Northwest Natural Holding Co Q2 FY2020 Earnings Call

Good morning. Welcome to the Northwest Natural Holding Company Second Quarter 2020 Earnings Conference Call. All participants are in listen-only mode. After today's presentation, there will be an opportunity for questions. Please note that this event is being recorded. I would now like to turn the conference over to Nikki Sparley, Head of Investor Relations. Please proceed.

Thank you, Kate. Good morning, and welcome to our second quarter 2020 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 will turn it over to David.

Thanks, Nikki, and good morning, everyone, and welcome. I hope you, your families, and your work colleagues are safe and well. Like all of you, we continue to navigate these unusual times. Cities within our service territory began reopening in the second quarter. And like many parts of our country, we began seeing an increase in COVID cases in late July. But it has appeared to plateau slightly. Now more than ever, we are tapping into our core value of caring for each other and the communities we serve. From a business perspective, we continue to focus on providing safe and reliable service while ensuring the health and safety of our employees. We continue to benefit from a conservative business model with stable utility margins. A majority of our revenues have recovery mechanisms in place to weather normalize and to decouple margins. We also remain focused on efficient operations. That, combined with the decline in natural gas prices, has led to natural gas bills that are about 40% lower today than they were 15 years ago, which is very good news for our customers. The third leg to our strategy is to look for growth that fits our conservative risk profile. Most recently, this has been a new contractual revenue stream from the North Mist gas storage expansion and, of course, our water and wastewater businesses. Our solid business strategy allows us to adapt to unforeseen challenges, such as the coronavirus. And our core values of integrity, safety, caring, service ethic, and environmental stewardship are the foundation and guiding principles for all we do. Safety continues to be a value at the forefront of our minds, and we remain vigilant during this pandemic regarding the safety of our 1,200 employees and, of course, the 2.5 million people that we serve. Our natural gas and water utilities are critical infrastructure. We've continued all essential options to provide reliable service while following relevant health and safety guidelines, including guidance from OSHA and the CDC. We've created a specialized field team that takes extra precautions when responding to calls where there's a known or suspected case of COVID. In the vein of caring and customer assistance, we temporarily stopped disconnecting customers and charging late fees on past-due bills. We are also providing financial assistance through a variety of programs, including our corporate philanthropy fund, our gas assistance program, several state and federal programs, and, of course, a special employee giving campaign. In June, we issued a $17 million bill credit to Oregon customers, which is a record amount under this sharing mechanism. At the same time, we continue to see strong customer growth. New construction plus conversions translated into connecting over 13,000 new customers during the last 12 months, which equated to a growth rate of 1.7%. While we can't predict the full economic effects of the pandemic, we continue to see mitigating factors for our business with our resilient business model, the timing of the onset of the pandemic, and our conservative and efficient business operations. Not only do we care for customers, we also care deeply about our employees, and I am proud of how quickly our employees have adopted new safety procedures and embraced working remotely, all the while they have maintained the highest service and productivity levels. During this time, we're also reminded of the importance of social justice in our workplace. As a company, we have publicly stated that racism in any shape or form is not tolerated at Northwest Natural. And for years, we have actively progressed in the anti-racism and equity agenda, not only internally with our employees but also by founding and supporting wider community diversity initiatives and meeting aggressive goals to provide business opportunities to minority and female-owned businesses. Today, our culture is one of accountability, creativity, and collaboration that is inclusive and supports opportunities for all employees. This work is not easy, and there are no shortcuts. We are focused on continuous improvement and will keep fostering such an environment, building a diverse workforce across all levels in our organization, providing equity in pay and development opportunities, and ensuring inclusion so all voices are heard and respected. Now turning to the progress we've made related to environmental stewardship. I'm pleased to share that in July, we've reached an important milestone here in Oregon. Rulemaking was completed on groundbreaking renewable natural gas legislation, what we call Senate Bill 98, which enables us to put renewable natural gas, or RNG, on our system and take the next step in our state's energy transition. RNG is a zero-carbon resource produced from organic materials like food, agriculture, and forestry waste, wastewater, or landfills that can be added into the existing natural gas system. All forms of RNG are supported in the law, including renewable hydrogen. The law enables us to acquire RNG on behalf of Oregon customers and goes further than any other law by outlining goals for adding as much as 30% RNG into the state's pipeline system by 2050. It allows up to 5% of a utility's revenue requirement to be used to cover the incremental costs of RNG. Currently, that equates to about $30 million annually for Northwest Natural. Gas utilities are also allowed to rate base interconnections with the gas system and could include RNG facilities in the rate base if that is the lowest-cost option for customers. We're pleased to take this significant step forward with the support of the legislature, governor, and regulators. Before I turn it over to Frank, I'd like to mention one last item that we made progress on recently. Last week, Northwest Natural and all parties in the Oregon general rate case filed a comprehensive stipulation with the Public Utility Commission of Oregon. The filing includes a $45.8 million increase in revenue requirement compared to a requested $71.4 million amount. This stipulation is based on the previously settled capital components, including a capital structure of 50-50 debt and equity, a return on equity of 9.4%, and a cost of capital of just under 7%. In addition, the stipulation reflects an average rate base of approximately $1.45 billion. Northwest Natural's filing is subject to OPUC approval. And if approved, new rates are expected to take effect on November 1 this year. This is also the time that our revised purchased gas adjustment takes effect. This year's PGA forecasts a reduction to customers' bills, which offsets the majority of this base rate increase we just settled on. We commend the commissioners and parties for their ability to continue working virtually under less-than-ideal conditions. So with that, Frank, I'll turn it over to you to cover the financial details of the second quarter and year-to-date.

