Business context and reporting period
Northwest Natural Holding Company and Northwest Natural Gas Company filed this unaudited combined Form 10-Q for the quarter and nine months ended September 30, 2018. The financial results primarily reflect Northwest Natural Gas Company’s regulated gas utility and subsidiaries before the October 1, 2018 holding-company reorganization. The holding company itself had no income-statement activity through September 30. Results are seasonal and interim results are not necessarily indicative of full-year performance.
Financial results and key metrics
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 |
|---|---|---|
| Operating revenue | $91.2 million | $479.4 million |
| Income (loss) from continuing operations | $(11.1) million | $30.5 million |
| Net income (loss), including discontinued operations | $(11.8) million | $28.7 million |
| Diluted EPS | $(0.41) | $1.00 |
| Utility margin | $54.9 million | $257.4 million |
| Cash provided by operating activities | Not presented for the quarter | $158.5 million |
| Capital expenditures | Not presented for the quarter | $158.8 million |
Quarterly results reflect the utility’s usual non-heating-season loss. At September 30, cash was $30.0 million; short-term debt was $100.5 million, and long-term debt including current maturities was $809.6 million. The commercial-paper balance carried a 2.3% weighted-average rate. The company reported a 55.2% consolidated indebtedness-to-capitalization ratio and compliance with its 70% debt covenant.
For the nine months, operating cash flow was below capital expenditures by approximately $0.3 million. Cash dividends paid were $38.4 million. The board declared a post-quarter dividend of $0.475 per share, an indicated annual rate of $1.90.
Changes versus the prior comparable period
- Third-quarter net loss from continuing operations increased by $3.3 million from 2017; diluted loss per share was $(0.39), versus $(0.28). Management cited higher payroll, benefits and other operating costs, and a smaller tax benefit, partly offset by higher utility margin.
- Nine-month continuing-operations income declined $7.1 million to $30.5 million; diluted EPS fell to $1.06 from $1.31. Utility margin decreased $11.8 million, while operations and maintenance expense rose $8.4 million. Lower income tax expense partly offset these effects.
- Nine-month utility volumes fell 9%, with weather 11% warmer than average in 2018 compared with 24% colder than average in 2017. Customer count grew 1.7% to 743,386.
- Operating cash flow declined $34.3 million year over year. Capital expenditures increased $13.5 million.
Reported revenue and expense comparisons are affected by the 2018 adoption of the new revenue standard, which moved revenue taxes into both operating revenue and operating expense. This increased each by $3.5 million for the quarter and $20.7 million year to date, with no impact on utility margin, net income or EPS.
Outlook, management commentary, risks and unusual items
- Rates and tax reform: An Oregon rate-case order effective November 1, 2018 authorized a $23.4 million, or 3.72%, annual revenue-requirement increase, a 9.4% ROE and a 7.317% overall rate of return. The order also increased pension expense included in rates by $8.1 million and changed sharing of certain asset-management revenues. Further proceedings on pension balancing and tax-reform deferrals were due by February 1, 2019. Management said significant tax-reform timing variances were not expected to continue after rates reset.
- Capital plan: Management estimated 2018 utility capital expenditures of $190 million to $220 million, including $20 million to $30 million for the North Mist expansion. The five-year 2018–2022 capital-expenditure estimate was $750 million to $850 million. The North Mist project was estimated at $144 million, with a target in-service date of March 31, 2019.
- Strategic changes: The October 1 holding-company reorganization placed the gas utility under NW Holdings, with regulatory ring-fencing conditions. Northwest Natural completed its $8.5 million stock-funded Falls Water acquisition in September, recognizing preliminary goodwill of $6.6 million. A proposed Sunriver water and wastewater acquisition was expected to close in the first half of 2019; management said the described water acquisitions would represent about $67 million of aggregate investment upon that closing.
- Gill Ranch sale: Gill Ranch was classified as held for sale and discontinued operations. The agreement provides for $25 million cash, subject to adjustment, plus potential performance payments of up to $26.5 million. Closing was expected in 2019, subject to California regulatory approval and other conditions.
- Environmental exposure: Estimated environmental liabilities totaled $116.5 million; related environmental regulatory assets were $69.1 million. For Gasco/Siltronic sediments, the company recorded $46.9 million at the low end of an estimated $46.9 million to $350 million range. Portland Harbor cost allocation remains unresolved, and the high end of certain other possible claims could not be estimated.
- Liquidity and credit: The company said near-term liquidity was sufficient, but noted that a downgrade to speculative-grade could require up to $7.0 million of derivative collateral under the scenario disclosed. Moody’s outlook was negative; S&P’s outlook was stable. A $75 million bond maturity was due in December 2018, with another $10 million due in September 2019.
- Other notable matters: The OPUC froze the pension balancing account as of October 31, 2018, with recovery subject to further proceedings. The company recorded a $216.6 million estimated regulatory liability related to regulated deferred taxes following federal tax reform; the final amount and customer treatment remained subject to regulatory developments.
The filing provides no specific full-year earnings guidance. Management’s statements about future results, transactions, recovery of regulatory assets and liabilities, and project timing are forward-looking and subject to regulatory, market, weather and execution risks.
Important facts for investors to verify
- Progress and outcomes of the remaining Oregon proceedings on pension balancing, tax-reform deferrals and excess deferred taxes.
- Completion, final proceeds and any performance payments for the Gill Ranch sale.
- Actual 2018 capital spending, North Mist project costs and in-service timing, and funding needs relative to operating cash flow.
- Environmental liability estimates, Portland Harbor allocation developments, and the amount and timing of customer recovery.
- Credit-rating changes, debt maturities, commercial-paper usage and any collateral requirements under derivative agreements.
- Closing and final purchase economics of the water acquisitions, and the effect of holding-company ring-fencing on financing and dividend capacity.