Good day and welcome to the Northwest Natural Holding Company Fourth Quarter 2020 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 Nikki Sparley, Director of Investor Relations. Please go ahead.

Thank you, Tom. Good morning and welcome to our fourth quarter 2020 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. In addition, some of our comments today reference non-GAAP adjusted measures. For a complete reconciliation of these measures and other cautionary statements, please refer to the language and reconciliation at the end of our press release. We expect to file our 10-K later today.

Well thanks, Nikki, and good morning everybody and welcome to our 2020 year-end call. Well, years come and go, but 2020 as we all know was unforgettable. The pandemic affected many aspects of our daily lives, and I’m proud of the way our employees pulled together to provide our customers with superior service. We successfully navigated a number of challenges while still achieving our key financial and operational goals. We report net income from continuing operations of $2.30 per share for 2020, that's driven by solid performance at the gas utility and a strong contribution from our new platform of water utilities. On the gas operations front, our field crews successfully handled everything from wildfires to restoring service in several towns over Christmas to navigating COVID, social unrest, etc. Just a few weeks ago, our employees in the natural gas system once again rose to the occasion and provided reliable service through an extreme weather event. Our storage facilities and overall hedge positions worked to mitigate the amount of gas purchased on the spot market and help to minimize the impact to our customers’ bills. This was incredibly important as prices, as everybody knows, spiked across the country from the widespread cold snap. Our balance sheet remains strong with ample liquidity. In 2020, we also executed on one of the largest capital programs in the company's history aimed at supporting reliability. We continued to operate one of the most modern and tightest systems in the nation, a system that has no cast iron and no bare steel. In 2020, we invested over $270 million in our natural gas infrastructure. From an economic perspective, 2020 was truly unprecedented. Prior to the pandemic, we had a fundamentally sound, sustainable growing economy with record low unemployment both nationally and in our service territories. We continue to see economic recovery and steady growth in several important areas. Portland's unemployment right now is 6.1%, which essentially matches the national rate down from a 14.9% high in April. Single-family housing activity remains strong. In the Portland metro region, home sales were up 8.3% from 2019 with price growth of about 12%. And new single-family permits issued last year were up 4% compared to 2019 levels.

Thank you, David, and good morning, everyone. I will begin by discussing the financial impacts of COVID-19 and the highlights of the fourth quarter and full year 2020 results. In 2020, our utility commissions approved COVID deferrals and term sheets that outline the types of revenues and costs that may be recovered. These include PPE, bad debt expense, financing costs associated with additional liquidity, and certain loss revenues. Direct expense reductions such as lower travel and meals and entertainment are to be netted against the deferral. Prudency review and recovery of the deferral accounts will be determined in future proceedings. While our business model is resilient, we are experiencing some financial impacts related to the pandemic. Through December 31, we incurred an estimated $10 million pre-tax of incremental costs and lower revenues due to the effects of COVID-19. Of this, $4.8 million were deferred to regulatory accounts. In addition, $1.3 million of late fee revenue that has not been charged to customers since the suspension of normal collection processes will be recognized in a future period when we begin to recover the foregone rates. The remaining $3.8 million that cannot be recovered through rates are primarily due to lower natural gas utility margin from customers that stopped service and slightly lower usage from customers that are not decoupled. In order to further mitigate the financial effects of the pandemic, we initiated temporary cost savings measures which provided approximately $3.5 million of savings in 2020. In summary, the total P&L impact of COVID in 2020 was $1.6 million. Turning to our detailed financial results. Note I'll describe earnings drivers on an after-tax basis using the statutory tax rate of 26.5%. Also note that year-to-date earnings per share comparisons reflect the successful issuance of 1.4 million shares in June 2019 as we raised equity to fund investment in our gas and water utilities. 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 season. For the quarter, we reported net income from continuing operations of $45.8 million or $1.50 per share compared to $38.3 million or $1.26 per share for the same period in 2019.

All right. Well, thank you, Frank. While the past year presented challenges, our focus remains the same: providing superior customer service, maximizing returns from our strong and growing regulated natural gas utility, and diversifying our business by investing in the water sector. We made progress on that last front with the sale of two investments that were no longer central to our strategy. In August, we sold our interest in the Trail West pipeline project, and in December, we completed the sale of the Gill Ranch Storage Facility in California.

We will now begin the question and answer session. We will pause momentarily to assemble our roster. And the first question comes from Chris Ellinghaus with Siebert Williams. Please go ahead.

Hey, everybody, good morning. How are you?

Hey, Chris.

