Northwest Natural Holding Company — Q2 2020 Form 10-Q
Business context and period. This unaudited combined filing covers Northwest Natural Holding Company (NW Holdings) and its principal subsidiary, Northwest Natural Gas Company (NW Natural), for the quarter and six months ended June 30, 2020. NW Natural’s regulated gas distribution business is the core operation; NW Holdings also has water and wastewater businesses and other investments. Gas operations are seasonal, so interim results are not necessarily indicative of full-year results.
Key financial results
Amounts below are NW Holdings consolidated unless otherwise noted; dollar amounts are in millions.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $135.0 | $123.4 | $420.1 | $408.8 |
| Income from operations | $8.9 | $16.1 | $85.4 | $92.1 |
| Net income (loss) from continuing operations | $(5.1) | $2.1 | $43.1 | $45.5 |
| Net income (loss), including discontinued operations | $(4.9) | $1.1 | $42.6 | $44.3 |
| Diluted EPS | $(0.16) | $0.04 | $1.40 | $1.52 |
| NGD margin | $79.7 | $81.0 | $233.8 | $233.6 |
- For the first six months, operating cash flow was $159.5 million, investing cash outflow was $160.4 million, and financing cash inflow was $128.3 million. Capital expenditures were $122.3 million.
- At June 30, NW Holdings had $137.1 million in cash, $233.0 million in short-term debt, $35.2 million in current maturities of long-term debt, and $918.9 million in long-term debt. NW Natural standalone had $120.3 million in cash, $153.0 million in short-term debt, and $917.0 million in long-term debt.
- NW Holdings’ equity was $884.0 million; total assets were $3.64 billion. The NW Natural 364-day term loan covenant limit is 70% debt-to-capitalization; the reported ratio was 56.0% at quarter-end.
- The quarterly dividend was $0.4775 per share; the July declaration maintained an indicated annual rate of $1.91 per share.
Material changes versus comparable periods
- Q2 consolidated net loss was $4.9 million versus net income of $1.1 million a year earlier. NW Natural’s standalone net loss was $4.7 million versus income of $3.1 million.
- Q2 NGD margin declined $1.3 million. Higher environmental remediation expense (including a prior-year reserve reversal), suspended late fees, and lower miscellaneous revenue offset customer growth, Washington rate increases, and North Mist storage revenue.
- Six-month net income fell $1.7 million, while NGD margin was nearly flat. Gas deliveries declined 5%, primarily reflecting weather 15% warmer than average versus 2% warmer in the prior-year period. New rates, customer growth and North Mist storage revenue largely offset lower volumes and other margin headwinds.
- Q2 operating and maintenance expense rose $4.5 million and depreciation and amortization rose $3.4 million. Interest expense increased $2.1 million, reflecting higher debt and pandemic-related financing.
- Year-to-date results also compare against 2019 pension-related items: $12.5 million of pension expense and a $10.5 million pension disallowance recognized in 2019 did not recur. Higher current-period operating costs, depreciation and interest partly offset those prior-year comparisons.
Outlook, commentary, risks and unusual items
- COVID-19: The companies continued essential utility service, stopped late fees and disconnections for nonpayment, and increased bad-debt estimates. The allowance for uncollectible accounts rose to $1.6 million from $0.7 million at year-end 2019; management estimated approximately $1.0 million of lower revenue from suspended late fees in the first half. About $4 million of identified COVID-related costs and lost late-fee revenue could be eligible for future rate recovery, but recovery was not yet considered probable.
- Liquidity actions: NW Natural borrowed $150 million under a 364-day term loan due March 22, 2021, issued $150 million of 3.60% first mortgage bonds due 2050, and retired $75 million of 5.37% bonds. Management stated liquidity was ample, supported by cash, operating cash flows and available credit facilities.
- Rate case: A comprehensive Oregon rate-case settlement was filed July 31, 2020, after quarter-end, proposing a $45.8 million annual revenue requirement increase and rates effective November 1, 2020, subject to OPUC approval. It includes $3.15 million for Oregon Corporate Activity Tax recovery and other adjustments.
- Capital investment: 2020 capital expenditures were forecast at $240–$280 million, including $230–$270 million for gas distribution. The NGD segment expected $950 million–$1.1 billion of investment over 2020–2024; water subsidiaries expected $30–$40 million over that period.
- Environmental exposure: NW Natural reported estimated environmental liabilities of $125.4 million. Portland Harbor and other site estimates remain uncertain; certain liabilities are recorded at the low end of ranges where the high end cannot be reasonably estimated. Regulatory recovery mechanisms cover eligible costs but may be subject to prudence and earnings reviews.
- Other transactions and policy: Two significant water acquisitions closed in 2020 for preliminary consideration of $38.1 million, including $19.2 million of goodwill. NW Holdings completed the sale of its TWH interest on August 6, 2020, for $14 million, with a reported after-tax book gain below $0.5 million. The proposed Gill Ranch Storage sale remained pending at quarter-end. Oregon’s greenhouse-gas executive order and future implementing rules could affect the gas business; scope and timing were uncertain.
- Management warned that prolonged pandemic effects could affect commercial and industrial demand, customer growth, collections, costs, capital access and pension assets. Actual effects depended on the pandemic’s duration, economic conditions and regulatory recovery.
Important facts for investors to verify
- Whether the OPUC approved the Oregon rate-case settlement and whether new rates took effect as expected.
- Whether COVID-related costs and foregone revenues qualify for recovery, and how customer arrears and bad debt develop.
- Liquidity and refinancing plans for the $150 million term loan due March 2021, as well as debt covenant and credit-rating headroom.
- Environmental liability estimates, recovery approvals, and developments in Portland Harbor and Front Street remediation.
- Completion and final proceeds of the Gill Ranch sale, including any contingent payments, and realization of the TWH sale proceeds.
- Actual capital spending, customer and meter growth, gas volumes, and the effects of weather and decarbonization policy on future margins.