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 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 remain robust in our region. And this translated 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% customer growth rate. We also closed acquisitions this past year, leading to an overall connection growth rate of 5%. During the quarter, we filed our annual Purchased Gas Adjustment, which, for the first time in Oregon, included renewable natural gas. In October, we received approval from both the Washington and Oregon commissioners on our PGAs. New rates went into effect November 1. Despite these increases, customers continue to pay nearly 30% less for their natural gas today than they did 15 years ago. And natural gas continues to maintain its competitive position as a fuel of choice. In fact, for a typical home we serve, natural gas enjoys up to a 60% price advantage over electric and oil furnaces. Now, an update on our general rate case in Washington. As you may remember, Washington service territory covers about 12% of our overall customers and about 10% of consolidated revenues. In October, the Commission issued an order approving our multiparty settlement. Under the multiyear order, Northwest Natural's revenue requirement increased by $5 million on November 1, and will increase by an additional $3 million on November 1 in 2022. The order includes several items that mitigate the impact to customer bills as parties recognize, this remains a very challenging time for customers. Both years are based on a cost of capital of 6.814%, and rate base would increase from a total of $52.6 million to $247.3 million. We continue to make progress under the landmark Oregon Senate Bill 98 legislation, which supports renewable energy procurement and investment by natural gas utilities. During the third quarter, our request for proposal for additional RNG supply or investments concluded, and I'm happy to report we have received a very robust response and are evaluating a number of potential opportunities coming out of this process. Northwest Natural has options to invest up to a total estimated $38 million in 4 separate RNG development projects that will access biogas derived from water treatment at Tyson Foods processing plants. Construction on our first RNG facility began this fall, with commissioning planned for early 2022. To date, we have signed agreements with options to purchase or develop RNG, totaling about 2% of Northwest Natural's annual sales volumes in Oregon. I'm very proud of the progress we’ve made in just, frankly, 1 year. To put it into perspective, today, wind and solar account for about 11% of our nation's electric supply, and that's after decades of investment. So I think we've made good progress in a short period of time with more to come. We'll continue to take these critical steps to source more and more of our supply from renewables, knowing that this also helps communities close the loop on waste. In our water business, we're seeing increased business development activity and a robust acquisition pipeline. That includes acquiring water utilities around our existing systems. We closed 3 tuck-in acquisitions this year and expect to close another 1 soon. At the same time, we continue to invest in our existing utilities. For example, construction is going well on an upgraded wastewater facility at our Sunriver, Oregon utility. Projects like this help our water utilities continue providing safe and reliable service and meet stringent environmental standards. To support investments at our utilities, we're filing general rate cases as necessary. And to date, we've successfully completed rate cases in Idaho, Oregon, and Washington, building constructive relationships with our regulators. Right now, we're working through a general rate case at our largest utility, Sunriver here in Oregon, which is moving along nicely. We continue to see an increased level of business development activity and remain excited about the investment potential for this business. We hope to have more announcements soon. And finally, this morning, I'm pleased to report that in the fourth quarter, the Board of Directors approved a dividend increase, making this the 66th consecutive year of annual dividend increases. Northwest Natural is 1 of only 3 companies on the New York Stock Exchange with this outstanding record.

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 by $4.1 million as a result of the new rates in Oregon and customer growth, which collectively contributed $3.7 million. Utility operations and maintenance increased by $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 by $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 the gas utility, which contributed $0.31, with our other businesses contributing $0.13 per share as compared to last year. Higher earnings at the gas utility were primarily related to new rates in Oregon and customer growth. In the Gas Distribution segment, utility margin increased by $26.2 million. Higher customer rates and customer growth contributed $27.3 million. This was partly offset by a loss from the gas cost incentive-sharing mechanism as we purchased higher-priced gas during the February 2021 cold weather event. Utility operations and maintenance increased by $8.5 million, driven by higher employee compensation and benefit costs, lease expenses for our new operations and headquarters, and higher costs related to information technology system upgrades. Depreciation expense and general taxes increased by $7.3 million. Net income from our other businesses increased by $3.9 million, largely due to higher asset management revenues from the cold weather event in February. During the first 9 months of 2021, cash provided by operating activities was $182 million, an increase of $31 million compared to last year. We reinvested $204 million into the business, most of which was for the gas utility capital expenditures. Our balance sheet remains strong with ample liquidity. The company reaffirmed 2021 earnings guidance today for net income in the range of $2.40 to $2.60 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.

