Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Northwest Natural Holdings Announces Agreement to Acquire Si Energy. All lines have been placed on mute during the presentation portion of the call, with an opportunity for question and answer at the end. If you would like to ask a question, please press star, followed by one on your telephone keypad. I would now like to transfer the call over to our host, Nikki Sparley, Head of Investor Relations, to begin.
Thank you. Good morning and welcome to our call. A presentation for today's call is available on our investor relations website at ir.northwestnaturalholdings.com, and following this call, a recording will also be available on our website. Turning to slide two. 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. 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 three. Speaking this morning are David Anderson, Chief Executive Officer, Justin Palfreyman, President, and Ray Kaszuba, Senior Vice President and CFO.
David, Justin, and Ray 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 on slide four.
Thanks, Nikki, and good morning, everybody. For those of you that have been following Northwest Natural Holdings for a while, you've heard me focus on our strategy for growth and diversification to drive shareholder value over the long term. As we screened growth opportunities and assessed how to deploy capital, we've been quite measured and disciplined with our approach, seeking the right opportunities. We believe we found a great one. That's why I'm thrilled to announce today we've signed an agreement to add Si Energy, a natural gas utility in Texas, to our portfolio. We're very excited about this acquisition and the opportunities it creates. The transaction meets all of our investment criteria. It's a regulated utility in a rapidly expanding region with constructive regulation and a long runway of growth opportunities.
We have hands-on experience with the dynamics of this region, as we already operate a number of water and wastewater utilities in Texas. I can attest from my experience that the housing and commercial growth is substantial. We believe Si Energy's double-digit growth will continue, and the acquisition strengthens our platform by further scaling and diversifying our business. With the addition of Si Energy, we're able to increase our overall utility rate-based growth, and importantly, this acquisition further supports our long-term earnings per share outlook. With that, let me turn it over to Justin to provide additional details. Thanks, David. Moving to slide five. This is a compelling acquisition for us. Importantly, it further expands our presence in Texas and provides a robust pipeline of opportunities in a rapidly expanding region of the country that has a constructive policy and regulatory environment.
Si Energy is one of the fastest-growing natural gas distribution utilities in the nation, serving approximately 70,000 residential and commercial customers in the Texas Triangle, which includes the greater metropolitan areas of Houston, Dallas-Fort Worth, and Austin. The company has experienced impressive organic growth by partnering with developers and homebuilders in the region and has established a strong reputation for building out its gas infrastructure reliably and on time. This has led to Si Energy becoming the preferred gas utility by many housing developers in Texas. While the company serves approximately 70,000 customers now, its backlog of signed agreements with developers representing 180,000 additional customers positions the company well for future growth. To give you a sense of the growth, Si Energy has achieved 22% annual customer growth over the last five years and rate-based growth of 26% over that same time period.
We foresee up to 20% annual customer growth at Si Energy over the next five years. As a result, capital investment opportunities are estimated to be between $450 million-$650 million in that period. With Si Energy, we believe our utility's combined annual rate-based growth target will increase from 5%-7% to 6%-8% through 2028. Si Energy also owns and operates a few strategic transmission pipelines, which are contracted with creditworthy parties under long-term take-or-pay contracts. We believe this could be another avenue for growth in the future. With that, let's move to slide six and our strategic rationale. Our strategy is to provide our investors with stable, growing returns. We strive to have excellent, efficient operations and add growth opportunities that fit our regulated risk profile. Si Energy checks all those boxes.
It is a natural gas utility with near and long-term growth opportunities and established, efficient operations. It has delivered double-digit customer and rate-based growth historically, underpinned by the fastest-growing regions it serves and supported by a constructive return on equity and efficient regulatory mechanisms. It isn't often that we see a natural gas utility of the right scale and location come to market. It's additive to our existing natural gas and water utility platforms but doesn't stretch our balance sheet. In addition to incremental growth, it also provides greater diversification of earnings and cash flows. We appreciate the balanced state energy policy and attractive regulatory environment with timely cost recovery mechanisms, which I'll discuss more in a minute. Si Energy's regulated business matches our core competencies. Importantly, we believe their values align with ours. The Si Energy team has demonstrated that they're innovative and strive for operational excellence.
Their system is made with modern materials, and the company maintains an impressive safety record. Like us, the company is deeply committed to customers, employees, and the communities it serves. This is an excellent management team and employee group, and we are excited for them to join our team. Finally, you've seen us take a disciplined approach to acquiring more than 30 water and wastewater utilities to create one of the top 20 largest investor-owned water businesses in the country. We've been successful at finding utilities in high-growth areas, and we're executing on that proven playbook here. Given Si Energy's geographic alignment with our water business in Texas, we believe there may be some unique opportunities for growth-related synergies between the gas LDC platform and our water and wastewater utility platform.
