Good day, and welcome to the NW Natural Holding Company Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. . After today’s presentation, there will be an opportunity to ask questions. . Please note, this event is being recorded. I would now like to turn the conference over to Ms. Nikki Sparley, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Chuck. Good morning, and welcome to our third quarter 2021 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. 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'll turn it over to David.

Thanks, Nikki, and good morning, everybody. I'll start today with highlights from the quarter, and then turn it over to Frank to cover our financial performance. And finally, I'll wrap up the call with a few updates on our strategic initiatives and a look forward. The company continues to operate very well during the year and, as you've seen, posted very strong financial results. We reported net income of $1.24 per share for the first 9 months of 2021 or a 55% increase compared to net income from continuing operations of $0.80 per share for the same period last year. New rates in Oregon drove results at the natural gas utility, along with solid customer growth and higher revenues at our interstate storage business. We also continue to see positive momentum in the local job market and the housing sectors. Employment growth in the Portland Metro area has picked up steam since late last year, growing faster than the U.S. throughout most of 2021. Unemployment rates in the Portland Metro area have declined to 14.4 -- excuse me, 4.9% in August 2021 compared to the national rate of 5.2%. Single-family housing activity remains very strong. In Portland, home sales were up 15% for the first 9 months of 2021 compared to 2020, and the average sale price was up 18%. New single-family permits issued were up 29% in Oregon through September this year compared to last year. In summary, construction and development remains robust in our region. And this resulted in -- translated, if you will, into nearly 12,000 new customers connecting to our system over the last 12 months, which equates to a growth rate of 1.5%. Our water and wastewater utilities also continue to grow. Strong residential construction, primarily in Idaho, Texas and Washington translated into a 3%…

Thank you, David, and good morning, everyone. I'll begin by discussing the highlights of the third quarter and year-to-date 2021 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%. As a reminder, Northwest Natural's earnings are seasonal, with a majority of revenues and earnings generated in the first and fourth quarters during the winter heating months. For the quarter, we reported a net loss of $20.7 million or $0.67 per share compared to a net loss of $18.7 million or $0.61 per share from continuing operations for the same period in 2020. The increase in net loss over last year was driven by our gas utility, which posted a $0.04 per share higher loss. Lower earnings at the gas utility were primarily related to higher operations and maintenance and depreciation expenses, partially offset by new rates in Oregon from a general rate case, which was effective beginning November 1, 2020. Utility margin in the Gas Distribution segment increased $4.1 million as a result of the new rates in Oregon and customer growth, which collectively contributed $3.7 million. Utility O&M increased $3.8 million, reflecting higher expenses from information technology upgrades, higher lease expenses associated with our new headquarters and operations center and a benefit in the third quarter of 2020 related to recording the year-to-date COVID deferral. Depreciation expense and general taxes increased $1.8 million related to higher property, plant and equipment as we continue to invest in our system. For the first 9 months of 2021, we reported net income of $38.1 million or $1.24 per share compared to net income from continuing operations of $24.5 million or $0.80 per share for the same period in 2020. The $0.44 per share increase was largely driven by…

Thanks, Frank. We're taking important steps today to lay the foundation for, frankly, continued success in the future. I'm proud to announce that we've also launched a competitive renewable natural gas strategy today and formed a new nonregulated subsidiary, Northwest Natural Renewables, to execute on that strategy. Northwest Natural Renewables is committed to leading the energy transition and providing renewable fuels to the utility, commercial, industrial and transportation sectors. We're focused on providing cost-effective solutions to help these sectors decarbonize using existing waste streams and renewable energy resources. We've been at the forefront of the energy transition for some time. We've led on conservation with the decoupling mechanism in the gas utility sector. We were one of the first they have a voluntary carbon-offset program. We prioritized and finished our bare-steel cast-iron pipe replacement program well ahead of others. And we were also a first mover with our 2016 carbon-savings goal, which is unique and ambitious. Not only does it include emissions on our operations, but it includes our customers' emissions, too. Now we're doing the work to help move us toward our vision of becoming a carbon-neutral utility. All of that work has culminated in the firm belief that there's a large and long-term need for renewable natural gas. Central to strategy is the belief that a diversified energy system is more affordable; more reliable; and importantly, more resilient. Events in Texas this past winter were a stark example of the importance of resilience and redundancy. The electric and gas systems depend on each other to serve our communities, and each system provides different benefits. In fact, by their nature, each system complements the other and hedges against certain risks, with wires above ground delivering renewable electrons and pipes below ground delivering renewable molecules. This diversification helps us effectively…

