Northwest Natural Holding Co. (NW Holdings) and Northwest Natural Gas Co. (NW Natural) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. NW Natural’s regulated gas distribution business is the principal operation. NW Holdings also owns water businesses and other investments. Results are seasonal and the quarter is not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | NW Holdings | NW Natural |
|---|---|---|
| Operating revenue | $285.2 million; down slightly from $285.3 million | $282.5 million, versus $284.8 million |
| Continuing-operations net income | $48.3 million, versus $43.4 million | $49.2 million, versus $43.9 million |
| NW Holdings EPS | Continuing: $1.58 vs. $1.50; total: $1.56 vs. $1.49 | Not applicable; NW Natural reports no per-share result |
| Operating cash flow | $102.9 million, versus $104.8 million | $104.1 million, versus $104.7 million |
| Cash at quarter-end | $471.1 million | $432.3 million |
| Debt at quarter-end | $550.0 million short-term; $954.2 million long-term | $450.0 million short-term; $917.1 million long-term |
NW Holdings’ NGD margin, a company-defined measure, increased to $154.1 million from $152.7 million. NW Natural’s operating income was $77.0 million, versus $76.6 million. NW Holdings’ net income includes a $0.8 million after-tax loss from discontinued operations; the comparable loss was $0.2 million.
NW Holdings used $101.4 million in investing activities, including $57.4 million of capital expenditures and $37.9 million for acquisitions, net of cash acquired. NW Natural used $61.6 million in investing activities, including $56.2 million of capital expenditures. Financing inflows substantially increased cash: NW Natural drew on credit facilities, borrowed $150 million under a 364-day term loan, and issued $150 million of 3.60% first mortgage bonds due 2050; it also retired $75 million of bonds. NW Holdings paid $13.8 million in cash dividends; its quarterly dividend was $0.4775 per share.
Changes versus the prior year
- Continuing-operations net income rose at both registrants, despite near-flat or lower revenue. NW Natural’s NGD margin improved by $1.5 million, helped by new rates, customer growth, and North Mist storage revenue.
- Gas volumes delivered fell 6%, mainly because Q1 2020 was 9% warmer than average, compared with 9% colder-than-average weather in Q1 2019. Customer meters increased 1.6% year over year.
- Comparisons were materially affected by 2019 pension-related regulatory recoveries, pension expenses and a regulatory disallowance that did not recur in 2020. Higher 2020 income-tax expense partly offset the benefit. Non-NGD storage earnings also declined amid less favorable market conditions.
- NW Holdings completed two water-sector acquisitions for preliminary aggregate cash consideration of $38.1 million. Preliminary goodwill from these acquisitions was $19.1 million; purchase accounting remains subject to adjustment.
Outlook, risks and contingencies
- COVID-19: Management reported no material operating or financial impact through March 31, but identified uncertainty around commercial and industrial demand, customer bad debts, new connections, costs and capital markets. Late fees and disconnections were suspended. The companies sought regulatory deferrals for pandemic-related costs; $0.7 million of incremental costs and lost revenue had been identified, including about $0.4 million of increased bad-debt expense. Recovery depends on regulatory approval.
- Capital plans: NW Holdings expected 2020 capital expenditures of $240–$280 million, including $230–$270 million at NGD. Planned NGD investment for 2020–2024 was $950 million–$1.1 billion; water investment over that period was estimated at $30–$40 million. Management stated that liquidity was ample after precautionary financing.
- Oregon rate case: NW Natural requested a $71.4 million annual revenue-requirement increase. A filed partial settlement would set a 6.965% overall cost of capital and 9.4% ROE; other rate-case matters remained unresolved. New rates were expected November 1, 2020, subject to regulator action.
- Environmental exposure: NW Natural reported estimated environmental liabilities of approximately $130.3 million. For Gasco/Siltronic sediment cleanup, the estimated range was $54.7–$350 million; the recorded liability was the $54.7 million low end. The high end of some other remediation and natural-resource-damage exposures could not be reasonably estimated. Regulatory recovery mechanisms apply, subject to their terms and reviews.
- Other matters: The planned Gill Ranch Storage sale remained subject to closing conditions; the agreement’s termination date was extended to May 15, 2020. The $25 million initial price was subject to working-capital adjustment, with up to $26.5 million of potential additional payments tied to future performance. Oregon’s greenhouse-gas executive order could lead to rules affecting the gas business; impacts were not yet clear.
Key investor verification points
- Track COVID-19 effects on commercial and industrial meters, bad debt, volumes, new connections, and regulatory recovery of deferred costs.
- Confirm the final Oregon rate-case outcome, effective date, and revenue requirement—not just the partial cost-of-capital settlement.
- Monitor borrowing levels, cash usage, covenant compliance, and refinancing of the $150 million term loan due March 2021.
- Review environmental cost estimates, insurance recoveries, regulatory treatment, and developments in the Portland Harbor allocation and related claims.
- Verify completion and final proceeds of the Gill Ranch sale, and final purchase-price allocations and performance of water acquisitions.
- Consider that management provided capital-spending expectations but no specific full-year earnings or EPS guidance in the supplied filing text.