David, can you talk a little bit about the Texas crisis and how you think that will help with the electrification, diversification, decarbonization, education process that you seemingly have to go through with municipalities and legislators today?

Yes, Chris, thanks for the question. And as you know, Texas is my home state, so my heart goes out to all that took place down there. It's a very, very sad situation. But with that said, I think we all need to make sure that we look at that and learn from it. I think it proves a point that I've been making for a long period of time: you need to have resiliency and redundancy in systems and not have all your eggs in one basket. I'm a big fan of electricity; it's where I started my career. But the natural gas infrastructure is also a critically important aspect of that. And I think when you apply it to even our current region, Chris, we had some very severe electric outages up here. The electric company worked hard and diligently to get everybody back online. But if you had natural gas, you had the ability to have your gas fireplace work, you had the ability to cook, and I know in my own household, that was greatly appreciated. So it is my hope that we all learn from these experiences and understand that the infrastructure in place is crucial. I'm not as close to Texas as I used to be 17, 18 years ago, but I do know in our region that I want to make sure policymakers are making good decisions and ensuring that we are prepared for those events, because they will happen. If you believe in climate change, which I do, it shows that extreme weather events will continue.

In Washington, the electrification bill that failed—you probably had some kind of interaction with that group of legislators. Were they well educated at the point that they brought that bill?

Well, the bill was brought by a freshman legislator, so he was brand new to the process. I'm not going to guess whether he was educated or not, but I will tell you that, like a lot of times, what happens is bills are put in the hopper, and then things are figured out after they’re put in the hopper. Once that happened, there was a tremendous amount of pushback on the bill, from everything—including building trades, electricians, gas unions, business and industry associations, grocery stores, some buildings, restaurants, and utilities—all pointed out that the bill, as currently written, was probably not a good outcome for the region. When more people started looking at it, they decided not to move the bill forward at this time. So I’m cautiously optimistic, Chris, that it will stay that way. You mentioned the word 'dead'—I don’t think bills are ever dead, but at this juncture, it does look like it’s not going to move forward.

Okay. David, you’re also saying that Europe is much further ahead on the hydrogen side than we are. I was going to ask you when you thought we’d get a lot of hydrogen data. So companies could start to make some decisions on the hydrogen investments. But really, why are pilots necessary here at this point, if there's a lot of information from Europe available?

I'll start and then I want to turn it over to Kim Heiting to talk a little bit more about what she saw in Europe. But I will tell you, Chris, I'm old enough to have been here when electricity became renewable. We had wind and solar down in Texas, and the only way the electricity system got to where it is today—with the amount of renewables—was with policy support. That’s what we need here in this country. I think Europe is ahead of us because they had policy support. I think they went down the path of electrification and figured out pretty quickly—or maybe not quickly—that it was not a viable path. I think they understand the value of gas infrastructure. So I think there’s a little bit of an education process here, Chris, to work with policymakers to ensure that they understand the energy systems and the importance of those energy systems going forward, and that these energy systems can be clean and green. Kim, do you want to add anything?

No, I think you’ve covered it well. I mean, you asked why do we need pilots? Part of our challenges is we need that policy overlay to accelerate bringing these proven technologies to scale. That's one of the areas of focus for us in the Eugene project we are working towards with the Eugene Water and Electric Board and the Bonneville Environmental Foundation, trying to demonstrate the methanation technology already being applied in Europe and beginning to be applied in Canada, so that we can then ask for that next step, which is really that policy overlay. I mean, David mentioned on the federal level, there are things here on the state level that we’d like to see over time, such as the treatment of methanation equipment or electrolyzers, as we do batteries and the rate contracts. So lots of possibilities, and we’re certainly very pleased to see the level of interest now around RNG and hydrogen for the gas networks and we expect that to only grow.

Okay, one last question. As far as the RNG announcements you had earlier in the year, should we be expecting a stream of these types of announcements from you guys?

Chris, when we look at what we’ve been doing as a utility to do everything we can to decarbonize our system—and we've got the tightest system in the country—we’ve been working with our upstream producers to lower their footprint and only buy from responsible producers. The last piece of that pie is to decarbonize the product going through our pipe. We will move aggressively on this front to do all we can along that line. So I hope the answer to your question is yes; we would like to get as much renewable product on the pipeline as we possibly can.

Okay, thank you very much. Appreciate the color.

Thanks, Chris. Have a good weekend.

You too.

The next question comes from Selman Akyol with Stifel. Please go ahead.

Thank you. Hello, hope everyone is doing well. A couple of quick things. First of all, can you just make some comments regarding how the water assets performed in Texas?

