die, among other things.

This progress is a partnership with modern electron of seattlevate, stable heat and power technology companies that has fundy support from Microsoft' foundound, Bill gates. We expect the progress to go live in early 2000 and twenty-threeange.

We believe the clean hydrogen, along renewable natural gas, energy efficiency and the quip innovation are critical to achieving our goals in GRE health gas invistment reductions.

And we're committed to preparing our system employees for any change in equipment operations and trained that working with blended gass might acquire.

Moving now to an update on our competitive renewable natural gas business that we launched late last year. As you know, we focused on providing cost-effective solutions to help a variety of sectors wedecarbonized, using existing waste streams and renewable energy resources.

Our first project with edl includes an investment in two renewable natciural gas facilities in a 20 -year rg suly agreement. Construction is ongoing in both rg facilities and we expect them to be placed into service in early 2020 -three.

The team is pony case, pursuing incremental opportunities to compleputting the final custoical of the business plan, which we will share in more detail later this year.

Turning to our water and wastewater utility businesses, as previously mentioned in December 2021, we sign our largest acquisitions today to acquire far wetwater and wastewater utilities in yuma Arizona, a bash frommine region which currently serves approximately 25 thousand customers.

In March we submitted the application for approval of the transaction with the Arizona commission in June . Arizona staff recommended the commission approved the acquision. The next step is obviously for commission review. We expect the commission's decision in August or even early September and, subject to its approval, as lect expect to close the transaction to assumed thereafter, as we can.

We expect this transaction to be accretive earnings per share after its first full year of operations.

We remain excited about the invested potential for this business and look forward to more announcement suits.

So in conclusion, we're also a good start for the year with continued customer growth in the utility water and wastewater utilities. Thanks for joining us this morning. With that, we'll open it up to questions se.

Thank you. As a reminder to ask a question, please press star one on your telephone Ke pad. The first question comes from Julian de molland Smith from Bank of America. Please go ahead.

ok it's kody clock off the drill and thanks for taking my questions.

You got going.

So first can you talk through the dynamics and expectations for pension expense in the next year? Know there's a lot of moving pieces that could change through the remainder of the year, But if we look at it today, what do you estimate the impact is for 2023? And you would have to go through your rate case for recovery in that corret.

anyy coodence's Frank. Yeah, great question.

We've seen about 5- six per quarter benefit year-over-year from lower pension expense and we expect that to continue to continue through the year. We set the set the rates for the year. Essentially it's what you said: the discount rate at 12- 31. that's pretty much the expense for the year, other than just a little bit of five Tu, Ning. So we think this will continue through the year. It's driven interest rates are higher, So discount rates are higher. Asset performance was very good over the last couple of years So we've got a better asset funded position.

And we don't. Yes, that goes at the rates. So that's forecasted to our test year for rates. So that'll be in our org case and November first. That will be reflected there and we don't see a big change in that right now. It is just kind of reset. So as long as interest rates and asset performance are kind of in the sameme rate, we don't expect big changes going forward here. It's been an improvement as both of those has improved.

Right But if I'm thinking about 2023 and this comes rates PS higher, asset performance slightly, a lot lower, I guess. Just the net impact of that: you have a and you are not into 2020, grou.

Yeah I mean right now and again we'll have to set rates at the end of the year. So it'll depend on where assets and discount rates are at the end of this year. But just when we look at it today, we're not seeing a lot of change. Net net. You've seen interest rates go up since year end last year and you've seen assets come down, but net net we're in very much the same position. So if I had to do it today, I make a guess today. Id say I'm not expecting a lot of change.

Okay got it. And second, just wondering if you can talk through the latest trends you're seeing with inflation and the impact on the ownon budget and capital plan, looking forward also any mitigating measures or procurement strategies that you're implemented.

Yeah great, no great question.

From a supply chain standpoint which is all kinds interrelated. We're not seeing a tremendous disruption. There. We're it a little bit slower delivery time on meters and some of the pippees in such. But but we're not seeinga disruption to our business to our projects and we've we've been going through this. We're being more proactive. We we're extending our orders out. We're extending our are building up our inventories and such as you might expect. We are see inlationary impacts on the materials but materials are actually a fair small component of our cost structure. We're more labor based whether it's internal labor third party labor other contracted costs. Most of our costs are under.

Multiyear contracts. A lot of them win fixed as players. But that's what we expect and what we build into rates and into our forecast. So we're not seeing any tremendous disruption at this point, just from inflation. We will. Over time we will see more of that as our locate contracts and our labor agreements and all of those repric over time we will see some of that inflation come through. But I think it's over a manageable structure.

Within the year. Interest rates are definitely up. We've got some short-term debt and both the utility in the holding company, So we see that some headwinds there. We saw that early in the year and so we put in place some cost control measures that have allowed us to get a head start on that, not overreact. So we've got a pretty good beat on the year and we're managing, to our cost, just based upon staffing levels, third party cost, discretionary expenses and sort of things that you would ordinarily manage a workflow, those sorts of things work mix. So we feel like we've got a really good project.

Program in place there to manage through this year on that coodating.

And soorry. Just one quick follow-up to that as we're looking at 23, any large sort of renegotiations of contracts that we should be keeping an eye on.

No our, our big contract here is always going to be our Union contracts, that's. I think that's got two years and it still So. We just renegotiated that a couple of years ago, So that's a couple of years out. And you know, every year we've got- you know it might be the paving contractactor, the locates that are come up, but no one of them presents a particularly large change. When we do our rate cases, we look forward as to what the major contracts will be. So I think we're in good shape there.

gotd Thanks so much for the time I'll pass it. Love there.

Thanks for your questions.

As a reminder for any further questions, please press start one on your telephone. che PA.

As we have no further questions at this time, I will hand the call back to David Anderson.

Thank you, said. We don't have a busy day out there everybody, and there's multiple calls going on, both for those of you listen to this later. Give any questions, please reach out to nicky and she will take your you. Jo always does So. Thank you for joining us today and look forward to seeing you said. Thank you, everybody.

This concludes today's conference call. Thank you very much for joining. You may now disconnect your lines.