Thank you, David, and good morning, everyone. I'll begin with a summary of our second quarter and year-to-date financials, and then discuss the key metrics and financial implications of COVID-19 on our business and guidance for 2020. I'll describe earnings drivers on an after-tax basis using the statutory tax rate of 26.5%. Our effective tax rate for the quarter was 24.6% as a result of the return of excess deferred income taxes to our Oregon customers. Also note that earnings per share comparisons were impacted by the issuance of 1.4 million shares in June of 2019 as we raised equity to fund investments in our gas utility. For the quarter, we reported a net loss from continuing operations of $5.1 million or $0.17 per share compared to net income of $2.1 million or $0.07 per share for the same period in 2019. The decline in earnings for the quarter reflects two key drivers. First, the second quarter results reflect the financial impacts of COVID-19 on margin, O&M, and interest expense. We estimate the total impact of COVID-19 to be approximately $4 million or $0.12 per share, most of which hit in the second quarter. We have recorded a deferral for a portion of these costs with an offsetting reserve until we have more clarity with regulators as to the recoverability of these costs. Second, last year's second quarter results benefited from the reversal of an earnings test reserve for environmental remediation expenses that we booked in the first quarter equal to $0.11 per share. Looking at the gas distribution segment. Utility margin decreased $1 million. Higher customer rates in Washington, customer growth, and revenues from the North Mist expansion project contributed $2.9 million, which was more than offset by a $3.2 million increase in environmental remediation expenses due to the reserve release in the prior year. COVID impacts on margin are estimated to be $1.5 million, including a $700,000 decline in revenues from lower late charges and disconnection fees as we temporarily and voluntarily suspended these charges in March. In addition, we experienced slightly lower usage from industrial and commercial use customers that were not decoupled. Utility O&M increased $2.8 million in the quarter as we incurred higher contractor service costs related to pipeline and meter safety as well as moving expenses as we transition to a new headquarters and operations center. In addition, compensation costs increased related to additional IT staff and higher wages under the new five-year union contract. Finally, O&M increased $200,000 due to the higher reserve for bad debt related to COVID. Depreciation expenses and general taxes increased $2 million related to our continued investment in our system, including the North Mist gas storage facility, which was placed into rates in May of 2019. Interest expense increased $1.1 million related to several financings undertaken in March to increase cash on hand as a precautionary measure during a period of significant market volatility amid the early stages of the pandemic. For the first six months of 2020, we reported net income from continuing operations of $43.1 million or $1.41 per share compared to net income of $45.5 million or $1.56 per share for the same period in 2019. Last year's results included a regulatory disallowance of $0.23 per share related to an Oregon Commission order. Excluding that disallowance, on an adjusted non-GAAP basis, earnings per share from continuing operations was $1.79 for 2019. The $0.38 per share decline is largely due to year-over-year growth in expenses and the effects of COVID-19. In the gas distribution segment, utility margin increased $100,000. Higher customer rates in Washington, customer growth, and revenues from the North Mist expansion project contributed an additional $10.1 million. This was partially offset by lower entitlement and curtailment fees related to pipeline constraints in 2019 and warmer weather in 2020 compared to 2019, which collectively reduced margin by $4.9 million. The remaining $5.2 million decline in utility margin is a result of the March 2019 Oregon order related to tax reform and pension expense. With the exception of the first quarter pension disallowance, this order has no impact on net income as offsetting adjustments were recognized through expenses and income taxes, as I'll describe in a moment. Utility O&M and other expenses declined $6.9 million during the first six months of 2020. This decrease is the result of accounting entries associated with the 2019 Oregon order, which resulted in $14 million of additional expense in the first quarter of 2019, as discussed previously. This was offset by a $5.8 million increase in underlying O&M related to the cost drivers I described in the quarterly results. Over the last several years, we have invested in our gas system at historically high levels, and we placed the North Mist gas facility into service. As a result, depreciation expense increased $4.9 million. Finally, 2019 utility segment tax expense included a $5.9 million benefit related to implementing the March order with no significant resulting effect on net income. Net income from our other businesses declined $1.5 million from lower asset management revenues due to less favorable market conditions. Now regarding the financial effects of COVID-19. While our business model is resilient and the initial timing of the event occurred after Northwest Natural's peak heating season, we are experiencing some financial impacts related to the pandemic. Through June 30, we have an estimated $4 million of combined incremental costs and lower revenues. Based on our experience to date and expectations for the future, we'll closely monitor the following items. First, we continue to track commercial customer losses as a result of businesses closing their doors and today have not seen a significant change or near-term implications on customer growth, but it is still very early in the economic contraction. Second, we are also monitoring the loss of late fee revenue and potential bad debt expense. We have doubled our reserve for bad debts from $800,000 in June 2019 to $1.6 million at June of 2020. Third, we have experienced some decline in industrial and large commercial customer usage, but have not seen a substantial reduction to date. As discussed, we took several steps to improve our liquidity position by increasing cash on hand. As a result, we had over $470 million of cash at the end of the first quarter. As market conditions have improved, we reduced that to $137 million. While there is an incremental interest cost associated with these financings, we believe it is relatively inexpensive insurance given the volatility in the market. We've applied for regulatory deferrals to recover certain of these costs and are working closely with our regulators to reach agreement on the type and amount of costs that will be eligible for recovery. In addition, we are taking actions to ensure we are operating effectively and efficiently, and these savings also moderate the impact of COVID. In summary, second quarter results are coming in about where we expected them to be, and we continue to monitor this evolving situation as we approach the next heating season. Today, we reaffirm guidance for continuing operations in the range of $2.25 to $2.45 per share and guide towards the lower end of the range due to the potential implications of COVID-19. Guidance also assumes continued customer growth, average weather conditions, and no significant changes in prevailing regulatory policies, mechanisms or outcomes, or significant laws, legislation, or regulations. Finally, this guidance excludes any gain related to the sale of Gill Ranch and associated operating results. We continue to monitor the impact of the pandemic on our capital programs. At this time, we do not expect a material change in our capital expenditure range of $240 million to $280 million. We are anticipating some lower expenditures related to customer acquisition due to the economic downturn, but the majority of our CapEx is maintenance in nature and includes some large projects that have already begun. With that, I'll turn the call back over to David for his concluding remarks.

