Good day, and welcome to the Northwest Natural Holding Company Third Quarter 2019 Conference Call and Webcast. [Operator Instructions]. Please note, this event is being recorded.I would now like to turn the conference over to Nikki Sparley, Director of Investor Relations. Please go ahead.

Thank you, Ben. Good morning, everyone, and welcome to our third quarter 2019 earnings call. As a reminder some of the things that will be said this morning contain forward-looking statements. They are based on management's assumptions, which may or may not occur. In addition, some of our comments today reference non-GAAP adjusted measures. For a complete reconciliation of these measures and other cautionary statements, refer to the language and reconciliation 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 Melissa Moore at 503-220-2436. 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'll turn it over to David.

Thanks, Nikki, and good morning, everyone. The year continues to progress nicely, both in terms of financial results and in the execution of our long-term strategy. Our year-to-date results are strong and position us nicely for a strong full year financial results. For the first 9 months of the year, net income was $0.91 per share compared to $1.06 per share for the same period in 2018. As previously discussed, our first quarter results included a onetime regulatory pension disallowance of $0.22 per share related to an Oregon Commission order. Excluding that disallowance, on an adjusted basis, net income increased $0.07 per share or $3 million to $33.6 million or $1.13 per share for the first 9 months of 2019. These results reflect new rates in Oregon North Mist storage project again in Gas Storage services and customer growth.Our gas utility continues to grow and that coincides with the momentum in the local job market and housing sector. Oregon's unemployment rate maintained a record low at 4.1% with the Portland area seeing unemployment at 3.9%. Single-family housing permits in the Portland metro area were up 8.4% year-to-date compared to the same period last year, and multifamily permits increased 10.4%. These factors translating -- translated into connecting more than 12,000 new customers over the last year, resulting in an annual growth rate of 1.6%.On the regulatory front, I'm pleased to report that after 10 months of review with stakeholders, an order was issued in our Washington general rate case. Our Washington State service territory covers about 11% of our overall customers and represents approximately 10% of overall revenues. New order provides for a $5.1 million increase in revenues from previous rates based on an ROE of 9.4% and a cost of capital of 7.2%, which represents a capital structure of 49%…

Thank you, David, and good morning, everyone. I'll begin with a summary of our third quarter and year-to-date recorded financials, and then discuss our cash flows and guidance for the year. I'll describe earnings drivers on an after-tax basis using the statutory rate. Note that our effective rate was 19% for the third quarter compared to our statutory rate of 26.5%. The main difference is a result of returning excess deferred income taxes related to tax reform to our Oregon customers. We expect the lower effective rate to persist as we continue to provide these benefits to customers. As a reminder, Northwest Natural's earnings are seasonal with the majority of revenues generated in the first and fourth quarters during the winter heating season.For the quarter, we reported a net loss from continuing operations of $18.5 million or $0.61 per share compared to a loss of $11.1 million or $0.39 per share for the same period in 2018. The $0.22 per share difference largely reflects 3 timing issues, all of which are offset across 2019.First, the Oregon rate case resulted in both an increase in customer rates and the recognition of greater pension expense. While the higher expenses matched by the rate increase over the year, there are quarterly timing differences. Whereas pension expense is recognized evenly through the year, it is recovered through rates on a volumetric basis. As a result of this difference, third quarter 2019 O&M and other expense increased $1 million over 2018.The second timing matter is also the result of the Oregon rate case. Beginning this year, we began returning tax reform benefits to customers on a volumetric basis. However, the company realizes the benefits in alignment with pretax income. As a result of this timing difference, tax benefits declined $2 million in the quarter compared…

Thanks, Frank. As we discussed last quarter, we're very pleased to be taking this significant step forward in our energy transition with the passage of Oregon bill, Senate Bill 98, the most aggressive renewable natural gas law in the country. This groundbreaking legislation was signed into law by Oregon Governor Kate Brown this summer after months of collaboration with Oregon senators Michael Dembrow and Lee Beyer and other influential environmental leaders across the state.The bill creates a path for renewable natural gas to become an increasing part of the state's energy supply. We know putting renewable natural gas on our system is one of the most effective ways to reduce emissions. In August, the Oregon Commission opened a docket to begin rule-making on this law. They've laid out an expedited process that is scheduled to conclude by July of 2020. We're in the early stages of these initiatives, and I look forward to a growing portion of supply coming from renewables and moving quickly on the opportunities in this market.We are laser-focused on providing our customers with innovative solutions that drive climate betterments at a reasonable cost and do not negatively impact reliability of the overall energy system.Turning now to the water side of the business. I'm very pleased with the success of our water strategy. We initiated this strategy two years ago with small transactions close to our natural gas service territory here in the Northwest and have grown to operate 9 utilities serving customers in the three state Northwest area. Our disciplined approach has worked well. We began with solid transactions that were financially manageable, ensuring good execution, confirming our understanding of the regulatory process and allowing our team to gain experience.Our acquisition strategy in the Pacific Northwest continues. In October, we signed an agreement to purchase the…

[Operator Instructions]. Our first question comes from Chris Ellinghaus with Siebert, Williams, Shank.

