Northwest Natural Holding Company — Q1 2019 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2019; financial statements are unaudited. NW Holdings is the parent of Northwest Natural Gas Company (NW Natural), whose regulated natural gas distribution business is the principal source of consolidated revenue and earnings. Results are seasonal and the first quarter is not necessarily indicative of full-year performance. NW Holdings and NW Natural report separately; figures below identify NW Holdings unless otherwise stated.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenue | $285.3 million | $263.6 million |
| Income from operations | $76.0 million | $67.8 million |
| Income from continuing operations | $43.4 million | $42.0 million |
| Net income, including discontinued operations | $43.2 million | $41.5 million |
| Diluted EPS | $1.49 | $1.44 |
| Cash provided by operating activities | $104.8 million | $104.5 million |
| Capital expenditures | $48.8 million | $57.3 million |
| Cash and cash equivalents at March 31 | $12.8 million | $11.2 million |
Natural gas distribution (NGD) margin, a company-defined operating measure, was $152.7 million, up $19.9 million, or about 15%. NGD volumes sold and delivered rose 10%; customer meters grew 1.7% to 754,447. Weather was 9% colder than the 25-year average in Q1 2019, compared with 7% warmer than average in Q1 2018.
At March 31, NW Holdings had $176.4 million of short-term debt, $104.2 million of current long-term debt maturities and $632.5 million of long-term debt. Total debt on these reported carrying-value categories was approximately $913.0 million. The $100 million NW Holdings and $300 million NW Natural revolving credit facilities were undrawn. NW Holdings’ current assets were $272.1 million and current liabilities $526.1 million; cash alone was modest relative to current obligations. The company stated that it believed available liquidity was sufficient for anticipated near-term needs.
Material changes versus the prior comparable period
- Revenue increased $21.7 million, while operating income rose $8.3 million. NGD margin benefited from new Oregon rates, customer growth and colder weather; much of the reported revenue change is affected by gas costs and regulatory mechanisms.
- Net income increased $1.7 million and diluted EPS rose $0.05. The effective tax rate on continuing operations fell to 16.7% from 27.1%, principally because of regulatory amortization of deferred Tax Cuts and Jobs Act (TCJA) benefits under the March 2019 Oregon rate-case order.
- Other expense, net, worsened to $13.7 million from $0.8 million, substantially reflecting pension-account recovery and disallowance items. Operations and maintenance expense rose $12.0 million, including pension-related charges and higher payroll and benefits.
- Operating cash flow was essentially flat. Lower capital spending reduced investing cash use, while financing cash use increased, principally due to greater repayment of short-term debt than in the prior-year quarter.
Outlook, commentary, risks and unusual items
- Capital plans: 2019 capital expenditures are estimated at $230–$270 million, including $225–$265 million for NGD. Planned NGD investment for 2019–2023 is $820–$910 million; water-business investment over that period is estimated at $30–$40 million. No full-year earnings guidance is provided in the supplied filing text.
- Rates and regulation: The Oregon order resolved open items in the 2018 general rate case and directs customer credits, recovery of the remaining pension balancing account over ten years, and a $1.4 million revenue-requirement increase effective April 1, 2019. NW Natural’s Washington rate case seeks new rates expected to take effect December 1, 2019, subject to regulatory review; requested terms include a 10.3% ROE and a decoupling mechanism.
- Pension item: The Oregon order led to $12.5 million of previously deferred pension expenses being recognized with related regulatory and tax offsets, and a separate $10.5 million pension regulatory disallowance. These items materially affected expenses, other income and taxes in the quarter.
- Environmental exposure: NW Natural reported estimated environmental liabilities of $124.5 million. Oregon recovery mechanisms cover 96.68% of eligible remediation costs allocable to Oregon customers, subject to regulatory review and an earnings test. For Portland Harbor sediment cleanup, the estimated range is $49 million to $350 million and the recorded liability is at the low end; some other environmental exposures have no reasonably estimable high end.
- Gill Ranch sale: NW Holdings expects to sell its Gill Ranch gas-storage subsidiary in 2019, subject to California Public Utilities Commission approval and other conditions. Consideration includes an initial $25 million cash price, subject to adjustment, plus potential performance-based payments of up to $26.5 million. PG&E’s bankruptcy is being monitored; management said it did not then anticipate an effect on the sale but could not predict the bankruptcy’s course or impact.
- Dividend and financing: The board declared a quarterly dividend of $0.475 per share, an indicated annual rate of $1.90. NW Natural’s short-term debt was $176.3 million, versus $50.0 million a year earlier; its commercial paper carried a 2.7% weighted-average rate at quarter end. Its Moody’s outlook was negative, while S&P’s outlook was stable.
- Other: Adoption of lease accounting standards resulted in recognition of $6.2 million of NW Holdings operating lease liabilities at quarter end. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Progress and final regulatory outcomes in the Washington rate case, including requested tax-benefit treatment and decoupling.
- Whether the Gill Ranch sale receives approval and closes, and whether the contingent performance payments are achieved.
- Environmental reserve adequacy, remediation-cost estimates, customer recovery approvals and potential litigation outcomes, particularly for Portland Harbor.
- Funding and timing of the substantial 2019–2023 capital program, debt maturities and short-term borrowing needs.
- How the Oregon pension-account order, customer credits and tax amortization affect earnings and cash flows in subsequent periods.