Thanks, Frank. While we continue to focus on day-to-day operations, we're also advancing key long-term objectives. As I mentioned earlier, we strive to provide stable earnings while adding new earnings streams with similar risk and cash flow profiles as our regulated gas utility. We believe the regulated water utility sector fits this profile and aligns with our core capabilities. Furthermore, the investment potential is promising as the water industry is highly fragmented, and in many cases, these utilities have not been able to adequately invest in their infrastructure. To that end, in 2017, we began building our water utility business, and I'm very proud of the progress we've made to date with regulatory policies and mechanisms. While we've seen some decline in activity lately due to travel restrictions related to COVID, so far, in 2020, we closed several transactions, including Suncadia in Washington State and our first water utility in Texas. In addition, we continue to execute on our tuck-in strategy around our existing systems. Just a few days ago, we closed our first municipal transaction in Idaho, acquiring water and wastewater utilities near our Falls water system in Idaho Falls and signed another agreement to acquire a small water system in the region. Cumulatively, we've invested $110 million in this space. Operationally, the water utilities continue performing well amid the pandemic. We leveraged our natural gas expertise to follow best practices regarding health and safety guidance for COVID, provide centralized resources and planning, as well as a larger, stronger balance sheet. The ability of our water utilities to work together along with our gas utility during this crisis further validates our roll-up strategy. In closing, our company has weathered many challenges in the last 162 years, and I'm confident in our ability to handle the challenges at hand. I stand behind our commitment to customers to provide safe and reliable service, and I believe in our regulated business strategy and the resilience of this team. So with that, Kate, that wraps up our prepared remarks, and we'd be happy to take any questions from analysts, if there's any in the queue.

