Good morning, ladies and gentlemen. Welcome to the NW Natural Holdings Company Q1 2023 Earnings Call. My name is Jaquita. I will be your moderator for today's call. [Operator Instructions] I would now like to pass the conference over to your host, Nikki Sparley with NW Natural Holdings. Nikki, please go ahead.

Thanks, Jaquita. Good morning, and welcome to our first quarter 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. 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. Welcome. We started off the year strong. Our financial results are solid, and we continue to make progress on all key objectives. This morning, I'll walk through a few financial and economic indicators and some decarbonization initiatives at our gas utility. Frank will then go through the quarter's results, and then I'll wrap up with an update on Northwest Natural Water and our renewables company. We reported net income of $2.01 per share in the first quarter compared to net income of $1.80 per share for the same period last year. These results were largely driven by higher revenues in Oregon and Washington from our natural gas utility, along with solid customer growth from our gas and water companies. So now let me cover a little bit on the economy in our service area. Related to our gas utility service territory, Oregon's unemployment rate was 4.4% in March 2023, which is on par with the 4.5% we saw at the end of the year in December and trending slightly above the 3.5% that we saw this time last year in March. As expected, single-family housing activity in our area continues to follow national trends. Overall, our gas utility customer growth added nearly 8,100 new customers during the last 12 months for a growth rate of 1%. Our water and wastewater utilities continue to operate in areas that have strong economic footing. Unemployment rates in our highest growth water service territories range from 2.8% in Idaho to 4.6% in Texas. Population growth in 2022 was over 4%, where our Texas utilities are located. The Idaho counties we do business in grew 1.1% and 1.9% last year. Overall, our falls water utility provided 5.7% organic customer growth during the last 12 months. Texas remained solid market…

Thank you, David, and good morning, everyone. I will begin by discussing the highlights of the first quarter 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 utility 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 of 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 quarter, we reported net income of $71.7 million or $2.01 per share compared to net income of $56.2 million or $1.80 per share for the same period in 2022, an increase of $0.21 per share. Our gas utility posted a $0.25 per share increase in earnings while results from our other businesses declined $0.04. Higher earnings at our gas utility were primarily related to new rates in Oregon and Washington and customer growth. As a result of these drivers and the amortization of regulatory deferrals approved in the Oregon rate case, utility margin increased $29.3 million. Gas utility O&M increased $8.7 million or 21%, reflecting higher payroll costs, information technology costs, contract labor and the amortization of regulatory deferrals related to COVID and 2 large IT projects. Most of the increased costs and the amortization of deferrals were anticipated in the Oregon rate case. Utility depreciation and general taxes increased $3.3 million due to higher property, plant and equipment investment. Other income increased $2.6 million, driven by lower pension costs and interest income while interest expense increased $2.8 million. Our other businesses provided a net loss of $300,000, which was lower than the prior year, primarily due to higher costs, including interest expense as we continue to invest in our water strategy. For 2023, cash provided by operating activities was $177 million. We invested $73 million into the business, most of which was for gas utility capital expenditures. Related to our financings, we've been active in the last year, issuing both debt and equity. We are starting off 2023 with a strong cash position and solid financial counterparties. Our objective remains 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 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% compounded annually from 2022 through 2027. With that, I'll turn the call back over to David.