We will look to leverage strong existing relationships with developers and homebuilders to enhance growth at both Si Energy and Blue Topaz, our Northwest Natural Water subsidiary in Texas. Turning to slide seven. Because location is important, I wanted to underscore a few things about this region. Houston, Dallas, and Austin are among the top 10 fastest-growing metro areas with the most annual new home starts in the United States. Over the last 10 years, we've seen hundreds of corporations relocate to this region, providing good jobs and strong communities. GDP in the territories in which Si Energy operates is growing 1.4 times faster than the U.S. as a whole. The population growth is 3.3 times higher than the U.S., and the employment growth is 2.3 times faster than the rest of the country. Slide eight further illustrates the dynamics of this region.
Of the top 10 fastest-growing metro areas in the United States, Si Energy operates in three of them, and Si Energy is operating in the top two cities of Dallas and Houston. Let's move to slide nine and a few comments on the regulatory environment. Si Energy is regulated by the Railroad Commission of Texas. Transparent and supportive jurisdictions are able to provide constructive rate settlements and support the rate-based growth that is critical to the safe, reliable delivery of affordable energy to customers. For Texas, there are several beneficial aspects that lay the foundation for stable returns. First, general rate cases allow for known and measurable adjustments to the historical test years, giving the utility the opportunity to more accurately reflect costs and rates. An average natural gas utility in Texas earns a return on equity of 9.6%, but that return can be higher assisted by growth.
Regulated capital structures are also strong in Texas. The median allowed equity layer is 59.7%. In addition, Texas has a variety of cost recovery mechanisms that support stability of earnings and timely recovery of deployed capital. Specifically, the Gas Reliability Infrastructure Program, or GRIP, can support improved capital efficiency with a shorter cycle between capital investment and cash generation. Under the GRIP, rates are updated annually for investments, with the utility filing a full rate case once every five years. We feel the regulatory environment supports fair and timely recovery on prudent investments. With that, let me turn it over to Ray to cover the transaction and financing details.
Thank you, Justin, and good morning, everyone. Moving to slide 10 and the transaction financing details. We're acquiring Si Energy for an estimated cash payment of $273 million and assumed debt of $152 million. Concurrent with signing the purchase agreement, we obtained a commitment for an underwritten term loan from JP Morgan to fund the initial purchase. Our permanent financing plan currently is to issue junior subordinated notes next year. We expect the junior subordinated notes to receive 50% equity treatment from the rating agencies. At this time, we do not expect to issue common equity to finance this transaction. We expect to close the transaction in the first quarter of 2025. There are customary closing conditions, including a waiting period under the Hart-Scott-Rodino Antitrust Improvements Act. No regulatory approval is needed from the Railroad Commission of Texas to close the transaction.
Moving to slide 11 and a discussion of our financing needs in light of the acquisition. We have always been disciplined in our approach to deploying capital, and our focus on maintaining our strong credit ratings and a solid balance sheet. That's also the approach we applied to financing this acquisition. Setting aside the Si Energy transaction for a moment, we see modest regular common equity and debt financing needs in 2025, with equity issuances at a lower level next year compared to 2024. We're done issuing equity through the ATM in 2024. For context, we issued $90.4 million through the ATM program this year. Our plan is to add junior subordinated notes to our financing portfolio as part of this transaction, with the goal of maintaining a healthy investment-grade credit rating. This would allow us to expand our financing avenues while meeting our financial objectives.
We'll continue to review our options over the coming months, but our plan is to issue permanent financing for this acquisition in the first half of 2025. Now for a few comments on earnings. We expect the acquisition to be modestly dilutive in 2025, but further support our existing 4%-6% EPS growth rate target through 2027. We expect earnings from Si Energy to be a key piece of our long-term earnings growth beyond 2027. As is our practice, our plan is to provide more details regarding our 2025 guidance and our fourth quarter 2024 earnings call, which we expect to host in late February. With that, I'll turn the call over to David for closing remarks.
Thanks, Ray. I'll wrap up on the call on slide 12. We've had a strong year of execution and are well positioned to continue delivering on our financial and strategic objectives. I'm proud of the accomplishments across all three of our growing businesses. To summarize our earnings call from last week, we've reached constructive completion of the Oregon general rate case. This was critical. Now we're on track to earn a strong return on our invested capital. Second, the water and wastewater utilities continue to experience robust growth. Importantly for water, we've worked with regulators to execute multiple rate cases this year, allowing us to recover crucial safety investments and provide a strong foundation for earnings going forward. I'm excited that Northwest Natural Renewables' first project is up and running, generating strong revenues and cash flows that support our balance sheet and our overall portfolio.
