Northwest Natural Holding Company

Hello and welcome to today's NW Natural Holdings Company Q4 2023 earnings call. My name is Bailey and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star followed by one on your telephone keypad. I would now like to pass the conference over to our host today, Nikki Sparley, Director of Investor Relations. Please go ahead.

Thank you, Bailey. Good morning and welcome to our fourth 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-K 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, Chief Executive Officer, and Brody Wilson, CFO, Vice President, Treasurer, 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.

Thanks, Nikki, and good morning and welcome, everybody. I'll start today by walking through 2024 guidance and priorities, and then I'll turn to a few comments about 2023 before I hand it over to Brody to cover the financials in more detail. And finally, I'll wrap up the call with an update on our strategic priorities. Turning to 2024, as you know, earnings growth is not always linear. And in certain years, the focus will be on investments and initiatives that set the stage for future growth. And quite frankly, 2024 is such a year for us. While we continue to maintain strong credit ratings, a solid balance sheet, and long-term earnings growth outlook of 4% to 6%, our earnings guidance for 2024 reflects a combination of lag related to our capital investments and inflationary pressures that we are experiencing simultaneously. I'll describe these two factors in more detail. First, our gas utility has continued to make necessary investments in safety, reliability, and technology at record levels. The regulatory lag, recovery lag associated with these investments is exacerbated in 2024 due to the increased level of investment and the shorter-lived nature, or if you will, higher depreciation expense associated with our cybersecurity and technology assets. Frankly, this is relatively new to us at these levels due to this level of technology investment that we've had to make to replace aging systems so quickly. Second, like many other companies, our gas utility is contending with inflationary pressure on operating expenses primarily due to the renewal of several multi-year O&N contracts, higher personnel costs, the amortization of cloud computing technology investments, and higher pension expenses. These are all reasons, frankly, why we decided to file a rate case in Oregon late last year. Our other operations are experiencing inflationary pressure also, but the magnitude of the items listed above in our gas company has resulted in 2024 earnings guidance being about 30 cents per share lower than our 2023 earnings. Our team has done all they can to reduce costs and operate as efficiently as possible while maintaining a safe and reliable system. For example, to help mitigate the near-term effects, we've extensively reviewed our entire organization and instituted aggressive cost-saving measures. All these regulatory lag items will be addressed in the Oregon general rate case that will conclude later this year. And as you may recall, Oregon rate cases are adjudicated over a 10-month period with our filing at year-end. We expect new rates to be in effect November 1st. The gas utility request includes a revenue requirement increase of $154.9 million based on a 50-50 cap structure, a ROE of 10.1%, and a cost of capital of 7.406%. This request includes an increase in average rate base of $381 million since the last rate case. The components of the revenue requirement increase are fairly straightforward, roughly 45% related to investments in the system, higher property taxes, and an updated depreciation study resulting in new depreciation rates. 35% due to operations and maintenance expenses with the remainder related to cost of capital and income taxes. We carefully considered this rate filing and the effect on our customer bills. And the good news is that on average, Oregon residential customers saw a 9% drop in their rates last November. And today, customers are paying 7% less for their total natural gas bill than they did 15 years ago. Although we're laser focused on our gas utility rate case, we're also working hard to refresh rates at multiple water utilities in 2024, including our largest one in Arizona that we filed last year. These cases are largely related to capital investments. We continue to find these systems need substantial investments to meet current drinking water standards, treated effluent standards, and to support our growing communities. These rate cases are a critical step in building a strong foundation of earnings for that business. We believe over the longer term, our business and investments will drive earnings and cash flow growth and solid returns. 2024 is a building year and reflects the magnified effect of the normal recovery lag in our highly regulated gas and water utility business model. Turning to Northwest Natural Renewables, construction was completed in 2023 on Two facilities that we're investing in with EDL that are designed to convert landfill waste gases to renewable natural gas. While raw gas volumes are flowing for both projects at the expected levels, which is good, full commissioning has not occurred due to a technical issue with the conditioning and equipment. After troubleshooting issues last year, our partners and their technical teams report that they have identified the solutions to resolve the remaining issues. and they expect both facilities to be online later this year. Our investment of $25 million per facility will only be made upon achieving full commercial operations. And importantly, the revenue and cash flows are expected to begin promptly thereafter from long-term, primarily fixed-price off-tech agreements that we have contracted with investment-grade counterparties. We remain committed to this business and see strong long-term growth opportunities here. However, I'm very disappointed with where we are on this project. We had planned for some earnings and cash flows from this business in 2023 and for a full year in 2024. The long-term financial returns of these projects remain largely intact, but are unfortunately delayed. And despite this disappointment, I am very excited with new leadership at our renewables company. Anna Chittum. was recently announced as a new president and already has hit the ground running. We are anxious to get through these startup issues this year on those assets and are confident that Anna and her team can find other growth opportunities for us soon. Moving to a few comments on 2023, last year was a tremendous yet challenging year for us. Northwest Nashville was once again recognized for customer satisfaction and scored second for large utilities in the Western United States, according to J.D. Power's gas utility residential customer satisfaction study. At the same time, we grew our gas and water utilities, began operation of our second renewable natural gas facility under Oregon's landmark Senate Bill 98 legislation, integrated our largest water and wastewater acquisition today, and launched a water services business. For the second year in a row, Ethisphere recognized us as one of the world's most ethical companies, which I greatly value. And we also increased the dividends for the 68th year, an outstanding legacy. For 2023, we reported net income of $93.9 million, or $2.59 per share. That's an increase of $7.6 million compared to net income of $86.3 million, or $2.54 a share in 2022. Higher revenues from new rates in Oregon drove results of the natural gas utility, along with customer growth, lower pension expense, offset by financing costs. A couple of quick notes on customer growth. Despite interest rates putting a damper on the national and local housing market, Northwest Natural Gas added approximately 4,800 new customers during the last 12 months for a growth rate of 0.6%. In January 2024, we reached a milestone for 800,000 gas utility customers. Our water and wastewater utilities also continued growing both organically and through four acquisitions that we closed. Northwest Natural Water added 10,400 customers in 2023 for an average overall growth rate of 12.7% and an organic growth rate of 2%. We also launched a water services business with two acquisitions, and today that business supports nearly 20,000 connections. This is a strong platform that we believe can be scaled in the coming years. I'm very pleased to serve over 892,000 customer connections across five states through our three businesses. In summary, while 2024 reflects a convergence of challenges, these are primarily related to lag, intrinsic, and a regulated utility. I believe we've taken the right actions to minimize the lag going forward and that we're making the right investments today to set the stage for long-term growth. Our objective is to grow earnings while continuing to maintain our strong credit ratings and solid balance sheet. and I'm confident in the value and future of this 165-year-old company. That's why today we are reaffirming our 4% to 6% long-term earnings per share growth rate, and the base year for that calculation on the five-year window is 2022, with earnings per share that were $2.54.