Hello, and welcome to today's NW Natural Holding Company Q3 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand over to our host, Nikki Sparley, with NW Natural Holding. The floor is yours. Please go ahead.

Thank you, Elliot. Good morning, and welcome to our third quarter 2022 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 our 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 503-610-7157. 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 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.

Thanks, Nikki, and good morning, everybody, and welcome. We continue to see strong financial results and expect the year to be in line with the guidance that we previously provided. Frank will go through more of the detailed financial results here in a moment. This morning, I'll walk through some economic indicators and provide summary of Northwest Natural's Oregon general rate case order. I'll wrap up with an update on hydrogen projects at the gas utility and recent news from our water and competitive renewables business. Turning to a few comments on the economy. In our gas utility service territory in Oregon and Washington, we continue to see strength in employment numbers, while the housing market moderates from its highs in 2021. Overall, Oregon is trending similar to national averages, but we continue to carefully monitor economic conditions. The labor market remains stable. In Oregon, for example, unemployment was 3.8% in September 2022. As expected, single-family health and activity is cooling as interest rates rise. Single-family permitting has moderated off the elevated levels in 2021. The median sales price of a home was down about 4.7% for the third quarter of this year. The inventory of homes for sale in the Portland Metro area remains very tight at only 2.2 months of supply. Overall, growth is roughly in line with our expectations. So far, we've seen the decline in mixed-use multifamily projects, but expect several developments to come online in the fourth quarter. In addition, supply chain issues have put customer' conversion projects on a longer runway. Despite these factors, we added nearly 8,800 new customers during the last 12 months, which equates to a growth rate of about 1.1%. Our water and waste water utilities continued to operate in areas that have a very solid economic footing. Unemployment rates…

Thank you, David, and good morning, everyone. I will begin by discussing the highlights of the quarter and year-to-date results and conclude with guidance for the year. I'll describe the earnings drivers on an after-tax basis using the statutory tax rate of 26.5%. As a reminder, Northwest Natural's earnings are seasonal with the majority of revenues and earnings in the first and fourth quarters during the winter heating months. For the third quarter, we reported a net loss of $19.6 million or $0.56 per share compared to a net loss of $20.7 million or $0.67 per share for the same period in 2021. That's an improvement in results of $0.11 per share. On a quarter-over-quarter basis, our gas utility provided $300,000 of higher earnings related to increased margin and lower pension expense. Net income from our other businesses increased $800,000 for the third quarter of 2022 related to higher asset management revenues, offset by higher interest expenses. For the first nine months of 2022, we reported net income of $38.4 million or $1.14 per share compared to net income of $38.1 million or $1.24 for the same period in 2021. The $200,000 increase in net income for the nine-month period reflects an improvement at the gas utility of $3.3 million, while results from our other businesses declined $3.1 million, as the prior period benefited from the higher asset management revenues related to the February 2021 cold weather event. Higher earnings at the gas utility were primarily related to customer growth, new rates in Washington and colder weather in 2022 compared to 2021. As a result of these factors, utility margin increased $6.6 million. Utility O&M increased $8.2 million, reflecting higher levels of contract and professional services and IT upgrades. Utility depreciation and general taxes increased $1.5 million due to higher property, plant and equipment as we continue to invest in our system. Other income increased $6.4 million, driven by lower pension costs. For 2022, cash provided by operating activities was $166 million. We invested $257 million into the business, most of which was for gas utility capital expenditures. Our credit ratings remain unchanged with a stable outlook. That includes Northwest Natural's senior secured long-term debt rating of AA- for S&P and A2 for Moody's. Our objective remains to keep our balance sheet strong with ample liquidity. Moving on to financial guidance. The company reaffirmed 2022 earnings guidance today for net income in the range of $2.45 to $2.65 per share. Guidance assumes continued customer growth, average weather conditions and no significant changes in prevailing regulatory policies, mechanisms or outcomes or significant changes in laws, legislation or regulations. We continue to target a long-term earnings per share growth rate of 4% to 6%. With that, I'll turn the call back over to David.

Thanks, Frank. Turning to a few updates on our key long-term objectives. Our long-standing core value of environmental stewardship is a driving force behind the choices we make every day in our operations and in planning for the future. We believe climate change requires rapid innovation and collective action, which is why we're committed to reimagining the role of our system and the fuel that we deliver. In September, we filed our integrated resource plan with the Oregon and Washington commissions, outlining long-range resource plans and pathways to reduce emissions. The plan incorporates complex modeling to arrive at a variety of scenarios to achieve the lowest cost, best options to meet safety, reliability and decarbonization needs. We expect these proceedings to conclude next year. But we are not just planning for the future, we're taking tangible steps forward. Our engineering team has completed 5% hydrogen blend test at our Sherwood operations and training center, and plans to increase to 10% blends in the coming weeks, with a goal of 15% by the end of the year, pending system and equipment testing results. We're also continuing to work on an exciting turquoise hydrogen pilot project to turn methane into clean hydrogen and solid carbon. We'll be testing this groundbreaking technology at our Portland operations facility. This project is in partnership with Modern Electron, and we expect the project to go live in the spring of next year. For a couple of our commercial customers, we're working on a pilot using CarbinX equipment. The equipment captures carbon from existing furnaces and boilers to reduce both energy use and greenhouse gas emissions. The carbon dioxide is converted to potassium carbonate, which is blended into sell products each unit has the potential to reduce CO2 emissions by nearly 18,000 pounds annually. We're not alone…

Thank you. [Operator instructions] Our first question comes from Chris Ellinghaus from Siebert Williams. Your line is open.