Our first question is from Aga Zmigrodzka from UBS. Go ahead.

Good morning. My first question is really on O&M. So it's up a lot year-over-year. And before, you talked about that this year, the O&M will be higher. However, a lot of your peers in 2Q cut costs on travel, training, deferred some expenses to offset the impact from COVID. Were you able to see any cost reduction due to those items?

Good morning, Aga, it's Frank. Most of our benefits or efficiencies that we are targeting will actually roll through the second half of the year, kind of to the July through December time frame. We have certainly some operational efficiencies that we're targeting. But we're also reducing, and we start with a pretty efficient model to begin with, but there are some operational efficiencies that we are putting in place. We also are reducing our marketing expenses significantly for the year. We've essentially frozen our hiring practices. But these really started to take effect in June, but they're going to track out through the rest of the year. You'll really see that benefit in the second half, not in the first half.

Perfect. And then, you noted the impact from COVID of roughly $4 million and then an increase in bad debt. Could you provide more color on what recovery you can expect? And are you in discussions with the commissioners about how you could recover those costs going forward?

Yes, Aga, this is David. I'll start. In all of our jurisdictions, we're in regular communication with the regulators and deferral orders have been filed. Each jurisdiction is approaching it a little bit differently. In fact, like in our water operations in Texas, the regulators have indicated they wanted to 'get back to normal now,' which means disconnects and late fees being charged. It's obviously a fairly small portion of our company. Washington, Governor Inslee has ordered no disconnects or late fees through the end of October. So there's still conversations going on with the Washington regulators on what that means long term. Here in Oregon, it's voluntary status, and we're working closely with the PUC. Commissioner Thompson with the PUC here is taking the lead in trying to work with all utilities to orchestrate a path forward. We expect to have some resolution of that process in the September timeframe. All the utilities, at least here in the Northwest, and we've been fairly vocal about it, too, is that we need to do everything we can to get back to, for lack of a better term, normal operations before we get into the winter months. The impacts of COVID are evident in the financials for the first and, to some degree, in the first and second quarters for us. But it's really imperative that when we get into the winter months, we have the ability to operate on a more normal basis. I'm hoping with both jurisdictions that we will be in that position, or there will be further guidance on deferral situations or whatever happens at the federal level with stimulus programs.

