Q2 2023 Northwest Natural Holding Company Earnings Call

Today during the presentation you can register to ask the question more pressing star one on your telephone keypad. If you change your mind. Please press star followed by two to remove your question.

I'd like to hand over to Ali to begin Nicky. Please go ahead.

Thank you good morning, and welcome to our second quarter 2023 earnings call.

Reminder, something things that will be said this morning contain forward looking statements. They are based on management's assumptions, which may or may not occur for a complete list of cautionary statements refer to the language at the end of our press release.

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. If you are an investor and have additional questions. After the call. Please contact me directly at 503, 70 125 30.

News media May contact David Roy at 50360, $71 57.

Speaking this morning are David Anderson, Chief Executive Officer, and Brody Wilson, CFO , Vice President Treasurer controller, and Chief Accounting Officer, Dave.

David and Brody have prepared remarks, and then will be available along with other members of our executive team to answer your questions with that I will turn it over to David.

Thank you Nikki and good morning, and welcome everybody. We continue to see strong financial results that are in line with our expectations and the guidance that we provided earlier this year Tony will go through the detailed results here in a moment. This morning, I'll walk through a few economic indicators and some decarbonization initiatives at the gas Tony and then I'll.

Wrap up with an update on our water company in our renewables company.

Turning to a few comments on the local economy.

Related to our gas utility service territory, Oregon's unemployment rate was three 5% in June coming down from the four 4%. We saw in March of this year and is now on par with the national rate of three 6%.

Oregon's real GDP growth was three 8% for the first quarter of 2023, which is the latest available data, Oregon had the ninth highest real GDP growth among the sites.

Over the last 12 months as interest rates have risen permits.

Sales and average home prices have declined a little bit yes. Despite these factors we added nearly 6400 new customers during the last 12 months, which equates to a growth rate.

8%.

We are seeing some recent positive movement in housing single family building permits in the Portland area have picked up approximately about one 5% over last year, we will continue to monitor these trends closely.

Our water and wastewater utilities continued to operate in areas that have solid economic study.

Unemployment rates in our highest growth water service territories range from two 3% in Idaho to four 1% in Texas.

On a consolidated basis, our water and wastewater utilities grew three 1% on an organic basis over the last 12 months that excludes approximately 30000 meters we added through acquisitions.

Collectively our gas and water utility customer base.

Our customer base grew by four 4% over the last 12 months.

Turning to an update on the gas utilities de carbonization activities as we reported last quarter. We got several pilot projects focused on our industrial and commercial customers. One project uses equipment designed to capture heat and carbon from existing boilers to reduce both energy use and greenhouse gas emissions will be study and the results of this pilot for the next <unk>.

Months.

We're also continuing to work on the turquoise hydrogen project to turn methane into clean hydrogen and solid carbon will be testing. This groundbreaking technology at our Portland operations facility in the coming months.

Related to hydrogen blending our engineering team completed 15% hydrogen blend tests at our sugar Sherwood Operation Center and are working towards testing of 20% blend soon.

As you've probably seen we have a CFO transition I would like to take a moment to personally thank Frank for his service and his leadership, we wish Frank the best in his new position Frank will be with US for the next several weeks to ensure a smooth transition Brody who you'll hear from in a minute, we'll be filling in as CFO until we figure out more permanent <unk>.

Solution with that Brody I'll turn it over to you for the financial comments.

Thank you David and good morning, everyone I will begin by discussing the highlights for the quarter and year to date results and conclude with guidance for the year I'll describe earnings drivers on an after tax basis, using the statutory tax rate of 26, 5%.

For clarification, our primary segment is the natural gas distribution business housed in our subsidiary northwest natural.

Activities from northwest natural water northwest after renewables Interstate storage and third party asset management revenues are combined outside our primary segment and referred to as other.

As a reminder, the gas utilities earnings are seasonal with the majority of revenues and earnings generated in the first and fourth quarters during the winter heating months.

For the second quarter, we reported net income of $1 2 million or <unk> <unk> per share compared to net income of $1 7 million or <unk> <unk> per share for the same period in 2022 at.