Hey, everybody. How are you?

Good.

Can you give us a little more color on -- you talked about this new hydrogen project, but can you give us a little color on sort of what your broader aspirations are for hydrogen?

Yes. I think as we've been very vocal, we believe that there's different products that can go through our pipeline. And if you're going to decarbonizes, obviously, the first thing you work on is energy efficiency. The second thing is renewable natural gases from biogenic resources like wastewater and landfill. But we also do believe like Europe has been doing for a period of time here, putting hydrogen on the system. And there's different forms of hydrogen and this area is well positioned for green hydrogen, and that's the purpose of testing what level of mix that we can put into the system and frankly, replicate what they're doing in Europe. And that really allows us to decarbonize what's already a very clean product flowing through the pipeline even further. So, the main focus is on the utility. I do believe long-term, Chris, there's going to be other investment opportunities for companies, especially after the Inflation Reduction Act was passed. There's tremendous funding from Congress now to push hydrogen forward, which is a good outcome.

You talked about the consolidation that's been taking place in RNG. Do you see that as enhancing or speeding up development or your ability to transact, or do you think some of these transactions maybe has a temporary slowing effect?

Well, I think overall, the transactions show that people see the same thesis that we're seeing, but this is important. If we really are going to address climate change, we have to get more renewable natural gas on the systems. I think a lot of people are trying to gain footholds, and it's really good that we've already established a small piece, and we're not going to try to compete against these bigger guys. But it does allow us to focus. And it's just a -- Chris, I would call it a reaffirmation that we're on the right path here. It's a competitive market. We believe that we can compete in it just because of our size, very much like what we're doing in water, that we can transact and be a little bit more nimble than maybe the big guys are doing. So I don't know if that fully answers your question or not?

That was sort of my next question. Does that mean you think some of these behemoth oil and gas companies coming into the space? Do you think that means they're going to be looking for the larger transactions, and that will leave maybe some of the smaller stuff more available to you than maybe some of the public RNG companies would have in retrospect?

That is exactly what we're -- what we believe will happen, and it makes sense. If these bigger companies are spending a lot of time on the smaller projects, I'm not sure the returns are going to be what they want them to be. And this is very similar to what we're seeing in the water sector.

Right. And lastly, you talked about having some additional transactions in water. What's your thought process or what are you seeing in the water business today? Are you seeing a pretty active environment?

Why don't I get our President of Water to answer that, Justin?

Yes. Thank you. We're seeing a pretty steady pipeline of activity, Chris, in the water space. It's very difficult to predict. There's larger transactions that will occur from time-to-time, but a pretty steady flow of tuck-in acquisitions. We mentioned earlier in the call that we just signed two in the past week, and one in Washington and one in Idaho. And that's pretty indicative of what we're seeing out there just building on our existing positions and then as larger new markets -- new market-related acquisitions become available, we will execute on that.

Okay. One last thing. Can you give us a little color on how you see the RNG tracker working from the rate case?

Hey, Chris, it's Frank. Good to hear from you. Yes, the RNG tracker, this is where we are able to invest in renewable net assets and put them into rate base. And the way it will work is pretty straightforward. We will invest. We will close, we will build, bring it online, and then we will incorporate it into rates each November 1 with the -- when we update rates for the PGA. So there's a little bit of lag, but it's -- in between rate cases, we can pick it up in rates every year. So to the extent we can, if there's opportunities, we would optimize that a little bit as they came online. But we'll have a little bit of lag within a year depending upon when they're ready to begin producing, so.

Very similar, Chris, if you remember, our bare steel and cast iron replacement program. That's how it worked as we would make the investment for the year. And then every November 1, which is when we update the gas portion of our bill that rates will be adjusted to reflect the increase in rate base and the associated cost.

Right. It's limited by the revenue percentage?

Yes. We still under SB98 still have that 5% of our revenue requirement per year, which up $35-plus million of incremental cost. Yes. So we still have quite a bit of room to continue to invest in renewable natural gas at the gas utility.

Okay. Great. Thanks so much for the details. Appreciate it.

Thanks, Chris.

[Operator Instructions] Our next question comes from Selman Akyol from Stifel. Your line is open.

Thank you.

Hi there.

