Northwest Natural Holding Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. The combined filing presents separate results for Northwest Natural Holding Company (NW Holdings) and its principal utility subsidiary, Northwest Natural Gas Company (NW Natural). The business is seasonal, so first-quarter results are not necessarily indicative of full-year performance.
Financial performance and position
Amounts below are in millions of dollars unless noted. NW Holdings’ results include NW Natural and other businesses.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| NW Holdings operating revenue | $315.9 | $285.2 |
| NW Holdings net income | $59.5 | $47.5 |
| NW Holdings diluted EPS | $1.94 | $1.56 |
| NW Natural operating revenue | $312.4 | $282.5 |
| NW Natural net income | $60.1 | $49.2 |
| NW Natural gas distribution (NGD) margin | $172.6 | $154.1 |
| NW Holdings cash from operations | $137.1 | $104.7 |
| NW Holdings capital expenditures | $65.7 | $57.4 |
- NW Holdings operating income was $94.7 million versus $76.4 million; income from continuing operations was $59.5 million versus $48.3 million. The prior-year quarter included a $0.8 million after-tax loss from discontinued operations.
- NW Holdings’ Q1 operating cash flow less capital expenditures was approximately $71.4 million; this is a simple calculation, not a company-reported free-cash-flow measure.
- At March 31, NW Holdings had $17.9 million cash, $236.2 million short-term debt, $95.3 million current maturities of long-term debt, and $860.7 million long-term debt. Total debt on those balance-sheet lines was approximately $1.19 billion.
- NW Holdings’ equity was $936.3 million and total assets were $3.76 billion. NW Natural separately reported $10.4 million cash and $175.2 million short-term debt.
- NW Natural’s $300 million revolving credit facility was undrawn; NW Holdings had $61 million drawn on its $100 million credit facility. NW Natural also had $175.2 million commercial paper outstanding. Both entities reported compliance with applicable debt covenants.
- NW Holdings paid dividends of $0.48 per share in the quarter. In April, the board declared another $0.48 quarterly dividend, equivalent to an indicated annual rate of $1.92 per share.
Changes versus the prior-year quarter
- NW Holdings net income increased $12.0 million, while NW Natural net income rose $10.9 million. NW Natural NGD margin increased $18.5 million, mainly reflecting rates from the 2020 Oregon rate case and customer growth.
- NW Natural reported 11,103 more meters year over year, a 1.4% increase; residential meters grew 1.8%. Total gas volumes delivered increased 2%.
- Other income benefited from a $6.9 million increase in asset-management revenue, primarily associated with the February 2021 cold-weather event. NW Natural’s reported net income also reflected higher operating expenses, depreciation, interest, and taxes.
- NW Holdings operating cash flow increased $32.4 million. Investing cash outflow was lower than in Q1 2020, when the company spent $37.9 million, net, on water and wastewater acquisitions. Financing cash flow fell substantially from the prior-year period, when the companies had borrowed to build precautionary liquidity during early COVID-19 market volatility.
- Cash balances were far below March 2020 levels, when precautionary borrowing had increased cash. NW Holdings’ short-term debt also declined from $550 million at March 31, 2020 to $236.2 million at March 31, 2021.
Outlook, commentary, risks and unusual items
- Cold-weather event: February’s severe storm caused approximately $29 million of higher commodity costs; approximately $27 million was deferred as a regulatory asset for future recovery. Management estimated the event reduced first-quarter utility margin by about $2 million. Asset-management revenue was approximately $39 million, of which about $33 million was deferred as a regulatory liability for customer benefit.
- Investment plans: NW Natural expects 2021 capital expenditures of $280 million to $320 million and $1.0 billion to $1.2 billion over 2021–2025. NW Natural Water expects approximately $15 million of 2021 maintenance capital expenditures and $40 million to $50 million over five years.
- Washington rate case: NW Natural requested annual revenue increases of $6.3 million in Year One and $3.2 million in Year Two, with proposed first-year offsets that would reduce the requested increase to approximately 5%. The requested effective date was November 1, 2021. The filing reports the parties were working toward a settlement in principle; the outcome was not final in this report.
- COVID-19: Management said 2021 capital projects were expected to proceed as planned, but a slow recovery could weaken customer connections and commercial and industrial meter counts. Late-fee and reconnection-fee revenue recognition may be delayed. Recovery of deferred pandemic-related costs remains subject to regulatory review. Approximately $5.0 million of incurred COVID-related costs had been deferred as a regulatory asset.
- Environmental contingencies: NW Natural reported estimated environmental liabilities of $113.5 million. For Gasco/Siltronic sediments, estimated remediation costs ranged from $49.4 million to $350 million, and the company recorded the low end. Other Portland Harbor and site exposures remain uncertain; the high end of some potential losses could not be reasonably estimated. Regulatory recovery mechanisms cover eligible costs, subject to applicable reviews and conditions.
- Regulatory and policy risks: Natural gas utility earnings depend on rate-case outcomes and timely recovery of costs. Oregon’s greenhouse-gas policy and related rulemaking could affect long-term resource decisions. The company is pursuing renewable natural gas projects and water-utility acquisitions; additional investments and regulatory approvals may be required.
- Other items: A $35 million water-subsidiary term loan was due in June 2021. The company expected a further $15.6 million of qualified pension-plan contributions during the remainder of 2021. Management was evaluating pension relief provisions in the American Rescue Plan. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether the requested Washington rate increase reached settlement or received regulatory approval, and the rates ultimately implemented.
- Regulatory treatment and timing of recovery for cold-weather commodity costs and COVID-19 deferrals, including any prudence review or customer refunds.
- Environmental liability estimates, particularly the Portland Harbor allocation and the range of Gasco/Siltronic sediment remediation costs.
- Execution and funding of the stated gas and water capital plans, including refinancing or repayment of the water subsidiary’s June 2021 term loan.
- Customer growth, commercial and industrial meter trends, and the effects of economic recovery, weather, and decarbonization policies on utility margins.