Good morning, everyone, and welcome to the NW Natural Holdings Company Q2 2023 Earnings. [Operator Instructions] I'd now like to hand over to Nikki Sparley to begin. Nikki, please go ahead..

Thank you, Sach. Good morning, and welcome to our second quarter 2023 earnings call. As a reminder, some statements 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) 721-2530.

News media may contact David Roy at (503) 610-71-57. Speaking this morning are David Anderson, Chief Executive Officer; and Brody Wilson, CFO, Vice President, Treasurer, Controller and Chief Accounting Officer. 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..

Well, 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. Brody 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 utility, and then I'll wrap up with an update on our Water Company and our Renewables Company. Turning to a few comments on the local economy.

Related to our gas utility service territory, Oregon's unemployment rate was 3.5% in June, coming down from the 4.4% we saw in March of this year, and is now on par with the national rate of 3.6%. Oregon's real GDP growth was 3.8% for the first quarter of 2023, which is the latest available data.

Oregon had the ninth highest real GDP growth among the states. Over the last 12 months as interest rates have risen, permits, home sales and average home prices have declined a little bit. Yet, despite these factors, we added nearly 6,400 new customers during the last 12 months, which equates to a growth rate of 0.8%.

We are seeing some recent positive movement in housing, single-family building permits in the Portland area have picked up approximately about 1.5% over last year. We'll continue to monitor these trends closely. Our water and wastewater utilities continue to operate in areas that have solid economic footing.

Unemployment rates in our highest growth water service territories range from 2.3% in Idaho to 4.1% in Texas. On a consolidated basis, our water and wastewater utilities grew 3.1% on an organic basis over the last 12 months. That excludes approximately 30,000 meters we added through acquisitions.

Collectively, our gas and water utility customer base grew by 4.4% over the last 12 months. Turning to an update on the gas utility decarbonization 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. We'll be studying the results of this pilot for the next several months. We're also continuing to work on a turquoise hydrogen project to turn methane into clean hydrogen and solid carbon.

We'll 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 Sherwood operations center and are working towards testing a 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, will be filling in as CFO until we figure out a more permanent 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 a statutory tax rate of 26.5%.

For clarification, our primary segment is the Natural Gas Distribution business housed in our subsidiary, Northwest Natural. The activities from Northwest Natural Water, Northwest Natural 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 $0.03 per share compared to net income of $1.7 million or $0.05 per share from the same period in 2022.

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 $3.3 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 $2.03 per share compared to net income of $58 million or $1.77 per share for the same period in 2022. The $0.26 increase in earnings per share is largely the result of a $0.30 increase from our gas utility related to new rates in both Oregon and Washington.

This was offset by a $0.04 per share decline from our other businesses, mainly due to higher interest expense. A few more details on the gas utility results. Utility margin increased $40.7 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 is offset by O&M expense.

Gas utility O&M increased $17.1 million or $0.23, reflecting - or 23%, excuse me, reflecting those deferral amortizations 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 million 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. We invested $152 million into the business, most of which was for the gas utility capital expenditures.

Related to our financings, 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 remaining to keep our balance sheet strong with ample liquidity. The 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'll turn the call back over to David..

Thanks, Brody. 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 nearing the finish line on our first project.

As you may remember, Northwest Natural Renewables has contracted to invest approximately $50 million in two facilities that are being developed by EDL in Ohio. Operations began for the first facility, and we expect the second facility to come online this fall.

When those facilities 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 and our renewables company play out, and we'll 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 today in Arizona.

We are particularly pleased that we've signed agreements to acquire Hiland Water, which includes about 2,300 owned utility connections and approximately 5,000 service customers across Western Oregon. Northwest Natural Water launched a water services business earlier this year.

We closed the King Water transaction in Washington in April, adding nearly 10,000 connections. We expect to close the Hiland acquisition by the end of 2023. These first two service business 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 our Sunriver utility in Central Oregon. This is a 4-year $18.5 million upgrade, and it's our largest single capital project for our water and wastewater utilities today.

We're pleased that through investments like these, 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 Escalent.

We scored highest in the West, and we were one of the highest in the country among over 140 natural gas utility survey. This study is based on our performance related to customer focus, community support, communications effectiveness, reliable quality, environmental dedication and, of course, reputation.

I couldn't be prouder of this result, but 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 Sach, we'll open it up for questions if anybody has questions..

[Operator Instructions] So our first question today comes from Selman Akyol from Stifel. Please go ahead..

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 what that testing is going to be? And how long you expect it to take place? And when you have results? And when it might be actionable? And then the other is, you mentioned in, sort of, wastewater, you 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?.

Hi Selman. This is Kim Rush. Good morning. I'll talk a little bit about our hydrogen pilot. The first one that you mentioned is a pilot that we're working on with modern hydrogen. It's basically a precombustion carbon capture technology that turns methane into clean hydrogen and the byproduct is a salt solid carbon material.

That solid carbon then can be used in secondary uses like asphalt, tire production. We, in fact, just completed sort of a small test where we took solid carbon from modern hydrogen facility and we used it in a slurry seal at our Sherwood facility. And this was a very small test, but it was basically a way to sequester that carbon using 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 the product or that technology to be online later this year. The other one, we have a couple of other technologies that we're experimenting with.

One is called Carbon X, and it's basically partnering with our large commercial customers on a technology that uses existing boilers to reduce both the customers' energy and emissions. And the technology creates a pearl ash byproduct. And again, that pearl ash can be used in secondary products, cleaning materials as a way to sequester that carbon.

The final technology that we're looking at is through a company called CarbonQuest. And that technology captures blue gas and converts it to liquid CO2 that then can be used in manufacturing processes like concrete production. That particular product can have an 80% or better carbon reduction at a facility.

So all of these are sort of in the piloting phase. We also have our hydrogen teams 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 the turquoise hydrogen could be a very low-cost low-emission solution.

And we - I've talked to FortisBC in Canada, they're also very excited about turquoise hydrogen. So that's the update, more to come. These projects take a bit to get online and - but we're really excited about the progress. Maybe the only other comment I'll make is we're stepping up our hydrogen blending at our own Sherwood facility to 20% this fall.

We've been consistently blending 15%. No anomalies on the equipment or our own pipe or other sort of fittings equipment. So we're happy to see there is nothing there that surprises us, and that the testing is going well..

Good morning. This is Justin Palfreyman, happy to answer your question on the water and wastewater returns. So the Sunriver wastewater treatment plant is just an example, one of many examples of projects and investments that we are making across our water and wastewater utilities. In general, the range of allowed ROEs is between roughly 9.5% 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 under-invested 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 ROEs in line with the allowed ROEs in that range..

Got it. Thank you so much..

Thanks Selman..

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

Well, thank you, Sach. I 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 you out. That will 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..