At the gas utility earnings reflected higher operating expenses, partially offset by new rates in Oregon, and Washington utility margin in the gas distribution segment increased $11 4 million, mainly from new rates and a gain on gas costs.

Utility O&M increased $8 $4 million, reflecting increases from the amortization of deferrals higher payroll information technology and contract labor costs.

The majority of these incremental costs were anticipated and are being recovered through our new rates in Oregon and Washington.

Depreciation and general taxes, collectively increased $3 $2 million from additional capital investments in the last year.

Other income increased three $3 million.

Primarily from lower pension expense.

Interest expense increased $3 3 million from higher debt balances and rates.

For the six months of 2023, we reported net income of $72 9 million or $2 <unk> per share.

Compared to net income of $58 million or $1 77 per share for the same period in 2022.

26% increase in earnings per share is largely the result of a 30 set increase from our gas utilities related to new rates in both Oregon and Washington.

This was offset by a <unk> <unk> per share decline from our other businesses, mainly due to higher interest expense.

Few more details on the gas utility results utility margin increased $47 million, primarily related to the new rates in Oregon, and Washington, which contributed $27 1 million.

Gains on gas costs added $4 1 million and customer growth provided $2 5 million.

The amortization of regulatory deferrals approved in Oregon in the Oregon rate case increased utility margin $5 1 million, but it is offset by O&M expense.

Gas utility O&M increased $17 1 million or 23.

Reflecting our 23% excuse me.

Flexing those deferral amortization, along with higher payroll information technology and contract labor costs.

Again, the majority of these O&M increases are being recovered through new rates.

Utility depreciation and general taxes increased $6 5 billion due.

Due to higher property plant and equipment investments.

Other income increased $5 $7 million, driven by lower pension costs and interest income.

Interest expense increased $6 $1 million due primarily to incremental long term debt financing, which decreased higher cost short term debt.

Our other business provided net income of $1 $2 million, which was lower than last year, primarily due to higher interest expense.

For 2023 cash provided by operating activities was $298 million and we.

<unk> $152 million into the business most of which was for the gas utility capital expenditures.

Related to our finance things, we've been active in the last year issuing both debt and equity we continue to be in a strong cash position in 2023 with our objective remains to keep our balance sheet strong with ample liquidity.

Company reaffirmed 2023 earnings guidance today for net income in the range of $2 55 to $2 75 per share guidance assumes continued growth average weather conditions and no significant changes in prevailing regulatory policies mechanisms or outcomes or significant changes in laws.

Legislation or regulations with that I will turn the call back over to David.

Moving now to an update on northwest natural renewables as you know through that business. We're focused on providing cost effective solutions to help a variety of sectors decarbonize using existing waste streams and renewable energy sources. We're.

We're nearing the finish line on our first project as you May remember north Central renewables has contracted to invest approximately $50 million in two facilities that are being developed by ADL in Ohio.

Operations began for the first facility and we expect the second facility to come online this fall.

When those facilities to achieve full commercial operations, we have contracts to sell the RMT volumes to investment grade Counterparties for the next 20 years.

We are pleased to see our investment thesis in our renewables company play out and we will continue to focus on growth opportunities in this space.

Let's now turn to the water company when we continue to execute we continue to execute on our water growth strategy in the last year, we completed acquisitions in four states, including our largest acquisition to date in Arizona. We are particularly pleased that we have signed agreements to acquire Highland water, which includes about 2300.

And utility connections and approximately 5000 service customers across western Oregon, nor.

Northwest natural water launched a water services business earlier this year, we closed the king water transaction in Washington in April , adding nearly 10000 connections we expect to close the Highland acquisition by the end of 2023.

These first two service businesses acquisitions provide a strong platform that we believe can be scaled in the coming years.

On another front I want to announce that we put a new wastewater treatment plant into service in July for some river utility and Central Oregon. This was a four year $18 $5 million upfront and it's our largest single capital project for our water and wastewater utilities today we're.

We're pleased that through investments like this we're able to provide safe clean and reliable wastewater services to our customers there.

And finally this morning, I'm proud to announce that northwest natural has been recognized as a cogent syndicated 2023, most trusted utility brand by escalate, we scored highest in what in the west and we were one of the highest in the country among over 140 natural gas utility survey.