Thanks, Frank. Moving now to an update on our Renewables business. As you know, through that business, we're focusing on providing cost-effective solutions to help a variety of sectors decarbonize using existing waste streams and renewable energy sources. We continue to look at opportunities across the spectrum. This could include owning or contracting, renewable natural gas from established facilities, acquiring existing projects or developing greenfield projects. Our main focus is working toward a portfolio of projects that generate income and cash flow growth that fit our overall corporate risk profile. A good example is our first project. Under the agreements, Northwest Natural Renewables has contracted to invest $50 million into 2 facilities that are being developed by EDL in Ohio. Commissioning of the first facility is expected later this month, with commercial operations expected in late May or early June. The second facility is expected to begin commissioning in roughly 6 weeks with commercial operations anticipated in late June or early July. We contracted to sell the anticipated volumes under long-term agreements. We are pleased to see our investment thesis in EDL play out, and we'll continue to focus on opportunities in this space. Turning to Northwest Natural Water. Since our water strategy began in 2017, we've grown through more than 25 acquisitions. We've expanded from owning water utilities in the Pacific Northwest to also invest in wastewater and broadening efforts to Arizona and Texas. Recently, we signed an agreement and are preparing to execute another early next week that will add another opportunity set to our water business and complement this strategy. Under these agreements, Northwest Natural Water is launching a water services business through 2 acquisitions supporting 15,000 connections in Oregon and Washington. This business will provide operations and maintenance support to water and wastewater system owners and works to create value by leveraging shared personnel, technology and expertise for delivery of clean, reliable water at a reasonable cost. We're excited about this opportunity to create long-term value by broadening our services, expanding our footprint and potentially allowing capital and acquisition investments in smaller systems. These first 2 acquisitions provide a strong platform that we believe can be scaled in the coming years. And finally, this morning, I'm proud of Northwest Natural Holdings being named one of 2023's World's most Ethical Companies by Ethisphere for the second year in a row. This reflects our long-standing commitment to leadership and business integrity through best-in-class ethics, compliance and governance practices. Northwest Natural Holdings is one of only 9 honorees in the energy and utilities industry. In all, 135 honorees were recognized spanning 19 countries and 46 industries. In conclusion, your company is financially strong, and we're -- and we'll continue working on your behalf to execute on the opportunities across all of our businesses. Thanks again for joining this morning. With that, operator, we'll open it up for questions.

[Operator Instructions] The first question comes from the line of Tate Sullivan with Maxim Group.

On the King water -- on the King Water Company acquisition. Is that in your natural gas service territory or separate parts of Washington and Oregon?

I will give that to our President of the water company, Justin Palfreyman, to answer that, Justin?

It's actually located in the Puget Sound region, so it does not have overlap with our gas utility service territory. It is in similar sort of geographic areas as our existing water utility business service territory.

Okay. And the water utility business in general, do you bill and get -- I mean, the tariffs, so to speak, on the connections as opposed to the amount of people served by those connections? Or does it vary by state roughly?

For the water utility business, yes, it's billed based on connections.

Based on connections Okay. And then shifting to natural gas customer growth data, is the growth more due to conversions still and as opposed to new home construction. And I mean the trajectory of the growth seems to be lower or could it possibly pivot back to the higher rated growth based on trends you're seeing for natural gas?

Thanks for the question. And we are kind of unique out here that we still have a conversion market that has provided a pretty steady results. But overall, the customer growth rate has always, and in the first quarter, comes more from new homes overall. I actually don't have the numbers at my fingertips, but it usually runs around 60% is new growth and 40% is conversions, and that's probably roughly correct. But we can get back with you with the exact breakdown.

And then I think it was the prior quarter, you talked about, I mean, a good permit environment. But I mean, can you talk about just Portland area general? Is there any population flight? Are you seeing good population trends? Or can you just talk about -- I mean, or is the outlook more around 1% going forward for customer growth?

Yes. I mean the permitting activity is still fairly decent, but we just -- we don't know how that's going to play out, Tate. I mean obviously, when you -- the country is experiencing higher interest rates and the Fed just moved rates yesterday, that should slow things down a little bit, and we're expecting that. And so if -- it wouldn't surprise me at all this 1% growth rate for a period of time as we work our way through this. But on the population side and things like that, nothing really to report on that front that would really kind of make you say that the growth rate is going to be materially different than what we reported in the first quarter.

And then lastly, I think you said earlier that was it an organic customer growth rate with the water utilities collectively at 3.9%? Or was that with acquisitions as well?

Yes. So a couple of numbers here. Organically, for water, it was 3.9%. And if you include all the gas and the water together, including acquisitions, our total customer growth is 4.6%.

Next question comes from the line of Selman Akyol with Stifel.

So just taking a look at sort of the King Water Company. Can you just talk about -- is it a big roll-up opportunity in front of you? Do you see that as similar to the utilities we're going to be able to go out and acquire a bunch of sort of the maintenance side of the equation?