Can I ask you, David, to talk a little bit high level about the renewables side? Once the implementation dockets sort of works its way through, what's your sort of thought process in terms of the time frame that you might start to see investment opportunities? And would you be interested in things as far down the chain of supply or electrolysis for hydrogen and that sort of thing? Or you're just thinking more pipes?

Yes. And I appreciate the question, Chris. I think for those on the phone, I think the first thing is to make sure everybody understands that when you look at our residential and sales customers, they represent about 5% of the state's emissions in our -- in Oregon. And Oregon, in general, has very low emissions, but we do believe there are going to be opportunities to lower that even further and to make sure that we do that.Along the line that you're talking about, the rule-making is in process, right? So we don't really have all items that we need to kind of work through this. But the law clearly sets the ability for us to probably invest around -- in terms of revenue increases, around $30 million. It's about 5% of revenues is what the bill highlights. Now whether that ends up being straightforward purchases, Chris, or it results in revenue requirement from investment opportunities, that's yet to be determined. From my perspective, strategically, I think it's important to get as much renewable natural gas on the system as quickly as possible, and that might start off with purchases. We will, obviously, work with the PUC not only through this rule-making process but in the future to see if there's opportunities on the investment side. But the key for us is to get that renewable natural gas flowing.And renewable natural gas, as you mentioned, is numerous items. It's obviously gas from landfills and wastewater facilities, like the one we did here with Portland and dairies, but it also includes what I'm really excited about is the new technologies out there that you mentioned that's power to gas. And that's using excess electricity generation, which we are abundant here at certain times of the year because of our hydro situation and our wind generation, to create hydrogen. And we can't put hydrogen on the system. And in fact, this is not really new technology, they've been doing it in Europe for a period of time. And we look forward to try to do that here. In fact, we're working on a pilot project with the City of Eugene right now.So all that being in place, it's an exciting opportunity. I would love to have more investment opportunities. But strategically, the most important thing to us right now is to get more decarbonized gas on the system. And then long term, we'll see whether the investment opportunities play out or not. Hopefully, that makes sense.

Sure. Would you imagine -- of course, this will go through the implementation docket, but when do you imagine that if you were just to make a straight purchase of some renewable gas that, that would be offset in the math that the legislature left you with in terms of the percentage of revenues?

Yes. The legislature, the way they set it up is they allowed us to increase rates by 5% to get renewable natural gas on the system, that's either through purchase or through investment. So it's not -- I'm trying to make sure I understand your question, it's not really an offset. So if we bought $2 million of RNG on the open market, there would still be $30 million of revenue requirement that could be spent on something else, whether it's direct purchases or investment that translates back up to our revenue requirement. Does that make sense?

Yes. I was just thinking in terms if I bought $2 million worth of renewable gas, that replaces $2 million of other gas. So I'm at a loss state if I'm really net-net.

That is true that it would replace the other gas. Sorry I misunderstood your question.

So can I also ask this Texas acquisition sort of opens up a new horizon for the water acquisition strategy. Can you give us any sense of what you're seeing in other locations in terms of the opportunity set? Is it as robust as what you've seen so far in the Pacific Northwest?

It's a great question. We are looking west of Mississippi, as we've been articulating you guys for a good nine months now. What was really attractive about Texas is just the size of the population and how many private water companies there are there. So the opportunity set is very good. So that was -- that got our attention initially. And you can kind of see what we've been doing in the Northwest is once we enter into a new area, I like to use the word that it's a beachhead for us, pardon the pun, but it allows us to do tuck-in acquisitions around that, so very similar to what we did in Idaho, both up in Coeur d'Alene and around Idaho Falls. And I suspect that most of our near-term efforts and attention will be focused on doing that in Texas. We continue to look at the other states right now, but I think at this juncture, Chris, most of the focus is on Texas as we try to build out that platform.

Okay. And you also have done your first municipal system. Are you seeing a lot of opportunities on the muni side?

No. The muni side takes a little bit longer to work out. There's -- I will tell you the more near-term opportunities are on the private side. But I think once you start -- I think the nice thing that we've been able to accomplish in 2 years is establish ourself as a water player, and that's an important step to where -- when we come in now, we're not seen as a gas utility, we're a water utility, and that includes the regulator. The regulatory clearly sees that we are a good long-term owner of these assets, and it's also been good for the sellers.On the municipal side, that is something that we continue to work on and have resources working on that. That's just -- usually, it's a little bit longer lead time, and every city, every municipality has different issues that it's trying to solve. So the tailor situation that we had was one that was right next door, it was small, and they needed somebody like us to come in and take over. We will be prepared to do that, especially in the footprint that we have right now. But I do believe long term, municipalities are a very important part of the long-term growth strategy, especially as you look at state that have fair value legislation. That'll be a dynamic that we'll continue to push hard. But right now, most of the effort is on the private side, Chris.

Are you seeing more -- as your name gets out there, more of the private side coming to you at this point?

