Northwest Natural Holding Company — FY2019 Form 10-K
Business context and period. This combined filing covers Northwest Natural Holding Company (NW Holdings) and its wholly owned gas utility subsidiary, Northwest Natural Gas Company (NW Natural), for the year ended December 31, 2019. NW Natural serves about 763,000 meters in Oregon and southwest Washington. Gas distribution is the principal business; NW Holdings also owns a growing water and wastewater business. The filing includes quarterly information, but reports annual results rather than a standalone Q4 filing.
Key financial results
| NW Holdings, unless stated | 2019 | 2018 |
|---|---|---|
| Operating revenue | $746.4 million | $706.1 million |
| Continuing-operations net income | $65.3 million | $67.3 million |
| Continuing-operations diluted EPS | $2.19 | $2.33 |
| Net income, including discontinued operations | $61.7 million | $64.6 million |
| NGD margin | $422.7 million | $383.7 million |
| Cash from operating activities | $185.3 million | $168.8 million |
| Capital expenditures | $223.5 million | $214.6 million |
| Cash and cash equivalents at year-end | $9.6 million | $12.6 million |
For Q4 2019, NW Holdings reported revenue of $247.3 million, continuing-operations net income of $38.3 million, and net income of $36.7 million. Q4 2018 figures were $226.7 million, $36.8 million, and $35.8 million, respectively. The filing attributes quarterly earnings variation principally to the seasonal nature of the gas utility business.
Debt and liquidity. At year-end, NW Holdings had $149.1 million of short-term debt and $881.1 million of long-term debt including current maturities; total equity was $866.0 million and total assets were $3.43 billion. The short-term debt balance was down from $217.6 million in 2018. NW Natural had a $300 million revolving credit facility with no balance outstanding under it at year-end; NW Holdings had a $100 million facility and $24 million outstanding. Management stated liquidity was sufficient for anticipated near-term requirements. NW Natural’s credit ratings outlook was stable; Moody’s revised its outlook to stable in May 2019 while lowering certain debt ratings.
Changes versus the prior year
- Revenue rose 5.7% and NGD margin increased $39.0 million, helped by new Oregon and Washington rates, customer growth, North Mist storage service beginning in May, and weather that was average in 2019 versus 15% warmer than average in 2018.
- Continuing-operations earnings fell $2.0 million at NW Holdings, while NW Natural’s increased $1.0 million. Higher pension costs, depreciation, and interest partly offset the stronger gas distribution margin. Other income and asset-management results also declined.
- Operating cash flow increased, including from tax refunds and pension-related collections; investing cash outflow rose substantially at NW Holdings, mainly due to water acquisitions. NW Holdings issued $93.0 million of common stock and NW Natural issued $140 million of first mortgage bonds.
Outlook, risks and unusual items
- NW Natural filed an Oregon rate case on December 30, 2019 requesting a $71.4 million annual revenue-requirement increase, based on a 10.0% requested ROE and $1.47 billion average rate base. New rates were expected to take effect November 1, 2020, subject to regulatory review.
- Management estimated 2020 capital expenditures of $240–$280 million, including $230–$270 million for gas distribution. Planned 2020–2024 investment was $980 million–$1.14 billion, subject to changes in regulation, growth, and costs.
- Management expected to begin procuring renewable natural gas for customers in 2020 under Oregon Senate Bill 98. The law sets voluntary targets allowing RNG to reach up to 30% of retail gas by 2050 and limits incremental RNG costs recoverable through rates to 5% of a utility’s revenue requirement; implementing rules were pending.
- The OPUC’s 2019 pension order led to a $10.5 million pension-related regulatory disallowance and recovery of previously deferred pension costs. The WUTC disallowed about $1.5 million of environmental costs, producing an after-tax charge of about $1.1 million in Q4 2019.
- Environmental remediation liabilities were estimated at $136.0 million at year-end. Recovery is subject to regulatory prudence reviews and, in Oregon, an earnings test. At Portland Harbor, the recorded sediment cleanup liability was $57.7 million, the low end of a disclosed $57.7–$350 million range; other potential harbor-wide and natural-resource-damage exposure remained uncertain.
- Other significant risks include dependence on a single interstate pipeline serving the gas distribution system, regulatory rate outcomes, climate and energy-policy changes, weather exposure, pension funding, acquisition integration, and access to capital. Gill Ranch remained classified as discontinued operations pending sale; the sale was approved by the California regulator but remained subject to closing conditions and a termination date of March 31, 2020.
Most important facts for investors to verify
- Progress and final outcome of the Oregon rate case, including the approved return, rate base, and effective date.
- Environmental liability estimates, regulator-approved recoveries, and any material change in Portland Harbor allocation or remediation costs.
- Execution and financing of the planned capital program and water acquisitions, and resulting debt, equity dilution, and cash flow needs.
- Whether the Gill Ranch sale closes and whether any contingent sale payments are earned.
- Ongoing pension funding requirements and the effect of actuarial assumptions and regulatory treatment on earnings and cash flows.
- RNG rulemaking, procurement costs, and the practical impact of climate-related policy on customer demand and utility investment recovery.