Let me just start off on RNG there and just a few follow-ups. So you referenced in your comments that you have two that are coming online in early 2023. Maybe you could just talk about the outlook for additional projects and how quickly they could come online?

Yeah. We're actively -- so Mike Kotyk is our President of the Renewables business based out of Michigan. He's got a team that is actively looking at projects across the country. Selman, this is everything from landfill opportunities, to dairies and things like that and even potential contractual arrangements. So it's little -- that's about all the information I can give to you right now. There's, a lot of projects that we're looking at in terms of development and things like that and, of course, also trying to line up customers for the product. So it's still early stages. We just started this business. But I think what you'll hear us do probably early next year is provide a little bit more on what we see in terms of the marketplace and then how we're attacking the market. But his team is actively looking at various projects around the country.

Got it. And then, just looking over to carbon capture, maybe you could just explain that a little bit more on exactly where your participation is going to be in that, on the transportation side or actually on the capture side? Could you just help me understand that a little bit better?

Sure. Yeah. Kim, do you want to take that one?

Yeah. Good morning. Yeah. Why don't I start with the Carbon X project? Our long-term view, as David said, is displacing conventional gas with RNG and then, clean and renewable hydrogen. We also do believe carbon capture, utilization and sequestration are going to be really important. And I think, again, you see that in the Inflation Reduction Act and some of the funding flowing to those technologies. So we have two projects, the Carbon X is one where we're partnered with some of our bigger commercial customers. And basically, the equipment is designed to fit onto existing natural gas furnaces and boilers. It reduces the energy use and then it captures the carbon dioxide exhaust from those appliances. And then it's converted into potassium carbonate and that can then be used in a secondary market to create both. This is just one example of this technology. We know that it is being piloted, as David mentioned, in Minneapolis and in Canada. But we're really excited about it. As we mentioned, it has the potential to reduce emissions annually by 18,000 pounds per unit. And it's very flexible. You can -- as this proves out, you can put it on a variety of customer accounts, and it allows them to meet some of their chemicals individually along with the system. The other project that we're really excited about is, a Turquoise hydrogen so a Methane pyrolysis project. With modern electron and if you followed in the news, there's a lot of excitement about Turquoise hydrogen because it has potential to be one of the lowest cost low-carbon fuels. Monolith has a $1 billion project that they're getting DOE spending on this technology. For our project, we are anticipating that this kind of equipment it proves out really have the flexibility to be located in a variety of areas on our system. It would allow us to produce distributed hydrogen wherever or whenever we need it. And so we're exploring the pilot. We want to prove out the technology. We're really interested in the price point. And we're part of a consortium in North America, of other utilities that are sort of sharing the learnings on these kinds of pilots and part of HyDeploy, which is an international hydrogen consortium, again, looking both at these kinds of technologies, but also some work on our hydrogen blending, as David mentioned before. So we are exploring a lot of different avenues. And I think it's a reflection of the versatility of hydrogen for gas networks, but also the carbon capture opportunities. Q – Selman Akyol: Do you see opportunities to deploy inside the utility and outside the utility, or would it be all outside the utility?

I think the focus for us right now, what Kim is talking about is inside the utility. I think one of our -- I think it is one of our main goals is to decarbonize our gas utility, and we even have a net-zero view that we can get there by 2050, and this would be part of that process. The more we learn about it, just like we learned about RNG in the utility business, I think it will also provide investment opportunities outside the utility. But right now, the focus is inside the utility. Q – Selman Akyol: Got it. Very helpful. Thank you. And then just last one for me. O&M seemed to come in lower than we were expecting. I was wondering if there was anything there you could talk about maybe just the way this shapes up for the fourth quarter relative to taking a look at the first two quarters of the year?

We have had some initiatives underway this year. So it's a great question, of course. That, too -- we've been, I'd say, slowly doing backfills and we've been monitoring and trying to keep a bit of a lid on unnecessary or non, say, mandatory cost expenditures during the year. And I think you're seeing a little bit of that dampening the trajectory. We're up at the utility about 8% for the year, which is really not too far from where we expected to be. I think our view is it will kind of level off for the rest of the year and we're kind of on track where we thought we would be for the year. But it's really -- so far, what we've been. It's been driven by some inflation in our contract work and then IT maintenance and cloud costs, but it's -- I'd say, in general, it's in line with where we would expect it to be, but just kind of reflecting a little bit extra management action to keep it a little dampened from maybe where you were expecting it to be. Q – Selman Akyol: All right. Thanks very much.

Thanks, Selman

This concludes our Q&A. I'll now hand over to David Anderson, President and CEO, for final remarks.

Thanks, Elliot, and thanks, everybody, for joining us. Obviously, if you have any questions, get a hold of Nikki or media, get hold of David Roy as Nikki said in her prepared remarks. We know it's a busy day, and I hope all the -- hope you get out there and vote. We'll talk to you soon. Thank you.

Today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.