. And the first question will come from Julien Smith with Bank of America.

So perhaps just at the onset, if you could talk a little bit more about how you're thinking about returns and profiles, especially as you think about 2024, as you get those first projects up and going on a run rate basis. But also, how does this impact your long-term earnings growth trajectory? Obviously, you've got the 3% to 5% out there. How are you thinking about this being additive? And when do you think about kind of rolling that in, if you will?

Yes. Well, I'll start off here, and then I'll turn it over to Justin to give a little bit more details on what we're seeing out there. But we're just now getting into this. We see -- as I mentioned in my prepared remarks, we see a lot of opportunities here. And it's -- and I think all of those are going to be additive to the earnings profile going forward. I'll let Frank talk a little bit more about that. We will be sharing more information in the coming months as we've rolled this out. But let me turn it over to Justin, first, to kind of give a little bit more information on what he's seeing there and a little bit more meat on the bone.

Thanks, David. Yes, we'll be updating you in the coming months on EPS impacts, Julien, I appreciate your question. We believe we are developing and securing RNG at prices that are well below market, if you look at kind of where you're seeing recent pricing on RINs and LCFS values, but certainly also in other areas where there's long-term contracts such as the CPUC that recently recommended a price of $17.70 per MMBtu as subject to a first-tier approval in their biomethane program. So there's a wide range of values out there in the market, and we are confident that the RNG are developing and securing will enable us to capture some margin there. But we'll be updating you in the coming months on the specific EPS impacts and growth targets.

Got it. Let me put it this way. Is there any parameters or framework that you would think about sort of capping out the size of this program? I mean, 10% of earnings. Any kind of heuristics that you're thinking about maybe driven by credit considerations or otherwise when you think about how far you want to go on this?

Good question. And we're not really prepared at this time to kind of talk about that. But like we've done with water, we would not have gotten into this if we didn't think we could grow it at scale. And we're still focused on doing that with water. We've done 1 contract on the RNG side here. We do have some other line-of-sight ones that we're looking at moving forward. But I do expect this to be additive to the 3% to 5% earnings growth that we see going forward. And I think some of the prices that Justin just gave out for that, support that. And again, we'll put a little bit more meat on the bone for you as we move forward on this. But at this juncture, it's a little early to say whether it's going to be 10% or 20%. But we do see lots of targets, lots of opportunities, and we wouldn't be in this for 1 or 2 off-type transactions.

Fair enough. Last question here real quickly, if you can. You mentioned the SB98 in Oregon here and talking about the RFP here. Can you talk a little bit about the opportunities that could come out of that? I mean, you said you're still evaluating, but kind of frame that as well here. I get that there's a parallel process here. But I'm curious, relative to competitive, what kind of opportunities could exist out of 98?

Yes. I mean I really appreciate the question because we are very focused on doing RNG in the utility, too. This does not mean that we're not focused on the utility side of the equation to continue to move that decarbonization process further. And frankly, we see enough opportunities out there for both the unregulated and the regulated side. But Justin, do you want to give a little bit more information on process internally on the utility side?

