Good day, and welcome to the Northwest Natural Holding Company Third Quarter 2018 Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instruction] Please note this event is being recorded.

I would now like to turn the conference over to Nikki Sparley, Director of Investor Relations. Please go ahead..

Thank you, Brandon. Good morning, and welcome to our third quarter 2018 earnings call. As a reminder, some of the 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 and also our SEC filings for additional information. 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 conference calls are designed for the financial community. If you are an investor and have additional questions after the call, please contact me directly at 503-721-2530. News Media may contact Stefanie Week at 503-226-4211, extension 5741.

Speaking this morning are David Anderson, President and Chief Executive Officer; and Frank Burkhartsmeyer, Senior Vice President and Chief Financial Officer. David and Frank have some prepared remarks and then will be available along with other members of our executive team to answer your questions. With that, I'll turn it over to David..

Thanks, Nikki, and good morning, everybody. I'll begin today with highlights from the period and then Frank will cover the financial details, and then I'll wrap up with an update on our key strategic initiatives that we've been discussing all year long. This was a significant quarter for us as we continue to execute on our long-term strategy.

Maximizing returns from our strong and stable and growing regulated natural gas utility and diversifying our business with investments in the water sector. Also, we completed our reorganization to a holding company structure on October 1.

This well known corporate structure gives us a more agile and efficient platform to pursue new growth opportunities in the water business. A lot of hard work ensured a seamless transition they won here, which I'm very thankful for.

Overall, financial results for the year continue to be driven by warm weather in 2018 compared to extremely cold weather in 2017, and some higher operations and maintenance costs. Our natural gas utility continues to grow and that coincides with the momentum in the local job market and housing sector.

The statewide unemployment rate maintained a record low 3.8% for the last two months and median wages for Oregonian's grew 4.6% over the last year. Housing permits in the Portland Metro area were up slightly in September versus the same period last year.

These factors translated into us connecting more than 12,500 new customers to our system over the last year resulted in a growth rate of 1.7%.

On the regulatory front, I'm pleased to report after 10 months of review with stakeholders, an order was issued in Northwest Natural's Oregon general rate case resolve in a majority of the items, the case addressed. The order provides an overall $23.4 million revenue requirement increase from previous rates.

After considering the conservation tariff and federal tax reform, the order represents an expected net benefit to Northwest Natural of about $14 million per year. This includes a return on equity of 9.4%, a cost of capital of 7.3%, and a 50-50 cap structure.

It also includes an increase in rate base of $300 million, since the last Oregon general rate case in 2012, bringing total rate base to $1.186 billion. Finally, the commission ruled on sharing allocations related to asset management revenues, as you may know, we engaged a third-party marketer to optimize our storage and utility assets.

We share the revenues from these activities with customers. Under the order 90% of asset management revenues earned from optimizing these utility assets will now be shared with customers, previously that was 67%. While we're disappointed with the commission's decision on this item, optimization revenues are not a significant portion of annual results.

The commission indicated that two additional or two items from the rate case will require additional review. First, the timing and method of returning federal tax savings to customers; and second, the recovery of cost in our pension balancing account.

The commission indicated, they want to conclude these two items quickly, but no later than February 1st. We intend to provide whatever additional information is needed to expedite the conclusion of these two items.

The order is effective November 1st, also effective on that date was the utilities are -- utilities purchase gas adjustment or PGA, for the fourth year in a row customers will see a rate reduction as a result of lower natural gas prices.

The combined effects of the PGA in the rate case mean that Oregon residential customers will see a 2% drop in their rates this winter. And in Washington where there is no rate case impact, customers will see a 7% reduction in the rates due to PGA.

In both service territories, customers are paying less for natural gas than they did 15 years ago, which is amazing, and these lower prices continued to boost our competitive position.

