Northwest Natural Holding Company (NWN) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited. The combined filing reports Northwest Natural Holding Company (NW Holdings) and its principal subsidiary, Northwest Natural Gas Company (NW Natural). The core business is regulated natural gas distribution in Oregon and southwest Washington; NW Holdings also owns water and wastewater businesses and other investments. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
Financial performance and position
| NW Holdings consolidated | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $462.4 million | $350.3 million | +32% |
| Operating income | $113.5 million | $87.6 million | +30% |
| Net income | $71.7 million | $56.2 million | +27% |
| Diluted EPS | $2.01 | $1.80 | +$0.21 |
| Cash from operating activities | $176.9 million | $141.0 million | +$35.8 million |
| Capital expenditures | $71.3 million | $68.5 million | +$2.8 million |
NW Natural reported net income of $75.5 million, up from $57.4 million. Its natural gas distribution (NGD) margin, a key management performance measure, rose to $217.6 million from $177.7 million. NW Holdings’ consolidated operating margin is not separately presented as a comparable measure; the filing defines NGD margin as NGD revenue less gas costs, environmental remediation expense, and revenue taxes.
- Revenue growth largely reflects higher gas costs passed through to customers, as well as new rates; revenue growth therefore exceeded margin growth. NGD margin increased $39.9 million, principally from Oregon and Washington rate increases effective November 1, 2022, colder comparative weather, customer growth, and gas-cost incentive sharing.
- NGD volumes sold and delivered rose 8%. Q1 2023 weather was 5% colder than the 25-year average, compared with weather 8% warmer than average in Q1 2022. Customer meters increased 1.0% year over year to 796,848.
- Higher operating and maintenance costs, depreciation, and interest expense partially offset margin gains. NW Holdings’ net interest expense increased to $18.3 million from $11.5 million; the filing attributes the increase mainly to higher debt balances.
- Operating cash flow increased, supported by higher earnings and working-capital movements, including lower inventory balances and smaller customer bill credits than in the prior-year period. Investing cash outflow was $73.0 million, including $71.3 million of capital expenditures.
Liquidity, debt, and capital
- At March 31, NW Holdings had $140.8 million of cash and cash equivalents; NW Natural had $129.7 million. Including restricted cash, the respective cash-flow statement balances were $156.0 million and $144.9 million.
- NW Holdings reported $72.5 million of short-term borrowings and approximately $1.535 billion of long-term debt, including current maturities. NW Natural had no commercial paper outstanding and approximately $1.324 billion of debt, including current maturities.
- NW Natural issued $100 million of 5.43% first mortgage bonds due 2053 in January and $100 million of 5.75% secured medium-term notes due 2033 in March. NW Holdings’ capital structure, excluding short-term debt, was 44.8% common equity and 55.2% long-term debt at quarter-end, versus 48.6% and 51.4%, respectively, at year-end 2022.
- NW Natural had an undrawn $400 million revolving credit facility; NW Holdings had a $200 million facility, of which $72.5 million was drawn. Management said liquidity was sufficient for anticipated near-term requirements. Both companies reported compliance with applicable debt covenants; NW Natural also reported compliance with ring-fencing provisions.
- NW Holdings raised $16.7 million net through its at-the-market equity program during the quarter, with $94.1 million of issuance capacity remaining at March 31. The Q1 dividend paid was $0.485 per share; in April, the board declared another $0.485 quarterly dividend, equivalent to an indicated annual rate of $1.94 per share.
Outlook, risks, and unusual items
- Capital plans: Management estimated NW Natural 2023 capital expenditures of $310–$350 million and five-year 2023–2027 expenditures of $1.3–$1.5 billion. NW Natural Water expected about $25 million of 2023 maintenance capital spending. Combined incremental capital needs for NW Holdings and NW Natural were estimated at $450–$550 million for 2023–2025. The filing does not provide formal earnings guidance.
- Regulation and climate: Earnings and cost recovery depend on utility commission decisions, rate cases, and regulatory mechanisms. Management estimated that Washington Climate Commitment Act compliance could increase non-low-income residential bills by 1.5%–6% in the first year, and Oregon Climate Protection Program compliance by 1%–9% in the first compliance period. These are estimates subject to change; recovery in rates and future compliance costs remain important uncertainties. Washington building-code changes and local proposals restricting natural gas use could affect customer growth and competitiveness.
- Environmental contingencies: NW Natural recorded $114.3 million of estimated environmental liabilities at March 31. Much of the remediation cost is subject to regulatory recovery, but estimates are uncertain. For the Gasco sediment cleanup, the recorded liability is $51.4 million, the low end of an estimated $51.4–$350 million range. Other Portland Harbor and natural-resource-damage exposures remain unresolved; the high end of some potential losses cannot be reasonably estimated. Management does not expect the ultimate disposition of disclosed legal matters to materially affect financial condition, results, or cash flows.
- Other risks: Management cited inflation, rising interest rates, commodity-price volatility, recession risk, supply-chain delays, cybersecurity threats, and regulatory and climate-policy uncertainty. No direct impact from the March 2023 regional bank failures was reported; the company said its banking counterparties were investment grade.
- Unusual item: NW Holdings recorded a $2.6 million allowance related to a third-party settlement agreement that provides for a $3.25 million payment; no gain was recognized because payment had not been received and collectability was uncertain.
- Other operating developments: NW Natural said the Dakota City renewable natural gas facility began production in April 2023; approval for inclusion in the Oregon RNG rate mechanism was pending. A water utility purchase agreement covering about 1,350 Arizona connections was awaiting regulatory approval.
Important facts for investors to verify
- Whether higher NGD margin is sustained as rate changes, weather, customer growth, and gas-cost mechanisms evolve.
- Actual 2023 capital spending, financing needs, debt maturities, interest costs, and progress toward the company’s capital-structure targets.
- Regulatory recovery, timing, and customer-bill impacts for environmental remediation, climate compliance, and deferred costs.
- Developments in Portland Harbor remediation and other environmental or legal matters, including whether estimated liabilities change.
- Customer-growth and demand effects from building codes, local restrictions, and changing energy preferences, as well as execution and economics of water and RNG investments.