Northwest Natural Holding Co. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. The filing is unaudited and presents separate consolidated results for Northwest Natural Holding Company (NW Holdings) and its principal operating subsidiary, Northwest Natural Gas Company (NW Natural). The core business is regulated gas distribution in Oregon and southwest Washington; NW Holdings also has water, wastewater, and other businesses. Gas operations are seasonal, so quarterly results are not necessarily indicative of full-year results.
Key financial results
Unless otherwise stated, amounts below are for NW Holdings; dollar figures are in millions.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Operating revenue | $237.9 | $195.0 | $700.3 | $545.3 |
| Operating income | $13.8 | $13.5 | $127.4 | $101.2 |
| Net income | $1.2 | $1.7 | $72.9 | $58.0 |
| Diluted EPS | $0.03 | $0.05 | $2.03 | $1.77 |
| NGD margin | $109.9 | $94.4 | $327.5 | $272.1 |
- Margins and drivers: NGD margin, the company’s principal measure of gas-distribution performance, rose 16% in Q2 and 20% year to date. Higher Oregon and Washington rates, lower-than-PGA-estimated gas costs, and customer growth contributed. Q2 gas volumes fell 12%, mainly as weather was 8% warmer than average versus 23% colder than average in the prior-year quarter. First-half volumes rose slightly, with colder comparative weather and customer growth.
- Cash flow: First-half operating cash flow was $297.9 million, up from $196.6 million. Investing cash outflow was $151.5 million, including $144.9 million of capital expenditures; financing cash outflow was $32.2 million. Cash, cash equivalents, and restricted cash ended the period at $155.1 million. Management attributes much of the operating-cash-flow increase to working-capital changes.
- Liquidity and debt: June 30 cash and cash equivalents were $137.8 million. NW Holdings reported $41.0 million of short-term debt and $1.535 billion of long-term debt, including current maturities. NW Natural had no short-term debt and $1.325 billion of long-term debt, including current maturities. NW Natural had a $400 million revolving credit facility with no balance drawn; NW Holdings had a $200 million facility with $41 million drawn. Management expects adequate liquidity from cash, operations, and available credit.
- Dividend: NW Holdings paid $0.485 per share in Q2 and declared the same quarterly dividend in July, implying an indicated annual rate of $1.94 per share.
Material changes versus the prior comparable period
- Q2 NW Holdings net income declined $0.5 million, while first-half net income increased $15.0 million. NW Natural’s first-half net income rose $17.2 million to $77.3 million.
- Revenue growth reflects higher gas distribution rates and higher gas costs billed through customer rates; cost of gas generally passes through to customers. Q2 NW Natural operations and maintenance expense increased $11.4 million, and net interest expense increased $4.4 million, partly offsetting stronger margin. First-half interest expense increased $14.2 million at NW Holdings, reflecting higher debt balances and financing costs.
- First-half capital expenditures decreased year over year, primarily because two significant information-technology projects had entered service in the prior year. NW Holdings issued $22.1 million of net equity through its at-the-market program in the first half, versus $174.1 million in the prior-year period.
Outlook, risks, contingencies, and unusual items
- Capital plans: NW Natural forecasts 2023 capital expenditures of $310–$350 million and $1.3–$1.5 billion over 2023–2027. NW Natural Water expects about $25 million of 2023 maintenance capital expenditures and $90–$110 million over 2023–2027. Combined incremental capital needs for NW Holdings and NW Natural over 2023–2025 are estimated at $450–$550 million.
- Regulatory and climate exposure: The gas business depends on rate-case outcomes and recovery of operating, investment, and compliance costs. Oregon and Washington greenhouse-gas programs may increase costs; the company intends to seek recovery through rates. It estimates first-year non-low-income residential bill impacts of 1.5%–6% for Washington’s Climate Commitment Act and 1%–9% for Oregon’s Climate Protection Program; these estimates are uncertain and could rise beyond initial compliance periods.
- Environmental contingency: NW Natural’s estimated environmental-site liability was $109.8 million. For Gasco sediments, it recorded $50.2 million, the low end of an estimated $50.2–$350 million range. Other Portland Harbor natural-resource-damage exposure remains uncertain, and the high end cannot be reasonably estimated. The company has regulatory recovery mechanisms, subject to applicable reviews and earnings tests.
- Other items: NW Holdings recognized a $2.7 million gain from a third-party settlement of receivables. The company completed the Dakota City renewable natural gas facility in April and deconsolidated it after commissioning, accounting for its investment under the equity method. Two water-sector acquisitions were completed in the first half. Subsequent to quarter-end, NW Natural expected to issue $130 million of additional bonds in August 2023.
- Risks and controls: Management cited inflation, rising interest rates, supply-chain delays, cybersecurity threats, weather, commodity and credit risks, regulatory changes, and possible constraints on natural-gas use. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether rate increases and regulatory mechanisms continue to support NGD margin as customer volumes, weather, and gas costs change.
- How higher debt and interest expense, upcoming maturities, and planned capital spending affect liquidity and future earnings.
- Whether environmental remediation estimates, particularly Portland Harbor exposures, change as allocation and cleanup work proceeds.
- Actual compliance costs and customer-rate recovery under Oregon and Washington climate programs, including the assumptions behind the estimated bill impacts.
- Progress and returns from water acquisitions and renewable natural gas investments, including regulatory approval and recovery of project costs.