Thanks, Frank. We're taking important steps today to lay the foundation for continued success in the future. I'm proud to announce that we've also launched a competitive renewable natural gas strategy 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 to 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 from 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 our 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 meet different energy needs and will be even more important going forward as climate change and severe weather pose new risks. All of this means we're approaching the competitive RNG space thoughtfully but with confidence. We're in the midst of a historic energy transition, and the demand for renewable fuels is only going to continue to grow. Renewables are a clear priority at all government levels. And importantly, customers are demanding renewable energy, including fuels to power their businesses and heat their homes. A growing number of states have renewable mandates, and others have voluntary renewable natural gas tariffs. Customers across sectors are also focused on this issue. In fact, 60% of the Fortune 500 companies have set a goal to act on the climate crisis and address energy use, and others are fast following. As a result, cost-effective RNG demand is expected to exceed supply in the near term with many large-scale, low-cost projects yet to be developed. Today, the RNG supply equals less than 1% of natural gas utility demand. And we project a substantial increase in RNG supply needed to meet voluntary and compliance-driven targets instituted by states and utilities. We see promising investment potential in this area. Just a few years ago, there were only 50 RNG facilities in North America, and now over 300 are in operation or under construction with nearly 100 more in development. Leaders in Europe are utilizing RNG at an aggressive pace, with Denmark accounting for nearly 25% of its supply coming from renewable natural gas. We believe we are well positioned to help fulfill this need as it aligns with our core competencies. We view a competitive RNG market as a natural extension of our sustainability efforts and believe it offers a broader set of opportunities to lead beyond our service territories. In the nascent U.S. market, we have an early mover advantage here. With our expertise and credibility as a leader, we are an attractive counterparty for developers and feedstock owners seeking a reliable, long-term strategic partner. Most RNG projects are also sized right for us to effectively transact and provide meaningful growth in cash flow. As we've discussed in the past, we strive to provide stable, growing gas and water utility earnings while seeking to add growth that fits our conservative strategy. The renewable natural gas business represents a significant opportunity for us to add earnings and cash flows under long-term contracts in a fast-growing market segment. As you can see from today's announcement, we've already taken our first steps in our nonregulated RNG strategy, one of which is a 20-year RNG supply agreement that includes a $50 million investment. We intend to remain disciplined and focused as we assess other RNG opportunities that support the energy transition and also provide additional growth for the company. In summary, your company is financially strong, and I'm pleased with the progress in our gas and water utilities. We believe the renewable strategy is additive to our earnings profile, providing us sidelines to incremental opportunities. So, thanks for joining us this morning. With that, Chuck, we'll open the call to any questions.

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 running 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?

Sure. I'll begin and then pass it over to Justin for further details on our observations. We're just starting this process, and as I mentioned earlier, there are numerous opportunities ahead. I believe these will all contribute positively to our earnings profile in the future. I'll let Frank elaborate on that. We plan to share more information in the coming months as we proceed. Now, I'll hand it over to Justin to offer additional insights on his findings and provide more specifics.

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 are 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 we 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 talk about that. But like we've done with water, we would not have entered this space if we didn't think we could grow it at scale. And we're still focused on doing that with water. We've done one contract on the RNG side here. We do have some other opportunities that we are looking at moving forward. But I do expect this to be additive to the 3% to 5% earnings growth that we see going forward. I think some of the prices that Justin just discussed support that. We will provide more detail as we move forward, but it's a bit early to say whether it will be 10% or 20%. But we do see lots of targets, many opportunities, and we wouldn't be in this for just 1 or 2 transactions.

Fair enough. Last question here real quickly, if you can. You mentioned the SB98 in Oregon and spoke 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 could you frame that? I get that there's a parallel process, but I'm curious, relative to competitive. What kind of opportunities could exist out of SB98?

Yes. I appreciate the question because we are very focused on developing RNG in the utility as well. This does not mean that we're not focused on the utility side of the equation to continue advancing that decarbonization process further. We see enough opportunities out there for both the unregulated and the regulated side. But Justin, do you want to provide a little bit more detail on the process internally on the utility side?

Yes. We mentioned our projects with Tyson a little earlier in the call. Our first project is working its way through the regulatory process now, and we expect to have 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 these are going through the utility and the SB98 process. The procurement contracts we've approved were 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 around our competitive RNG strategy reflects the broader opportunity we see. We are on track to meet the targets set out under SB98 for decarbonizing our own fuel supplies here in Oregon. We also see a broader opportunity in the market across the country to decarbonize not just our own gas utility but other customers as well, whether they are 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 hear you saying that you're running parallel efforts, but it sounds like they may come to a conclusion at roughly the same time, whether it's the credit or the competitive or even the regulated RNG opportunities.

Yes. We'll continue to convey that we're in the early stages on the unregulated side, and we'll keep you informed as we grow and move forward. No Analyst Day is planned at this time, but I do anticipate sharing additional information with everyone as we continue to make progress.

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

I've got a couple of follow-up questions on the RNG 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?