Perfect. And my last question is really, right now, we have the legislation in place clarifying RNG rules. How do you think about your expansion of the RNG portfolio? Are there any CapEx opportunities to invest in connection to RNG facilities? Or maybe investing in clearing equipment to get RNG-to-pipeline quality? Any color would be helpful.

Yes. No, no, on the RNG, thank you for that question. We're really excited, not only about the legislation but I think the rulemaking that came out from the Oregon PUC followed the intent of the legislation and gives us great flexibility. Justin Palfreyman is here. Why don't I let him take the lead on the RNG processes for us a little bit. Why don't you try to give a little bit more detail for Aga?

Yes. Great. Thanks, Aga, this is Justin. We have been building up a team and capabilities enabling us to execute on our RNG strategy really in parallel with finalizing the rules. We are actively engaged in opportunities to invest in specific RNG projects and we have a strong set of rules that will enable us to do that. We are also out in the market right now with an RFP for procurement, entering into long-term RNG gas supply agreements. What we're doing is really evaluating what's best for our customers over the long term. We believe we'll end up with a mix of some investment opportunities as well as longer-term procurement or gas supply agreements. We'll be approaching it very much through the lens of what's best for our customers.

Thank you for the color.

Our next question is from Richard Ciciarelli from Bank of America. Go ahead.

Hi guys. Just wanted to follow up on the prior question there. Just curious if you can provide a little bit more color on quantifying the CapEx opportunity and as well as the timing of spend. Do you see it potentially crowding out some of your spending currently in your plan? Or is it potentially all incremental?

Well, I'll start here. And you're talking about the RNG, Richard, to make sure I understand it correctly?

Yes, correct.

Yes. So the number one goal for us as a company is to get as much RNG product on our pipeline and decarbonize our product as much as possible. That's goal number one. Whether it's outright purchase of the RNG or it's through rate basing, interconnection, and things like that is a little bit secondary. What has to be done is to make sure that it's done at a price that is the best for customers. If a rate-basing methodology is more expensive than a purchasing, then that doesn't make sense, nor will the regulators let that go through. That's part of the process we need to go through as we look forward. The good news is we have the opportunity to either invest directly into it or buy. It's a little bit early at this juncture to put out numbers about that. As Justin just said, the RFP is out there. We've been working in the space here for a period of time. If we can find good investment opportunities, we will. I think I can speak for Frank. I think absent the cost of these being very substantial, which again, if they come back to that $30 million revenue requirement level, it should be very doable for us and our CapEx without cutting back on CapEx and the rest of the company, because, frankly, the rest of that CapEx, Frank and the team have done a good job with operations. It's line-of-sight capital. I mean it's stuff that has to be done. So whether it's IT systems as we go forward or just pipe replacement, that's pretty well locked in for a period of time here.

All right, got it. That's very helpful. And just separately, I appreciate the color you guys provided on COVID and the financial impacts and what you're kind of seeing out there. So just given that you and many of your peers haven't experienced the COVID impacts through the peak winter heating season, curious how you guys are thinking about cost-mitigation efforts and the sustainability of those into the second half and even into 2021 as you think about those impacts going forward.

Yes. This is David again. I think the uncertainty out there is, number one, where we are in this pandemic. It does look like this is going to carry on for a period of time. This is where it comes back to at a state and federal level, with the governments and what they will do stimulus-wise. One of the reasons we're in good shape now is the payroll protection program in place and individuals had money from the federal government that allowed them to not only put food on the table but also to make sure their basic utilities were paid for. I also think it comes down to the regulatory process and how the regulators in all of our jurisdictions will look at this as we enter the winter season. In Oregon and Washington, we're working through that. I'm hopeful that we will come to a good resolution that will allow us to handle customers' bills that are having difficulty during that period.