Study is based on our performance related to customer focused community support communications effectiveness reliable reliable quality environmental dedication and of course reputation.

I couldnt be prouder of this resolved and I'm pleased to say that we strive to bring these values and the same dedication to all of our businesses.

With that thanks for joining us this morning, and catch we'll open it up for questions. If anybody has questions.

Yeah.

Thank you David if you'd like to ask a question. Please press star followed by one on your ton of thank you Pat now.

If you change your mind, Please press star two.

And to answer your question. Please ensure your face your phone is on mute locally.

Star one to ask a question.

So first question today comes from Selman <unk> from Stifel. Please go ahead.

Good morning, Selman. Thank you good morning.

Just a couple of quick ones for me. So you first talked about sort of.

Turquoise and hydrogen and maybe you could just expand on.

Testing is going to be and how long you expect it to take place.

When you add results and what it might be actionable and then the other is you mentioned in sort of wastewater you've made your largest investment to date at $18 5 million and could you maybe just talk about some of the returns you're expecting out of that.

Excuse me Hi, Selman this is Kevin Ross good morning.

I'll talk a little bit about our.

Hi, our hydrogen pilot the first one that you mentioned is.

A pilot that we're working on with modern hydrogen.

It's basically a pre combustion carbon capture technology that turns methane into clean hydrogen and the byproduct is a solid solid carbon.

Curious that solid carbon then can be used in secondary pieces like asphalt at tire production. We in fact, just completed a sort of a small test where we took solid carbon from modern hydrogen at facility and we use that in a flare.

At our Sherwood facility and.

This was a very small test, but it was basically the way to sequester that carbon using that that byproduct and so we're really excited about the pilot we're kind of in the construction phase at our central facility here in Portland.

And we're expecting that that product or that technology need to be online later this year the other one.

We have a couple of others technologies that we're experimenting with what is called carbon acts and it's it's basically partnering with our large commercial customers.

On a technology that uses existing boilers to reduce the customers' energy and emission.

The technology creates it.

Ash byproduct and again that Carl Ash can be used in secondary products cleaning materials as a way to sequester that carbon.

The technology that we're looking at is through a company called carbon class.

That technology captures flue gas and convert that to liquid cotwo that then can be used in manufacturing processes like concrete production that particular product can have an 80% or better carbon rhythm action at that facility. So all of these are sort of in the piloting.

Phase, we also have our hydrogen team.

Exploring other carbon capture technologies that mimic the turquoise hydrogen.

Production and the reason for that is when we've done the analysis. The cost analysis. We believe that you are quite hydrogen can be a very low cost low emission solution and we I've talked to.

Fortis BC in Canada. They are also very excited about turquoise hydrogen. So that's the update more to come these projects take a bit to get online and that we're really excited about the progress maybe the only other comment I'll make is we are stepping up our hydrogen blending at our own Sherwood facility.

20%. This fall we've been consistently blending 15% no anomalies on the equipment or our own pipe where are other sort of getting the equipment. So we're happy to see there is nothing there that surprises us in that testing is going well.

And good morning.

<unk> minutes.

Happy to answer your question on the on the water and wastewater returns. So the Sun River wastewater treatment plant is just an example of one of many examples of projects and investments that we're making across our water and wastewater utilities.

In general the range of.

Allowed ROE is between roughly nine 5% and 12%.

So consistent with most other regulated utility businesses that you cover.

We are.

Focused on getting to scale and maturing our water business. So in many cases some of these systems have been out of rate cases for many years.

In other situations they have been underinvested in and we have been making those investments and then it takes us some time to get through the regulatory process and recover and get our earned ROE in line with the allowed ROE is in that range.

Got it thank you so much.

Thanks, gentlemen.

We have no further questions from the lines I'd like to hand back to David for any closing remarks.

Well. Thank you catch really do appreciate everybody joining us on the call today and thank you for the question Selman.

As you review the material if you have additional questions. Please contact Nikki directly and she'll help yep that'll conclude the call today. Thank you.

This does conclude today's call you may now disconnect your lines and enjoy the rest of your day. Thank you.