In fact, for the typical home we serve, natural gas enjoys up to a 70% price advantage over an electric or oil furnace and around a 30% advantage -- price advantage on heat pumps. Adding to the good news for the six year in a row, customers rank Northwest Natural first in the West in the J.D. Power Residential Customer Satisfaction Study.

Northwest Natural also posted the third highest score in the nation marking the 14th time in 17 years that we scored in the top five in the country. These results are a testament to our customer centric culture, and I'm very proud of all of our employees who make this happen every day.

And finally, this morning, I'm pleased to report that in the fourth quarter, the Board approved the dividend increase making this the 63rd consecutive year of annual dividend increases. We are proud to be one of only three companies on the New York Stock Exchange with this record. Let me turn it over to Frank to cover the financials in more detail.

Frank?.

Thank you, David, and good morning, everyone. Before turning to our detailed numbers, I will first highlight reporting changes resulting from our holding company reorganization, which occurred on October 1st, and provide an update on the impact of tax reform, then I will turn to the financial results of the rate case and our guidance for the year.

From a financial statement perspective, the third quarter is a transitional period, this is the last quarter in which Northwest Natural Gas Company financials will reflect consolidated results. Beginning with the fourth quarter, Northwest Natural Holding Company will be the parent and their financial statements will reflect consolidated results.

Regarding tax reform, our 2018 quarterly results have reflected timing differences between the customer revenue deferral associated with tax reform, and the tax expense benefit from the lower federal tax rate. First quarter results benefited from this timing difference as the tax savings were greater than the revenue deferral.

This benefit partially reversed in the second quarter and as anticipated fully reversed in the third quarter, bringing us to a neutral position for the year. With the order from the Oregon rate case, we were able to reset customers rates and complete the interim deferral period for Oregon.

We finalized our deferral estimate and consequently recorded an after-tax benefit of $1.6 million in utility margin. We do not anticipate significant timing variances going forward. However, the distribution of earnings across the quarters is permanently affected due to tax reform.

With our seasonal earnings profile, the impact of the lower tax rate will be positive in the first and fourth quarters, when earnings are higher and vice versa in the second and third quarters. Turning now to our financial results. Please note that I'll describe individual earnings drivers on an after-tax basis using the statutory tax rate of 26.5%.

For the third quarter of 2018, we reported a net loss of $11.8 million or $0.41 per share, an increase of $3.3 million compared to a net loss of $8.5 million or $0.30 per share for the same period in 2017.

Results for the quarter reflect higher O&M costs and a lower tax benefit, partially offset by higher utility margin related to the previously mentioned changes in the interim tax deferral.

For the first nine months of 2018, we reported net income of $28.7 million or a $1 per share compared to $34.5 million or $1.20 per share for the same period last year, a decrease of $5.8 million.

Results were driven by a $7.1 million decrease in the utilities net income, reflecting lower margins related to weather and higher O&M costs related to compensation and benefit expense.

Utility margin declined $8.7 million, due to the effects of the cooler weather in 2017, and the $5.1 million revenue deferral from tax reform, partially offset by customer growth.

While the weather normalization mechanism in Oregon provides a large degree of margin stability, we do not have a normalization mechanism in Washington and a portion of Oregon customers have opted out. In the first nine months of 2017, our service territory experienced very cold weather or about 24% colder than average.

By contrast, in 2018 we experienced a more typical winter and a very warm spring and summer with weather 11% warmer than average. Also affecting earnings was a $4.5 million increase in O&M, and a $1.3 million aggregate increase in depreciation and property taxes.

The estimated cumulative year-to-date impact of tax reform on net income is negligible as the estimated tax expense benefit roughly offsets the $5.1 million revenue deferral. Turning to cash flow.

During the first nine months of 2018, the company generated a $159 million in operating cash flows, down $34 million from 2017, primarily due to higher income taxes paid and lower deferred gas costs from the warmer weather.

We continue to reinvest back into the business with a $159 million in capital expenditures related to systems reinforcement, customer growth, and the North Mist expansion project. Our balance sheet remains strong with ample liquidity. Turning next to the Oregon general rate case.