All right, that's very helpful. And then last one here for me. Just on your water strategy, has COVID potentially impacted some of these smaller players out there to potentially capitulate and be more willing sellers? How large do you envision your water strategy eventually growing? And what's the timeline for that?

Yes, and this is David again. I will tell you that the properties and employees that we have now as part of the Northwest Natural family, if you talk to them individually, they're thrilled to be part of a company like this in the midst of this COVID situation. If they needed PPE or access to capital, it's been readily available to them. That word gets out there likely to many of these other smaller water utilities. I suspect you're correct; some are probably hurting unfortunately worse than others. On the M&A activity front, with this dynamic out there, we're here to help any water utility that needs assistance, whether it's municipal or private. The M&A activity has been pretty slow. Everybody is doing things remotely, and due diligence has been slowed down a bit. We'll have to monitor that carefully. I hope that as we look forward, more opportunities will present themselves.

Thank you. Our next question is from Chris Ellinghaus from Siebert Williams. Please go ahead.

Hey, everybody. How are you?

Excellent.

Frank, can you give us any color on what the moving expenses were? Maybe I missed that.

Yes, that was as we relocated from our previous facility into our new headquarters and operations center, there were some O&M costs that we couldn't capitalize to relocate the business. I think that was about $500,000. So that's kind of a one-time cost.

Okay, great. Frank, what you outlined for the $4 million, a lot of those are costs or avoided revenues that are proportionate by season. You didn't talk much about PPE costs or whatnot, but can you give us any kind of sense of the proportionality of what is fixed versus what might be proportional as we look into the more substantial fourth quarter?

Yes, sure. Good question. I didn't mention PPE, but about $0.5 million is what we incurred. There will be more of that, but kind of that's front-end loaded. About $1.7 million, Chris, is just interest. We've got some that will be ongoing because, as you know, we put on a 364-day facility that we're going to keep in place, and as our cash needs to buy gas in the latter half of the year grow, it will just naturally fund that. We also put on a slightly larger first mortgage bond. It was bigger and it helped put on some cash. So there's a little bit extra interest here. So, that $1.7 million of incremental interest is really, again, front-end loaded. There are late and uncollectible fees, around $2.7 million a year in our rates for late fees and reconnection fees. So that kind of caps out. At this point, we've recognized about $1 million just over $1 million of that as essentially uncollected. So there's maybe another $1 million to go on that across the balance of the year. And then what we get into is what happens with usage and customer losses, and that could increase in the back half of the year. The way I'm looking at it is the first half of the year, we had this $4 million after tax, $5 million pretax cost of COVID. I don't think that’s unreasonable for the second half of the year, but more of that will be usage and less of that will be interest and O&M. Bad debt cost is like usage. We have to keep an eye on that one right now, and we've got a rigorous process in place to look at our customers and work with them to keep them from going delinquent. It's a bit unknown because the economy is outside of our control, but we're doing all we can. That’s how I’m looking at it, kind of split between first half and second half, but the second half is more volume-based.

Okay. David, you talked about the construct for RNG. I'm curious, locally, there's obviously a lot of environmental interest. What is the trade-off, or what is the thought process in Oregon about costs versus carbon benefits with RNG? RNG is going to be a smaller economy of scale than the delivery of just natural gas. How does that dynamic work in the commission's mind and the legislator's intent to have that trade-off of equivalent cost to natural gas versus the benefit of decarbonizing?

Yes, and I'll start. The legislation lays it out pretty clearly, right? Last session, we did have a cap and trade bill that didn't pass, which would have put a price on carbon. The legislation did put forth to the commission that it would be okay at this juncture to have higher costs passed on to customers for RNG. There's not really this contemplation of cost of carbon in association with it. That's the ruling. We really don't have to, if I understand your question correctly, Chris, that's certainly not part of the process. If we can go out there and find RNG, which there's a lot out there, I might have Kim just detail a bit about some of the opportunities there. Justin, do you want to add anything?

