Business context and reporting period
Northwest Natural Holding Company (NW Holdings) and its principal subsidiary, Northwest Natural Gas Company (NW Natural), filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. NW Natural’s regulated natural gas distribution business serves Oregon and southwest Washington; NW Holdings also owns water and wastewater businesses. Results are seasonal, and the second quarter is not necessarily indicative of full-year performance.
Financial results and position
Amounts below are in millions of dollars except per-share data. NW Holdings’ results include NW Natural and other holding-company activities.
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| NW Holdings revenue | $148.9 | $135.0 | $464.9 | $420.1 |
| NW Holdings net income (loss) | $(0.7) | $(4.9) | $58.8 | $42.6 |
| NW Holdings diluted EPS | $(0.02) | $(0.16) | $1.92 | $1.40 |
| NW Natural revenue | $144.6 | $131.2 | $456.9 | $413.7 |
| NW Natural net income (loss) | $0.6 | $(4.7) | $60.7 | $44.5 |
| Natural gas distribution (NGD) margin | $91.2 | $79.7 | $263.8 | $233.8 |
NW Holdings’ Q2 operating income was $12.6 million, compared with $8.9 million; its six-month operating income was $107.3 million, versus $85.4 million. NW Natural’s Q2 operating income was $14.1 million, versus $8.9 million; its six-month figure was $109.3 million, versus $85.9 million. Net interest expense at NW Holdings was $22.2 million for the first half, down from $23.2 million. No company-level net profit margin is stated in the filing.
Management attributed NGD margin improvement mainly to new rates following the 2020 Oregon rate case, customer growth and recovering commercial activity. NW Natural added 11,975 meters year over year, a 1.6% increase, including 1.8% growth in residential meters. Six-month NGD volumes rose 3% year over year.
For the six months, NW Holdings generated $194.3 million of operating cash flow, used $127.9 million in investing activities and used $73.5 million in financing activities. Capital expenditures were $130.1 million. Cash and cash equivalents at June 30 were $20.1 million at NW Holdings and $11.5 million at NW Natural.
At June 30, NW Holdings had $240.0 million of short-term debt and $975.8 million of long-term debt, including current maturities; NW Natural had $198.0 million and $917.4 million, respectively. NW Natural’s long-term bonds carried a 4.6% weighted-average interest rate. NW Holdings’ consolidated capital structure was 48.6% common equity and 51.4% long-term debt, excluding short-term debt from that presentation. NW Natural had $300 million of committed credit facilities with no balance drawn; NW Holdings had a $100 million facility, with $42 million drawn.
Material changes versus the prior period
- First-half NW Holdings net income increased $16.1 million, while NW Natural net income rose $16.2 million; NGD margin increased $30.1 million.
- Q2 NW Natural returned to a small profit from a year-ago loss. NW Holdings remained slightly loss-making, but its loss narrowed; 2020 Q2 included $0.3 million of income from discontinued operations related to Gill Ranch, which was sold in December 2020.
- First-half operations and maintenance expense at NW Holdings increased $9.3 million, and depreciation and amortization rose $5.7 million, reflecting higher lease, professional-services, compensation and technology costs, and additional investment in utility systems.
- First-half operating cash flow increased $32.2 million at NW Holdings. Financing cash flow shifted from $128.3 million provided in 2020 to $73.5 million used in 2021, including commercial-paper repayments and different borrowing activity. Investing cash use fell year over year, largely because 2020 included water acquisitions.
Outlook, management commentary and risks
- Cold-weather event: February 2021’s severe cold caused about $29 million of higher commodity costs; approximately $27 million was deferred as a regulatory asset for future recovery. The event reduced first-half utility margin by about $2 million. Approximately $39 million of related asset-management revenue was generated, with about $33 million deferred as a regulatory liability for customer benefit.
- Rates and outlook: A Washington rate-case settlement filed July 27, 2021, after quarter-end, proposed increases of $5.0 million (6.4%) from November 2021 and up to $3.0 million (3.5%) from November 2022, before agreed offsets. It remained subject to WUTC approval. No explicit full-year EPS guidance is provided in the filing text.
- Capital spending: NW Natural expected 2021 capital expenditures of $280–$320 million and $1.0–$1.2 billion over 2021–2025. NW Natural Water expected about $15 million of 2021 maintenance capital spending and $40–$50 million over 2021–2025. NW Holdings estimated $400–$500 million of incremental capital needs over the next three years.
- COVID-19: Management cited economic recovery, commercial and industrial customer activity, customer payment ability and delayed resumption of late fees and disconnections as uncertainties. About $5.8 million of incurred COVID-related costs had been deferred as regulatory assets; recovery remains subject to regulatory review.
- Regulation and climate: Oregon decarbonization and emissions rules under development could affect future natural-gas utility policy, costs and customer bills. The company expected draft Climate Protection Program rules in August 2021 and final consideration in December 2021; the next full integrated resource plan was extended to July 2022.
- Environmental contingency: NW Natural reported an estimated $110.3 million environmental-site liability. For Gasco sediments, it recorded $48.3 million, the low end of a $48.3–$350 million estimated range; allocation among more than 100 potentially responsible parties and the final remedy remain uncertain. Most remediation costs are subject to regulatory recovery mechanisms, with prudence and earnings-test conditions.
- Management stated that it expected sufficient liquidity and was in compliance with relevant debt covenants at quarter-end. The $100 million NW Natural term loan borrowed in June is due in June 2022. A $55 million five-year loan for NW Natural Water was also borrowed in June 2021 and is guaranteed by NW Holdings.
Important facts for investors to verify
- Whether the Washington rate-case settlement received WUTC approval and the final rates and offsets adopted.
- Regulatory recovery and timing for cold-weather gas costs and COVID-related deferred costs, including any prudence review or customer refunds.
- Updated environmental remediation estimates, allocation outcomes and potential exposure beyond recorded liabilities, particularly at Portland Harbor and Gasco.
- Funding needs, capital-spending execution, refinancing of 2021 debt maturities and repayment of the June 2022 term loan.
- Effects of COVID-19 recovery, customer growth and emerging Oregon climate rules on margins, collections and future investment requirements.