Northwest Natural Holding Company — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; this is an annual filing, not a standalone fourth-quarter report. The combined filing covers Northwest Natural Holding Company (NW Holdings) and its wholly owned subsidiary Northwest Natural Gas Company (NW Natural). NW Natural’s regulated gas utility is the principal business; NW Holdings also owns water and wastewater operations and pursues renewable natural gas activities.
Financial results and condition
| Metric | FY2023 | FY2022 | Change / context |
|---|---|---|---|
| NW Holdings revenue | $1,197.5 million | $1,037.4 million | Up $160.1 million |
| NW Holdings operating income | $184.9 million | $167.5 million | Up $17.5 million |
| NW Holdings net income | $93.9 million | $86.3 million | Up $7.6 million |
| Diluted EPS | $2.59 | $2.54 | Up $0.05; share issuance tempered per-share growth |
| NW Natural net income | $104.7 million | $91.6 million | Up $13.2 million |
| NGD margin | $575.0 million | $505.9 million | Up $69.1 million |
| Cash from operating activities | NW Holdings: $279.9 million | $147.7 million | Up $132.3 million |
| Capital expenditures | NW Holdings: $327.3 million | $338.6 million | Utility-system investment |
| Cash and cash equivalents at year-end | NW Holdings: $32.9 million | $29.3 million | NW Natural: $19.8 million versus $13.0 million |
NW Holdings’ operating margin, calculated as operating income divided by revenue, was approximately 15.4% in 2023 versus 16.2% in 2022. This is a simple calculation from reported figures, not a company-reported margin measure. The company’s specified NGD margin is a non-GAAP segment measure: gas distribution revenues less associated gas costs, environmental remediation expense and revenue taxes.
At year-end, NW Holdings reported $1.586 billion of gross long-term debt, including current maturities, and $89.8 million of short-term debt, compared with $1.346 billion and $258.2 million, respectively, in 2022. Common equity was 44.9% of capital excluding short-term debt, down from 46.8%. The company reported access to committed credit facilities and expected sufficient near-term liquidity. NW Natural’s $400 million revolving credit facility had no borrowings outstanding at year-end; NW Holdings had $73 million outstanding on its credit agreement.
Material changes and drivers
- Gas distribution margin increased mainly due to new Oregon and Washington rates, customer growth, and lower actual gas prices than estimated in the prior-year PGA. Some deferred-balance amortization also increased margin but was largely offset in expenses and interest.
- Gas deliveries fell 4% to 1.207 billion therms, with 2023 weather 8% warmer than average versus 1% colder than average in 2022. Most Oregon residential and small-commercial customers have weather-normalization and decoupling mechanisms; Washington customers do not have the same weather protection.
- Operating and maintenance expense rose $49.1 million at NW Holdings, including higher payroll, contract labor, IT costs, cloud-computing amortization and costs from acquired water businesses. Consolidated interest expense rose $23.3 million, primarily reflecting higher debt balances and borrowing costs.
- Operating cash flow increased substantially, driven chiefly by working-capital changes, including lower receivables and deferred gas costs. Investing cash outflow declined to $335.5 million, partly due to lower acquisition spending. Financing cash inflow fell to $64.2 million, reflecting lower equity proceeds and debt repayment.
- NW Holdings issued 1.65 million shares under its ATM program for $66.4 million net of fees. Shares outstanding increased to 37.63 million from 35.52 million. The annual dividend paid was $1.9425 per share; the board later declared an indicated annual rate of $1.95.
Outlook, risks and notable items
- NW Natural filed an Oregon rate case on December 29, 2023, requesting a $154.9 million annual revenue-requirement increase, a 10.1% ROE and a $2.14 billion average rate base. New rates were expected November 1, 2024, subject to regulatory review; the request is not an approved outcome.
- Management estimates combined incremental capital needs of $500 million to $575 million for 2024–2026. NW Natural forecasts capital expenditures of $350 million to $400 million in 2024 and $1.4 billion to $1.6 billion over 2024–2028. NW Natural Water expects approximately $40 million of 2024 maintenance capital expenditures.
- NW Natural’s Washington Climate Commitment Act (CCA) compliance costs are being recovered through an approved mechanism. The filing estimates these costs currently increase non-low-income residential bills by approximately 12% to 38%; future costs are uncertain. Oregon’s prior Climate Protection Program rules were invalidated in December 2023, and the state plans a new rulemaking.
- Environmental liabilities at NW Natural were estimated at $121.6 million at year-end, with related regulatory assets of $128.6 million after insurance proceeds and other adjustments. Portland Harbor remediation estimates include a $55 million recorded liability for the Gasco sediment cleanup, at the low end of a $55 million to $350 million range; other potential exposures remain difficult to estimate. Recovery depends on regulatory review and applicable earnings tests.
- Unregulated RNG projects carry construction, commissioning, production and contract-volume risks. Two Ohio facilities were still testing and commissioning with delays; NW Natural Renewables expects to fund approximately $25 million per facility upon commercial operation. Fixed-volume sales commitments could create exposure if production falls short.
- NW Natural’s S&P outlook was revised to negative in October 2023; ratings were A-1 commercial paper, AA- secured debt and A+ corporate credit. The filing identifies regulatory outcomes, decarbonization policy and building codes, customer growth, weather, gas supply and dependence on a single interstate pipeline as key risks.
- NW Natural’s qualified pension plan was underfunded by $109.2 million at year-end; the company expected to contribute approximately $20.6 million in 2024. The filing also reported a $115.5 million unrealized loss on gas financial swaps, generally subject to regulatory deferral and customer recovery, subject to prudence review.
Management reported effective internal control over financial reporting, and the independent auditor issued unqualified opinions on NW Holdings’ financial statements and internal control. The auditor identified regulatory accounting as a critical audit matter, particularly the assessment of recovery of regulatory assets and settlement of regulatory liabilities.
Important facts for investors to verify
- Track the Oregon rate-case decision, timing and final authorized rates, capital structure and return—not only the company’s requested increase.
- Assess whether planned utility and water investment can be financed while preserving credit quality, liquidity and dividend capacity; monitor leverage and any further equity issuance.
- Review actual CCA compliance costs, customer bill impacts, allowance proceeds and recovery, as well as the implications of new Oregon emissions rules and building-code changes.
- Follow Portland Harbor and other environmental remediation estimates, regulatory recovery approvals, insurance recoveries and any changes to the currently recorded liabilities.
- Monitor RNG facility commissioning, production and contract performance, particularly the potential mismatch between produced volumes and fixed-volume sales commitments.
- Compare future earnings and cash flow with 2023’s results, recognizing that operating cash flow benefited materially from working-capital movements and that gas volumes declined in warmer weather.