Yes. It's Kim. One of the things that the legislation did was contemplate price protections for customers, not unlike the renewable portfolio standard on the electric side. That's why you see that 5% cap of revenue requirement annually. We think this is a good starting point because it lets us get RNG in our system over time in a way that can be absorbed from a customer-cost standpoint. Again, very similar to the RPS on the electric side, how they sort of stepped into that volume. I don't know if, Justin, you have anything. In terms of supply, we've had several early studies. The Oregon Department of Energy conducted a study on the technical potential of renewable natural gas in Oregon. They found nearly 50 billion cubic feet of technical potential, which is equivalent to all the residential throughput in our state. As you may know, the legislation contemplates, again, like on the electric side, that we'll be able to procure RNG nationwide. Justin's team is currently out with that RFP looking at various opportunities for supply. There was also a study funded by the American Gas Foundation and many utilities across the country this year that looked at the technical potential of renewable natural gas nationwide, and again, that looks to be nearly 90% of all the current gas throughput nationwide. Both studies show that technical potential does not necessarily equal economic potential. However, we feel very good about the prospects of stepping into RNG in a way that protects customers and rates, especially with the supply potential that's out there.

Yes, that helps. David, I'm sort of just sitting here thinking about how renewables initially or QFs have definitions of cost versus benefit, but sometimes that can get contentious in the regulatory process. I was just wondering whether you felt there's enough clarity that, that won't become an issue with RNG.

Yes, this is Justin. One of the things we're working through and always do with our regulators, we have a very robust methodology for how we calculate the cost and really, the avoided costs in our gas procurement and other resource decisions. That's in our IRP. One important thing that has been going on in parallel with the RNG rulemaking is more clarity with our OPUC staff around exactly how we quantify RNG and look at our resource options over time. It was essential, I think, in addition to everything Kim just mentioned that we have that 5% of our revenue requirement that we're allowed to invest in RNG, which is really just the beginning of our overall kind of decarbonization of our product. That is over and above the avoided cost calculated for our customers for gas procurement. Depending on the type of RNG and its location, it will have a certain benefit that will be netted from that cost. I don't know if that's more confusing than enlightening, but we have a fairly robust process we go through with our stakeholders to analyze the cost and benefit of RNG, and the SB98 legislation is fairly clear in what it allows us to do.

Yes, that helps. Also, as far as bad debt goes and any deferral ruling aside, were you suggesting that you're worried a little bit that as Congress dilly-dallies with unemployment benefits and as this pandemic gets protracted, that you're a little concerned if bad debt goes up later in the year or into next year?

Yes. I think there's uncertainty, right? If you look at the macro issues, this is one reason our bad debt is low to begin with. We're focused on talking about the increases, but if you look historically, gas prices are down 40%, actually more than 40%, bills down 40%. So we're in a strong starting position. I do think whether it's a utility or any other company, the longer this moves in for us and the electric utilities in this region, quality of service during the winter months is important because bills are higher. I want to ensure we have clarity on all these factors, whether it's late fees, bad debt, and so on. Frank, do you want to add on?

Yes. Chris, I just want to add because there's uncertainty about how long the moratorium on disconnects will last, it makes it just harder to know. So, obviously, the bill can continue to accrue for months on end until we have that ability. We'll work actively with our customers to keep them from going delinquent with that moratorium in place. It just adds uncertainty that wouldn't have been there in prior years.

Yes, great, I appreciate it.

You too, Chris. Thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to David Anderson for closing remarks.

Well, everybody, Kate, thank you very much. Thank you all for joining us this Friday morning or afternoon if you're on the East Coast. If you have further questions, please reach out to Nikki Sparley, Director of Investor Relations, and she'll be happy to try to answer those questions. So with that, Kate, we'll conclude the call. Stay safe, everybody.

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