Yes. And we mentioned our projects with Tyson a little bit earlier in the call. Our first project is working its way through the regulatory process now, and we expect to have a little bit more visibility on that in the coming months. We have 3 additional projects with Tyson that we anticipate moving forward as well. And all of those are going through the utility and the SB98 process. The procurement contracts that we've approved as well are also through SB98 effectively, and the first 2 were already approved through the PGA just a couple of weeks ago. So it's great to see that progress. The announcement here around our competitive RNG strategy is really a reflection of the broader opportunity that we see. We are well on track to meet the targets set out under SB98 for decarbonizing our own fuel supplies here in Oregon. And we see a broader opportunity out there in the market, frankly, across the country to decarbonize not just our own gas utility, but other customers as well, whether they're in the utility, commercial, industrial or transportation sectors. So more details to come, but we are excited about the opportunities here.

Sorry to keep going. I just want to clarify what you said there a moment ago. Should we expect some kind of holistic update early next year in the form of like an Analyst Day or something like this? I mean I hear you that you're running parallel efforts, but they sound like they sort of come to a conclusion at roughly at the same time, whether it's the credit or the competitive or even the regulated RNG opportunities.

Yes. We'll continue to -- what we're trying to say is we're in the early stages on its unregulated side, and we'll continue to keep you up to speed as we grow this and as we move forward. No Analyst Day planned at this time, but I do anticipate additional information being shared with everybody as we continue to make progress here.

The next question will come from Tate Sullivan with Maxim Group.

I've got a couple of follow-up questions on the RNG on the unregulated strategy. What led you to EDL? And roughly how many RNG projects have they already done in the U.S., if you can share that?

Justin, do you want to take that one?

Yes, happy to share that. So EDL is actually -- they're an Australia-based global leader in renewable energy. They have a portfolio of landfill gas assets here in the United States that, I believe, is well over a dozen projects. These first 2 were really attractive to us just because of the scale and the overall cost profile that, that leads to. And EDL, as a partner, is also very attractive to us. They are very experienced in the space. There's other opportunities to work with them, we believe, in the future. And so far in the relationships that we've developed, it's very constructive and cooperative and we have very aligned views on the market and our strategic objectives.

Okay. And understanding that more details to come, but will you -- I mean, can this focus, similar to your water strategy in multiple states, are you focusing on specific regions?

We see this as really a national strategy. There's RNG supplies to be had all around the country. And so we don't see this as limited to any specific region with our water strategy. We really started in the Pacific Northwest and expanded from there and very selective, particularly as it relates to the individual states and regulatory considerations in those states. With RNG, it's a little bit broader because some of those considerations just aren't as applicable. But I wanted to emphasize, we're approaching this competitive RNG strategy thoughtfully and with discipline. We're looking at acquiring and developing RNG projects, once key permits and feedstock and lease agreements are in place and ensuring that design and construction costs are fully understood and that risks are appropriately allocated through contracts. So when we're talking about how big this business could get, it's really a function of the risk profile and how we will be able to manage that going forward. Importantly, we want to make sure that we build a diverse portfolio of projects that have long-term fixed price contracts and limited exposure to the volatile RIN and LCFS credit markets to ensure that stable and predictable cash flow is consistent with the rest of our businesses over the long term.

And I think there are some examples in the market of pipelines leading away from the landfills to offtake area. But assuming that is what your first 2 projects with the EL might involve, can you -- you mentioned funding your investments one commercial -- once commercial operations take place. Is this usually what EDL has done with their projects? Is that funding initially for the pipeline coming from EDL? Or how should I look at that?

Yes. I think the agreement that we have with EDL is somewhat unique, and it's unclear that this will be replicated exactly the same way for other projects that we pursue. And I think this is just a function of kind of the nature of these projects where EDL was at with them and where we were at with our investment commitment. It's attractive for us because we are going to wait until the projects are constructed and ready for the commercial operations to begin before we actually fund our portion. So it has a lot of sort of risk-allocation features that we find attractive.

. Our next question will come from Selman Akyol with Stifel.

So just a quick follow-up on EDL. Are you guys only looking at landfill? Or should we expect to see this maybe expanded over to dairy or...?

