Northwest Natural Holding Company — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing. The combined filing covers Northwest Natural Holding Company (NW Holdings) and its wholly owned gas utility subsidiary, Northwest Natural Gas Company (NW Natural); figures below identify the registrant where relevant.
Business context
NW Natural distributes regulated natural gas through approximately 774,500 meters in Oregon and southwest Washington. NW Holdings also owns water and wastewater utilities and other businesses. Natural gas distribution is the sole reportable segment; the gas utility generates most of the group’s revenue and earnings.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| NW Holdings operating revenue | $773.7 million | $746.4 million |
| NW Holdings net income from continuing operations | $70.3 million | $65.3 million |
| NW Holdings diluted EPS from continuing operations | $2.30 | $2.19 |
| NW Holdings total net income, including discontinued operations | $76.8 million | $61.7 million |
| NW Natural operating revenue | $758.7 million | $739.9 million |
| NW Natural net income | $70.6 million | $69.0 million |
| Natural gas distribution (NGD) margin | $438.1 million | $422.7 million |
| Cash provided by operating activities — NW Holdings | $143.0 million | $185.3 million |
| Capital expenditures — NW Holdings | $273.0 million | $223.5 million |
NW Holdings’ continuing-operations income rose $5.0 million. NW Natural’s NGD margin increased $15.4 million, primarily reflecting rate increases and customer growth, partly offset by warmer weather and lower fees. Total gas volumes sold and delivered fell 6%, with 2020 weather 12% warmer than average. NW Holdings’ total net income included a $6.5 million after-tax gain from the sale of Gill Ranch storage.
NW Holdings reported $30.2 million in cash at year-end, $304.5 million in short-term debt, $95.3 million in current long-term debt maturities, and $860.1 million in long-term debt. NW Natural reported $10.5 million in cash and $231.5 million in short-term debt. NW Natural’s $300 million revolving credit facility had no balance outstanding at year-end; NW Holdings had drawn $73 million under its credit agreement. Management stated liquidity was sufficient for anticipated near-term needs. The filing reports capital structure and debt separately for each registrant; these balances should not be combined without accounting for intercompany and subsidiary obligations.
NW Holdings’ dividend was $1.9125 per share in 2020. In January 2021, the board declared a quarterly dividend of $0.48 per share, implying an indicated annual rate of $1.92.
Material changes and notable items
- Operating cash flow declined by $42.3 million at NW Holdings year over year, reflecting increased receivables, higher pension contributions, lower decoupling cash collections, and higher environmental spending; lower deferred gas costs partly offset the decline.
- Capital expenditures increased. NW Natural invested $266.0 million in 2020, compared with $221.4 million in 2019; NW Holdings’ total was $273.0 million.
- NW Natural’s October 2020 Oregon rate case authorized an approximately $45 million annual revenue-requirement increase. The order uses a 9.4% authorized ROE and a 50% equity/50% long-term debt capital structure.
- NW Natural filed a Washington rate case in December 2020 seeking increases of $6.3 million in year one and $3.2 million in year two, partly offset by a proposed $2.2 million rate reduction. These are requests, not approved increases.
- NW Holdings closed the sale of Gill Ranch on December 4, 2020, receiving an initial net payment of $12.5 million. Up to $15 million in additional payments may be made depending on future performance; their fair value at closing was recorded as zero.
- NW Holdings completed water-sector acquisitions and reported $69.2 million of goodwill at year-end, all related to water and wastewater businesses. No goodwill impairment was recorded.
Outlook, risks and contingencies
- 2021 investment: NW Natural expects capital expenditures of $280 million–$320 million in 2021 and $1.0 billion–$1.2 billion over 2021–2025. NW Natural Water expects about $15 million of 2021 maintenance capital expenditures. The filing does not provide a quantified 2021 earnings or EPS forecast.
- COVID-19: Management estimated approximately $10 million of 2020 pretax financial effects. About $4.8 million of incurred costs were deferred to a regulatory asset, and $1.3 million of forgone late-fee revenue was expected to be recognized later. Approximately $3.8 million of effects were expected to remain unrecovered through rates. Recovery of deferred amounts remained subject to regulatory review.
- Environmental exposure: NW Natural recorded an estimated $120.5 million liability for environmental sites. Regulatory recovery mechanisms exist, but recovery is subject to prudence reviews and, in Oregon, an earnings test. For Gasco/Siltronic sediments, the estimated remediation range was $51.3 million–$350 million; the recorded liability was $51.3 million. The high end of several site exposures could not be reasonably estimated.
- Climate and regulation: Oregon’s 2020 executive order set emissions-reduction goals and directed agency rulemaking; Washington building-code changes took effect February 2021. Potential effects include compliance costs, reduced demand or customer growth, and changes in the competitiveness of natural gas. The company is pursuing renewable natural gas and hydrogen initiatives; its first BioCarbN project was estimated at $8 million, with expected production beginning in late 2021.
- Operational and financial risks: The distribution system depends on one interstate pipeline, and the company relies on third parties for gas supply. Other significant risks include regulatory disallowance or delays in cost recovery, weather, customer affordability and COVID-related disconnections, pension funding, cybersecurity, and access to capital.
- Audit and controls: The independent auditor issued unqualified opinions on NW Holdings’ financial statements and internal control. Regulatory accounting was identified as a critical audit matter, involving significant judgment over recovery of regulatory assets and settlement of regulatory liabilities.
Important facts for investors to verify
- Track the outcome and timing of the Washington rate case and whether the requested increases are approved.
- Monitor collection performance, disconnections, bad-debt expense, and regulatory decisions on recovery of COVID-19-related costs.
- Assess the scale, timing, and recoverability of environmental remediation spending, especially Portland Harbor and Gasco/Siltronic exposures.
- Compare planned capital spending with operating cash flow, short-term borrowing, debt maturities, and the company’s ability to maintain its targeted capital structure.
- Evaluate whether climate-policy changes affect natural-gas customer growth and demand, and whether RNG investments meet cost and execution expectations.
- Distinguish recurring continuing-operations earnings from the $6.5 million discontinued-operations gain, and review NW Holdings and NW Natural financial statements separately.