00:00 Hello and welcome to NW Natural Holding Company Q1 2022 Earnings Call. My name is Alex and I will be coordinating the call today. 00:24 I will now hand over to your host Nikki Sparley, Director of Investor Relations. Over to you, Nikki.

00:31Thank you, Alex. Good morning and welcome to our first 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 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. 01:22 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. 01:39 With that, I will turn it over to David.

01:41 Thanks, Nikki. And good morning, everybody and welcome. We started off the year strong and in line with our expectations. Our financial results were solid and we continue to make progress on all key objectives. We reported net income today of $1.80 per share in the first quarter compared to net income of $1.94 per share for the same period last year. 02:01 Results for 2021 include a $0.09 per share benefit related to severe cold weather event in February last year. Setting that aside, financial results in 2022 were driven by new rates in Washington and customer growth, as well as continued growth in expenses as we invest in our natural gas utility system. 02:21 We also see positive momentum in our local Portland Metro area economy, the strong labor market helped to drive unemployment down to near historic lows. Unemployment rates in Oregon declined to 3.8% in March 2022, compared to 6.1% a year ago. Single-family housing activity remains robust. The average sales price of a home was up over 10% for the first quarter of March 2022 compared to last year. Single-family permits issued were up almost 3% in Oregon through February 2022, compared to the prior period. Construction and development remained robust in our region. 02:59 We continue to see a healthy pipeline of conversions to natural gas in single-family homes. In the last 12 months, 2,200 customers have converted in our service territory. These conversions, along with new construction translated into nearly 11,000 customers connected to our gas system during the last 12 months. That equates to a growth rate of about 1.4%. 03:21 Our water and wastewater utilities also continue to grow. Strong residential housing construction primarily in Idaho and Texas translated into a 3.1% organic customer growth rate over the last 12…

05:21 Thank you, David. And good morning, everyone. I will begin by discussing the highlights of the first quarter of 2022 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%. 05:36 As a reminder, Northwest Natural's earnings are seasonal with a majority of the revenues and earnings generated in the first and fourth quarters during the winter heating months. 05:45 For the quarter, we reported net income of $56.2 million or $1.80 per share compared to net income of $59.5 million or $1.94 for the same period in 2021, a decline of $0.14 per share. The decrease in net income largely reflects the $2.8 million or $0.09 per share benefit of the February 2021 cold weather event. The gas utility posted a $0.01 per share increase in earnings, while results from our other businesses declined $0.15 per share. 06:16 Higher earnings at the gas utility were primarily related to new rates in Washington, customer growth and an improvement in the results from the gas cost incentive sharing mechanism as the prior year included the effect of purchasing higher-priced gas during the February weather event. As a result of these factors, utility margin increased $3.7 million. 06:36 Utility O&M increased $3.5 million, reflecting higher levels of expense from payroll, contractor and professional services and IT upgrades. Utility depreciation and general taxes increased $900,000 due to higher property, plant and equipment as we continue to invest in our system. Other income increased $1.9 million, driven by lower pension costs. Net income from our other businesses decreased $4.7 million as the prior period benefited from higher asset management revenues related to the cold weather event. 07:08 For 2022, cash provided by operating activities was $141 million, an increase of $4 million compared to last year. We invested $70 million into the business, most of which was for gas utility and capital expenditures. On April 1, we completed an equity offering and received approximately $140 million of proceeds to support our growing businesses. Our balance sheet remains strong with ample liquidity. 07:34 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 our long-term earnings per share growth rate of 4% to 6%. 08:01 With that, I'll turn the call back over to David.

