Northwest Natural Holding Co. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. This combined filing reports Northwest Natural Holding Company (NW Holdings) and its principal regulated subsidiary, Northwest Natural Gas Company (NW Natural). NW Natural’s gas distribution business serves customers in Oregon and southwest Washington; results are seasonal, so second-quarter performance is not necessarily indicative of full-year results.
Financial results and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| NW Holdings operating revenue | $195.0 million | $148.9 million | $545.3 million | $464.9 million |
| NW Holdings net income (loss) | $1.7 million | $(0.7) million | $58.0 million | $58.8 million |
| NW Holdings diluted EPS | $0.05 | $(0.02) | $1.77 | $1.92 |
| NW Natural net income | $2.7 million | $0.6 million | $60.1 million | $60.7 million |
| NW Natural gas distribution margin | $94.4 million | $91.2 million | $272.1 million | $263.8 million |
For the six months, NW Holdings operating cash flow was $196.6 million, capital expenditures were $167.7 million, and cash used in financing was $24.0 million. Cash, cash equivalents and restricted cash totaled $30.0 million at June 30; balance-sheet cash and cash equivalents alone were $17.2 million. NW Natural reported operating cash flow of $193.4 million and capital expenditures of $156.2 million.
At June 30, NW Holdings had $222.7 million of short-term debt and $1.046 billion of long-term debt; NW Natural had $78.7 million and $986.8 million, respectively. NW Holdings’ short-term debt included $144.0 million drawn on its credit agreement and NW Natural’s $78.7 million of commercial paper. NW Natural had a $400 million revolving credit facility with no amount drawn. Management said liquidity was expected to be sufficient for anticipated near-term needs, including available credit capacity and operating cash flows.
Changes versus the prior comparable period
- Q2 revenue rose 31%, but the increase primarily reflects higher natural gas costs passed through to customers, not equivalent margin growth. Average gas cost increased 35%; most higher commodity costs were embedded in the Purchased Gas Adjustment mechanism.
- Q2 NW Holdings net income improved by $2.4 million, while NW Natural’s increased by $2.1 million. NW Natural’s margin gained $3.2 million, supported by customer growth, higher usage by non-decoupled customers, and Washington rate increases. Lower pension-related costs also benefited results; higher operating and maintenance costs partly offset the gains.
- Six-month NW Holdings diluted EPS declined to $1.77 from $1.92 despite nearly unchanged net income, in part because of the April share issuance and higher weighted-average shares. NW Natural’s six-month net income fell $0.6 million: margin growth and lower pension costs were offset chiefly by increased operating and maintenance expense and lower asset-management revenue.
- Quarterly gas volumes were 26% higher year over year, as Q2 2022 weather was 23% colder than average versus 40% warmer than average in Q2 2021. First-half volumes rose 8%; weather was 2% warmer than average in 2022 versus 12% warmer in 2021.
Outlook, management commentary and risks
- Regulatory outlook: Oregon rate-case stipulations filed in May and June provide for a $62.65 million revenue-requirement increase, subject to adjustments and OPUC approval. The stipulations do not resolve every issue; the company expected new rates to take effect November 1, 2022. A stipulation also provides for COVID-19 deferral recovery over two years beginning on that date.
- Investment and funding: NW Natural estimated 2022 capital expenditures of $310–$350 million and $1.3–$1.5 billion for 2022–2026. Combined incremental capital needs for NW Holdings and NW Natural were estimated at $600–$700 million from 2022 through 2024. NW Holdings raised approximately $138.6 million net in an April stock offering and additional funds through its at-the-market program. A $140 million NW Natural bond issue at 4.78%, due 2052, was agreed after quarter-end and expected to close around September 30, 2022.
- Commodity, rates and operations: Management cited inflation, rising interest rates and commodity costs, and potential supplier or supply-chain disruptions. It reported no material supply-chain disruption to date. Gas-price volatility remained elevated; the company planned to monitor prices and hedging as it prepared for the next gas year.
- Environmental and climate exposure: NW Natural recorded $104.8 million of environmental site liabilities. The Gasco sediments cleanup estimate ranges from $46.9 million to $350 million, with $46.9 million recorded; certain other site and natural-resource-damage exposures have no reasonably estimable high end. The company expects recovery of a substantial portion of remediation costs through regulatory mechanisms, subject to prudence and earnings reviews. Oregon climate rules and Washington’s Climate Commitment Act, evolving building codes, and possible restrictions on gas use could raise compliance costs or affect customer growth and demand; recovery and customer impacts remain uncertain.
- Other items: NW Natural recorded approximately $13.4 million of COVID-19-related incurred costs as a regulatory asset it believes recoverable, and expected a further $3.6 million of forgone late-fee revenue to be recognized later. The first-half 2021 cold-weather event generated unusual asset-management revenue and commodity costs, making year-over-year comparisons less representative. No material change to reported risk factors was disclosed.
Important facts for investors to verify
- Whether the OPUC approved the Oregon rate-case stipulations and whether new rates took effect on the expected date.
- How actual capital spending, financing needs, equity issuance and the planned $140 million bond issue compare with management’s estimates.
- Whether margin growth persists after separating customer growth and rate changes from weather effects and pass-through gas costs.
- Developments in environmental remediation estimates, insurance recoveries, regulatory recovery and the Portland Harbor allocation process.
- Final climate rules, related compliance costs, rate recovery, and potential effects of building-code or local restrictions on natural-gas demand.