Northwest Natural Holding Co annual report, FY2022

Northwest Natural Holding Co. — FY2022 Form 10-K

Business context and reporting period. This combined annual filing covers Northwest Natural Holding Company (NW Holdings) and its wholly owned subsidiary Northwest Natural Gas Company (NW Natural) for the year ended December 31, 2022; it is not a standalone fourth-quarter report. The core business is regulated natural gas distribution in Oregon and southwest Washington, with water and wastewater utilities, gas storage, and renewable natural gas (RNG) activities also reported. NW Natural served 794,497 meters at year-end. Figures below are for NW Holdings unless identified otherwise.

Key financial results

Metric	2022	2021	Change
Operating revenue	$1,037.4 million	$860.4 million	+$176.9 million
Income from continuing operations	$86.3 million	$78.7 million	+$7.6 million
Diluted EPS	$2.54	$2.56	-$0.02
Net cash from operating activities	$147.7 million	$160.4 million	-$12.7 million
Cash used in investing activities	$435.5 million	$300.1 million	-$135.4 million
Net cash from financing activities	$301.6 million	$131.4 million	+$170.2 million

Distribution margin: NW Natural’s NGD margin, a company-defined measure, rose 5.4% to $505.9 million from $479.8 million. It increased $26.1 million, mainly from new Oregon and Washington rates, customer growth, and deferred-balance amortization.
Revenue and gas costs: NW Natural revenue increased to $1,014.3 million from $843.1 million. NGD cost of gas rose 47% to $429.9 million, reflecting a 32% increase in average gas cost and 10% higher sales volumes. Gas commodity costs are largely passed through to customers, so revenue growth alone does not indicate equivalent margin growth.
Profit and expenses: NW Natural net income increased to $91.6 million from $81.2 million. Higher margin and lower pension non-service costs were partly offset by higher operating and maintenance, interest, depreciation, tax, and property-tax expenses. NW Holdings’ diluted EPS declined slightly, in part because of share issuance.
Cash flow and investment: NW Natural generated $145.2 million of operating cash and used $320.3 million in investing activities, including $318.7 million of capital expenditures. NW Holdings’ investing outflow included $94.3 million for water and wastewater acquisitions.
Liquidity and debt: Year-end cash and cash equivalents were $29.3 million at NW Holdings and $13.0 million at NW Natural. NW Holdings had $258.2 million of short-term debt and $1,345.9 million of gross long-term debt; NW Natural had $170.2 million of short-term commercial paper and $1,134.7 million of gross long-term debt. NW Natural’s $400 million revolving credit facility had no balance outstanding at year-end. Management said liquidity was sufficient for anticipated near-term needs.
Capital and dividends: NW Holdings raised approximately $208.6 million net from common-stock issuances in 2022, including a marketed offering and ATM sales. The annual dividend was $1.9325 per share; the January 2023 declaration implied an annual rate of $1.94.

Material changes versus 2021

Natural gas volumes sold and delivered increased 6% to 1,252 million therms; 2022 weather was 1% colder than average versus 12% warmer than average in 2021. Customer meters grew 1.1%, adding 8,600.
The Oregon rate case order increased the revenue requirement by approximately $59.4 million, effective November 1, 2022; it authorized a 9.4% ROE and 6.836% cost of capital. Washington rates also increased under the prior rate-case order.
NW Holdings’ common equity issuance supported subsidiary funding, while consolidated short-term debt fell from $389.5 million to $258.2 million. Gross long-term debt increased.
Water and wastewater expansion accelerated: NW Holdings completed seven transactions in 2022, including the approximately $97 million Far West acquisition in Arizona. Goodwill rose to $149.3 million from $70.6 million, primarily due to water acquisitions; no goodwill impairment was recorded.
Operating cash flow decreased despite higher net income, reflecting working-capital and customer-credit timing, including higher receivables and customer bill credits related to prior-year asset-optimization revenue.

Outlook, risks, contingencies, and unusual items

Investment plans: NW Natural forecast 2023 capital expenditures of $310–$350 million and $1.3–$1.5 billion for 2023–2027. NW Natural Water expected about $25 million of 2023 maintenance capital expenditures. Combined incremental capital needs for NW Holdings and NW Natural were estimated at $450–$550 million from 2023 through 2025.
Regulatory and climate outlook: Management intends to seek recovery in rates of costs to comply with Oregon’s Climate Protection Program (CPP) and Washington’s Climate Commitment Act (CCA). Estimated non-low-income residential bill impacts were 1.5%–6% in the first CCA compliance year and 1%–9% during the first Oregon CPP compliance period; management cautioned these estimates may change and costs could rise. Building-code changes and restrictions on new gas connections may pressure customer growth.
Growth initiatives: Management expected initial RNG resale revenue from its EDL project in 2023, subject to facility commissioning. The project involves approximately $50.1 million of committed development payments and long-term RNG purchase arrangements; estimated purchases include $567.8 million thereafter over the contract term. Execution, production, market prices, and contracting remain important uncertainties.
Environmental exposure: NW Natural recorded an estimated $118.8 million environmental liability at year-end and a $111.6 million related regulatory asset. Recovery depends on regulatory prudence reviews and, in Oregon, an earnings test. The Gasco sediment cleanup estimate ranges from $51.9 million to $350 million; the company recorded the low end. The high end of certain other site liabilities could not be reasonably estimated.
Other key risks: Regulatory decisions could delay or limit cost recovery; NW Natural relies on a single interstate pipeline to serve its distribution territory; weather, gas prices, interest rates, credit access, and pension performance may affect results or liquidity. Natural gas transition policy and competition from electrification also pose customer-growth risks.
Unusual prior-period event: The February 2021 cold-weather event produced approximately $29 million of higher commodity costs, mostly deferred for recovery, and approximately $39 million of asset-management revenue, mostly deferred for customers. NW Natural refunded approximately $41.1 million of related storage and asset-management sharing credits to Oregon customers in early 2022.
Audit and controls: The independent auditor issued unqualified opinions on NW Holdings’ and NW Natural’s financial statements. NW Holdings’ internal control over financial reporting was assessed as effective. The auditor identified regulatory accounting as a critical audit matter because of judgment involved in the recovery of regulatory assets and settlement of regulatory liabilities.

Most important facts for investors to verify

Whether authorized rate increases and regulatory deferrals translate into sustained margin and cash-flow growth, and whether regulators approve recovery of deferred costs.
How much of revenue growth reflects pass-through gas costs versus growth in NGD margin; also monitor customer growth, usage, and weather exposure.
Funding and refinancing needs against planned capital expenditures, debt maturities, rising borrowing costs, and further equity issuance or dilution.
Actual CPP and CCA compliance costs and customer impacts, including legal or regulatory developments affecting building codes and gas connections.
Environmental remediation estimates, insurance offsets, regulatory-asset recoverability, and developments in Portland Harbor and other site proceedings.
EDL RNG facility commissioning, contracted offtake, expected production and economics, and the substantial long-term purchase commitments.