Title

Presentation

Northwest Natural Holding Company beats earnings expectations. Reported EPS is $2.28, expectations were $2.09.

Operator: Thank you. Thank you all for attending. I would like to welcome you all to today’s call, the Northwest Natural Holdings Company Q1 2025 Earnings Call. My name is Brika, and I will be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass you over to our host, Nikki Sparley, Head of Investor Relations to begin. Thank you. You may proceed.

Nikki Sparley: Thank you. Good morning and welcome to our first quarter 2025 earnings call. A presentation for today’s call is available on our Investor Relations website at irnwnaturalholdings.com. And following this call, a recording will be available on our website. Turning to Slide 2. 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. Additionally, our risk factors are provided in our 10-Q and 10-K filings. We will also refer to certain non-GAAP financial measures. For additional disclosures about these non-GAAP measures, including reconciliations to comparable GAAP measures, please see the slides that accompany today’s call, which are available on the Investor Relations page of our website.

Please note, our 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 regulation. For context, our segment reporting includes our Northwest Natural Gas utility, which was previously referred to as the Northwest Natural Gas Distribution or NGD segment. Beginning with first quarter 2025 results, we are providing information on two additional segments: our Sea Energy Gas Utility segment and our Northwest Natural Water Utility segment. Finally, the other category includes our interstate storage services and asset management services, Northwest Natural Renewables and holding company expenses. We expect to file our 10-Q later today.

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. Moving to Slide 3. With us today are Justin Palfreyman, President and Chief Executive Officer; and Ray Kaszuba, Senior Vice President and Chief Financial Officer. Justin will provide an update on each of our businesses, and Ray will walk through financial results, liquidity and financing and guidance. After Justin and Ray’s prepared remarks, they will be available along with other members of our executive team to answer your questions. With that, I will turn it over to Justin on Slide 4.

Justin Palfreyman: Thanks, Nikki. Good morning, and welcome, everyone. It is an honor to be speaking to you this morning, and I am pleased to report that Northwest Natural Holdings had a solid first quarter. Before getting into the business highlights, I’d like to take a moment to thank David Anderson for his over 20 years of service at Northwest Natural. Our employees, customers and communities have benefited greatly from David’s dedication. Under his leadership, our company has expanded into new areas and evolved significantly. David led initiatives that improved employee and customer safety, maintained low customer rates and extended our tradition of excellent customer service and community engagement. We wish David all the best in retirement.

He has left the company well-positioned for future growth, and importantly, with an excellent team that is focused on delivering long-term value to our shareholders. Part of David’s legacy is the company’s long-standing commitment to leadership and business integrity. I am proud to say that Northwest Natural Holdings was named one of the 2025 World’s Most Ethical Companies by Ethisphere for the fourth year running. Turning now to Q1 results. We have executed well across all of our businesses. Our financial results are on track for the year and in line with our full year guidance issued in February. We reported adjusted net income of $2.28 per share in the first quarter of 2025, compared to net income of $1.69 per share for the same period last year.

Our combined utility customer growth rate was 9.6% for the 12 months ended March 31, 2025. The main driver was the acquisition of Sea Energy, which added about 73,000 gas meters in Texas. Northwest Natural Water is contributing strong incremental meter growth as well, posting a 5.9% increase. Our financial results reflect the strength of our business plan and collective utilities. Moving to Slide 5. Our key initiatives for 2025 are underway, and we are well-positioned to meet our annual goals. Let me provide an update on each of our businesses. Turning to our Northwest Natural Gas utility. Our overall earnings per share improvement year-over-year is predominantly driven by the Northwest Natural Gas utility, which benefited from new rates that went into effect on November 01, 2024.

After careful consideration, at the December 2024, Northwest Natural filed an Oregon general rate case to recover our critical investments in gas infrastructure and expenses related to providing safe and reliable service to customers. The request included a revenue requirement increase of $59.4 million or 5.8% over current rates. The case is made up of a few key components. First, it includes an increase in average rate base of $204 million, since the last rate case. This is mainly related to investments in our critical infrastructure, including capital expenditures to ensure reliability during the coldest winter days at our Mist Storage facility. Second, the case includes a capital structure of 52% equity and 48% long-term debt, a return on equity of 10.4% and a cost of capital of approximately 7.7%.

Finally, it includes an updated depreciation study. Oregon rate cases are adjudicated over a 10-month period, so we are still in the early months of the process. Right now, we are working through reply testimony to staff and intervenors with settlement conferences scheduled in June. We look forward to continued collaboration with parties and expect new rates to be effective starting November 1. I want to emphasize that we carefully consider this rate case filing and the effect on customer bills and broader affordability concerns. It is important to note that today, our Northwest Natural Gas customers are paying less for their natural gas service than they did 20 years ago. This past winter, I’m pleased to report that once again, we were able to provide credits on our Oregon customers’ bills as a result of savings we generated from efficient gas supply management.