The order provides an estimated overall earnings benefit to Northwest Natural of $14.2 million on a pre-tax basis, and an additional $15 million in annual cash flows. As David mentioned, the commission ordered further proceedings specific to tax reform and recovery of the pension balancing account, these two items are primarily cash flow related.

While the commission authorized Northwest Natural to increase the FAS 87 pension expense included in rates by $8.1 million and ordered us to freeze the pension balancing account on October 31, it did not conclude on the timing and method of returning federal tax savings to customers and our recovery of the pension balancing account.

For background, the pension balancing account was established in 2011 to defer the difference between actual pension expense and the amount included in rates. As of September 30, 2018, the balance of the account was approximately $70 million.

The commission did not expressly rejected tax and pension balancing account solutions from our initial settlement with parties, but instead asked us to provide further information and reach resolution on these matters by February 1, 2019.

Meanwhile, Northwest Natural began collecting the full pension expense through base rates, beginning on November 1st under the rate case order, which is beneficial to cash flows. Moving on to 2018 guidance. With respect to capital expenditures, we continue to forecast investment in the range of a $190 million to $220 million.

Northwest Natural Holdings affirm 2018 earnings guidance today in the range of $2.10 to $2.30 per share. Guidance assumes continued customer growth from our utility segment, average weather conditions and no significant change in the prevailing regulatory policies, mechanisms or outcomes or significant laws or regulations.

With that, I'll turn the call back over to David..

Thanks, Frank. First, let me give you an update on the North Mist expansion project. As you may remember, we've been operating our storage facility in Mist, Oregon for nearly 30 years.

The Mist storage facility is uniquely situated with just a single pipeline serving the region, storage is essential to support reliable service and that is extremely valuable. The value of our Mist properties was proven once again in October, when a major pipeline incident in Canada disrupt the natural gas service to the Pacific Northwest.

Mist was a crucial resource that supported our customers as well as local utilities and marketers.

As you may recall, Northwest Natural is developing a new 2.5 billion cubic feet reservoir, a compressor station and a 13-mile pipeline, which will supply non-notice storage service to Portland General Electric's Port Westward Power Plant, so that they can balance renewable power on the grid.

We have now completed base gas injections, and are currently constructing the compressor station, unfortunately the contractor has experienced delays. We are working closely with the contractor to finish the project, and now expect the expansion to be in service by the end of March 2019, with an estimated cost of around a $144 million.

As a reminder, when the expansion is placed into service, the investment will immediately be rate based and an established tariff schedule already approved by the Oregon Public Utility Commission. The facility has contracted for initial, an initial 30-year period to Portland General with renewal options up to 50 years beyond that.

Another area of focus for us is proactively helping reduce greenhouse gas emissions in the communities that we serve. Each year, Northwest Natural delivers more energy in Oregon than any other utility. Yet natural gas sales to our customer's homes and businesses accounts for about 5% of emissions.

But we know we can do better, which is why we've launched an initiative called our low carbon pathway, an effort that includes the voluntary carbon savings goal of 30% by 2035.

Through this initiative, we are identifying new opportunities to reduce emissions using our existing infrastructure, one of the most modern, tightest pipeline systems in the nation.

This year, we commissioned the consulting firm E3, to do an economywide deep decarbonization study for Oregon and Washington that evaluates different strategies to achieve an 80% reduction in greenhouse gas emissions by 2050.

As you may know, E3 is a premier environmental consulting firm that originated the deep decarbonization work, started in California and now throughout the US. In this study, E3 takes a closer look at how to achieve the goal, while also meeting peak winter energy needs.

For example, today the natural gas system in the Pacific Northwest delivers more energy than the regions entire hydro system. So, key question is how do we ensure reliable, clean energy on the coldest winter days and months, while also dramatically driving down emissions over the next three decades.