Yes, it's a great question. These first 2 projects are landfill projects. There are some attractive features, we believe, around landfill RNG and a lot of that is really just related to the cost profile. And the cost profile for certain dairy and other agricultural projects. Sometimes it has just a higher underlying operational costs and overall capital cost relative to the volumes of RNG you're able to produce. So while we are looking at a variety of feedstocks, that's what sort of led us to these initial. I will also say, given our strategy, which is really focused on a low risk profile and ensuring that we can get long-term contracts for these RNG supplies in the nonregulated business. It's unlikely that we'll have as many dairy projects simply because the folks that are out there investing in dairy projects today are monetizing those values in the LCFS markets primarily. And those markets are just -- they're a little bit more volatile and introduce an element of risk that isn't really where we're focused right now.

Appreciate that. And then you also referenced sort of 2% of your gas you're delivering now is RNG. How high do you expect to take that over time?

Well, we've signed up agreements and have investments in place to get to 2%. That will happen in the near term. And I think the limits on this -- do you want to talk about the Senate Bill 98 level, at least the current legislation?

Yes. The Senate Bill 98 lays out voluntary targets for RNG volumes. And between now and 2025, it's 5% of our organic sales volume. After 2025 and up to 2030, it's 10%. So those are sort of the targets that have been laid out there. Those are targets that we feel confident that we'll be able to achieve. And there may be additional volumes that we'll be able to get to over time as we develop more and more cost-effective RNG and as this market matures.

Good. Appreciate that. And then just always of interest to me. Any update on hydrogen?

Kim, why don't you take that?

Yes. We're continuing to work with the project that we’ve signed an MoU in Eugene, Oregon. We -- the partner that we're working with, EWEB, they have acquired the land. And we've hired a consultant to do sort of the equipment, understanding kind of the cost drivers there. We're trying to line up a filing for funding both here in Oregon under some potential legislation, the Senate Bill 844 that allows natural gas utilities to invest in projects that reduce greenhouse gas emissions. But we're also working and interested to secure funding through the low-carbon resources initiative. It's over $100 million fund in an organization sort of partnering with Gas Technology Institute and EPRI on developing and investing in low-emission technology. So there's more work that we're doing, but the project is moving forward. As you may recall, it's lending project that we're focused on, demonstrating hydrogen blends from the excess wind, solar or hydro from the electric utility in Eugene and blending it directly into our system. So the other part of the projects that our engineering team is working on is beginning the technical work to understand where in the system do we blend what -- where are those molecules going so that we have a really tight plan in parallel with trying to secure the funding.

I think what's also important, Selman, is what's going on in D.C. right now with a House Reconciliation Bill. And AGA is right in the midst of that. Both the Republicans and the Democrats are supporting -- has strong support for hydrogen in the bill. So that's encouraging because that's some of the policy stuff that we need to have as an industry to kind of help that move forward. And in fact, AGA is also trying to work to see if we can get renewable natural gas opportunities in that bill. So -- but to have both sides of the aisle really supporting hydrogen, that's a good sign for the country in general. How it plays out specifically out here is yet to be determined, other than what Kim just talked about, but that's encouraging. I think everybody is recognizing that hydrogen is a real solution if we're going to solve this climate change problem that we have as a world.

Maybe one other comment. We've been working with our peers at AGA and in Canada. You may have heard there was a study that came out of the European Union in the summer where 21 nations produced a hydrogen backbone analysis that demonstrated roughly 70% of the existing gas infrastructure to deliver hydrogen and sort of realize the carbon-neutral goals that the EU has set out. We're analyzing that information and beginning the work to think about here in North America, how do we start planning the connections to our system and think about developing a similar plan here, and I'm really excited about that work.

This concludes our question-and-answer session. I would like to turn the conference back over to David Anderson for any closing remarks. Please go ahead, sir.

Well, thank you, Chuck, and thank you, everybody. I know it's a Friday, and I know it's a busy Friday. Thank you for the time. If you have additional information you want, you all know that Nikki Sparley is your point contact. And we'd be happy to have any follow-up, so just give her a buzz. Everybody, have a great weekend. Thank you.

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