Over the last 20 years, we have been able to provide more than $280 million in bill credits to Northwest Natural Gas customers. Moving to our Sea Energy gas utility in Texas. We were thrilled to close the Sea Energy acquisition on January 7 and add this rapidly growing business to our portfolio. Out of the gate, Sea Energy has produced strong customer growth in line with our expectations and is hitting its meter set targets. We believe Sea Energy is on track to meet its operational and financial targets for the year. Further supporting Sea Energy, we recently signed an agreement to purchase Hughes Gas Resources from EPCOR for $60 million. Hughes is expected to have approximately $46 million of rate base at the end of 2025, and is a logical bolt-on acquisition for us in Texas.

With a similar business model as Sea Energy, Hughes has grown organically by providing infrastructure to residential and commercial developments in the high growth areas surrounding Houston. Sea Energy’s overlapping footprint with Hughes allows for operational synergies in addition to incremental future customer growth. I am excited about our continued expansion in the Texas market. We expect the transaction to close in the second quarter of this year and expect that it will be accretive in 2026. On a combined basis, Sea Energy and Hughes served approximately 80,000 customers at March 31, 2025, with an impressive contracted customer backlog of over 200,000. Turning now to Northwest Natural Water. Collectively, our water and wastewater utility customer base grew 5.9% over the last 12 months, including 3 acquisitions.

While we continue to manage a robust acquisition pipeline, we are staying focused and disciplined as we seek the right opportunities to create value. In 2025, we expect to refresh rates at multiple water utilities, including in Idaho, Washington and Oregon. These requests are primarily related to recovery of critical infrastructure investments, as we continue to find these systems need substantial improvements. During 2025, we expect to invest approximately $60 million in our water utilities to replace end of life infrastructure, improve our water and wastewater treatment facilities and support continued growth in our communities. We are enthusiastic about the long-term earnings power of Northwest Natural Water and believe they are on track for the year.

Now, a brief update on Northwest Natural Renewables. Both of our renewable natural gas projects with EDL began operations last year. Production levels have been meeting our expectations, and operations are running smoothly. These facilities and our related offtake contracts provided a full quarter of steady cash flows and earnings during the first quarter of 2025, and we expect this to continue going forward. I’d like to turn to Slide 6 and highlight a few items on the Pacific Northwest energy system. Northwest Natural’s gas system today is perhaps more essential to the region than ever, and we expect that to continue, given the heightened focus on reliability and affordability. Our system delivers about 50% more energy than any other Oregon utility, gas or electric, over the course of a year and reliably serves peak heating loads throughout the winter.

The fact that we are delivering more energy than any other utility is even more remarkable, when you consider that electric utilities in Oregon consume more natural gas for power generation than all the state’s gas utilities combined. And as you can see from this chart of IEA data, natural gas usage for power production has been increasing significantly in recent years, as they shift away from coal and bring on more intermittent renewables. With these grid dynamics as a backdrop, recent analysis shows under a variety of operating conditions, gas furnaces are not only more cost effective for customers, but they are also resulting in lower emissions over electric heat pumps for most of the people we serve. These findings are consistent with analysis recently conducted for other regions, which evaluated marginal emissions for the grid and the massive electric build out that will be required to serve gas heating loads.

This clearly highlights the value and efficiency of our gas distribution and storage infrastructure in the Northwest, and this is why we will continue to work closely with other utilities, with policymakers and with stakeholders to emphasize these important facts in support of energy policy that is focused on the most reliable and cost-effective ways to meet our climate goals. In conclusion, I am happy to report that all of our businesses are in a strong financial position, and we are well poised for future growth. With that, let me turn it over to Ray to cover the financials in more detail.

Ray Kaszuba: Thank you, Justin, and good morning, everyone. Turning to Slide 7. As you’ve seen in the earnings release and as we mentioned on our last call, we have begun providing financial data for our Sea Energy Gas Utility and Northwest Natural Water Utility segments. You can find additional information by segment in the 10-Q we expect to file later today. We reported adjusted net income of $91.8 million or $2.28 per share for the first quarter of 2025, compared to net income of $63.8 million or $1.69 per share for the same period in 2024. The increase reflected strong results across all our business segments. We saw new rates for our gas utility in Oregon, contributions from Sea Energy, higher income from Northwest Natural Water related to new rates and acquisitions and a full quarter of revenues from our Renewables business.

These items were partially offset by higher depreciation and interest expense. For our Northwest Natural Gas segment, net income increased $21.5 million or $0.42 per share. Margin increased $38.7 million, mainly due to new rates in Oregon effective November 01, 2024. O&M increased $2.2 million, reflecting higher payroll and benefit expense. Depreciation and general taxes increased $4.8 million due to continued investment in our system. Other expense increased $1.4 million, mainly driven by higher pension costs. Sea Energy provided net income of $5.5 million or $0.14 per share for the first quarter of 2025. Margin and net income results met our expectations for the quarter. Historically, roughly 30% of margin for Sea Energy is earned in the first quarter.

Our Water segment net income increased $2.4 million or $0.06 per share. The key drivers were new rates at our largest water and wastewater utility in Arizona and additional revenues from the Putman utilities after the acquisition in September 2024. Finally, moving to our other businesses, the other category included our interstate storage services and asset management services, Northwest Natural Renewables and holding company expenses. Collectively, the other businesses provided an adjusted net loss of $2.6 million, which was an increase of $1.4 million or $0.06 per share, compared to the same period last year. This was primarily due to higher interest expense at the holding company, partially offset by higher revenues from the Renewables business, as it completed its first full quarter of operations.

