Northwest Natural Holding Company — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. The combined filing reports Northwest Natural Holding Company (NW Holdings) and its wholly owned regulated gas utility, Northwest Natural Gas Company (NW Natural). NW Natural’s Oregon and southwest Washington gas distribution business is the principal operation; NW Holdings also owns water and other businesses. Interim results are seasonal and are not necessarily indicative of full-year performance.
Financial performance
| NW Holdings, $ millions except per-share data | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | 90.3 | 91.2 | 499.1 | 479.4 |
| Operating income (loss) | (9.6) | (6.1) | 82.5 | 69.9 |
| Continuing-operations net income (loss) | (18.5) | (11.1) | 27.0 | 30.5 |
| Consolidated net income (loss) | (19.3) | (11.8) | 25.0 | 28.7 |
| Basic and diluted EPS | (0.63) | (0.41) | 0.84 | 1.00 |
| NGD margin | 55.9 | 54.9 | 289.5 | 257.4 |
NGD margin, management’s measure of distribution performance, is revenue less gas costs, environmental remediation expense, and revenue taxes; it is not a GAAP profit measure. NW Natural reported nine-month revenue of $494.7 million and continuing-operations net income of $29.4 million, compared with $479.4 million and $30.5 million, respectively, in 2018.
Material changes and operating drivers
- Q3 NW Holdings continuing-operations loss widened by $7.4 million year over year. Management cited timing effects of Oregon rate-case pension and tax-reform provisions, higher interest expense, and increased holding-company costs; higher NGD margin and tax benefits partly offset the impact.
- For the nine months, NW Holdings continuing-operations income fell $3.6 million despite a $32.1 million increase in NGD margin. Drivers included a $10.5 million pension regulatory disallowance, higher pension costs, depreciation and interest, and lower AFUDC income; lower income-tax expense and increased regulatory interest income provided offsets.
- NGD margin growth reflected Oregon rate changes, customer growth, colder weather early in 2019, and North Mist storage service commencing in May. Total NGD volumes rose 6% for the nine months; the customer base grew 1.6% to 755,458 meters.
- North Mist contributed $7.2 million of NGD margin for the nine months. Its expansion entered service in May and is accounted for as a sales-type lease, with regulated tariff revenue and a substantial lease receivable.
Cash flow, debt, and liquidity
- NW Holdings generated $155.3 million of operating cash in the first nine months, versus $158.5 million a year earlier. Investing used $225.3 million, including $153.0 million of capital expenditures and $56.2 million for acquisitions. Financing provided $67.9 million.
- Cash and cash equivalents were $10.5 million at September 30, 2019. Reported current assets were $202.7 million and current liabilities $358.4 million.
- NW Holdings had $65.6 million of short-term debt and $900.7 million of long-term debt, including current maturities, at September 30. The company issued $140 million of NW Natural first-mortgage bonds in June and retired $10 million in September; NW Natural Water also borrowed $35 million under a two-year term loan. NW Holdings’ capital structure included 46.6% common equity, 44.5% long-term debt, and 8.9% short-term debt and current maturities.
- NW Holdings’ nine-month cash dividends were $1.425 per share. In October, the board declared a $0.4775 quarterly dividend, or an indicated annual rate of $1.91 per share.
Outlook, regulation, and risks
- Investment plans: Management estimated 2019 capital expenditures of $230–$270 million, including $225–$265 million for NGD. The five-year 2019–2023 NGD capital plan was $820–$910 million; water-business investment was expected to be $30–$40 million over that period. Funding was expected from operating cash flow and/or debt or equity issuance.
- Regulatory developments: An October 2019 Washington rate-case order, effective November 1, authorized about $5.14 million in annual revenue increases, while also requiring customer tax-benefit credits. It allowed a Washington environmental cost-recovery mechanism and is expected to result in an approximately $1.1 million after-tax charge in Q4 2019. Oregon customer credits related to tax reform and pension-account recovery also affect earnings timing.
- Gill Ranch sale: The proposed sale of the California gas-storage business remained subject to CPUC approval and closing conditions. A proposed decision approving the sale was issued October 31, after quarter-end; final CPUC approval was still required. The agreement provides for $25 million initial cash consideration, subject to adjustment, and up to $26.5 million in contingent payments. PG&E’s bankruptcy was identified as a factor being monitored.
- Environmental exposure: NW Natural’s estimated environmental-site liability was $119.1 million. The largest uncertainty is Portland Harbor, where NW Natural recorded $49.8 million for the Gasco/Siltronic sediment cleanup at the low end of an estimated $49.8–$350 million range. Allocation among responsible parties and other possible claims remain uncertain; most eligible costs are subject to regulatory recovery mechanisms.
- Other risks and commentary: Key exposures include regulatory outcomes and recovery of deferred costs, pension obligations, weather, commodity and interest-rate movements, derivative collateral requirements, and environmental remediation. A speculative credit downgrade could require up to $1.5 million of derivative collateral under the filing’s scenario analysis. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Track final CPUC approval, closing timing, and actual proceeds from the Gill Ranch sale, including contingent consideration.
- Review the drivers and cash implications of pension accounting, tax-reform customer credits, and the Q4 Washington regulatory charge.
- Monitor Portland Harbor cost allocation, environmental liability estimates, and the timing and regulatory recoverability of remediation spending.
- Compare planned capital spending, water acquisitions, and financing needs with operating cash generation and debt maturities.
- Assess whether NGD margin growth and customer additions translate into sustainable earnings after pension, interest, depreciation, and regulatory adjustments.