Business context and reporting period
Northwest Natural Holding Company (NW Holdings) filed this combined Form 10-K with its wholly owned subsidiary, Northwest Natural Gas Company (NW Natural), for the fiscal year ended December 31, 2018. The filing is annual, not a standalone fourth-quarter report. NW Natural distributes gas to about 750,000 meters in Oregon and southwest Washington; NW Holdings also owns water businesses and other investments. On October 1, 2018, the company reorganized under a holding-company structure. Gill Ranch storage operations were classified as discontinued operations following an agreement to sell the business.
Financial performance and position
| NW Holdings consolidated metric | 2018 | 2017 |
|---|---|---|
| Operating revenue | $706.1 million | $755.0 million |
| Continuing-operations net income | $67.3 million | $72.1 million |
| Discontinued-operations loss, net of tax | $2.7 million | $127.7 million |
| Net income (loss) | $64.6 million | $(55.6) million |
| Diluted EPS from continuing operations | $2.33 | $2.51 |
| NGD margin | $383.7 million | $392.6 million |
| Cash from operating activities | $168.8 million | $206.7 million |
| Capital expenditures | $214.6 million | $213.3 million |
| Cash and cash equivalents at year-end | $12.6 million | $3.5 million |
| Long-term debt at year-end | $706.2 million | $683.2 million |
Short-term debt was $217.6 million at year-end, up from $54.2 million; commercial paper carried a 3.0% weighted-average rate. NW Natural had $704.1 million of long-term debt and $217.5 million of short-term debt. It had $300 million of revolving credit capacity, with no outstanding borrowings under that facility. Cash from operations declined while investing needs remained high. NW Holdings reported total assets of $3.24 billion and equity of $762.6 million at year-end.
NGD margin is a company-defined measure of distribution revenues less gas costs, environmental remediation expense, and revenue taxes; it is not a GAAP profit measure. Reported 2018 revenue and expenses each include $30.1 million of revenue taxes presented gross following adoption of the new revenue standard, with no effect on margin or net income. NW Holdings' fourth-quarter unaudited results included revenue of $226.7 million, continuing-operations income of $36.8 million, and diluted continuing-operations EPS of $1.27; comparable 2017 figures were $238.6 million, $34.5 million, and $1.20.
Material changes versus the prior comparable period
- Continuing-operations income declined $4.8 million and diluted continuing-operations EPS fell $0.18. The 2017 result included a $3.4 million tax benefit from remeasuring deferred taxes under the Tax Cuts and Jobs Act (TCJA); excluding that item, adjusted continuing income declined $1.4 million.
- NGD margin fell $8.9 million. Gas volumes sold and delivered declined 9%, primarily because weather was 26% warmer than in 2017 and 15% warmer than average. Customer growth of 1.7% partly offset the weather impact.
- Operating and maintenance expense increased $4.3 million, and depreciation and amortization increased $4.1 million, principally reflecting payroll, services, and additional capital investment. The lower federal tax rate reduced income tax expense.
- Operating cash flow decreased $37.9 million, in part due to deferred gas-cost balances and higher cash taxes after bonus depreciation was eliminated for regulated utility property acquired after 2017.
- Net income turned positive compared with 2017's net loss largely because the 2017 discontinued-operations result included a $192.5 million pre-tax impairment of Gill Ranch assets. The 2018 discontinued-operations loss was $2.7 million after tax.
Outlook, commentary, and risks
- Management did not provide a specific earnings or EPS forecast. It expects 2019 NGD capital spending of $225 million to $265 million, and $820 million to $910 million of NGD capital expenditures over 2019–2023. Water businesses expect $30 million to $40 million of investment over that five-year period.
- The North Mist storage expansion, estimated at approximately $149 million, was targeted to enter service in spring 2019 under a long-term contract with Portland General Electric. Management also described ongoing water acquisitions, renewable natural gas projects, and work to develop a lower-carbon role for gas.
- The Oregon rate case increased annual revenue requirement by $23.4 million, effective November 1, 2018. A February 2019 settlement proposal on remaining pension-balancing and TCJA issues was subject to OPUC approval; if approved, the company expected an after-tax earnings charge of about $6.7 million.
- NW Natural filed a Washington rate case in December 2018 seeking a rate increase, a decoupling mechanism, and specified treatment of tax-reform benefits and environmental costs. The requested outcome was pending regulatory review.
- A rupture on a major Canadian pipeline disrupted regional gas flows in October 2018. NW Natural served firm customers using storage and supply realignment, but its distribution system depends on a single interstate pipeline company, making supply and transportation disruption a key risk.
- Environmental remediation liabilities were estimated at $128.7 million. Recovery depends on regulatory prudence reviews and mechanisms; Portland Harbor remediation estimates remain uncertain. The filing states that the high end of certain potential losses cannot be reasonably estimated.
- The sale of Gill Ranch remained subject to CPUC approval and closing conditions. The agreement provided for $25 million initial cash consideration, subject to adjustment, and up to $26.5 million in potential additional payments. PG&E, the facility's 25% owner, filed for bankruptcy in January 2019; the company said the effect on the sale could not be fully predicted.
- Other key risks include regulatory lag or disallowances, climate legislation and energy-transition effects, weather and customer growth, pension funding, construction costs, access to capital, cybersecurity, and the approaching November 2019 union-agreement expiration.
Important facts for investors to verify
- Whether the OPUC approved the proposed Oregon settlement, including its expected $6.7 million after-tax charge and customer credits.
- The timing and final outcome of the Washington rate case and proposed customer decoupling mechanism.
- Completion, cost, and in-service timing of the North Mist expansion and progress against the disclosed capital-spending plans.
- CPU C approval and closing status of the Gill Ranch sale, including any effect of PG&E's bankruptcy and whether contingent sale payments are achieved.
- Actual environmental remediation spending, regulatory recovery, and changes to the Portland Harbor and other site estimates.
- Ability to fund elevated capital needs while managing short-term debt, pension contributions, and dividend obligations.
- Interpret year-over-year revenue with the $30.1 million presentation change in mind; confirm any performance comparison uses consistent revenue-tax presentation.