Yes. Selman, this is Justin Palfreyman and I'll take that question. We view this as a nice starting point for a platform for water services. And really, the water services strategy is a bit different than our utility strategy. It allows us to enter into contracts and drive margin for our business in a market that we haven't necessarily been able to access historically. So serving homeowners associations, small utility districts, municipally owned utilities that aren't necessarily acquisition targets per se for our utility business. We view these first 2 acquisitions as a nice starting point for continuing to expand organically with these businesses. I don't think that the roll-up strategy is exactly the same for the services business as it is for our utility business because it's more of a competitive nonregulated sector. So I hope that answers your question.

Yes.

I think the nice thing, Selman, as you've seen -- as you've seen for us, we've kind of gone from still focused on the water utility side and we expanded into the wastewater side and now into the services business. So it's been just a very nice evolution. The other thing that I really like about the services business is it's going to provide steady earnings and revenues, even though it's an unregulated operation because typically, once you get the relationship, you maintain those for a long period of time. And so it's exciting. And I think the horizon for this is good for us as we look forward.

Got it. So just kind of going back to the nonregulated nature of it. Can you maybe just talk about what returns you anticipate getting? I presume a premium to water utility, but any comment you could make there?

Yes. The return profile is a little bit healthier, I would say, than the regulated water utility business. But it's still a relatively low margin business, roughly 10% profit margin business. So it's a little bit different in nature. It doesn't have the regulatory lag and that kind of thing. But it is very sticky in terms of really fairly high renewal rates for the contracts that these businesses have as long as you're providing good customer service and continuing to add value to these customers, the contracts tend to get renewed, and we really like that aspect of the business.

Awesome. Just on the decarbonization front, let me just ask you, you guys didn't mention hydrogen. So I'm just kind of curious what's going on there.

Yes, we're still very focused on it. I might have Kim kind of give a little bit of update on what we're doing, especially with where we are on our Sherwood testing facility.

Yes. We are continuing -- you may recall, we've been testing different blends of hydrogen at our Sherwood facility. We're now up to 15%. We are stepping into 20% by the end of the year. We've been really pleased with the testing, both on the -- our equipment but also in the end use appliances. We're also piloting some different technologies. We have a modern electron pilot that we're conducting is getting finished now over at our central facility. This is a technology that basically produces a precombustion technology that produces hydrogen and solid carbon. The solid carbon is then used in secondary markets like tires or asphalt and so we're really excited about it. We've lined up some participants there. We're also looking at another technology under NDA that basically sort of a flavor of the turquoise hydrogen, but it's really a good fit for existing buildings where you're capturing the flue gas and then creating a liquid carbon that then is also applicable to secondary markets like concrete. So we're -- from our perspective, there's a lot of innovation in R&D that is happening in the carbon capture and utilization. We're seeing technologies that we think have a lot of flexibility can be put in different kinds of areas or facilities on our system. So a lot going on. We're also participating in several national and international consortiums around hydrogen and learning a lot there. So more to come but that's the report.

Got it. And then on the RNG, what's the outlook for others coming online, other facilities?

In terms of the regulated utility, we're going to continue to push efforts there. We can do another facility at our Tyson project that we're evaluating now. The focus for us, Selman, is to get as much decarbonized product as we can on our pipeline, whether that's through owning and building or contracting. So I think you'll see more areas there. And then in our unregulated business, we continue to look through opportunities across the country, whether it's an opportunity like our EDL or greenfield or just buying facilities outright.

There are no additional questions voting at this time. So I would now like to pass the conference over to David Anderson for closing remarks.

Well, thank you very much, Juquita, for facilitating this. And thank you, everybody that was on the call. As always, if you have -- if investors have questions, please reach out to Nikki. And if you're going to be at the AGA Financial Forum later this month, we'd love to see you there. So please step in. And if you need to set up an appointment, call, Nikki for that, too. With that, we'll conclude the call. Thank you.

That concludes the NW Natural Holdings Company Q1 2023 Earnings Call. Thank you for your participation. You may now disconnect your lines.