08:04 Thanks, Frank. We continue to progress and execute on our business strategy. Our focus is maximizing returns from our strong and growing regulated gas utilities and positioning our business for incremental long-term growth by investment in water utilities and the competitive renewable natural gas business. 08:21 In addition to moving our gas utility towards a renewable future, last year we also launched a competitive renewable natural gas strategy. We're committed to leading in the energy transition and providing renewable natural gas to the utility, commercial, industrial and transportation sectors. We're focused on providing cost-effective solutions to help these sectors decarbonize, while existing waste streams and renewable energy sources were using the existing waste streams and renewable energy sources. 08:51 As you know, we've already taken our first steps with the 20-year RNG supply agreement and a total of $50 million committed investment in two RNG facilities. Construction has begun on both of those facilities and we expect them to be placed into service in early 2023. At the end of January, Mike Kotick joined our team to lead our competitive RNG efforts. In just a few short months, Mike has hired additional members to the RNG team who comes with significant RNG experience. The team is fully engaged, pursuing incremental opportunities and putting the final touches on the business plan. We'll share more details on that in the coming months. 09:28 Turning to our water and wastewater utility businesses. As previously mentioned, in December 2021 we signed our largest acquisition to date to acquire Far West Water and wastewater utilities in Yuma, Arizona, a very fast-growing region which currently serves approximately 25,000 customers. We've met with all the Arizona utility commissioners and look forward to working closely with them in SAP. In March, we submitted the application for approval…

11:13 Thank you. Our first question for today comes from Julien Smith from Bank of America.

11:32 Good morning.

Hey, good morning, David and Frank. This is Kody Clark on for Julien. Thanks for the time. So first, curious if you can share more on what you're seeing with the current inflationary backdrop? And specifically, how much is expected as it relates to the IT program for '22 versus some other pressures that we've seen with the backdrop?

11:57 Hello, good morning, Kody, it's Frank. Yes, I wouldn't -- I don't want to describe the O&M change that you're seeing as inflationary. It's really an effort that we're making right now. A lot of that impact is coming from some investments that we're having to make in IT. And part of that is taking on some cloud arrangements which flows through O&M now. That's a fair piece of that. The rest of it is salary and benefits are up. I wouldn't call that inflationary. We didn't see a huge, say, extraordinary change in our salary and benefits year-over-year. And then we also have a little bit more business development. We're doing RNG now, it's in a competitive market as well as the water business. 12:39 So, you kind of have those three things and then just your ordinary -- the business is growing. This is why we filed the rate case or a big part of it year-over-year. Just we knew this growth was coming. I will say though that the first quarter shows a bigger change, if you looked at a percentage, probably almost double what we would expect for the full year. So we expect O&M to grow this year. Nothing unusual there. But in the first quarter, there's a little bit of a timing impact that makes the first quarter versus the first quarter last year look a bit higher. So that will normalize as the year plays out.

13:13 Understood. Got it. And on regulated RNG, you're at 3% of volumes. But as we think about the caps in '25 and beyond, how should we be thinking about your ability to rebate investments versus just offtake? So what's the difference in customer costs, if any? And any data points or color there that you can point to would be helpful.

13:37 Yes. Kody, I think the number one thing that you -- that everybody should understand is, we're going to do all we can to decarbonize as much of our product as we can under Senate Bill 98 and that will be through -- it could be through investments or it could be through just direct purchases, whatever is in the best interest of our customers. And right now, we've done that and we've done it through a rate base investment with the Tyson opportunity that I referenced in my prepared remarks and then we've also got purchase agreements. 14:04 So I expect more coming down as we continue to progress and hopefully, it reaches close to the limit of Senate Bill 98 as quickly as we possibly can. So it's a little hard right now to say X amount will come from rate base, X amount will come from purchases. Again, we'll do what is in the best interest of our customers, which I believe going forward will be a combination of both.

14:29 Okay. Got it. And then just lastly, if I can squeeze it in on competitive RNG. And you mentioned potentially getting some additional announcements here. But wondering if there's any timing that you can point to? Is it a matter of getting those first projects under your belt and in service in early 2023 before committing to anything incremental or could we see some additional announcements sooner?

14:55 Yes. We're in the early stages, as we just mentioned. I'm really pleased with the progress that Mike has made with his team of getting the team established. There's already incremental opportunities that we're looking at and it's one of the reasons when we came out with the strategy late last year that we raised our earnings growth guidance from the 3% to 5% through 4% to 6% because we do see additional opportunities here that will help the company grow faster than it would without that. 15:21 So more details to come in the coming months but you're right, Kody, I think we need to do some more transactions and then we'll be a little bit more descriptive when those transactions happen. And some of those can be development, some of them could be contract purchases and we market them, there's various options that Mike is working through with the team right now.