Yes, happy to share that. So EDL is actually an Australia-based global leader in renewable energy. They have a portfolio of landfill gas assets here in the United States that has well over a dozen projects. These first two were particularly attractive to us due to the scale and overall cost profile. EDL, as a partner, is very appealing because they are experienced in this space. We believe there are opportunities to work together in the future. So far, in the relationships we've developed, it's very constructive and cooperative, and we have very aligned views on the market and our strategic objectives.

Okay. I understand more details will be provided later, but are you focusing on specific regions, similar to your water strategy in multiple states?

We see this as a national strategy. There are RNG supplies to be had all around the country. So we don't see this as limited to any specific region, unlike our water strategy. We started in the Pacific Northwest and expanded from there, being selective, particularly concerning the individual states and their regulatory considerations. With RNG, it's a little broader because some of those considerations just aren't as applicable. However, we want to emphasize that we're approaching this competitive RNG strategy thoughtfully and with discipline. We're looking at acquiring and developing RNG projects once key permits, 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 talk about how large this business could become, it's fundamentally a function of the risk profile and how we manage that moving forward. Importantly, we want to ensure that we build a diverse portfolio of projects with long-term fixed-price contracts and limited exposure to the volatile RIN and LCFS credit markets to ensure stable and predictable cash flow consistent with the rest of our businesses over the long term.

I think there are examples in the market of pipelines leading away from the landfills to offtake areas. Assuming that your first two projects with EDL might involve this, can you clarify whether funding for your investments typically begins once commercial operations start? Is EDL usually the source of the initial funding for the pipeline, or how should I understand this?

Yes. I think the agreement 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. I think this is just a function of the nature of these projects where EDL was at with them and where we were with our investment commitment. It's attractive for us because we will wait until the projects are constructed and ready for commercial operations to begin before we actually fund our portion. So it has many risk-allocation features that we find appealing.

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 two projects are landfill projects. There are attractive features around landfill RNG, which relate to the cost profile. Certain dairy and other agricultural projects typically have higher underlying operational and capital costs relative to the volumes of RNG produced. While we are looking at various feedstocks, that has sort of led us to these initial projects. Given our strategy, which focuses on maintaining a low-risk profile and ensuring that we can secure long-term contracts for these RNG supplies in the nonregulated business, we will likely have fewer dairy projects due to the volatility in their respective markets. The folks investing in dairy projects today are mainly monetizing those values primarily in the LCFS markets. Those markets can introduce an element of volatility and risk that doesn't align with our current focus.

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?

We've signed agreements and have investments in place to achieve 2% in the near term. I believe the limits on this – would you like to discuss the Senate Bill 98 level, at least the current legislation?

Yes. The Senate Bill 98 lays out voluntary targets for RNG volumes. Between now and 2025, it's 5% of our organic sales volume. After 2025 and up to 2030, it's 10%. Those are targets we feel confident that we will be able to achieve. We might be able to achieve additional volumes over time as we develop more cost-effective RNG and as this market matures.

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

Yes. We're continuing to work on the project in Eugene, Oregon where we've signed an MoU. The partner we're working with, EWEB, has acquired the land. We've hired a consultant to understand the cost drivers. We're trying to line up a funding application in Oregon under Senate Bill 844, which permits natural gas utilities to invest in projects that reduce greenhouse gas emissions. We are also exploring funding through the low-carbon resources initiative, a $100 million fund in partnership with the Gas Technology Institute and EPRI on developing and investing in low-emission technology. There is more work to be done, but the project is moving forward. As you may recall, it's a blending project aimed at demonstrating hydrogen blends from excess wind, solar, or hydro from the electric utility in Eugene and integrating it into our system. Additionally, our engineering team is working on the technical aspects of where and how to blend those molecules so we can create a robust plan alongside securing funding.

What's also important, Selman, is what's happening in D.C. with the House Reconciliation Bill. AGA is heavily involved in discussions around this. Both Republicans and Democrats support hydrogen in the bill. That's encouraging as we need strong policy support to advance as an industry. In fact, AGA is also seeking opportunities for renewable natural gas in that bill. So, having bipartisan support for hydrogen is a positive sign for our country overall. How it pans out specifically here is yet to be determined, other than what Kim just described, but it's a positive development. Everyone recognizes that hydrogen is a viable solution to address climate change globally.

One more comment. We've been collaborating with our peers at AGA and in Canada. Recently, there was a study from the European Union, where 21 nations produced a hydrogen backbone analysis that showed approximately 70% of existing gas infrastructure could deliver hydrogen and meet the carbon-neutral goals the EU has set. We're analyzing that information and initiating discussions on how we plan connections to our system here in North America. I'm excited about this 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 your time. If you have additional information you want, you all know that Nikki Sparley is your point of contact. We would be happy to engage in 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.