I think that's a fair thing to say. And I think the other side of this is when you have 160-year-old utility that usually is number one, number two or number three in the country with customer satisfaction numbers. It's clear that we -- that the sellers appreciate selling to somebody that understands the business. And then I think we're also getting good feedback from the regulators in three states, and I suspect Texas, too, that they understand the value of a utility and a utility owning these assets versus private individuals.

Okay. One last question. I know it'll be a while before water might potentially become a reportable segment. But as you get to the more critical mass in terms of dollars invested and having more and more acquisitions complete their first year, how do you envision sort of providing more benchmarks to us to sort of keep an eye on how the water business is progressing?

Yes. It's a great question. And I think as we gain momentum and we gain size, I mean, we do have $110 million invested. Of course, we're a $3 billion asset company. So you'll -- in the future, when we get the scale, you'll see segment information. But we'll try to do more in our investor relations materials to make sure that you guys understand. But at this juncture, Chris, we're trying to build a business. And at this juncture, the most important thing is to get more assets under management. And then for Justin and Brody, which are the 2 that are running this company, they're putting plans in place for additional CapEx because each one of these have opportunities to expand their investment footprint. So I think we're in the early stages here, but I definitely hear your question. And hopefully, in the future, not-so-distant future, we'll be able to provide more guidance along this front.

Our next question comes from Aga Zmigrodzka with UBS.

Customer growth looks like it slowed modestly to 1.6% in 3Q. Could you please discuss what are your expectations for customer growth going forward? And do you think there is any impact of potential building electrification trend on the West Coast?

Yes. On the trailing 12, I think the actual number is 1.62%, so it did drop a little bit on a trailing 12 basis. We've been consistently seeing around that 1.6% or 1.7% for quite a bit of time here. And we have a lot of multifamily projects that'll be coming on pretty soon. So I think it's kind of hard always to focus customer growth because then you got to -- you have to ask, are we going to have a recession? Are we not going to have a recession?The great thing is, our product is very attractively priced, and people want gas. So it's a high value-add product that they want to put in place. So I think a lot of those factors, including the economic information that we shared with you in the transcript in terms of how many new housing permits are and things like that, bode well for continued good customer growth. Whether that ends up being a 1.6% number or a little bit lower, a little bit higher, it's a little bit hard, Aga, to kind of forecast that.On the electrification discussion that you mentioned, obviously, there's quite a bit of that discussion going on throughout the country, as you saw the activities down in California. One of the things that we've been trying to make sure that all of our local officials understand is the value of the natural gas system. And again, I think also, I think, gas systems are going to be a little different by what territory you are in. Obviously, we are -- we have long cold weathers. And if you really wanted to "electrify" everything, you're actually going to increase the carbon footprint for many years to come because, frankly, you're going to be using natural gas no matter what. You're going to either use natural gas directly, which we believe is the right thing to do, especially as you add renewables, or you're going to use it in gas fire generation because the renewable portfolio can't handle the peak periods like it needs to.So there's discussions everywhere, Aga, and we'll continue to be part of that, but it's our focus right now to make sure all of our elected officials, all the city councils, all of our jurisdictions, understand why the gas system exists, what it's here for and how we can achieve the climate change goals that our Governor and the state want to achieve.

Our next question comes from Sarah Akers with Wells Fargo.

Can you share your latest thoughts on the timing of the next Oregon rate case? And maybe talk through some of the key drivers of the need there?

Yes. This is David. I'll start, and then maybe I'll hand it over to Frank to cover some of the CapEx. Obviously, results year-to-date have been strong as we indicated, and we're in a good position for strong results for the year. But with that said, we've also been making substantial investments in the system. And we are seriously contemplating right now filing another Oregon rate case very soon, and it's really driven by that investment profile that we see. And Frank, you might just describe a little bit of that from a CapEx perspective.

You bet. Sarah, you know our historic average capital expenditure was more in the range of $160 million. We were up a little bit last year, and then this year, we've got $230 million to $270 million as our guidance. So at this sustained level, of course, we'd be facing lag, and we don't want to endure that for too long. A lot of this investment will come online, be in service here over this period. So it's really -- as David said, it's looking like we'll need to consider a rate case late this year or early next year.

And Sarah, just a reminder. Our practice in the past is we really like to update rates at the same time that we do our PGAs, which for Oregon and Washington -- obviously, we're talking about Oregon here since we just finished Washington, I don't want to infer that there's Washington rate case right behind this. But it would still probably be the right thing to do is to update right at the same time as the PGA. If that's the fact, that probably means if we do decide to file a rate case, it'll be late this year.

Showing no further question, we will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. David Anderson for any closing remarks.

Ben, Thank you. And thank you for -- everybody for participating on the call. Obviously, Nikki is available for questions. Just to kind of repeat where I started off, we've started the year really strong. You can see that in the year-to-date results. You can also see it in the trailing 12 results that we're in a good place where we need to be by year-end. So Ben, thank you. Everybody, if you have any questions, please call Nikki, and thanks for joining us today.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.