Northwest Natural Holding Co. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The combined filing reports Northwest Natural Holding Company (NW Holdings) and its principal subsidiary, regulated gas utility Northwest Natural Gas Company (NW Natural). Results are seasonal; the third quarter is not necessarily indicative of full-year performance.
Financial performance
| NW Holdings, $ millions except per-share data | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Operating revenue | 116.8 | 101.4 | 662.1 | 566.3 |
| Operating income (loss) | (14.9) | (14.4) | 86.3 | 92.9 |
| Net income (loss) | (19.6) | (20.7) | 38.4 | 38.1 |
| Diluted EPS | (0.56) | (0.67) | 1.14 | 1.24 |
| NW Natural NGD margin | 61.7 | 61.1 | 333.8 | 324.9 |
Revenue rose 15% in Q3 and 17% year to date, principally reflecting higher natural gas costs passed through to customers and increased distribution revenues. Cost of gas increased $10.9 million in Q3 and $82.8 million year to date; the company said most higher costs were reflected in regulatory rates. NGD margin, a key segment measure, increased $0.6 million in Q3 and $8.9 million year to date. NW Natural’s nine-month net income was $41.3 million, up from $39.7 million.
Q3 net loss narrowed by $1.1 million at NW Holdings. Year-to-date net income was nearly flat, while diluted EPS declined from $1.24 to $1.14, reflecting the increase in weighted-average shares following equity issuance. Year-to-date operating income fell $6.7 million as higher operating costs more than offset revenue growth.
Cash flow, debt and liquidity
- For the first nine months, NW Holdings generated $166.0 million of operating cash flow, spent $257.0 million on investing activities, including $251.8 million of capital expenditures, and received $184.2 million from financing activities. Operating cash flow was down $15.8 million year over year; capital expenditures were up $39.5 million.
- At September 30, NW Holdings had $108.6 million of cash, $141.0 million of short-term debt and $1,337.6 million of long-term debt, including current maturities. NW Natural had $11.4 million of cash, $53.0 million of short-term debt and $1,126.5 million of long-term debt, including current maturities.
- NW Holdings’ capital structure excluding short-term debt was 45.6% equity and 54.4% long-term debt; NW Natural’s was 50.6% equity and 49.4% long-term debt. Both reported compliance with debt covenants. NW Natural had no balance drawn on its $400 million revolving credit facility.
- NW Holdings raised approximately $190.9 million net through common-stock issuance and its ATM program during the first nine months. NW Natural issued $140 million of 4.8% first mortgage bonds due 2052. NW Holdings and NWN Water also borrowed $100 million and $50 million, respectively, under 18-month facilities at 4.1% at quarter-end.
Changes, outlook and notable items
- Year-to-date NGD margin growth reflected customer growth, Washington rate increases and higher usage by non-decoupled customers. Gas volumes delivered rose 6% year over year, while Q3 volumes declined 2%. The company added 8,784 meters over the prior 12 months, a 1.1% increase.
- Management cited higher contract labor, cloud-computing amortization, professional services and IT costs. Lower pension non-service costs supported earnings. Asset-management revenue was lower year to date because the unusually strong February 2021 cold-weather event did not recur.
- The OPUC approved an Oregon rate-case revenue requirement increase of $59.4 million, effective November 1, 2022, and approved recovery of $10.9 million of 2020–2021 COVID-related deferrals over two years. New Oregon and Washington PGA rates also took effect November 1, 2022. Approximately 80% of forecast 2022–23 gas-year sales volume was hedged at September 30.
- Management estimated NW Natural capital expenditures of $310–$350 million in 2022 and $1.3–$1.5 billion over 2022–2026. Combined incremental capital needs for NW Holdings and NW Natural were estimated at $600–$700 million from 2022 through 2024. No earnings guidance was provided in the supplied filing text.
- NW Natural reported estimated environmental-site liabilities of $99.8 million. For Gasco sediments, the estimated remediation range was $46.3–$350 million; the recorded liability was at the low end. Some environmental costs are recoverable through regulatory mechanisms, but estimates and cost allocation remain uncertain. The filing also describes unresolved Portland Harbor and natural-resource-damage exposures.
- Risks discussed include rising interest rates, gas-price volatility, supply-chain constraints, cybersecurity requirements, climate regulation and potential changes to building codes that could affect natural-gas demand and customer growth. Management said it had not experienced material supply-chain disruption to date. In October, NWN Water completed the approximately $88 million Far West Water & Sewer acquisition, a subsequent event.
Important facts for investors to verify
- Whether rate-case and PGA changes, including deferred-cost recovery and customer bill credits, support future margins and cash collection as expected.
- How the substantial capital program will be funded, and the effects of higher interest rates, additional debt and equity issuance on leverage and per-share earnings.
- Whether environmental remediation liabilities, particularly Portland Harbor and Gasco, increase beyond recorded amounts or recoveries through rates are delayed or limited.
- How climate rules, building-code changes, cybersecurity spending and supply constraints affect customer additions, gas demand, compliance costs and long-term asset investment.
- Whether NWN Water acquisitions and renewable-natural-gas investments produce returns consistent with their funding and execution risks.