Northwest Natural Holding Company (NWN Holdings) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The combined filing reports NW Holdings and its principal operating subsidiary, Northwest Natural Gas Company (NW Natural); amounts below are NW Holdings consolidated unless otherwise stated. Financial figures are in millions of dollars, except per-share data.
Business context and results
NW Natural’s regulated gas distribution business in Oregon and southwest Washington is the principal business. NW Holdings also owns water and wastewater businesses and other investments. Results are seasonal, and interim performance may not indicate full-year results.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $123.4 | $124.6 | $408.8 | $388.2 |
| Income from operations | $16.1 | $8.3 | $92.1 | $76.0 |
| Continuing-operations net income | $2.1 | $(0.3) | $45.5 | $41.7 |
| Consolidated net income | $1.1 | $(1.0) | $44.3 | $40.5 |
| Diluted EPS | $0.04 | $(0.03) | $1.52 | $1.41 |
| NGD margin | $81.0 | $69.7 | $233.6 | $202.5 |
Financial position, cash flow and capital
- Cash flow: Six-month operating cash flow was $155.1, versus $162.7 a year earlier. Capital expenditures were $91.1; acquisitions, net of cash acquired, used $55.8. Investing cash outflow was $153.4.
- Cash and debt: At June 30, cash was $60.9, short-term debt $20.1, current maturities of long-term debt $104.4, and long-term debt $806.0. Total assets were $3,238.1 and equity $876.7.
- Financing: NW Holdings issued 1.4375 million shares for net proceeds of about $92.8. NW Natural issued $140 million of first mortgage bonds; NW Natural Water entered a $35 million, two-year LIBOR-based term loan. NW Holdings’ consolidated indebtedness-to-capitalization ratio was 51.5%, within its 70% covenant limit.
- Dividends: Q2 dividends were $0.475 per share. The board declared another $0.475 quarterly dividend, indicating an annual rate of $1.90 per share.
Changes versus prior year and management commentary
- Q2 revenue was slightly lower, but operating income and continuing earnings improved. Six-month revenue increased about 5% and continuing net income about 9% year over year.
- NGD margin increased $11.2 in Q2 and $31.2 for the first half. Drivers included Oregon rate increases, customer growth, and North Mist storage service beginning in May. First-half margin also benefited from colder weather; Q2 was warmer than the comparable period.
- Q2 included a $4.4 reversal of an estimated environmental cost-sharing reserve after a remediation project was delayed to 2020. Pension costs, higher interest expense and increased depreciation partly offset margin gains. The March 2019 Oregon rate-case order also resulted in pension-related charges, including a $10.5 regulatory disallowance.
- North Mist began service under a sales-type lease; $146.0 of plant was derecognized on commencement, with the investment presented as lease assets. The project generated $2.1 of lease revenue in the first half.
- NW Holdings completed the $55.2 Sunriver water and wastewater acquisition and reported preliminary goodwill of $40.2. Management described this as part of its water-sector growth strategy.
Outlook, regulation and risks
- Capital plans: Estimated 2019 capital expenditures are $230–$270, including $225–$265 for NGD. Management estimated NGD investment of $820–$910 over 2019–2023 and water-business investment of $30–$40 over that period.
- Rates: A Washington general rate-case settlement, if approved by the WUTC, would increase annual base revenues by about $5.14 beginning November 1, 2019, with customer tax-benefit credits and environmental-cost provisions. Proposed Washington decoupling remained subject to regulatory review.
- Environmental exposure: NW Natural reported estimated environmental-site liabilities of $120.6. The Portland Harbor sediment estimate recorded by the company was $48.8, at the low end of a $48.8–$350 cost range for that project; allocation among numerous potentially responsible parties remains unresolved. The company noted that high-end exposure for some other matters cannot be reasonably estimated. Oregon recovery mechanisms apply to eligible costs, subject to regulatory review and earnings tests.
- Gill Ranch sale: The proposed sale has a $25.0 initial cash price, subject to adjustment, plus up to $26.5 of potential contingent payments. CPUC approval remained pending; a settlement participant sought to withdraw in July 2019, and the company continued to target closing by year-end. PG&E’s bankruptcy was an additional uncertainty.
- Other risks: Results depend on regulation and timely cost recovery, weather, customer growth and usage, commodity and interest rates, pension costs, environmental proceedings, and access to capital. NW Natural’s Moody’s outlook was revised to stable in May, while its secured and unsecured ratings were revised to A2 and Baa1, respectively.
Important facts for investors to verify
- Whether the Washington rate-case settlements and requested decoupling mechanism receive WUTC approval on the proposed terms and schedule.
- Progress, final cost allocation and recoverability of Portland Harbor and other environmental remediation obligations.
- Whether Gill Ranch receives CPUC approval and closes, and the value and timing of any contingent sale proceeds.
- Execution of the stated NGD and water capital plans, including funding needs, debt maturities and compliance with lending covenants.
- How much of reported earnings growth is recurring versus attributable to rate changes, regulatory pension and tax accounting, weather, and the environmental reserve reversal.