Buried within Northwest Natural Holding Company's <a href="https://seekingalpha.com/symbol/NWN" alt="NWN">NWN</a> recent earnings call transcript lies a detail that could send shivers down the spines of even the most seasoned utility investors. While the headline focuses on regulatory lag and inflationary pressures impacting the company's 2024 outlook, a seemingly minor "technical issue" with their renewable natural gas (RNG) facilities might be masking a much larger gamble.

Northwest Natural, a stalwart in the Pacific Northwest energy landscape, has boldly ventured into the burgeoning RNG sector, partnering with EDL to construct two facilities converting landfill waste gases into RNG. The promise? Long-term, fixed-price off-take agreements with investment-grade counterparties, creating a predictable and lucrative revenue stream.

However, the reality has proven far more turbulent. Construction completed in 2023, yet a persistent "technical issue" with the conditioning equipment has stalled full commissioning. While raw gas production hums along at expected levels, the inability to process it into usable RNG has delayed both earnings and cash flows. This is no small hiccup; it's a full-year delay with potentially significant ramifications.

CEO David Anderson, while expressing disappointment, assures investors the facilities will be online later in 2024, with full earnings kicking in by 2025. But what if this "technical issue" isn't a temporary snag? What if it signals a deeper problem, potentially inherent to the chosen technology or the specifics of these projects?

Here's the hidden gamble. Northwest Natural has committed $25 million per facility, contingent upon achieving full commercial operations. This means their capital is tied up, earning nothing, while the clock ticks. Each passing month without resolution erodes the projected returns and raises questions about the viability of the entire venture.

Let's crunch some numbers. Assuming a conservative 8% return on capital, each month of delay costs Northwest Natural roughly $167,000 per facility, or $334,000 total. Extrapolating this over a full year, the cost of the delay balloons to over $4 million, directly impacting the company's bottom line.

Furthermore, this "technical issue" could indicate broader risks associated with RNG development. Landfill gas composition can vary significantly, potentially impacting the efficiency and effectiveness of the conditioning process. Untested technology, unforeseen operational challenges, and even regulatory hurdles can all contribute to delays and cost overruns.

This isn't to say Northwest Natural's RNG venture is doomed. The potential for this burgeoning sector remains undeniable. However, the "technical issue" casts a long shadow, highlighting the inherent risks associated with emerging technologies and infrastructure projects.

Investors should be wary of dismissing this detail as a mere footnote. It's a flashing warning light, demanding greater scrutiny of Northwest Natural's RNG strategy and their ability to navigate the uncertainties of this promising, yet unproven, sector. Will this gamble pay off or leave investors with a sour aftertaste? Only time, and the resolution of this "technical issue," will tell.

Hypothesis:

If the "technical issue" is readily resolved and both facilities reach full commercial operation by Q3 2024, the impact on 2024 earnings would be minimal.

If the delay persists beyond Q3 2024, the financial impact will become increasingly significant, potentially requiring a downward revision of the company's long-term earnings growth outlook.

If the "technical issue" proves to be a symptom of a larger problem with the chosen technology or the specifics of these projects, Northwest Natural could face substantial losses and a strategic reassessment of their RNG ambitions.

Earnings Performance

The following chart shows the reported earnings per share for Northwest Natural Holding Company over the past 8 quarters. The gray bar represents the current 2024 EPS guidance range.

"Fun Fact: Did you know Northwest Natural is one of the oldest companies in the United States? Founded in 1859, they predate the Civil War and have been providing energy to the Pacific Northwest for over 165 years!"