Turning to our growth outlook and guidance on Slide 8. The company reaffirmed annual 2025 adjusted earnings guidance today in the range of $2.75 per share and $2.95 per share. First quarter results were in line with our expectations and we remain confident in our full year guidance. As a reminder, our gas utility earnings are seasonal with the majority of revenues and earnings generated in the first and fourth quarters during the winter heating months. We expect the quarterly profile for 2025 for the consolidated company to be roughly similar to the past couple of years. We continue to expect Sea Energy and Water to each provide approximately $0.25 to $0.30 of earnings per share this year. Regarding tariffs, we have analyzed and are actively monitoring the new tariff regulations, negotiations, impact on our supply chain and the effect on our businesses.

At this time, we do not expect a material effect on 2025 financial results from tariffs. Related to organic customer growth, collectively, our utilities grew 2.2% during the first quarter on an annualized basis. For 2025, we continue to project 2% to 2.5% organic customer growth with Sea Energy expected to contribute an impressive 20% or more. I am happy to report we are on track, based on first quarter results. Turning to our capital expenditures. For 2025, consolidated capital expenditures are expected to be in the range of $450 million to $500 million, anchored by significant projects at our Northwest Natural Gas Utility, related to modernizing end of life meters, system reinforcement and gas storage upgrades. Our CapEx projections only include line of sight projects that have been specifically identified and estimated.

It doesn’t include any pending or future acquisitions, including the Hughes transaction. Longer term, we continue to expect an earnings per share growth rate of 4% to 6% compounded annually from 2025 adjusted EPS. Moving to Slide 9. Our objective remains to keep our balance sheet strong with ample liquidity. At March 31, 2025, we had liquidity of more than $600 million with significant availability on our lines of credit and cash on hand. We continue to see modest regular common equity financing needs in 2025, with equity issuances expected to be in the range of $65 million to $75 million. Even with the Hughes acquisition, we expect to be within our original financing range. In March, we completed a $325 million junior subordinated debenture issuance, successfully securing permanent financing for the Sea Energy transaction.

In 2025, we have no material debt maturities, but do expect to refinance existing debt of approximately $150 million currently at Sea Energy. In summary, we are off to a strong start in 2025. Our expectations for the full year remain in line with our guidance, and we continue to expect to maintain a strong balance sheet. Thanks for joining us this morning. With that, I’ll open it up for questions.

Operator: Thank you, Ray. We’ll now begin the question-and-answer session. [Operator Instructions] And we have the first question from Selman Akyol with Stifel. Please go ahead.

Unidentified Analyst: Hey, this is Tyler on for Selman. I wanted to ask about the pickup in 2025 on the water side. Obviously, 2025 looks pretty favorable. And I’m just wondering, as you make go into these rate cases, again for safety investments, just sort of what your outlook looks like in Arizona and your other geographies for water?

Justin Palfreyman: Well, good morning, Tyler. Thank you for the question. The water utilities, the increase in Q1, the results that you’re seeing is largely driven by rate case activity from last year, the largest of which was the Foothills rate case with new rates in effect late last year. We continue to file rate cases across our water service territories. Most of these are small on an individual basis, but you’ll see that over time, as we continue to file rate cases and recover the investments in rates that growth will continue and earnings contribution will continue from Northwest Natural Water. We anticipate about $0.25 to $0.30 earnings contribution in 2025.

Ray Kaszuba: And Tyler, just to put some additional numbers around it. That $0.25 to $0.30, that translates to about $10 million to $15 million in net income on top of the $5.5 million that you saw in Q1. And then, over the next couple of years, an EPS growth rate of 10% to 15%.

Unidentified Analyst: Got that. Appreciate the color on that. Also if I could ask on the Hughes acquisition, the backlog for that, is that sort of similar to that of Sea in that, it’s primarily residential and commercial as opposed to any like industrial customers in that?

Justin Palfreyman: Yes, that’s right. It’s primarily residential and commercial customers. There’s no transmission business within the Hughes Gas entity. So, it’s very similar to Sea Energy. And in fact, there’s a lot of geographic overlap surrounding Houston with these assets. So, it’s a very logical acquisition for Sea Energy. It adds a little more scale and growth for us in the Texas jurisdiction.

Unidentified Analyst: All right. Thank you, guys, for the time.

Ray Kaszuba: Thanks, Tyler.

Justin Palfreyman: Thanks, Tyler.

Operator: [Operator Instructions] I can confirm we’ll complete the question-and-answer session there. And I’d like to hand it back to Justin for some final closing comments.

Justin Palfreyman: Great. Well, thanks everybody for participating and listening in on the call this morning. 2025 is off to a great start. Wishing everybody a safe day today and we’ll talk to you soon.

Operator: Thank you all for dialing in for the Northwest Natural Holdings Company’s Q1 2025 earnings call. Today’s call has concluded. Thank you for your participation and you may now disconnect.