Finally, the Si Energy acquisition adds incremental growth, scale, and further diversification. I know this platform is the right fit for our company and will provide ample future opportunities for growth and investment. While many things have changed, our objective remains the same: to provide investors with a stable return and growth opportunities. Our recent accomplishments position us to continue doing just that. Thanks for joining us this morning. With that, I'll open it up for questions.
Thank you, David. If you would like to register a question, please press star followed by 1 on your telephone keypad, ensuring your line is unmuted locally. If you'd like to withdraw your question at any time, you can do so by pressing star followed by 2. To join the queue, please press star followed by 1. We will pause here briefly to compile a Q&A roster. Your first question comes from the line of Selman Akyol of Stifel. Your line is now open. Please go ahead.
Thank you. Good morning. Congratulations. Let me ask you, just start off with how much of the management team is coming with this and the connections into the developers?
Yeah. Good morning, Selman. This is David. The full management team will be coming.
Good deal. And then you also talked about the GRIP, and I'm just curious, how long do you think you would take for you to get that in place?
Justin, do you want to take that one?
Yeah. Thanks, Selman. The GRIP is something that we will evaluate at the next rate proceeding. So we'll look at that in the next couple of years, depending on the timing of the next rate filing. But it's an attractive feature in Texas in terms of getting timely recovery on investment. So one of the reasons that we highlighted it in our script.
Got it. And then just when was their last rate case?
The last rate case was 2023.
Okay. And then just to be clear, is the HSR the only thing you need in terms of hurdles for approvals on this?
Yeah, that's right. We have a customary HSR filing and then just notifications before we can close this transaction. So we expect the closing to happen in Q1.
Got it. And then I'm sorry, just one more. You talked about some transmission pipes, and I'm just curious if you can maybe elaborate on some of your growth plans for those?
Yeah. I want to emphasize this is a small part of their existing business, like 1% of revenues, roughly. So it's a fairly small part, but there are large-scale commercial and industrial customers that do have demand and interest in transmission pipes. So they have a contract with one of the regional transit authorities, for example, and one of the larger corporate customers down in their region. So it's an area that we could see future opportunities for, for data centers or other types of industrial demand.
Got it. Thank you very much.
Thanks, Selman.
Thank you. The next question comes from the line of Chris Ellinghaus of Siebert Williams Shank. Your line is now open. Please go ahead.
Hey, everybody.
Morning, Chris.
How are you? David, just trying to read through the last rate case for the company and sort of looking at the rate base growth subsequent to that case. For one, you're expecting to increase the CapEx, it seems, over the next five years from what the apparent last couple of years is. Is that right?
Due to this acquisition? Correct. Or are you talking for the utility in general, Chris?
So I also want to understand. So you don't have the GRIP in place, but do you have a five-year stay-out from that 2023 rate case, or can you file prior at any point at this point?
Yeah. We do not have a stay-out from the last rate case. So we have the flexibility to file when it is needed, and we'll be evaluating that after we close. Their last rate case, just so you know, Chris, was a black box settlement. So there's probably not a tremendous amount of information there that's available. But yeah, there's no stay-out here.
Okay. So there was a big rate increase there at that point because they hadn't been in for almost five years. So there should be theoretically a pretty sizable step up in 2024 earnings off of that case. But it still looks like, based on what you expect year-end rate base to be this year, that they'll be under-earning pretty substantially. So is it your expectation that you would probably file in 2025?
Yeah, Chris, we're not in a position to give guidance on that, nor do we typically give guidance on our rate case timing, but it's something that we will evaluate and have been evaluating as part of the diligence process.
Okay. Also, Ray, you mentioned, and I'm not sure if I quite caught this correctly, but you said something about Si being a material portion of earnings growth post-2027. Was that what you meant for us to take away from that?
Yeah. I mean, as I think you're aware, Chris, our EPS growth rate target of 4%-6% is through 2027. Si Energy further supports that through 2027, but after 2027 as well, we expect it to be a material portion of our growth going forward. That's what I was getting at.
Gotcha. Gotcha. As far as the financing goes, are you anticipating having a cap structure that's something akin to that median that you quoted us?
That's right. You're saying for Si Energy itself, from a financing perspective at the Si Energy level, yeah, we would expect to be closer to those averages that we mentioned for Texas.
Okay. That makes sense. Okay. Thanks. I appreciate the caller.
Thank you, Chris.
Thank you. As a reminder, if you'd like to ask a question, please press star followed by one on your telephone keypad. As there are no additional questions waiting at this time, I'd like to hand the conference call back over to David Anderson for closing remarks.
Thank you, Candace. Thank you, everybody, for joining us this morning. As you work through this and if you have additional questions, please reach out to Nikki. She'll be available. And also, Ray and the rest of the management team will be available if we need to do that too. Thanks, everybody.