Yes, I will start and then Justin Palfreyman, our President of Water, is on. In general, we are very pleased with our Texas assets. We’re trying to add more of those assets as we can, though COVID—as I mentioned in my prepared remarks—has kind of slowed down the acquisition activities for safety reasons on both sides of the table. But Justin, do you want to talk a little bit? I know a lot of people saw the freeze-offs and give an update on what we observed in our operations.

Yes, absolutely. Our Texas water operations were impacted similarly to many other utilities last week. However, our team reacted very quickly. There were power outages that affected some of the services and resulted in some freezing over and bursting pipes within about half of our overall systems, affecting about half of our customers. We were able to restore water service generally within 24 to 48 hours on our systems, and get customers back online very rapidly relative to most of the other utilities in the state. So we're very pleased to see that response from our team down there.

Great, thank you for the update. In your opening comments, you referenced increased gas demand as well as prices in the first part of the quarter with the cold event. Is there any reason for us to anticipate needing relief from a regulatory standpoint or anything in terms of incremental bad debts or anything of that nature?

No, Selman, we got ahead a little bit before the rest of the country did with the system, and we did get pretty cold, but not like Texas and Arkansas. However, we had some additional purchases, but we also had some offsets; our storage facilities worked fairly well. So we're in good shape. We are not in a situation like some of my peers who have encountered unprecedented liquidity issues to finance; we’re in good shape.

Glad to hear that. And then just the last one for me. You guys referenced testing a 5% hydrogen blend at your training facility. Can you just talk about how that's going—pipe leakage, anything noteworthy coming out of that?

Kim, do you want to take that?

Yes. Yes, we’re really pleased. Last fall, we began the 5% blend. Backtracking a bit, when we took our trip to Europe, we were really amazed at the level of specificity in their testing protocol. Fast forward, we started to build out our own blend test protocols at our training facility in Sherwood, Oregon. It’s a good spot for this kind of testing. Last fall, we began the 5% blend, focusing on leakage detection equipment and the performance of that equipment. We purchased a hydrogen blending leak detection piece of equipment, which performed as expected. We’ve now moved on to testing the blend on end-use equipment like fireplaces, water heaters, and cooktops. So far, we haven’t seen anything unexpected; we’re really pleased. We are building out this testing plan for the rest of the year, with a goal to be serving the entire facility with that 5% blend by year-end. We’re also working with others in a high-deploy organization, sharing technical data and collaborating with companies internationally doing hydrogen blends, which includes technical analysis on pipes, components, and end-use equipment. We’re taking all those learnings and applying them to our plan. The final step we see is system audits to determine the best locations for blends at different percentages. So there’s a lot happening, a lot of exciting work, and we’re staying close to peers collaborating with us.

And that’s all in the blend you might just mention about methanation. But what about the difference?

Yes, we see three applications of hydrogen: blending, dedicated hydrogen systems, and methanation of hydrogen. We think the blending will be kept between 20% and maybe 30% before there are issues with any equipment or components. Dedicated hydrogen systems would require pipes and components built specifically for hydrogen, with no limitations on the amount allowed. The application we're really interested in is methanation, where you can take waste CO2 from industrial facilities or power generation, apply it to the power-to-gas process, and create methanated hydrogen. We believe all applications will be in play. There are advantages to each, and they will be critical paired with renewable natural gas to achieve carbon neutrality by 2050. We’re currently doing scenarios around which components will be necessary and planning around that.

Got it, and I apologize. I'm going to ask one more. In your comments, you talked about government policies and support. With your AGI Chairman hat on, is there anything you can discuss regarding plans to help in that area?

Yes, Selman, thank you. I mean, policy support can come in various ways. You can see what we did in Oregon with a renewable natural gas bill, known as Senate Bill 98. There are opportunities at the federal level for something similar. One reason I agreed to serve as the AGI Chair this year is to help drive that support. Support can take the form of tax credits, but it can also help the industry move forward in various ways. I'm pleased to see the Biden administration include hydrogen in some discussions they've had. Recently, I pointed out some issues we need to address as a country to transition our energy system. I hope this crisis in Texas presents us the opportunity to build a more resilient energy system—improving its efficiency and cleanliness. There’s a great opportunity at both federal and state levels to support this transition.

Thank you once again.

Thanks, Selman.

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

Well, thanks, Tom, and thanks to everybody for joining us on a Friday. Thanks for those great questions, by the way. If you have any questions, Nikki Sparley has your contact information as your point of contact, and on the media side, Melissa Moore—both of their information is in the press release. With that, we’ll go ahead and sign off, and everybody have a great, safe, and warm weekend.

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