15:41 Okay, that's very helpful. Thanks so much for the time, and good luck.

15:45 You bet. Thank you.

15:49 Thank you. Our next question for today comes from Selman Akyol from Stifel. Your line is now open.

16:02 Thank you. Good morning. Just staying with renewables. Was there any update on hydrogen? I mean, we're just starting to hear more about it. So I was just curious from what you're seeing on your side.

16:12 Nothing new update on our front. Nikki, why don't you kind of give an indication of what we're working on?

16:18 Sure. We have a couple of efforts that are active right now. One of them is continuation of our work with the Eugene Electric Utility to develop a hydrogen blending project in Eugene, where we're at there is we have an engineer and an equipment consultants working on finishing the project plan. We also hired a consultant to do a system audit. It's a readiness audit in that site and where we're going to be blending in that area that helps us understand hydrogen readiness for all our pipes and components and meters. 16:55 And we expect that work to be done in July and then we'll be wrapping on that into a potential filing under Senate Bill 98 here in Oregon, along with securing potentially other funding from a clean energy fund in the United States. The other thing that we're doing is continuing our hydrogen blend cap at our Sherwood facility in Oregon. We've been blending about 5% hydrogen in a section of that facility for about 1.5 years, testing end-use applications, furnaces, water heaters, fireplaces. 17:35 Our 2022 goals are to step up that blend to a 24/7 operation with a ramp-up at a 15% blend and 5% increment through this year, of course, subject to performance, both in our system and on the end-use equipment. And we're looking at other opportunities with hydrogen in our area and nationally partnering with other groups. The application that I mentioned for the Eugene project with the -- under that Senate Bill 98, that is legislation that was passed several years ago in Oregon that allows natural gas utilities to apply for spending on projects that reduce emissions that would otherwise not be cost-effective. 18:24 So it's an avenue that we have to work collectively with the EWEB Electric Utility. And I'm sorry, it's SD844, I said 98, I apologize, that's our RNG legislation. But a lot of activity and you're right, we're hearing a lot of interest in hydrogen and we're working hard on it ourselves.

18:47 Yes, Selman, I mean, we're really focused on RNG and hydrogen. They're both going to be the solutions for the industry and I would argue for the greater economy as a whole. So hopefully, more to come on that front but we're all in on both.

19:02 Got it and very helpful. Just pivoting over to water. Can you just maybe talk a little bit about what you're seeing out there and maybe your pipeline and just how pricing is going or is there upward pressure on the systems that you're seeing in terms of pricing or is it sort of in line with what you've been doing?

19:21 Yes. I'm really pleased with the success we've had today in the last year or so. Justin, why don't you -- Justin is our President of the Water Company and let me get him to address it.

19:31 Yeah. Good morning, Salman. We continue to see a robust set of opportunities in pipeline in the water space. It is competitive and there are a number of players out there that are also pursuing opportunities. That competition varies a little bit depending on the specific market. But we are pleased with the progress we've been making and we see a fairly robust pipeline of opportunities going forward. We will continue to tuck-in smaller acquisitions around our existing service territories and we're working hard on investing in the existing utilities that we own. We actually just completed a couple of rate cases this last quarter with new rates in effect May 1 in both -- one of our Oregon subsidiaries and one of our Washington subsidiaries. 20:20 So things are going well there. I believe that we'll continue to see a robust set of opportunities and acquisitions going forward.

20:29 All right, thank you very much.

20:32 Thank you, Salman.

20:35 Thank you. We have no further questions for today. So I will hand back to David Anderson for any closing remarks.

20:43 Thank you, Alex. And thank you guys for joining us and for those of you that will be at the AGA event here in a couple of weeks, we'd love to see you, give Nikki a call and we'll see if we can set up time. With that, have a great day, everybody. Thank you.

20:59 Thank you for joining today's call. You may now disconnect.