Northwest Natural Holding Company — Q1 2024 Form 10-Q
Business context and reporting period
Unaudited quarter ended March 31, 2024; comparisons are with Q1 2023. The combined filing reports Northwest Natural Holding Company (NW Holdings) and its majority-owned regulated gas utility, Northwest Natural Gas Company (NW Natural), separately. NW Natural’s principal business is regulated gas distribution in Oregon and southwest Washington; NW Holdings also owns water and wastewater businesses and other investments. Results are seasonal and this quarter is not necessarily indicative of full-year performance.
Key financial metrics
| NW Holdings consolidated (USD millions, except EPS) | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Operating revenue | $433.5 | $462.4 | -$28.9 |
| Operating income | $109.8 | $113.5 | -$3.7 |
| Net income | $63.8 | $71.7 | -$7.8 |
| Diluted EPS | $1.69 | $2.01 | -$0.32 |
| Cash from operations | $125.0 | $176.9 | -$51.8 |
| Capital expenditures | $82.2 | $71.3 | +$10.9 |
| NW Natural utility metrics (USD millions, except volumes) | Q1 2024 | Q1 2023 |
|---|---|---|
| Operating revenue | $422.8 | $454.5 |
| Net income | $67.6 | $75.5 |
| Natural gas distribution (NGD) margin | $218.2 | $217.6 |
| NGD volumes sold and delivered | 429.0 million therms | 463.0 million therms |
At March 31, NW Holdings reported cash and cash equivalents of $72.4 million, total assets of $4.85 billion, short-term debt of $94.7 million, and long-term debt of $1.575 billion. The $1.575 billion long-term debt balance is net of issuance costs and includes $0.9 million of current maturities. NW Natural reported cash of $61.9 million and long-term debt of $1.365 billion, with $31.7 million of commercial paper outstanding. NW Holdings’ $200 million credit facility had $63 million drawn; NW Natural’s $400 million revolving facility was undrawn. NW Holdings’ capital structure, excluding short-term debt, was 46.0% equity and 54.0% long-term debt.
Material changes versus the prior comparable period
- NW Holdings’ net income fell $7.8 million and diluted EPS declined from $2.01 to $1.69. At NW Natural, lower other income, higher interest expense, general taxes and depreciation outweighed a modest increase in NGD margin.
- NGD margin edged up $0.5 million, despite a 34.0-million-therm decline in deliveries. Q1 2024 weather was 9% warmer than average, compared with 5% colder-than-average weather in Q1 2023. Customer growth and deferred-balance amortization supported margin.
- Operating cash flow declined $51.8 million at NW Holdings. Management cited working-capital effects, including inventory and receivables movements, higher customer bill credits for asset optimization revenue sharing, and lower net income. Capital spending increased.
- Revenue fell, mainly reflecting lower gas costs passed through to customers and lower gas volumes. NW Holdings issued 333,000 shares through its at-the-market program for $12.2 million net proceeds.
Outlook, management commentary, risks and contingencies
- Rates and investment: NW Natural requested a $154.9 million annual revenue-requirement increase in its Oregon rate case, based on a requested 10.1% ROE and $2.14 billion average rate base. The filing was under review; new rates were expected to take effect November 1, 2024, subject to regulatory approval.
- Capital spending: NW Natural estimated 2024 capital expenditures of $350–$400 million and $1.4–$1.6 billion for 2024–2028. NW Natural Water expected approximately $40 million of 2024 maintenance capital spending. Management estimated combined incremental capital needs for NW Holdings and NW Natural of $500–$575 million from 2024 through 2026.
- Environmental exposure: NW Natural reported estimated environmental-site liabilities of $113.5 million. For Gasco sediment cleanup, the estimated range was $51.4–$350 million and the recorded liability was at the low end; other Portland Harbor and upland-site exposures remain uncertain. The company said most remediation costs are subject to regulatory recovery mechanisms, but recovery is subject to applicable reviews and conditions.
- Climate and regulatory risks: Washington’s Climate Commitment Act compliance costs are being recovered through rates, while future costs and customer impacts remain uncertain. Management estimated current CCA compliance costs increase non-low-income residential bills by approximately 12%–38%; estimates may change. Oregon is developing replacement climate rules after the prior program was invalidated on procedural grounds. Washington building-code changes effective March 2024 are subject to legal challenges.
- Other commitments and risks: NW Natural Renewables’ contracted RNG purchases from delayed EDL facilities could amount to approximately $557.4 million after 2028, based on current estimates and contingent on commercial operations. A long-term RNG sales agreement includes potential payment obligations if annual deliveries fall below specified thresholds. Derivative positions expose the utility to liquidity and counterparty risks, although no collateral was required at quarter-end.
- Management updates: S&P revised NW Natural’s outlook to stable in April 2024, while revising NW Holdings’ rating from A+ to A with a negative outlook. The CIO departed in March; an acting interim CIO and CISO began in April. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Track the Oregon rate-case decision, final allowed return and rate-base treatment, and whether new rates take effect as expected.
- Review the drivers of weaker earnings and operating cash flow, including weather, pension costs, interest expense, customer bill credits and working capital.
- Monitor capital spending, financing needs, debt costs, credit ratings and remaining ATM equity-program availability; the program was due to expire in August 2024.
- Assess environmental-liability estimates, regulatory recovery and any developments in Portland Harbor, Gasco and related litigation.
- Follow CCA and other climate-policy developments, customer bill impacts, and the operational and contractual status of RNG projects.
- Consider the effect of seasonality: management cautions that first-quarter results are not necessarily indicative of full-year results.