All three Northwest deep decarbonization studies that have been done agree on this point, the natural gas continues to be used in 2050, to achieve our carbon goals as affordably and reliably as possible.

We believe the E3 study results show that Northwest Natural's on the right path, by working with customers on energy efficiency, by exploring cutting-edge technologies like power to gas, and by working to include renewable natural gas in our supply mix.

The Oregon Department of Energy just released a report that showed nearly 40 billion cubic feet of renewable natural gas technical potential is in our state, that's equivalent to all of Oregon's residential gas throughput.

So not only do we have a great opportunity to reduce the carbon intensity of what's going through our pipes, but we can help our community solve their waste problems in the process. To that end, we are pleased to be working on three local projects that will interconnect and flow RNG into our system by the end of next year.

While this is just the beginning, I look forward to continuing work with our regulators and other stakeholders on finding new innovative solutions that provide climate benefits to our customers at reasonable cost. Now, a quick update on the Gill Ranch sale process. Last quarter we announced the sale of this business in California.

In July, we have filed for approval with the California Public Utilities Commission. We hope to receive that approval early next year, which would allow us to continue to target closing the transaction in the summer of 2019. Finally today, let me update you on the progress we've made with our water strategy.

Through our water acquisition or water utility acquisition strategy, we are adding an earning stream that has a similar risk and cash flow profile as our regulated natural gas utility. We made several important advancements here.

In October, Northwest Natural Water signed our largest agreement to-date to acquire 9,400 water and wastewater connections in Sunriver.

Sunriver is located in Central Oregon, and is one of the longest standing resort communities in the Pacific Northwest, both its water and wastewater systems are well run and have an excellent track record for safety and reliability. We are also excited to gain a talented workforce with deep technical expertise.

This acquisition is another meaningful step for our growing water business and adds wastewater to our portfolio. Overtime, I believe this could create more opportunities for us as we continue these endeavors. I believe the water sector has tremendous investment potential in the coming years, as aging infrastructure will need to be replaced.

I'd also like to mention that over the last several weeks, we closed all four water company acquisitions that we previously announced, adding over 7,300 connections that serve approximately 22,000 people across the Pacific Northwest. In total, we have committed $67 million in investment into the water sector to-date.

These aggregate acquisitions are projected to be accretive to earnings per share in the first full year of operations. At this juncture, these investments remains small and their earnings are not yet material. In closing, today I'm proud of all that we've accomplished this year and excited about executing on the opportunities in front of us.

I want to thank you again for taking time to join us this morning. With that Brandon, I think we're ready to open it up for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Aga Zmigrodzka with UBS. Please go ahead..

I would like to follow-up on your comment on the water strategy and roughly $67 million of investments.

How should we think about your returns and growth from this part of the business going forward?.

You know what -- I think it's -- we're in the early stages of this, I mean, the good news is, there are a lot of private water companies out there. In fact, if you look at the Northwest three states, there's probably about 500,000 connections that are in the private side of the equation.

So there's a good target opportunity for us as we look to roll these up. At this juncture, it's a little difficult for us to provide future guidance on the level of materiality that it can provide at this juncture. Frankly, to achieve what we've achieved in the year period, I'm very pleased with.

So, we'll keep etching away at this, and hopefully continue to add these acquisitions, and of course, once the acquisitions get into the portfolio, it provides us greater opportunity for investments in each one of those, so I think you'll continue to see the segment grow.

At this juncture, though, we're not really providing guidance in terms of how large we believe this could become, because it's just in the early stages at this front..

My second question is related to the North Mist expansion and revision to cost, is there any risk that there could be further delay in that project?.

Yes. It's a very good question. When you develop gas storage properties, they are very difficult assets to construct. I mean, one, you're dealing with mother nature and the reservoir underneath the ground. We've proven overtime whether it's our expansion at Mist or even the way we developed Gill Ranch, that we've done a good job there.

