Northwest Natural Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 6 speakers on the call.

Operator

Good morning, everyone, and welcome to the NW Natural Holdings Company Q2 2023 Earnings Call. My name is Chet, and I'll be the coordinator for today. During the presentation, you can register to ask a question by pressing star 1 on your telephone keypad. I'd now like to hand over to Nicky, please go ahead.

Speaker 1

Thank you, Tetch. Good morning, and welcome to our Q2 2023 earnings call. As a reminder, some 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.

Speaker 1

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 for 7212530. News Media may contact David Roy at 503-610-7157.

Speaker 1

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.

Speaker 2

Well, thank you, Nikki, and good morning, and welcome, everybody. We continue to see strong financial for the 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 with an update on our water company and our renewables company. Turning to a few comments on the local economy.

Speaker 2

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 a national rate of 3.6%. Oregon's real GDP growth was 3.8 percent for the Q1 of 2023, which is the latest available data. Oregon had the 9th 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. Yes.

Speaker 2

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 for 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.

Speaker 2

Unemployment rates in our highest growth water service territories range from 2.3 for the Q1 of 2019. 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 utilities decarbonization activities. As we reported last quarter, we got several pilot projects focused on our industrial and commercial customers.

Speaker 2

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 for the Q1 of 2019. 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.

Speaker 2

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.

Speaker 2

With that, Brody, I'll turn it over to you for the financial comments.

Speaker 3

Thank you, David, and good morning, everyone. I will begin by discussing the highlights for the quarter 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.

Speaker 2

The

Speaker 3

activities from Northwest Natural Water, Northwest Natural Renewables, Interstate Storage and 3rd 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 1st and 4th quarters during the winter heating months. For the 2nd quarter, we reported net income of 1 point for the Q2,000,000 or $0.03 per share compared to net income of $1,700,000 or $0.05 per share for 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 $11,400,000 mainly from new rates and a gain on gas costs.

Speaker 3

Utility O and M increased $8,400,000 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 $3,200,000 from additional capital investments in the last year. Other income increased $3,300,000 primarily from lower pension expense. Interest expense increased $3,300,000 from higher debt balances and rates.

Speaker 3

For the 6 months of 2023, we reported net income of $72,900,000 or $2.03 per share, compared to net income of $58,000,000 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 for the Q4 of 2018.

Speaker 3

$40,700,000 primarily related to the new rates in Oregon and Washington, which contributed $27,100,000 Gains on gas costs added $4,100,000 and customer growth provided $2,500,000 The amortization of regulatory deferrals approved in Oregon in the Oregon rate case increased utility margin $5,100,000 But it's offset by O and M expense. Gas utility O and M increased $17,100,000 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 and M increases are being recovered through new rates. Utility depreciation and general taxes increased $6,500,000 for the Q2 of fiscal 2019 due to higher property, plant and equipment investments. Other income increased $5,700,000 driven by lower pension costs Interest expense increased $6,100,000 due primarily to incremental long term debt financing, Which decreased higher cost short term debt.

Speaker 3

Our other business provided net income of $1,200,000 Which was lower than last year, primarily due to higher interest expense. For 2023, cash provided by operating activities was $298,000,000 We invested $152,000,000 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.

Speaker 3

Guidance assumes continued growth, for the Q4 of fiscal 2020. For the Q3. With that, I'll turn the call back over to David.

Speaker 2

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, North Los Angeles Renewables has contracted to invest approximately $50,000,000 in 2 facilities that are being developed by EDL in Ohio.

Speaker 2

Operations began for the first facility, And we expect the 2nd facility to come online this fall. When those facilities achieve full commercial operations, we have contracts to sell for the next 20 years. We are pleased to see our investment thesis in 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.

Speaker 2

In the last year, we completed acquisitions in 4 states, including our largest acquisition to date in Arizona. We are particularly pleased that we've signed agreements to acquire Highland Water, which includes about 2,300 owned utility connections and for 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 Highland acquisition by the end of 2023.

Speaker 2

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 $18,500,000 upgrade, and it's our largest single capital project for our water and wastewater utilities to date. 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 Escalade.

Speaker 2

We scored highest in the West, and we were one of the highest in the country among over 140 natural gas utilities surveyed. The 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, 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.

Operator

Thank you, David. So our first question today comes from Selman Akyol from Stifel. Please go ahead.

Speaker 4

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 $18,500,000 And Could you maybe just talk about some of the returns you're expecting out of that?

Speaker 5

Excuse me. Hi, Selman. This is Kim Rush. Good morning. I'll talk a little bit about our hydrogen pilot.

Speaker 5

The first one that you mentioned is of 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 carbon material. That solid carbon then can be used in secondary uses like asphalt, tire production. We, in fact, just completed a sort of a small test where we took solid carbon from Modern Hydrogen's 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.

Speaker 5

And so we're really excited about pilot. We're kind of in the construction phase at our central facility here in Portland. And we're expecting that 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 CarbonX, and it's basically partnering with our large commercial customers on a technology that uses existing boilers to reduce both the customers' energy use and emissions.

Speaker 5

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 Carbon Quest. And that technology, captures flue 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 at a facility.

Speaker 5

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 the turquoise hydrogen could be a very low cost, for low emission solution. And we've I've talked to Fortis, BC and Canada. They're also very excited about Turquoise Hydrogen.

Speaker 5

So that's the update, more to come. These projects take a bit to get online, 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's nothing there that surprises us and the testing is going well.

Speaker 3

Good morning, Simon. This is Justin Pelphreyman. Happy to answer your question on the water and wastewater return. So the Sunriver for the Q1 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% 12%.

Speaker 3

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 ROEs in line with the allowed ROEs in that range.

Speaker 4

Got it. Thank you so much.

Speaker 2

Thanks, Selman.

Operator

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

Speaker 2

Well, thank you, Chet. I really do appreciate everybody joining us on the call today, And thank you for the questions, 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.

Operator

This does conclude today's call. You may now disconnect your lines, and enjoy the rest of your

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