Business context and reporting period
Northwest Natural Holding Company (NW Holdings) and subsidiary Northwest Natural Gas Company (NW Natural) filed this unaudited combined Form 10-Q for the quarter and nine months ended September 30, 2020. NW Natural’s regulated natural gas distribution business is the core activity; NW Holdings also includes water and wastewater businesses. Results are seasonal and interim results are not necessarily indicative of full-year performance.
Financial results and key metrics
Amounts below are in millions of dollars unless stated otherwise. NW Holdings includes NW Natural and other subsidiaries; the two registrants’ results are not interchangeable.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| NW Holdings revenue | $93.3 | $90.3 | $513.4 | $499.1 |
| NW Holdings net income (loss) | $(17.9) | $(19.3) | $24.7 | $25.0 |
| NW Holdings diluted EPS | $(0.59) | $(0.63) | $0.81 | $0.84 |
| NW Natural revenue | $88.4 | $87.6 | $502.1 | $494.7 |
| NW Natural net income (loss) | $(20.2) | $(17.6) | $24.2 | $29.4 |
| NW Natural gas distribution (NGD) margin | $55.5 | $55.9 | $289.3 | $289.5 |
NW Holdings’ nine-month operating income was $73.8 million versus $82.5 million; NW Natural’s was $72.5 million versus $85.1 million. The companies reported operating losses in the third quarter, consistent with the seasonal pattern of gas usage. NW Natural’s nine-month gas volumes fell 6%, mainly reflecting weather 15% warmer than average, while NGD margin was nearly flat year over year.
NW Holdings generated $148.5 million of operating cash flow in the first nine months, down from $155.3 million. Investing activities used $226.8 million, including $193.3 million of capital expenditures and $38.1 million for acquisitions. Cash at September 30 was $35.9 million at NW Holdings and $27.1 million at NW Natural.
At September 30, NW Holdings had $223.0 million of short-term debt and $955.4 million of long-term debt, including current maturities; NW Natural had $150.0 million of short-term debt and $917.1 million of long-term debt, including current maturities. NW Natural’s long-term debt carried a 4.60% weighted-average interest rate. NW Holdings’ consolidated equity was 47.2% of its long-term-debt capital structure; including short-term debt and current maturities, common equity was 42.0% of capitalization. The companies said liquidity was ample, including available credit facilities.
Material changes versus the prior comparable period
- NW Natural’s nine-month net income declined $5.1 million. Higher depreciation and general taxes from utility investment and higher income tax expense were partly offset by lower pension-related expenses that had affected 2019.
- NW Holdings’ nine-month continuing-operations income declined $2.5 million, partly offset by increased earnings from acquired water and wastewater businesses.
- NW Natural’s nine-month NGD margin was essentially unchanged. New Washington rates and North Mist storage revenue offset lower weather-related, industrial, and fee-related contributions.
- NW Holdings’ allowance for uncollectible accounts rose to $1.8 million from $0.7 million at year-end 2019, reflecting pandemic-related credit risk assessments.
- Capital spending increased: NW Holdings’ nine-month capital expenditures were $193.3 million versus $153.0 million in 2019. Property, plant and equipment additions contributed to higher depreciation.
Outlook, management commentary, risks and unusual items
- Rate case: After quarter-end, on October 16, 2020, the Oregon Public Utility Commission approved a settlement providing an approximately $45 million revenue-requirement increase, effective November 1, 2020. The order assumes a 9.4% return on equity and a 50% equity/50% long-term-debt capital structure.
- Capital plans: NW Holdings projected 2020 capital expenditures of $240 million to $280 million, including $230 million to $270 million for NGD. The NGD business expected $950 million to $1.1 billion of capital investment over 2020–2024; water businesses expected $30 million to $40 million over that period.
- COVID-19: The utilities suspended late fees and customer disconnections for nonpayment, affecting revenue and potentially increasing bad debt. Management reported no substantial overall sales-volume reduction attributable to the pandemic as of September 30, but warned that commercial and industrial customer losses, lower usage, weaker customer growth, and higher uncollectible accounts could affect future results. Oregon approved deferral of certain pandemic-related costs; recovery depends on regulatory treatment.
- Financing: NW Natural borrowed $150 million under a 364-day term loan due March 2021 and issued $150 million of 3.60% first mortgage bonds due 2050. On October 30, 2020, it repaid the term loan using short-term commercial paper. NW Natural reported compliance with its debt-to-capitalization covenant at September 30.
- Environmental contingencies: NW Natural estimated environmental liabilities of $122.6 million at September 30, substantially subject to regulatory recovery mechanisms. For Gasco/Siltronic sediments, the estimated remedy range was $51.8 million to $350 million; the recorded liability was at the low end. The high end of certain other environmental exposures, including natural-resource-damage claims, could not be reasonably estimated.
- Other transactions and distributions: NW Holdings completed the sale of its Trail West Holdings interest in August for $14 million, with $7 million received at closing and $7 million due one year later; the after-tax gain was approximately $0.5 million. The Gill Ranch Storage sale remained pending, with a possible purchase price of $25 million plus up to $26.5 million in contingent payments and a November 20, 2020 termination date. The October dividend declaration was $0.48 per share quarterly, equivalent to an indicated annual rate of $1.92.
- Risks: Management highlighted pandemic duration and economic effects, customer nonpayment and disconnections, environmental remediation, changing greenhouse-gas policy, regulatory recovery, weather, and access to capital markets. Oregon’s emissions-reduction executive order could lead to future rules; scope and timing were unresolved.
Investor verification points
- Confirm implementation and realized earnings effects of the Oregon rate-case increase effective November 1, 2020.
- Track bad-debt expense, customer arrears, commercial and industrial usage, and regulatory recovery of COVID-19-related costs.
- Review debt and liquidity following repayment of the term loan with commercial paper, including upcoming maturities and covenant headroom.
- Monitor progress and closing conditions for the Gill Ranch sale before its termination deadline, and receipt of the deferred Trail West sale proceeds.
- Assess changes in environmental liability estimates, particularly the Gasco/Siltronic sediment remedy and unresolved Portland Harbor allocations.