The above ground materials, it's just -- it's a very complicated plant, it's the best way to think about this. And as a result, sometimes you do have delays and complications that happen.

We are coming to the end, though, I mean, once you start, the gas is in the ground right now, the pipeline is done, this is now about building out the compressor station and the other components. So, we believe that the March 2019 is a very achievable date.

Could you have further delays? Well, you could, I mean if it rained, which does happen in this part of the country, it affects schedule in terms of snows and stuff like that, you can have weather delays and other delays.

But we are coming close to the end, so even if it is delayed, I think we're very close to that in the March period at this juncture..

Our next question comes from Dennis Coleman with Bank of America Merrill Lynch. Please go ahead..

I wonder just on the North Mist, can you -- what happened, what caused the delays, can you be a little more specific?.

It's normal construction activities, Dennis. It's the above ground materials, I might turn to Dave Weber to give a little bit of additional guidance, but it's a combination of things.

Dave, do you want to kind of talk a little bit about this?.

The summer was hot and dry and we have restrictions that are created by the forest service, when you can work in the forest or constructing up in the forest.

So their soil conditions and environmental conditions that affect how the contractor in the project can proceed that have to be dealt with, and they're just taking longer than we're anticipated to work through..

So, maybe in this case you needed more rain?.

Well. Yes. I mean, it's interesting, again -- there's so many little moving parts here, and again, what's important during this period of time ATDC continues to accrue, but we want to get it online as soon as possible, obviously, because the asset needs to be in operation.

We need to start going through the testing process, so that it's fully operational for PGE, specifically when it comes into the winter months, so we -- and that also begins the cash flows that we would start getting as a company.

So, we're anxious to get it online as soon as possible, but it's a very complicated asset that you just want to make sure you're getting right, so that you don't find yourself in a situation where you do major damage to it when you're starting it up..

Also doubling back on the water strategy, you say you've now closed the first four deals and clearly the regulatory process here is one of the pinch points where you have to go through even for small assets, any learning's there that might help you accelerate the growth of the business as you've completed the first four?.

Yes. We've actually made filings in three jurisdictions, Idaho, Washington and Oregon. And I will tell you from my perspective, they all went pretty quick. Number one, it helps when the parent company is a holding company, right.

So, we're not asking for a utility to be acquiring another utility, so the holding company structure ultimately will even speed this up quicker. But each jurisdiction, as they go through their standard processes what we found in general from the commission is that they are supportive of these water acquisitions.

They believe roll-up is a good thing, I also, Dennis, believe it doesn't hurt when you have a 160-year old company like Northwest Natural that's been providing service like this for a long period of time with really good customer satisfaction results that they're not worried about the entity that's buying the facility, in fact, I think there's someone encouraged that we'll operate it differently going forward, because we're in this for the long-term versus the small mom and pop companies.

So, in general, I think it's gone very, very quick, and things don't usually go quicker regulatory process by definition. But to consider that we have all four of these closed, and I would suggest the Sunriver will be hopefully done in the middle part of the next year, that's a pretty quick regulatory process.

And when you say lessons learned, I'm not sure there really is any lessons learned at this point. I think it's the standard process are going through, making sure they understand the dynamics of transaction, and then understanding the operational plan that we have before them in terms of how we're going to operate these assets..

And then finally, largely through the Oregon rate case, I realize there are some big items to address there, but any update on the Washington rate case now looking forward?.

Yes. I'd love to have been done with the Oregon rate case at this point, so we got a couple of open items that we need to work through, but we continue to believe, Dennis, there's a high probability that we'll file our Washington rate case either late this year or early next year..

[Operator Instructions] At this time there are no further questions, I would like to turn the conference back over to Mr. David Anderson for any closing remarks..

Great, Brandon, thank you for doing that, and everybody, thank you for joining us. As usual, if you have further questions reach out to Nikki. She'll be happy to walk you through various things, and we do appreciate your support. Have a great day..

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect..