Northwest Natural Holding Co (NYSE:NWN) Q3 2019 Earnings Conference Call November 5, 2019 11:00 AM ET Company Participants Nikki Sparley - Director, IR David Anderson - President, CEO & Director Frank Burkhartsmeyer - SVP & CFO Conference Call Participants Christopher Ellinghaus - The Williams Capital Group Aga Zmigrodzka - UBS Investment Bank Sarah Akers - Wells Fargo Securities Operator Good day, and welcome to the Northwest Natural Holding Company Third Quarter 2019 Conference Call and Webcast. [Operator ...

Northwest Natural Holding Company (NYSE:NWN) Q2 2019 Earnings Conference Call August 6, 2019 11:00 AM ET Company Participants Nikki Sparley – Director-Investor Relations David Anderson – President and Chief Executive Officer Frank Burkhartsmeyer – Senior Vice President and Chief Financial Officer Conference Call Participants Sarah Akers – Wells Fargo Operator Good day, and welcome to the NW Natural Holdings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] ...

PART I. FINANCIAL INFORMATION [FORWARD-LOOKING STATEMENTS](index=4&type=section&id=FORWARD-LOOKING%20STATEMENTS) This section outlines forward-looking statements, emphasizing their basis in current expectations and inherent uncertainties and risks - Forward-looking statements are based on current expectations and assumptions, subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict[7](index=7&type=chunk) - Examples of forward-looking statements include plans, projections, objectives, future events, earnings, dividends, capital expenditures, climate change, customer rates, and regulatory outcomes[6](index=6&type=chunk) - The company cautions against relying on forward-looking statements, as actual results may differ materially due to various factors discussed in the 2018 Annual Report on Form 10-K[7](index=7&type=chunk) [ITEM 1. UNAUDITED FINANCIAL STATEMENTS](index=6&type=section&id=ITEM%201.%20UNAUDITED%20FINANCIAL%20STATEMENTS) This section presents unaudited consolidated financial statements for NW Holdings and NW Natural, including income, balance sheets, equity, and cash flows [NW Holdings Consolidated Statements of Comprehensive Income](index=6&type=section&id=NORTHWEST%20NATURAL%20HOLDING%20COMPANY%20CONSOLIDATED%20STATEMENTS%20OF%20COMPREHENSIVE%20INCOME) This statement presents NW Holdings' unaudited comprehensive income, net income, and EPS for the periods ended June 30, 2019 and 2018 **NW Holdings Consolidated Statements of Comprehensive Income (Unaudited)** | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Operating revenues | $123,443 | $124,567 | $408,791 | $388,202 | | Income from operations | $16,098 | $8,269 | $92,143 | $76,020 | | Net income (loss) | $1,095 | $(998) | $44,296 | $40,539 | | Comprehensive income (loss) | $1,210 | $(845) | $44,526 | $40,846 | | Basic EPS | $0.04 | $(0.03) | $1.52 | $1.41 | | Diluted EPS | $0.04 | $(0.03) | $1.52 | $1.41 | - NW Holdings' net income significantly improved from a loss of **$(998) thousand** in Q2 2018 to a profit of **$1,095 thousand** in Q2 2019, and increased from **$40,539 thousand** to **$44,296 thousand** for the six months ended June 30, 2019[10](index=10&type=chunk) [NW Holdings Consolidated Balance Sheets](index=8&type=section&id=NORTHWEST%20NATURAL%20HOLDING%20COMPANY%20CONSOLIDATED%20BALANCE%20SHEETS) This section presents NW Holdings' unaudited consolidated balance sheets, detailing assets, liabilities, and equity as of June 30, 2019 and 2018 **NW Holdings Consolidated Balance Sheets (Unaudited)** | Metric (in thousands) | June 30, 2019 | June 30, 2018 | December 31, 2018 | | :-------------------- | :------------ | :------------ | :---------------- | | Total current assets | $239,058 | $180,844 | $295,921 | | Total non-current assets | $2,999,073 | $2,805,916 | $2,946,741 | | Total assets | $3,238,131 | $2,986,760 | $3,242,662 | | Total current liabilities | $307,030 | $297,880 | $509,084 | | Total deferred credits and other non-current liabilities | $1,248,354 | $1,245,459 | $1,264,697 | | Total equity | $876,746 | $759,526 | $762,634 | | Total liabilities and equity | $3,238,131 | $2,986,760 | $3,242,662 | - NW Holdings' total assets increased to **$3,238,131 thousand** at June 30, 2019, from **$2,986,760 thousand** at June 30, 2018. Total equity also saw a significant increase to **$876,746 thousand** from **$759,526 thousand** over the same period[13](index=13&type=chunk)[15](index=15&type=chunk) [NW Holdings Consolidated Statements of Shareholders' Equity](index=10&type=section&id=NORTHWEST%20NATURAL%20HOLDING%20COMPANY%20CONSOLIDATED%20STATEMENTS%20OF%20SHAREHOLDERS%27%20EQUITY) This statement presents NW Holdings' unaudited consolidated shareholders' equity, detailing changes in common stock, retained earnings, and comprehensive loss **NW Holdings Consolidated Statements of Shareholders' Equity (Unaudited)** | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Total shareholders' equity, beginning balances | $794,227 | $772,205 | $762,634 | $742,776 | | Common stock, ending balances | $555,052 | $452,195 | $555,052 | $452,195 | | Retained earnings, ending balances | $330,018 | $315,462 | $330,018 | $315,462 | | Accumulated other comprehensive loss, ending balances | $(8,324) | $(8,131) | $(8,324) | $(8,131) | | Total shareholders' equity, ending balances | $876,746 | $759,526 | $876,746 | $759,526 | | Dividends per share of common stock | $0.4750 | $0.4725 | $0.9500 | $0.9450 | - NW Holdings' total shareholders' equity increased from **$759,526 thousand** at June 30, 2018, to **$876,746 thousand** at June 30, 2019, primarily driven by an increase in common stock and retained earnings[16](index=16&type=chunk) - Dividends per share of common stock increased slightly from **$0.4725** to **$0.4750** for the three months ended June 30, 2019, and from **$0.9450** to **$0.9500** for the six months ended June 30, 2019[16](index=16&type=chunk) [NW Holdings Consolidated Statements of Cash Flows](index=11&type=section&id=NORTHWEST%20NATURAL%20HOLDING%20COMPANY%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) This statement presents NW Holdings' unaudited consolidated cash flows, categorizing activities into operating, investing, and financing **NW Holdings Consolidated Statements of Cash Flows (Unaudited)** | Metric (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | | Net income | $44,296 | $40,539 | | Cash provided by operating activities | $155,109 | $162,652 | | Cash used in investing activities | $(153,397) | $(102,458) | | Cash provided by (used in) financing activities | $46,540 | $(54,911) | | Increase in cash and cash equivalents | $48,252 | $5,283 | | Cash and cash equivalents, end of period | $60,885 | $8,755 | - Cash provided by operating activities decreased from **$162,652 thousand** in H1 2018 to **$155,109 thousand** in H1 2019. Cash used in investing activities significantly increased from **$(102,458) thousand** to **$(153,397) thousand**, primarily due to acquisitions[18](index=18&type=chunk) - Financing activities shifted from using cash of **$(54,911) thousand** in H1 2018 to providing cash of **$46,540 thousand** in H1 2019, largely due to proceeds from common stock issuance and long-term debt[18](index=18&type=chunk) [NW Natural Gas Company Consolidated Statements of Comprehensive Income](index=13&type=section&id=NORTHWEST%20NATURAL%20GAS%20COMPANY%20CONSOLIDATED%20STATEMENTS%20OF%20COMPREHENSIVE%20INCOME) This statement presents NW Natural's unaudited comprehensive income, net income, and EPS for the periods ended June 30, 2019 and 2018 **NW Natural Gas Company Consolidated Statements of Comprehensive Income (Unaudited)** | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Operating revenues | $122,242 | $124,563 | $407,088 | $388,198 | | Income from operations | $17,240 | $8,405 | $93,884 | $76,143 | | Net income (loss) | $3,054 | $(998) | $46,949 | $40,539 | | Comprehensive income (loss) | $3,169 | $(845) | $47,179 | $40,846 | - NW Natural's net income significantly improved from a loss of **$(998) thousand** in Q2 2018 to a profit of **$3,054 thousand** in Q2 2019, and increased from **$40,539 thousand** to **$46,949 thousand** for the six months ended June 30, 2019[20](index=20&type=chunk) [NW Natural Gas Company Consolidated Balance Sheets](index=14&type=section&id=NORTHWEST%20NATURAL%20GAS%20COMPANY%20CONSOLIDATED%20BALANCE%20SHEETS) This section presents NW Natural's unaudited consolidated balance sheets, detailing assets, liabilities, and equity as of June 30, 2019 and 2018 **NW Natural Gas Company Consolidated Balance Sheets (Unaudited)** | Metric (in thousands) | June 30, 2019 | June 30, 2018 | December 31, 2018 | | :-------------------- | :------------ | :------------ | :---------------- | | Total current assets | $221,589 | $173,737 | $272,786 | | Total non-current assets | $2,917,104 | $2,817,102 | $2,919,950 | | Total assets | $3,138,693 | $2,990,839 | $3,192,736 | | Total current liabilities | $277,121 | $290,045 | $494,056 | | Total deferred credits and other non-current liabilities | $1,262,510 | $1,257,373 | $1,278,878 | | Total equity | $830,115 | $759,526 | $715,668 | | Total liabilities and equity | $3,138,693 | $2,990,839 | $3,192,736 | - NW Natural's total assets increased to **$3,138,693 thousand** at June 30, 2019, from **$2,990,839 thousand** at June 30, 2018. Total equity also increased significantly to **$830,115 thousand** from **$759,526 thousand** over the same period[23](index=23&type=chunk)[25](index=25&type=chunk) [NW Natural Gas Company Consolidated Statements of Shareholder's Equity](index=16&type=section&id=NORTHWEST%20NATURAL%20GAS%20COMPANY%20CONSOLIDATED%20STATEMENTS%20OF%20SHAREHOLDER%27S%20EQUITY) This statement presents NW Natural's unaudited consolidated shareholder's equity, detailing changes in common stock, retained earnings, and comprehensive loss **NW Natural Gas Company Consolidated Statements of Shareholder's Equity (Unaudited)** | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Total shareholder's equity, beginning balances | $746,743 | $772,205 | $715,668 | $742,776 | | Common stock, ending balances | $319,634 | $452,195 | $319,634 | $452,195 | | Retained earnings, ending balances | $518,805 | $315,462 | $518,805 | $315,462 | | Accumulated other comprehensive loss, ending balances | $(8,324) | $(8,131) | $(8,324) | $(8,131) | | Total shareholder's equity, ending balances | $830,115 | $759,526 | $830,115 | $759,526 | - NW Natural's total shareholder's equity increased from **$759,526 thousand** at June 30, 2018, to **$830,115 thousand** at June 30, 2019, primarily due to an increase in retained earnings[26](index=26&type=chunk) [NW Natural Gas Company Consolidated Statements of Cash Flows](index=17&type=section&id=NORTHWEST%20NATURAL%20GAS%20COMPANY%20CONSOLIDATED%20STATEMENTS%20OF%20CASH%20FLOWS) This statement presents NW Natural's unaudited consolidated cash flows, categorizing activities into operating, investing, and financing **NW Natural Gas Company Consolidated Statements of Cash Flows (Unaudited)** | Metric (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | | Net income | $46,949 | $40,539 | | Cash provided by operating activities | $156,136 | $162,582 | | Cash used in investing activities | $(96,064) | $(102,459) | | Cash used in financing activities | $(10,155) | $(54,911) | | Increase in cash and cash equivalents | $49,917 | $5,212 | | Cash and cash equivalents, end of period | $57,864 | $8,322 | - Cash provided by operating activities decreased from **$162,582 thousand** in H1 2018 to **$156,136 thousand** in H1 2019. Cash used in investing activities decreased from **$(102,459) thousand** to **$(96,064) thousand**[28](index=28&type=chunk) - Cash used in financing activities significantly decreased from **$(54,911) thousand** in H1 2018 to **$(10,155) thousand** in H1 2019, primarily due to capital contributions from the parent and long-term debt issuance[28](index=28&type=chunk) [NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)](index=19&type=section&id=NOTES%20TO%20CONSOLIDATED%20FINANCIAL%20STATEMENTS%20(UNAUDITED)) This section provides detailed notes to the unaudited consolidated financial statements, explaining accounting policies and financial details [1. Organization and Principles of Consolidation](index=19&type=section&id=1.%20ORGANIZATION%20AND%20PRINCIPLES%20OF%20CONSOLIDATION) This note details the October 2018 holding company reorganization, making NW Natural a wholly-owned subsidiary of NW Holdings - NW Holdings completed a reorganization into a holding company structure on **October 1, 2018**, making NW Natural a wholly-owned subsidiary[30](index=30&type=chunk) - The NGD segment is the core operating business, serving residential, commercial, and industrial customers in Oregon and southwest Washington, and is the only reportable segment for both NW Holdings and NW Natural[32](index=32&type=chunk) - The pending sale of Gill Ranch Storage, LLC is presented as discontinued operations for NW Holdings, with prior period amounts retrospectively adjusted[33](index=33&type=chunk)[37](index=37&type=chunk) [2. Significant Accounting Policies](index=20&type=section&id=2.%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note updates significant accounting policies, focusing on industry regulation and new accounting standards adopted - NW Holdings and NW Natural capitalize or defer certain costs and revenues as regulatory assets and liabilities based on orders from state public utilities commissions[40](index=40&type=chunk) **Regulatory Assets (in thousands)** | Category | June 30, 2019 | December 31, 2018 | | :------- | :------------ | :---------------- | | Current | $46,688 | $41,930 | | Non-current | $318,340 | $371,786 | **Regulatory Liabilities (in thousands)** | Category | June 30, 2019 | December 31, 2018 | | :------- | :------------ | :---------------- | | Current | $32,484 | $47,436 | | Non-current | $605,036 | $611,560 | - The company adopted ASU 2016-02 (Leases) on **January 1, 2019**, requiring recognition of operating leases on the balance sheet, resulting in approximately **$7.3 million** in operating lease right-of-use assets and liabilities for NW Holdings[52](index=52&type=chunk)[56](index=56&type=chunk) - NW Natural elected to reclassify **$1.4 million** of stranded tax effects from the Tax Cuts and Jobs Act (TCJA) from accumulated other comprehensive loss to retained earnings in Q1 2019[48](index=48&type=chunk) [3. Earnings Per Share](index=24&type=section&id=3.%20EARNINGS%20PER%20SHARE) This note details the calculation of basic and diluted earnings per share for NW Holdings, including income from continuing and discontinued operations **NW Holdings Earnings Per Share (Unaudited)** | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Basic EPS (continuing operations) | $0.07 | $(0.01) | $1.56 | $1.45 | | Diluted EPS (continuing operations) | $0.07 | $(0.01) | $1.56 | $1.45 | | Basic EPS (net income) | $0.04 | $(0.03) | $1.52 | $1.41 | | Diluted EPS (net income) | $0.04 | $(0.03) | $1.52 | $1.41 | - Basic and diluted EPS from continuing operations for NW Holdings increased to **$0.07** in Q2 2019 from **$(0.01)** in Q2 2018, and to **$1.56** for the six months ended June 30, 2019, from **$1.45** in the prior year[63](index=63&type=chunk) [4. Segment Information](index=24&type=section&id=4.%20SEGMENT%20INFORMATION) This note details the company's primary reportable segment, Natural Gas Distribution (NGD), and other aggregated activities - The company primarily operates in one reportable business segment: NW Natural's local gas distribution business (NGD)[64](index=64&type=chunk) - Gas storage activities, including Interstate Storage Services and asset management at the Mist facility, are now reported under 'Other' for NW Natural, following a reevaluation of reportable segments[64](index=64&type=chunk) - NW Holdings' 'Other' activities include water and wastewater operations (NWN Water), equity investments in pipeline projects (TWH), and other pipeline assets (NNG Financial)[68](index=68&type=chunk) **NGD Margin (in thousands)** | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | NGD margin | $80,981 | $69,746 | $233,636 | $202,462 | [5. Common Stock](index=26&type=section&id=5.%20COMMON%20STOCK) This note details NW Holdings' June 2019 equity issuance, generating $92.8 million in net proceeds for general corporate purposes - In **June 2019**, NW Holdings completed an equity issuance of **1,437,500 shares** of common stock at **$67.00 per share**[75](index=75&type=chunk) - The issuance generated net proceeds of **$92.8 million** for NW Holdings, intended for general corporate purposes and equity transfers to subsidiaries[75](index=75&type=chunk) [6. Revenue](index=28&type=section&id=6.%20REVENUE) This note disaggregates revenue from continuing operations for NW Holdings and NW Natural by type and recognition policy **NW Holdings Total Operating Revenues (in thousands)** | Revenue Type | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :----------- | :------------------------------- | :------------------------------- | | Natural gas sales | $112,015 | $408,201 | | Gas storage revenue, net | $2,740 | $5,523 | | Asset management revenue, net | $460 | $1,966 | | Appliance retail center revenue | $1,058 | $2,574 | | Other revenue | $1,305 | $1,807 | | Alternative revenue | $3,733 | $(13,520) | | Leasing revenue | $2,132 | $2,240 | | **Total operating revenues** | **$123,443** | **$408,791** | - NW Natural's primary revenue source is natural gas sales to residential, commercial, industrial, and transportation customers, with revenue recognized over time upon delivery[81](index=81&type=chunk) - Alternative revenue programs, such as Weather Normalization (WARM) and decoupling mechanisms, are considered contracts with regulators and are excluded from revenue from contracts with customers[83](index=83&type=chunk) - Leasing revenue, primarily from the North Mist Storage contract, is accounted for as a sales-type lease with regulatory accounting deferral treatment[84](index=84&type=chunk) [7. Leases](index=31&type=section&id=7.%20LEASES) This note details the company's lease accounting under the new ASC 842 standard, covering lease revenue and expenses - NW Natural's North Mist natural gas storage agreement with PGE is classified as a sales-type lease, with revenue recognized according to an OPUC-approved tariff schedule[91](index=91&type=chunk) **NW Natural Lease Revenue (in thousands)** | Lease Type | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :--------- | :------------------------------- | :------------------------------- | | Operating leases | $47 | $95 | | Sales-type leases | $2,085 | $2,145 | | **Total lease revenue** | **$2,132** | **$2,240** | - Upon adoption of ASC 842, NW Holdings recorded an operating lease right-of-use asset and associated liability of approximately **$7.3 million**, with NW Natural recording **$7.0 million**[56](index=56&type=chunk) **NW Holdings Operating Lease Liabilities (in thousands) as of June 30, 2019** | Category | NW Natural | Other (NW Holdings) | NW Holdings | | :------- | :--------- | :------------------ | :---------- | | Current liabilities | $4,141 | $130 | $4,271 | | Non-current liabilities | $634 | $87 | $721 | | **Total operating lease liabilities** | **$4,775** | **$217** | **$4,992** | [8. Stock-Based Compensation](index=34&type=section&id=8.%20STOCK-BASED%20COMPENSATION) This note describes NW Holdings' stock-based compensation plans, including LTIP and RSUs, and associated unrecognized costs - NW Holdings' stock-based compensation plans include a Long Term Incentive Plan (LTIP), an Employee Stock Purchase Plan (ESPP), and a Restated Stock Option Plan[106](index=106&type=chunk) - No expense was recognized for 2018 and 2019 LTIP performance shares as of June 30, 2019, because performance factors remained variable, preventing a mutual understanding of key terms[107](index=107&type=chunk) - As of June 30, 2019, there was **$4.0 million** of unrecognized compensation cost from RSU grants, expected to be recognized by NW Natural and other subsidiaries through 2023[111](index=111&type=chunk) [9. Debt](index=36&type=section&id=9.%20DEBT) This note provides details on NW Holdings' and NW Natural's short-term and long-term debt, including recent bond issuances and term loans - At June 30, 2019, NW Holdings had **$20.1 million** in short-term debt, while NW Natural had no commercial paper outstanding[112](index=112&type=chunk) - NW Natural issued **$140.0 million** in First Mortgage Bonds (FMBs) in June 2019, with interest rates of **3.869%** (due 2049) and **3.141%** (due 2029)[114](index=114&type=chunk) - NW Natural Water, a NW Holdings subsidiary, entered a new **$35.0 million** two-year term loan in June 2019, guaranteed by NW Holdings, which requires maintaining a consolidated indebtedness to total capitalization ratio of **70% or less** (**51.5%** at June 30, 2019)[115](index=115&type=chunk) **Estimated Fair Value of Long-Term Debt (in thousands)** | Entity | June 30, 2019 (Carrying Amount) | June 30, 2019 (Estimated Fair Value) | | :----- | :------------------------------ | :----------------------------------- | | NW Holdings | $910,397 | $970,205 | | NW Natural | $873,306 | $933,167 | [10. Pension and Other Postretirement Benefit Costs](index=37&type=section&id=10.%20PENSION%20AND%20OTHER%20POSTRETIREMENT%20BENEFIT%20COSTS) This note outlines net periodic benefit cost components and the impact of a March 2019 OPUC order on pension expenses - The service cost component of net periodic benefit cost is recognized in operations and maintenance expense, while other non-service cost components are recognized in other income (expense), net[120](index=120&type=chunk) **Net Periodic Benefit Cost Charged to Expense (in thousands)** | Benefit Type | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :----------- | :------------------------------- | :------------------------------- | | Pension Benefits | $5,260 | $32,262 | | Other Postretirement Benefits | $306 | $611 | - A **March 2019 OPUC order** allowed NW Natural to apply deferred revenues and tax benefits from the TCJA to reduce its pension regulatory balancing account, resulting in **$12.5 million** in pension expenses recognized in Q1 2019, with offsetting benefits[122](index=122&type=chunk) - NW Natural also recognized a regulatory pension disallowance of **$10.5 million** in Q1 2019, charged to operations and maintenance expense and other income (expense), net[122](index=122&type=chunk) [11. Income Tax](index=39&type=section&id=11.%20INCOME%20TAX) This note explains interim income tax expense calculation and the impact of TCJA, including regulatory amortization of deferred benefits **Effective Income Tax Rate for Continuing Operations** | Entity | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | NW Holdings | 23.4% | 31.5% | 17.0% | 27.1% | | NW Natural | 24.4% | 32.1% | 17.3% | 27.1% | - The effective income tax rate for NW Holdings and NW Natural decreased in 2019 compared to 2018, primarily due to regulatory amortization of deferred TCJA benefits approved in the **March 2019 OPUC order**[130](index=130&type=chunk) - The OPUC ordered NW Natural to provide TCJA income tax benefits to Oregon customers through ongoing annual credits to base rates and a one-time recovery of a portion of the pension balancing account[133](index=133&type=chunk) [12. Property, Plant, and Equipment](index=41&type=section&id=12.%20PROPERTY,%20PLANT,%20AND%20EQUIPMENT) This note details property, plant, and equipment classifications, highlighting derecognition due to new lease standards and project commencement **Property, Plant, and Equipment, Net (in thousands)** | Entity | June 30, 2019 | December 31, 2018 | | :----- | :------------ | :---------------- | | NW Natural | $2,321,244 | $2,417,584 | | Other (NW Holdings) | $18,382 | $3,788 | | **Total NW Holdings** | **$2,339,626** | **$2,421,372** | - In **January 2019**, NW Natural derecognized **$26.0 million** in build-to-suit asset and liability balances due to the new lease standard (ASC 842), as it is no longer considered the accounting owner during construction[137](index=137&type=chunk) - The North Mist gas storage expansion project, valued at **$146.0 million**, was derecognized from property, plant, and equipment upon lease commencement in **May 2019**, as it is classified as a sales-type lease[138](index=138&type=chunk) [13. Gas Reserves](index=42&type=section&id=13.%20GAS%20RESERVES) This note details NW Natural's $188 million investment in the Jonah Field gas reserves program for customer price protection - NW Natural has invested **$188 million** in the Jonah Field gas reserves program as of June 30, 2019, to provide long-term price protection for NGD customers[139](index=139&type=chunk) - Costs, including a carrying cost for the rate base investment, are recovered through the annual Oregon PGA filing, allowing NW Natural to recover these costs through customer rates[140](index=140&type=chunk) **NW Natural's Net Gas Reserves Investment (in thousands)** | Metric | June 30, 2019 | December 31, 2018 | | :----- | :------------ | :---------------- | | Gas reserves, current | $17,206 | $16,647 | | Gas reserves, non-current | $170,101 | $170,660 | | Less: Accumulated amortization | $113,930 | $104,463 | | Total gas reserves | $73,377 | $82,844 | | Less: Deferred taxes on gas reserves | $26,995 | $20,071 | | **Net investment in gas reserves** | **$46,382** | **$62,773** | [14. Investments](index=42&type=section&id=14.%20INVESTMENTS) This note describes NW Holdings' investments, including its 50% equity interest in Trail West Holdings, LLC, a Variable Interest Entity - NW Holdings, through NWN Energy, owns a **50% equity investment** in Trail West Holdings, LLC (TWH), which is developing a new gas transmission pipeline[144](index=144&type=chunk) - TWH is a Variable Interest Entity (VIE), but NW Holdings is not the primary beneficiary, limiting its maximum loss exposure to its equity investment balance of **$13.4 million** at June 30, 2019[145](index=145&type=chunk) [15. Business Combinations](index=42&type=section&id=15.%20BUSINESS%20COMBINATIONS) This note details NW Holdings' business combinations, primarily in the water sector, including the Sunriver acquisition and associated goodwill - In **May 2019**, NWN Water of Oregon acquired Sunriver Water, LLC and Sunriver Environmental, LLC for approximately **$55.2 million** in cash, expanding NW Holdings' water and wastewater operations[147](index=147&type=chunk) - The Sunriver acquisition resulted in preliminary goodwill of **$40.2 million**, attributed to the regulated water utility service territory, experienced workforce, and strategic growth benefits[149](index=149&type=chunk) **Preliminary Purchase Price Allocation for Sunriver Acquisition (in thousands) as of May 31, 2019** | Asset Acquired | Amount | | :------------- | :----- | | Current assets | $211 | | Property, plant and equipment | $14,009 | | Goodwill | $40,153 | | Deferred tax assets | $828 | | **Total assets acquired** | **$55,201** | - Total goodwill from all acquisitions in 2018 and 2019 was **$49.4 million** as of June 30, 2019, primarily related to water and wastewater acquisitions[157](index=157&type=chunk) [16. Derivative Instruments](index=45&type=section&id=16.%20DERIVATIVE%20INSTRUMENTS) This note details NW Natural's use of financial derivative contracts to hedge natural gas and foreign currency risks - NW Natural uses financial derivative contracts (swaps, options) to hedge natural gas sales requirements and foreign currency exchange rates for pipeline demand charges[158](index=158&type=chunk)[159](index=159&type=chunk) **Notional Amounts of Open Derivative Positions (in thousands)** | Instrument | June 30, 2019 | December 31, 2018 | | :--------- | :------------ | :---------------- | | Natural gas (therms) - Financial | 466,280 | 408,850 | | Natural gas (therms) - Physical | 564,500 | 472,275 | | Foreign exchange | $7,552 | $6,936 | - Derivatives related to regulated NGD operations generally receive regulatory deferral accounting treatment, with costs recognized in the cost of gas and subject to regulatory deferral tariffs[164](index=164&type=chunk) - NW Natural realized net losses of **$0.9 million** and net gains of **$10.4 million** for the three and six months ended June 30, 2019, respectively, from the settlement of natural gas financial derivative contracts[165](index=165&type=chunk) [17. Environmental Matters](index=47&type=section&id=17.%20ENVIRONMENTAL%20MATTERS) This note details NW Natural's environmental remediation liabilities for various sites and the Site Remediation and Recovery Mechanism - NW Natural owns or previously owned properties that may require environmental remediation, with liabilities estimated based on current technology, regulations, and PRP assessments[171](index=171&type=chunk) **Environmental Liabilities (in thousands)** | Site | June 30, 2019 (Current) | June 30, 2019 (Non-Current) | | :--- | :---------------------- | :-------------------------- | | Portland Harbor site | $6,553 | $49,999 | | Gasco/Siltronic Upland site | $9,964 | $42,672 | | Front Street site | $1,051 | $10,150 | | **Total** | **$17,578** | **$103,020** | - NW Natural has a Site Remediation and Recovery Mechanism (SRRM) in Oregon to recover **96.68%** of prudently incurred environmental remediation costs allocable to Oregon, subject to an earnings test[191](index=191&type=chunk) - A **$4.4 million** reserve for anticipated environmental cost sharing was reversed in Q2 2019 due to delays in an environmental project to 2020[194](index=194&type=chunk) [18. Discontinued Operations](index=50&type=section&id=18.%20DISCONTINUED%20OPERATIONS) This note details discontinued operations for NW Holdings (Gill Ranch sale) and NW Natural (entities transferred to NW Holdings) - NW Holdings' discontinued operations relate to the pending sale of Gill Ranch Storage, LLC, a natural gas storage facility in California, with an initial cash purchase price of **$25.0 million** plus potential additional payments[200](index=200&type=chunk)[201](index=201&type=chunk) - The sale of Gill Ranch is subject to CPUC approval, with the company striving to close the transaction by the end of 2019, despite a recent motion to withdraw from the settlement agreement by one party[202](index=202&type=chunk)[203](index=203&type=chunk) **NW Holdings Discontinued Operations Assets and Liabilities (in thousands) as of June 30, 2019** | Category | Assets | Liabilities | | :------- | :----- | :---------- | | Current | $14,001 | $13,279 | - NW Natural's financial statements reflect entities transferred to NW Holdings during the **October 2018 reorganization** (e.g., NWN Energy, NWN Gas Storage, NWN Water) as discontinued operations for all periods presented[209](index=209&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=55&type=section&id=ITEM%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's analysis of NW Holdings' and NW Natural's financial condition and results, emphasizing business seasonality - NW Holdings completed a reorganization into a holding company structure on **October 1, 2018**, to pursue and finance new opportunities like the water sector, while providing legal separation for regulated natural gas distribution operations[213](index=213&type=chunk) - The NGD segment is the core business, while 'Other' activities for NW Holdings include water businesses and pipeline investments, and for NW Natural, non-NGD storage and asset management[214](index=214&type=chunk) - The business is seasonal, with results for interim periods not necessarily indicative of full-year results[212](index=212&type=chunk) [Executive Summary](index=56&type=section&id=EXECUTIVE%20SUMMARY) This summary highlights NW Holdings' and NW Natural's financial performance, customer growth, infrastructure investment, and increased net income - NW Holdings' NGD business added over **12,400 meters** in the past twelve months, achieving a **1.7% growth rate** by June 30, 2019[218](index=218&type=chunk) - The company invested **$90.5 million** in the NGD distribution system for growth, safety, and reliability, and placed its North Mist expansion project into service[218](index=218&type=chunk) **NW Holdings Key Financial Highlights (in thousands, except per share data)** | Metric | Q2 2019 Amount | Q2 2019 Per Share | Q2 2018 Amount | Q2 2018 Per Share | QTD Change | | :----- | :------------- | :---------------- | :------------- | :---------------- | :--------- | | Net income from continuing operations | $2,051 | $0.07 | $(339) | $(0.01) | $2,390 | | Consolidated net income | $1,095 | $0.04 | $(998) | $(0.03) | $2,093 | | NGD margin | $80,981 | | $69,746 | | $11,235 | **NW Holdings Key Financial Highlights (in thousands, except per share data)** | Metric | YTD 2019 Amount | YTD 2019 Per Share | YTD 2018 Amount | YTD 2018 Per Share | YTD Change | | :----- | :-------------- | :----------------- | :-------------- | :----------------- | :--------- | | Net income from continuing operations | $45,469 | $1.56 | $41,672 | $1.45 | $3,797 | | Consolidated net income | $44,296 | $1.52 | $40,539 | $1.41 | $3,757 | | NGD margin | $233,636 | | $202,462 | | $31,174 | - The increase in net income from continuing operations for NW Holdings was primarily driven by an **$11.2 million** increase in NGD margin in Q2 2019, due to new customer rates in Oregon, reversal of an environmental cost sharing reserve, and North Mist expansion services[219](index=219&type=chunk) [Dividends](index=58&type=section&id=DIVIDENDS) This section reports on NW Holdings' dividend payments, noting a slight increase in quarterly and year-to-date dividends per common share **Dividends Paid Per Common Share** | Period | 2019 | 2018 | Change | | :----- | :--- | :--- | :----- | | Three Months Ended June 30 | $0.4750 | $0.4725 | $0.0025 | | Six Months Ended June 30 | $0.9500 | $0.9450 | $0.0050 | - In **July 2019**, NW Holdings' Board of Directors declared a quarterly dividend of **$0.4750 per share**, reflecting an annual indicated dividend rate of **$1.90 per share**[226](index=226&type=chunk) [Results of Operations](index=58&type=section&id=RESULTS%20OF%20OPERATIONS) This section analyzes the financial results of NW Holdings and NW Natural, covering regulatory matters, segment performance, and consolidated operations [Regulatory Matters](index=58&type=section&id=Regulatory%20Matters) This section details the regulatory environment affecting NW Natural, including rate cases, FERC regulation, and the impact of OPUC orders - NW Natural's natural gas distribution business is regulated by the OPUC and WUTC, affecting rates, terms of service, and security issuances[228](index=228&type=chunk) - The **March 2019 OPUC order** resolved pension balancing account recovery and TCJA benefits, leading to the recovery of **$12.5 million** in deferred pension expenses and annual base rate credits for customers[234](index=234&type=chunk)[239](index=239&type=chunk) - NW Natural filed a general rate case in Washington in **December 2018**, requesting an ROE of **10.3%**, a decoupling tariff, and a mechanism for environmental cost recovery[236](index=236&type=chunk)[269](index=269&type=chunk)[270](index=270&type=chunk) - Oregon's Senate Bill 98, signed into law in **July 2019**, enables natural gas utilities to procure or develop renewable natural gas (RNG), setting broad targets for RNG in the pipeline system by 2050[277](index=277&type=chunk)[278](index=278&type=chunk) [Business Segment - Natural Gas Distribution (NGD)](index=65&type=section&id=Business%20Segment%20-%20Natural%20Gas%20Distribution%20(NGD)) This section analyzes the NGD segment's performance, noting increased net income driven by margin growth and customer rates **NGD Segment Net Income (in thousands, except EPS data)** | Metric | Q2 2019 | Q2 2018 | QTD Change | YTD 2019 | YTD 2018 | YTD Change | | :----- | :------ | :------ | :--------- | :------- | :------- | :--------- | | NGD net income | $1,212 | $(2,970) | $4,182 | $42,418 | $36,913 | $5,505 | | EPS - NGD segment | $0.04 | $(0.10) | $0.14 | $1.45 | $1.28 | $0.17 | - NGD net income increased by **$4.2 million** (QTD) and **$5.5 million** (YTD) primarily due to an **$11.2 million** (QTD) and **$31.2 million** (YTD) increase in NGD margin[284](index=284&type=chunk)[285](index=285&type=chunk) - NGD margin growth was driven by new Oregon customer rates, customer growth, reversal of an environmental cost sharing reserve, and lease revenue from the North Mist storage contract[285](index=285&type=chunk) **NGD Margin (in thousands)** | Metric | Q2 2019 | Q2 2018 | QTD Change | YTD 2019 | YTD 2018 | YTD Change | | :----- | :------ | :------ | :--------- | :------- | :------- | :--------- | | NGD margin | $80,981 | $69,746 | $11,235 | $233,636 | $202,462 | $31,174 | | Total NGD volumes sold and delivered (therms) | 214,047 | 217,393 | (3,346) | 661,785 | 624,346 | 37,439 | | Total number of meters | 755,106 | 742,667 | 12,439 | | | 1.7% growth | | Average cost of gas (cents per therm) | $0.29 | $0.34 | $(0.05) | $0.30 | $0.35 | $(0.05) | [Other](index=71&type=section&id=Other) This section covers the financial results of 'Other' activities for both NW Holdings and NW Natural, noting a decrease in net income due to increased costs **Other Net Income (in thousands, except EPS data)** | Metric | Q2 2019 | Q2 2018 | QTD Change | YTD 2019 | YTD 2018 | YTD Change | | :----- | :------ | :------ | :--------- | :------- | :------- | :--------- | | NW Natural other - net income | $1,842 | $2,699 | $(857) | $4,531 | $4,830 | $(299) | | Other NW Holdings activity | $(1,003) | $(68) | $(935) | $(1,480) | $(71) | $(1,409) | | **NW Holdings other - net income** | **$839** | **$2,631** | **$(1,792)** | **$3,051** | **$4,759** | **$(1,708)** | | EPS - NW Holdings - other | $0.03 | $0.09 | $(0.06) | $0.11 | $0.17 | $(0.06) | - The decrease in NW Holdings' 'Other' net income was primarily driven by increases in professional service costs and expenses associated with developing the water business[307](index=307&type=chunk)[308](index=308&type=chunk) [Consolidated Operations](index=71&type=section&id=Consolidated%20Operations) This section provides a consolidated overview of key operational expenses, including operations and maintenance, depreciation, and interest **Operations and Maintenance Expense (in thousands)** | Entity | Q2 2019 | Q2 2018 | QTD Change | YTD 2019 | YTD 2018 | YTD Change | | :----- | :------ | :------ | :--------- | :------- | :------- | :--------- | | NW Holdings | $39,486 | $38,028 | $1,458 | $90,968 | $77,551 | $13,417 | - Operations and maintenance expense increased for NW Holdings primarily due to higher professional service costs and expenses related to developing the water business[309](index=309&type=chunk)[310](index=310&type=chunk) **Other Income (Expense), Net (in thousands)** | Entity | Q2 2019 | Q2 2018 | QTD Change | YTD 2019 | YTD 2018 | YTD Change | | :----- | :------ | :------ | :--------- | :------- | :------- | :--------- | | NW Holdings | $(2,768) | $7 | $(2,775) | $(16,515) | $(827) | $(15,688) | - Other income (expense), net, decreased significantly due to higher pension costs (non-service component) from regulatory changes and a **$6.6 million** regulatory pension disallowance, partially offset by **$4.8 million** in regulatory interest income[316](index=316&type=chunk)[317](index=317&type=chunk) **Interest Expense, Net (in thousands)** | Entity | Q2 2019 | Q2 2018 | QTD Change | YTD 2019 | YTD 2018 | YTD Change | | :----- | :------ | :------ | :--------- | :------- | :------- | :--------- | | NW Holdings | $10,654 | $8,771 | $1,883 | $20,859 | $18,045 | $2,814 | - Interest expense, net, increased for NW Holdings due to a **$0.7 million** increase in NGD commercial paper interest expense from higher short-term debt and a **$0.6 million** decrease in AFUDC debt interest[318](index=318&type=chunk)[319](index=319&type=chunk) [Pending sale of Gill Ranch Storage](index=73&type=section&id=Pending%20sale%20of%20Gill%20Ranch%20Storage) This section updates on the pending sale of Gill Ranch Storage, LLC, subject to CPUC approval, with results presented as discontinued operations - NW Holdings is in the process of selling Gill Ranch Storage, LLC for an initial cash purchase price of **$25.0 million**, plus potential additional payments[325](index=325&type=chunk) - The transaction requires CPUC approval, and despite a recent motion to withdraw from the settlement agreement by one party, the company continues to strive for a closing by the end of 2019[326](index=326&type=chunk)[327](index=327&type=chunk) - The results of Gill Ranch Storage are classified as discontinued operations and presented separately from continuing operations for NW Holdings[329](index=329&type=chunk) [Financial Condition](index=74&type=section&id=FINANCIAL%20CONDITION) This section analyzes the financial condition of NW Holdings and NW Natural, focusing on capital structure, liquidity, and cash flows [Capital Structure](index=74&type=section&id=Capital%20Structure) This section outlines the consolidated capital structure for NW Holdings and NW Natural, aiming for a target of 50% common stock and 50% long-term debt - The long-term goal is to maintain a strong consolidated capital structure with a target utility capital structure of **50% common stock** and **50% long-term debt** at NW Natural[332](index=332&type=chunk) **NW Holdings' Consolidated Capital Structure** | Component | June 30, 2019 | December 31, 2018 | | :-------- | :------------ | :---------------- | | Common stock equity | 48.5% | 44.4% | | Long-term debt | 44.6% | 41.1% | | Short-term debt, including current maturities of long-term debt | 6.9% | 14.5% | | **Total** | **100.0%** | **100.0%** | **NW Natural's Consolidated Capital Structure** | Component | June 30, 2019 | December 31, 2018 | | :-------- | :------------ | :---------------- | | Common stock equity | 48.7% | 42.9% | | Long-term debt | 45.1% | 42.2% | | Short-term debt, including current maturities of long-term debt | 6.2% | 14.9% | | **Total** | **100.0%** | **100.0%** | [Liquidity and Capital Resources](index=74&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses liquidity and capital resources for NW Holdings and NW Natural, supported by cash, dividends, and credit facilities - NW Holdings' short-term liquidity is primarily provided by cash balances (**$60.9 million** at June 30, 2019), dividends from operating subsidiaries, and available cash from a multi-year credit facility[334](index=334&type=chunk)[335](index=335&type=chunk) - NW Natural's short-term liquidity is provided by cash balances (**$57.9 million** at June 30, 2019), internal cash flow, commercial paper, and equity contributions from NW Holdings[334](index=334&type=chunk)[341](index=341&type=chunk) - Ring-fencing conditions from the holding company reorganization restrict NW Natural's dividend payments to NW Holdings if credit ratings or common equity ratios fall below specified levels[336](index=336&type=chunk) **NW Natural's Credit Ratings** | Rating Agency | Commercial Paper | Senior Secured | Senior Unsecured | Corporate Credit Rating | Ratings Outlook | | :------------ | :--------------- | :------------- | :--------------- | :---------------------- | :-------------- | | S&P | A-1 | AA- | n/a | A+ | Stable | | Moody's | P-2 | A2 | Baa1 | n/a | Stable | - In **May 2019**, Moody's revised NW Natural's ratings outlook from negative to stable, and adjusted its senior secured and unsecured long-term debt ratings[355](index=355&type=chunk) [Cash Flows](index=78&type=section&id=Cash%20Flows) This section analyzes changes in cash flows from operating, investing, and financing activities for both entities **Cash Provided by Operating Activities (in thousands)** | Entity | YTD 2019 | YTD 2018 | YTD Change | | :----- | :------- | :------- | :--------- | | NW Holdings | $155,109 | $162,652 | $(7,543) | | NW Natural | $156,136 | $162,582 | $(6,446) | - Operating cash flows decreased primarily due to a **$49.6 million** decrease from changes in deferred gas cost balances, partially offset by a **$19.4 million** increase from income tax refunds and **$5.4 million** from pension expense collections[363](index=363&type=chunk)[366](index=366&type=chunk) **Cash Used in Investing Activities (in thousands)** | Entity | YTD 2019 | YTD 2018 | YTD Change | | :----- | :------- | :------- | :--------- | | NW Holdings | $(153,397) | $(102,458) | $(50,939) | | NW Natural | $(96,064) | $(102,459) | $6,395 | - NW Holdings' cash used in investing activities increased by **$50.9 million**, primarily due to **$55.8 million** in acquisitions, net of cash acquired[367](index=367&type=chunk) **Cash Provided by (Used in) Financing Activities (in thousands)** | Entity | YTD 2019 | YTD 2018 | YTD Change | | :----- | :------- | :------- | :--------- | | NW Holdings | $46,540 | $(54,911) | $101,451 | | NW Natural | $(10,155) | $(54,911) | $44,756 | - NW Holdings' financing cash flows increased by **$101.5 million**, driven by **$93.2 million** from common stock issuance and **$175.0 million** from long-term debt issued, partially offset by higher short-term debt repayments[373](index=373&type=chunk) [Application of Critical Accounting Policies and Estimates](index=81&type=section&id=APPLICATION%20OF%20CRITICAL%20ACCOUNTING%20POLICIES%20AND%20ESTIMATES) This section reiterates that financial reporting involves significant judgment and estimates, with no material changes since the 2018 Form 10-K - Critical accounting policies and estimates, requiring management's difficult judgments, include regulatory accounting, revenue recognition, derivative instruments, pensions, income taxes, environmental contingencies, and impairment of long-lived assets and goodwill[376](index=376&type=chunk) - There have been no material changes to the application of critical accounting policies and estimates since the 2018 Form 10-K[376](index=376&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=81&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section states that NW Holdings and NW Natural are exposed to various market risks, with no material changes for the period - NW Holdings and NW Natural are exposed to market risks such as commodity supply and price, interest rate, foreign currency, credit, and weather risks[378](index=378&type=chunk) - No material changes related to market risk disclosures occurred for the six months ended June 30, 2019[378](index=378&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=81&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section confirms the effectiveness of disclosure controls and procedures and no material changes in internal control over financial reporting - NW Holdings and NW Natural's disclosure controls and procedures were evaluated and deemed effective as of June 30, 2019[379](index=379&type=chunk) - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2019[381](index=381&type=chunk) PART II. OTHER INFORMATION [ITEM 1. LEGAL PROCEEDINGS](index=82&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section states that the company is involved only in routine, nonmaterial litigation, aside from environmental matters - The company is involved only in routine, nonmaterial litigation, aside from environmental matters disclosed in Note 17 and those referenced in the 2018 Form 10-K[382](index=382&type=chunk) [ITEM 1A. RISK FACTORS](index=82&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section indicates no material changes to the risk factors previously discussed in the 2018 Form 10-K - No material changes occurred from the risk factors discussed in Part I, Item 1A of the 2018 Form 10-K[383](index=383&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=82&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section details purchases of NW Holdings' equity securities for share-based compensation, with no repurchases under the Board-Approved program **Issuer Purchases of Equity Securities (Quarter Ended June 30, 2019)** | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----- | :------------------------------- | :--------------------------- | | 05/01/19-05/31/19 | 2,302 | $68.25 | | **Total** | **2,302** | **$68.25** | - During Q2 2019, **2,302 shares** of NW Holdings common stock were purchased on the open market to meet requirements of share-based compensation programs[384](index=384&type=chunk) - No shares were repurchased under the Board-Approved share repurchase program during Q2 2019, but the program was extended through **May 2022**[385](index=385&type=chunk) [ITEM 6. EXHIBITS](index=82&type=section&id=ITEM%206.%20EXHIBITS) This section lists the exhibits filed with the Form 10-Q, including amended bylaws, credit agreements, and certifications - The exhibit index includes amended bylaws for both Northwest Natural Holding Company and Northwest Natural Gas Company, a credit agreement for NW Natural Water Company, LLC, and a supplemental executive retirement plan[388](index=388&type=chunk) - Certifications from principal executive and financial officers for both registrants, pursuant to Sarbanes-Oxley Act sections 302 and 906, are included[388](index=388&type=chunk) - The report also includes financial statements formatted in Inline Extensible Business Reporting Language (iXBRL)[388](index=388&type=chunk) [SIGNATURE](index=84&type=section&id=SIGNATURE) This section contains the signatures of the Principal Accounting Officer for both Northwest Natural Gas Company and Northwest Natural Holding Company - The report is signed by Brody J. Wilson, Principal Accounting Officer, Vice President, Treasurer, Chief Accounting Officer and Controller, for both Northwest Natural Gas Company and Northwest Natural Holding Company[390](index=390&type=chunk)

Financial Performance and Growth Targets - NW Natural Holdings targets EPS growth of 3%-5% over the next five years[13] - The company anticipates gas utility customer growth of 1.7%+ per year[9, 13] - A five-year capital plan of $820-$910 million for the gas utility is expected to result in a rate base growth of 4%-6%[13] - The company's water growth strategy includes a $30-$40 million five-year capital plan[13] Gas Utility Operations - The gas utility serves 2 million people through more than 750,000 meters in Oregon and southwest Washington[11, 21] - The company has a diverse resource portfolio, with 60% of its gas supply from Canada and 40% from the Rockies[23] - The Mist Gas Storage Facility has a capacity of 16 Bcf, with 11 Bcf serving utility customers and 5 Bcf under long-term contracts[23] - A 3 Bcf North Mist storage expansion is underway to serve a single customer under a long-term contract[24] Water Utility Strategy - The company aims to grow its water utilities to provide incremental earnings growth and diversity[13] - The company is pursuing a deliberate and disciplined roll-up strategy in the fragmented water and wastewater industry[14, 51] - Pending and closed transactions will serve 45,000 people through 18,000 connections in Oregon and Washington[58] Regulatory and Environmental Initiatives - The company has a target of 30% carbon emissions savings associated with current and new customers by 2035, from a 2015 baseline[17] - Oregon customers rates declined 1.6% from the combined effect of the Oregon general rate case and annual Purchase Gas Adjustment (PGA) for the 2018-19 gas year[43] - The company is requesting an $8.3 million increase in revenue requirement in the Washington 2019 rate case[46]

[PART I. FINANCIAL INFORMATION](index=4&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Forward-Looking Statements](index=4&type=section&id=Forward-Looking%20Statements) This section provides a standard disclaimer regarding forward-looking statements, highlighting their inherent uncertainties and the various factors that could cause actual results to differ materially from those projected - Forward-looking statements are based on current expectations and assumptions, subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict[11](index=11&type=chunk) - Important factors that could cause actual results to differ materially are discussed in NW Holdings' and NW Natural's 2018 Annual Report on Form 10-K, Part I, Item 1A "Risk Factors" and Part II, Item 7 and Item 7A, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures about Market Risk"[11](index=11&type=chunk) [Item 1. Unaudited Financial Statements](index=6&type=section&id=Item%201.%20Unaudited%20Financial%20Statements) This section presents the unaudited consolidated financial statements for Northwest Natural Holding Company and Northwest Natural Gas Company, including comprehensive income, balance sheets, shareholders' equity, and cash flows, along with detailed notes explaining accounting policies, segment information, and other financial details for the quarter ended March 31, 2019 - The report includes separate consolidated financial statements for NW Holdings and NW Natural, reflecting a holding company reorganization effective October 1, 2018[31](index=31&type=chunk) - Financial statements are unaudited and include all material adjustments management considers necessary for a fair statement, including normal recurring accruals[35](index=35&type=chunk) - Results of operations for interim periods are not necessarily indicative of full-year results due to the seasonal nature of NW Natural's business[35](index=35&type=chunk) [Consolidated Statements of Comprehensive Income of Northwest Natural Holding Company](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20of%20Northwest%20Natural%20Holding%20Company) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (2019 vs 2018) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Operating revenues | $285,348 | $263,635 | +$21,713 | | Total operating expenses | $209,303 | $195,884 | +$13,419 | | Income from operations | $76,045 | $67,751 | +$8,294 | | Income before income taxes | $52,093 | $57,643 | -$5,550 | | Income tax expense | $8,675 | $15,632 | -$6,957 | | Net income | $43,201 | $41,537 | +$1,664 | | Basic EPS | $1.49 | $1.44 | +$0.05 | | Diluted EPS | $1.49 | $1.44 | +$0.05 | - NW Holdings' net income increased by **$1.664 million**, and diluted EPS increased by **$0.05**, for the three months ended March 31, 2019, compared to the same period in 2018[13](index=13&type=chunk) [Consolidated Balance Sheets of Northwest Natural Holding Company](index=7&type=section&id=Consolidated%20Balance%20Sheets%20of%20Northwest%20Natural%20Holding%20Company) | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | Change | | :-------------------------------- | :------------------------------ | :------------------------------- | :------- | | Total current assets | $272,109 | $295,921 | -$23,812 | | Total non-current assets | $2,919,008 | $2,946,741 | -$27,733 | | Total assets | $3,191,117 | $3,242,662 | -$51,545 | | Total current liabilities | $526,089 | $509,084 | +$16,905 | | Long-term debt | $632,484 | $706,247 | -$73,763 | | Total deferred credits and other non-current liabilities | $1,238,317 | $1,264,697 | -$26,380 | | Total equity | $794,227 | $762,634 | +$31,593 | | Total liabilities and equity | $3,191,117 | $3,242,662 | -$51,545 | - Total assets for NW Holdings decreased by **$51.5 million** from December 31, 2018, to March 31, 2019, primarily due to decreases in both current and non-current assets[15](index=15&type=chunk) - Total equity for NW Holdings increased by **$31.6 million** from December 31, 2018, to March 31, 2019[17](index=17&type=chunk) [Consolidated Statements of Shareholders' Equity of Northwest Natural Holding Company](index=9&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Equity%20of%20Northwest%20Natural%20Holding%20Company) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (2019 vs 2018) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Total shareholders' equity, beginning balances | $762,634 | $742,776 | +$19,858 | | Net income | $43,201 | $41,537 | +$1,664 | | Dividends on common stock | $(14,015) | $(13,805) | -$210 | | Reclassification of tax effects from the TCJA | $1,366 | $0 | +$1,366 | | Total shareholders' equity, ending balances | $794,227 | $772,205 | +$22,022 | | Dividends per share of common stock | $0.4750 | $0.4725 | +$0.0025 | - Total shareholders' equity for NW Holdings increased by **$22.0 million** year-over-year, driven by net income and the reclassification of TCJA tax effects[18](index=18&type=chunk) [Consolidated Statements of Cash Flows of Northwest Natural Holding Company](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20of%20Northwest%20Natural%20Holding%20Company) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (2019 vs 2018) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Cash provided by operating activities | $104,794 | $104,521 | +$273 | | Cash used in investing activities | $(51,056) | $(57,488) | +$6,432 | | Cash used in financing activities | $(53,554) | $(39,290) | -$14,264 | | Increase in cash and cash equivalents | $184 | $7,743 | -$7,559 | | Cash and cash equivalents, end of period | $12,817 | $11,215 | +$1,602 | - Cash provided by operating activities for NW Holdings remained stable, while cash used in investing activities decreased, and cash used in financing activities significantly increased year-over-year[19](index=19&type=chunk) [Consolidated Statements of Comprehensive Income of Northwest Natural Gas Company](index=11&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20of%20Northwest%20Natural%20Gas%20Company) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (2019 vs 2018) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Operating revenues | $284,846 | $263,635 | +$21,211 | | Total operating expenses | $208,202 | $195,897 | +$12,305 | | Income from operations | $76,644 | $67,738 | +$8,906 | | Income before income taxes | $52,743 | $57,649 | -$4,906 | | Income tax expense | $8,848 | $15,635 | -$6,787 | | Net income | $43,895 | $41,537 | +$2,358 | - NW Natural's net income increased by **$2.358 million** year-over-year, driven by higher operating revenues and lower income tax expense[21](index=21&type=chunk) [Consolidated Balance Sheets of Northwest Natural Gas Company](index=12&type=section&id=Consolidated%20Balance%20Sheets%20of%20Northwest%20Natural%20Gas%20Company) | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | Change | | :-------------------------------- | :------------------------------ | :------------------------------- | :------- | | Total current assets | $248,733 | $272,786 | -$24,053 | | Total non-current assets | $2,891,895 | $2,919,950 | -$28,055 | | Total assets | $3,140,628 | $3,192,736 | -$52,108 | | Total current liabilities | $511,342 | $494,056 | +$17,286 | | Long-term debt | $630,370 | $704,134 | -$73,764 | | Total deferred credits and other non-current liabilities | $1,252,173 | $1,278,878 | -$26,705 | | Total equity | $746,743 | $715,668 | +$31,075 | | Total liabilities and equity | $3,140,628 | $3,192,736 | -$52,108 | - Total assets for NW Natural decreased by **$52.1 million** from December 31, 2018, to March 31, 2019, primarily due to decreases in both current and non-current assets[23](index=23&type=chunk) - Total equity for NW Natural increased by **$31.1 million** from December 31, 2018, to March 31, 2019[25](index=25&type=chunk) [Consolidated Statements of Shareholder's Equity of Northwest Natural Gas Company](index=14&type=section&id=Consolidated%20Statements%20of%20Shareholder's%20Equity%20of%20Northwest%20Natural%20Gas%20Company) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (2019 vs 2018) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Total shareholder's equity, beginning balances | $715,668 | $742,776 | -$27,108 | | Net income | $43,895 | $41,537 | +$2,358 | | Dividends on common stock | $(12,935) | $(13,805) | +$870 | | Reclassification of tax effects from the TCJA | $1,366 | $0 | +$1,366 | | Total shareholder's equity, ending balances | $746,743 | $772,205 | -$25,462 | - Total shareholder's equity for NW Natural decreased by **$25.5 million** year-over-year, despite net income, due to a lower beginning balance[26](index=26&type=chunk) [Consolidated Statements of Cash Flows of Northwest Natural Gas Company](index=15&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20of%20Northwest%20Natural%20Gas%20Company) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change (2019 vs 2018) | | :-------------------------------- | :------------------ | :------------------ | :-------------------- | | Cash provided by operating activities | $104,703 | $104,571 | +$132 | | Cash used in investing activities | $(50,649) | $(57,487) | +$6,838 | | Cash used in financing activities | $(55,168) | $(39,290) | -$15,878 | | Increase (decrease) in cash and cash equivalents | $(1,114) | $7,794 | -$8,908 | | Cash and cash equivalents, end of period | $6,833 | $10,904 | -$4,071 | - Cash provided by operating activities for NW Natural remained stable, while cash used in investing activities decreased, and cash used in financing activities significantly increased year-over-year[28](index=28&type=chunk) [Notes to Unaudited Consolidated Financial Statements](index=16&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) This section provides detailed notes to the unaudited consolidated financial statements, explaining the company's organization, significant accounting policies, segment information, revenue recognition, lease accounting, stock-based compensation, debt, pension and postretirement benefits, income taxes, property, plant & equipment, gas reserves, investments, business combinations, derivative instruments, environmental matters, and discontinued operations [1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION](index=18&type=section&id=1.%20ORGANIZATION%20AND%20PRINCIPLES%20OF%20CONSOLIDATION) - On October 1, 2018, NW Natural completed a reorganization into a holding company structure, with NW Natural becoming a wholly-owned subsidiary of NW Holdings[30](index=30&type=chunk)[201](index=201&type=chunk) - Gill Ranch Storage, LLC is presented as a discontinued operation for NW Holdings, and certain subsidiaries previously owned by NW Natural are now owned by NW Holdings and presented as discontinued operations for NW Natural[33](index=33&type=chunk)[36](index=36&type=chunk) - NW Natural's core operating business is the natural gas distribution (NGD) segment, serving residential, commercial, and industrial customers in Oregon and southwest Washington, which is the only reportable segment for both NW Holdings and NW Natural[32](index=32&type=chunk) [2. SIGNIFICANT ACCOUNTING POLICIES](index=19&type=section&id=2.%20SIGNIFICANT%20ACCOUNTING%20POLICIES) - NW Holdings and NW Natural capitalize or defer certain costs and revenues as regulatory assets and liabilities pursuant to orders from the Oregon Public Utilities Commission (OPUC), Washington Utilities and Transportation Commission (WUTC), or Idaho Public Utilities Commission (IPUC)[39](index=39&type=chunk) - NW Natural adopted ASU 2018-02 in Q1 2019, electing to reclassify **$1.4 million** of stranded tax effects from the Tax Cuts and Jobs Act (TCJA) from accumulated other comprehensive loss to retained earnings[46](index=46&type=chunk) - Upon adoption of ASU 2016-02 (Leases) on January 1, 2019, NW Holdings recorded an operating lease right-of-use asset and an associated operating lease liability of approximately **$7.3 million**[54](index=54&type=chunk) [3. EARNINGS PER SHARE](index=22&type=section&id=3.%20EARNINGS%20PER%20SHARE) | Metric | 2019 | 2018 | | :-------------------------------- | :----- | :----- | | Net Income from continuing operations | $43,418 | $42,011 | | Loss from discontinued operations, net of tax | $(217) | $(474) | | Net income | $43,201 | $41,537 | | Basic EPS | $1.49 | $1.44 | | Diluted EPS | $1.49 | $1.44 | - NW Holdings' diluted EPS from continuing operations remained stable at **$1.50** for both periods, while total diluted EPS increased from **$1.44** to **$1.49**[61](index=61&type=chunk) [4. SEGMENT INFORMATION](index=22&type=section&id=4.%20SEGMENT%20INFORMATION) - The primary reportable business segment is NW Natural's local gas distribution (NGD) business, serving customers in Oregon and southwest Washington[62](index=62&type=chunk)[63](index=63&type=chunk) - NW Holdings' 'Other' activities include water operations (NWN Water), equity investments in pipeline projects (TWH), and other non-NGD corporate activities[66](index=66&type=chunk) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change | | :-------------------------------- | :------------------ | :------------------ | :------- | | NGD operating revenues | $279,041 | $257,933 | +$21,108 | | Less: NGD cost of gas | $105,513 | $108,164 | -$2,651 | | Less: Environmental remediation expense | $8,947 | $4,624 | +$4,323 | | Less: Revenue taxes | $11,926 | $12,429 | -$503 | | NGD margin | $152,655 | $132,716 | +$19,939 | - NGD margin increased by **$19.9 million**, or **15%**, year-over-year, primarily due to new customer rates in Oregon, customer growth, and colder than average weather[71](index=71&type=chunk)[208](index=208&type=chunk) [5. REVENUE](index=24&type=section&id=5.%20REVENUE) | Revenue Source | NW Natural (in thousands) | NW Holdings (in thousands) | | :-------------------------------- | :------------------------ | :------------------------- | | Natural gas sales | $296,186 | $296,186 | | Gas storage revenue, net | $2,783 | $2,783 | | Asset management revenue, net | $1,506 | $1,506 | | Appliance retail center revenue | $1,516 | $1,516 | | Other revenue (NW Holdings) | $0 | $502 | | Total operating revenues | $284,846 | $285,348 | - NW Natural's primary source of revenue is natural gas sales, recognized over time upon delivery, with consideration dependent on Oregon and Washington tariffs[76](index=76&type=chunk) - Unrecognized revenue for the fixed component of gas storage and asset management contracts was approximately **$52.2 million** as of March 31, 2019[82](index=82&type=chunk) [6. LEASES](index=26&type=section&id=6.%20LEASES) - Upon adoption of ASC 842 (Leases) on January 1, 2019, NW Holdings recorded an operating lease right-of-use asset and an associated operating lease liability of approximately **$7.3 million**[54](index=54&type=chunk) - The build-to-suit asset and liability balances of **$26.0 million** for the new headquarters were derecognized in January 2019, as NW Natural is no longer considered the accounting owner under ASC 842[53](index=53&type=chunk) - Total operating lease liabilities for NW Holdings were **$6.151 million** as of March 31, 2019, with a weighted average remaining lease term of **1.3 years** for NW Natural[93](index=93&type=chunk)[94](index=94&type=chunk) - A 20-year operating lease for a new Portland headquarters, commencing in late 2019 or early 2020, has estimated base rent payments of approximately **$160 million**[95](index=95&type=chunk) [7. STOCK-BASED COMPENSATION](index=30&type=section&id=7.%20STOCK-BASED%20COMPENSATION) - No expense was recognized for 2019 and 2018 Long Term Incentive Plan (LTIP) performance shares as the performance factor remains variable until the first quarter of the third year of the award period[102](index=102&type=chunk) - As of March 31, 2019, there was **$0.8 million** of unrecognized compensation cost associated with the 2017 LTIP grants, expected to be recognized through 2019[104](index=104&type=chunk) - During Q1 2019, **28,884 Restricted Stock Units (RSUs)** were granted with a weighted-average grant date fair value of **$64.26 per share**, resulting in **$4.0 million** of unrecognized compensation cost expected to be recognized through 2023[105](index=105&type=chunk) [8. DEBT](index=31&type=section&id=8.%20DEBT) | Metric | NW Holdings (in thousands) | NW Natural (in thousands) | | :-------------------------------- | :------------------------- | :------------------------ | | Short-term debt outstanding | $176,391 | $176,300 | | Long-term debt outstanding (carrying amount) | $734,454 | $734,454 | | Weighted average coupon rate (long-term debt) | 5.009% | 5.009% | | Estimated fair value of long-term debt | $775,590 | $775,590 | - NW Natural's long-term debt consists of first mortgage bonds (FMBs) with maturity dates ranging from 2019 through 2048[107](index=107&type=chunk) [9. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS](index=31&type=section&id=9.%20PENSION%20AND%20OTHER%20POSTRETIREMENT%20BENEFIT%20COSTS) | Metric | Pension Benefits 2019 (in thousands) | Pension Benefits 2018 (in thousands) | Other Postretirement Benefits 2019 (in thousands) | Other Postretirement Benefits 2018 (in thousands) | | :-------------------------------- | :----------------------------------- | :----------------------------------- | :------------------------------------------------ | :------------------------------------------------ | | Service cost | $1,517 | $1,807 | $68 | $80 | | Interest cost | $4,662 | $4,183 | $281 | $241 | | Expected return on plan assets | $(5,207) | $(5,151) | $0 | $0 | | Net periodic benefit cost | $4,577 | $5,373 | $329 | $314 | | Net amount charged to expense | $27,002 | $1,935 | $305 | $287 | - In March 2019, an OPUC order allowed for the recognition of **$12.5 million** in previously deferred pension expenses and directed a **$10.5 million** reduction to the pension balancing account[113](index=113&type=chunk) - NW Natural made cash contributions totaling **$1.5 million** to qualified defined benefit pension plans in Q1 2019 and expects further plan contributions of **$9.5 million** during the remainder of 2019[115](index=115&type=chunk) [10. INCOME TAX](index=33&type=section&id=10.%20INCOME%20TAX) | Metric | NW Holdings 2019 | NW Holdings 2018 | NW Natural 2019 | NW Natural 2018 | | :-------------------------------- | :--------------- | :--------------- | :-------------- | :-------------- | | Income taxes at statutory rates | $14,313 | $15,368 | $14,485 | $15,372 | | Total provision for income taxes on continuing operations | $8,675 | $15,632 | $8,848 | $15,635 | | Effective tax rate for continuing operations | 16.7% | 27.1% | 16.8% | 27.1% | - The effective income tax rate for NW Holdings and NW Natural decreased significantly in Q1 2019 (from **27.1%** to **16.7%/16.8%**) primarily due to regulatory amortization of deferred TCJA benefits[119](index=119&type=chunk)[122](index=122&type=chunk) - The OPUC ordered the return of approximately **$6.3 million** of excess deferred income taxes, resulting in **$2.0 million** in income tax benefits recognized in Q1 2019[206](index=206&type=chunk) [11. PROPERTY, PLANT, AND EQUIPMENT](index=34&type=section&id=11.%20PROPERTY,%20PLANT,%20AND%20EQUIPMENT) | Metric | NW Natural (in thousands) | Other (NW Holdings) (in thousands) | Total NW Holdings (in thousands) | | :-------------------------------- | :------------------------ | :------------------------------- | :------------------------------- | | NGD plant, net | $2,378,731 | N/A | N/A | | Other plant, net | $51,761 | $3,851 | $55,612 | | Total property, plant, and equipment, net | $2,430,492 | $3,851 | $2,434,343 | - The build-to-suit asset and liability balances of **$26.0 million** for the new headquarters were derecognized in January 2019 due to the adoption of the new lease standard (ASC 842)[127](index=127&type=chunk) [12. GAS RESERVES](index=34&type=section&id=12.%20GAS%20RESERVES) - NW Natural has invested **$188 million** in the Jonah Field in Wyoming through its gas reserves program to provide long-term price protection for NGD customers[128](index=128&type=chunk) - The cost of gas from these reserves, including a carrying cost for the rate base investment, is recovered through the annual Oregon PGA filing[129](index=129&type=chunk) | Metric | 2019 (in thousands) | 2018 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Total gas reserves | $78,064 | $95,684 | | Less: Deferred taxes on gas reserves | $19,638 | $22,115 | | Net investment in gas reserves | $58,426 | $73,569 | [13. INVESTMENTS](index=36&type=section&id=13.%20INVESTMENTS) - NWN Energy, a wholly-owned subsidiary of NW Holdings, owns **50%** of Trail West Holdings, LLC (TWH), which is pursuing the development of a new gas transmission pipeline[134](index=134&type=chunk) - NW Holdings' investment in TWH is accounted for under the equity method, and the maximum loss exposure is limited to the equity investment balance of **$13.4 million**[135](index=135&type=chunk) [14. BUSINESS COMBINATIONS](index=36&type=section&id=14.%20BUSINESS%20COMBINATIONS) - In September 2018, NWN Water completed the acquisition of Falls Water Co., Inc. for preliminary non-cash consideration of **$8.5 million**, marking its first acquisition in the water utility sector and providing entry into Idaho[138](index=138&type=chunk) - Preliminary goodwill of **$6.4 million** was recognized from the Falls Water acquisition, attributable to its regulated service territory and experienced workforce[140](index=140&type=chunk) - Total goodwill from all acquisitions completed in 2018 was **$9.0 million** as of March 31, 2019, with no impairments recognized to date[143](index=143&type=chunk) [15. DERIVATIVE INSTRUMENTS](index=37&type=section&id=15.%20DERIVATIVE%20INSTRUMENTS) - NW Natural enters into financial derivative contracts (swaps, options) primarily to hedge a portion of the NGD segment's natural gas sales requirements and manage commodity price variability[144](index=144&type=chunk) - For the 2018-19 gas year, NW Natural hedged **48%** of its forecasted sales volumes in financial swap and option contracts and **24%** in physical gas supplies[149](index=149&type=chunk) - NW Natural realized net gains of **$11.3 million** from the settlement of natural gas financial derivative contracts for the three months ended March 31, 2019, compared to net losses of **$9.0 million** in the prior year[152](index=152&type=chunk) - The net fair value of derivatives was an asset of **$4.4 million** at March 31, 2019, compared to a liability of **$17.7 million** at March 31, 2018[158](index=158&type=chunk) [16. ENVIRONMENTAL MATTERS](index=39&type=section&id=16.%20ENVIRONMENTAL%20MATTERS) - NW Natural owns or previously owned properties that may require environmental remediation, with a recovery mechanism in place to collect **96.68%** of remediation costs allocable to Oregon customers[159](index=159&type=chunk) - The estimated costs for the Gasco/Siltronic Sediments clean-up range from **$49.0 million** to **$350 million**, with a recorded liability of **$49.0 million**, reflecting the low end of the range[167](index=167&type=chunk) | Site | Current Liabilities (in thousands) | Non-Current Liabilities (in thousands) | Total (in thousands) | | :-------------------------------- | :--------------------------------- | :----------------------------------- | :------------------- | | Gasco/Siltronic Sediments | $4,595 | $44,427 | $49,022 | | Other Portland Harbor | $2,299 | $5,958 | $8,257 | | Gasco/Siltronic Upland site | $11,951 | $43,800 | $55,751 | | Central Service Center site | $10 | $0 | $10 | | Front Street site | $11,288 | $0 | $11,288 | | Oregon Steel Mills | $0 | $179 | $179 | | Total | $30,143 | $94,364 | $124,507 | - NW Natural's total estimated liability related to environmental sites was **$124.5 million** as of March 31, 2019[330](index=330&type=chunk) [17. DISCONTINUED OPERATIONS](index=42&type=section&id=17.%20DISCONTINUED%20OPERATIONS) - NW Holdings entered into an agreement to sell its **75%** interest in Gill Ranch Storage, LLC for an initial cash purchase price of **$25.0 million**, plus potential additional payments up to **$26.5 million**[190](index=190&type=chunk) - The sale is expected to close in 2019, subject to CPUC approval, with an order anticipated by the end of June 2019[191](index=191&type=chunk) | Metric | 2019 (in thousands) | 2018 (in thousands) | | :-------------------------------- | :------------------ | :------------------ | | Revenues | $1,721 | $1,077 | | Loss from discontinued operations, net of tax | $(217) | $(474) | | Loss from discontinued operations per share (Diluted) | $(0.01) | $(0.02) | - As a result of the holding company reorganization, several subsidiaries previously owned by NW Natural are now presented as discontinued operations in NW Natural's financial statements[197](index=197&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=47&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on NW Holdings' and NW Natural's financial condition and results of operations for the three months ended March 31, 2019, compared to 2018, highlighting key drivers, regulatory matters, and segment performance - NW Holdings completed a reorganization into a holding company structure on October 1, 2018, to pursue new opportunities like the water sector and provide legal separation for regulated natural gas distribution operations[201](index=201&type=chunk) - NW Natural added over **12,500 meters** during the past twelve months, achieving a **1.7%** growth rate as of March 31, 2019[207](index=207&type=chunk) - NW Holdings' consolidated net income increased by **$1.664 million**, and NW Natural's consolidated net income increased by **$2.358 million** for the three months ended March 31, 2019, compared to 2018[205](index=205&type=chunk) [Executive Summary](index=48&type=section&id=Executive%20Summary) | Metric | 2019 (in thousands) | 2018 (in thousands) | QTD Change | | :-------------------------------- | :------------------ | :------------------ | :----------- | | Net income from continuing operations | $43,418 | $42,011 | +$1,407 | | Consolidated net income | $43,201 | $41,537 | +$1,664 | | NGD margin | $152,655 | $132,716 | +$19,939 | - NW Natural added over **12,500 meters** during the past twelve months, for a growth rate of **1.7%** at March 31, 2019[207](index=207&type=chunk) - In March 2019, the OPUC issued an order resolving the remaining open items from NW Natural's 2018 Oregon general rate case regarding recovery of the pension balancing account and treatment of TCJA benefits[205](index=205&type=chunk) [Dividends](index=49&type=section&id=Dividends) | Per common share | 2019 | 2018 | QTR Change | | :-------------------------------- | :----- | :----- | :--------- | | Dividends paid | $0.4750 | $0.4725 | +$0.0025 | - In April 2019, NW Holdings declared a quarterly dividend of **$0.4750 per share**, reflecting an annual indicated dividend rate of **$1.90 per share**[211](index=211&type=chunk) [Results of Operations - Regulatory Matters](index=49&type=section&id=Results%20of%20Operations%20-%20Regulatory%20Matters) - NW Natural's natural gas distribution business is subject to regulation by the OPUC and WUTC, with rates and terms of service significantly impacting earnings and cash flows[213](index=213&type=chunk) - Effective November 1, 2018, the OPUC authorized new rates for Oregon customers based on a Return on Equity (ROE) of **9.4%** and an overall rate of return of **7.317%**[216](index=216&type=chunk)[248](index=248&type=chunk) - NW Natural filed a general rate case in Washington on December 31, 2018, requesting an ROE of **10.3%** and proposing a decoupling tariff and environmental cost recovery mechanism[218](index=218&type=chunk)[251](index=251&type=chunk)[252](index=252&type=chunk) - The OPUC approved terms in March 2019 for returning deferred TCJA benefits to customers and resolving pension balancing account recovery, including a **$10.5 million** regulatory pension disallowance[246](index=246&type=chunk)[249](index=249&type=chunk) [Results of Operations - Business Segment - Natural Gas Distribution (NGD)](index=55&type=section&id=Results%20of%20Operations%20-%20Business%20Segment%20-%20Natural%20Gas%20Distribution%20(NGD)) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change | | :-------------------------------- | :------------------ | :------------------ | :------- | | NGD net income | $41,206 | $39,883 | +$1,323 | | EPS - NGD segment | $1.42 | $1.39 | +$0.03 | | Gas sold and delivered (in therms) | 447,738 | 406,953 | +40,785 | | NGD margin | $152,655 | $132,716 | +$19,939 | - NGD net income increased by **$1.3 million**, or **$0.03 per share**, primarily due to a **$19.9 million** increase in NGD margin from new Oregon rates, pension balancing account recoveries, customer growth, and colder weather[260](index=260&type=chunk) - Total NGD volumes sold and delivered increased by **10%** year-over-year, driven by colder than average weather in 2019 compared to warmer than average weather in 2018, and customer growth[260](index=260&type=chunk)[261](index=261&type=chunk) | Meter Type | 2019 | 2018 | Change | Growth Rate | | :-------------------------------- | :----- | :----- | :----- | :---------- | | Residential meters | 683,796 | 672,570 | +11,226 | 1.7% | | Commercial meters | 69,611 | 68,322 | +1,289 | 1.9% | | Industrial meters | 1,040 | 1,028 | +12 | 1.2% | | Total number of meters | 754,447 | 741,920 | +12,527 | 1.7% | [Results of Operations - Cost of Gas](index=59&type=section&id=Results%20of%20Operations%20-%20Cost%20of%20Gas) | Metric | 2019 (in thousands) | 2018 (in thousands) | Change | | :-------------------------------- | :------------------ | :------------------ | :------- | | Cost of gas | $105,513 | $108,164 | -$2,651 | | Volumes sold (therms) | 341,779 | 303,632 | +38,147 | | Average cost of gas (cents per therm) | $0.31 | $0.36 | -$0.05 | - Cost of gas decreased by **$2.7 million**, or **2%**, primarily due to a **14%** decrease in the average cost of gas from lower gas costs within the PGA, partially offset by a **13%** increase in volumes sold[269](index=269&type=chunk) [Results of Operations - Other](index=59&type=section&id=Results%20of%20Operations%20-%20Other) | Metric | 2019 (in thousands) | 2018 (in thousands) | QTD Change | | :-------------------------------- | :------------------ | :------------------ | :----------- | | NW Natural other - net income | $2,689 | $2,131 | +$558 | | Other NW Holdings activity | $(477) | $(3) | -$474 | | NW Holdings other - net income | $2,212 | $2,128 | +$84 | - NW Holdings' 'Other' net income increased by **$0.084 million**, while NW Natural's 'Other' net income increased by **$0.558 million**[271](index=271&type=chunk) [Results of Operations - Consolidated Operations](index=59&type=section&id=Results%20of%20Operations%20-%20Consolidated%20Operations) This section presents a consolidated view of key operating expenses and income items for NW Holdings and NW Natural, including operations and maintenance, depreciation and amortization, other income (expense), and interest expense [Operations and Maintenance](index=59&type=section&id=Operations%20and%20Maintenance) | Metric | 2019 (in thousands) | 2018 (in thousands) | QTD Change | | :-------------------------------- | :------------------ | :------------------ | :----------- | | NW Natural | $50,434 | $39,500 | +$10,934 | | NW Holdings | $51,482 | $39,523 | +$11,959 | - Operations and maintenance expense increased by **$12.0 million** for NW Holdings, primarily due to a **$4.6 million** increase in pension expenses (service cost component) and a **$3.9 million** regulatory pension disallowance[274](index=274&type=chunk) [Depreciation and Amortization](index=60&type=section&id=Depreciation%20and%20Amortization) | Metric | 2019 (in thousands) | 2018 (in thousands) | QTD Change | | :-------------------------------- | :------------------ | :------------------ | :----------- | | NW Natural | $21,504 | $20,868 | +$636 | | NW Holdings | $21,572 | $20,875 | +$697 | - Depreciation and amortization expense increased by **$0.7 million** for both NW Holdings and NW Natural, primarily due to NGD plant additions[276](index=276&type=chunk) [Other Income (Expense), Net](index=60&type=section&id=Other%20Income%20(Expense),%20Net) | Metric | 2019 (in thousands) | 2018 (in thousands) | QTD Change | | :-------------------------------- | :------------------ | :------------------ | :----------- | | NW Natural other income (expense), net | $(13,768) | $(815) | -$12,953 | | Other NW Holdings activity | $21 | $(19) | +$40 | | NW Holdings other income (expense), net | $(13,747) | $(834) | -$12,913 | - Other income (expense), net, decreased by approximately **$12.9 million** for both entities, mainly due to a **$7.9 million** decrease from higher pension costs (non-service component) and a **$6.6 million** regulatory pension disallowance[279](index=279&type=chunk) - This decrease was partially offset by a **$3.8 million** increase in regulatory interest income related to the pension balancing account[279](index=279&type=chunk) [Interest Expense, Net](index=60&type=section&id=Interest%20Expense,%20Net) | Metric | 2019 (in thousands) | 2018 (in thousands) | QTD Change | | :-------------------------------- | :------------------ | :------------------ | :----------- | | NW Natural | $10,133 | $9,274 | +$859 | | NW Holdings | $10,205 | $9,274 | +$931 | - Interest expense, net, increased by **$0.9 million** for both NW Holdings and NW Natural, primarily due to a **$1.2 million** increase in commercial paper interest expense from higher short-term debt balances[278](index=278&type=chunk) [Income Tax Expense](index=61&type=section&id=Income%20Tax%20Expense) | Metric | 2019 (in thousands) | 2018 (in thousands) | QTD Change | | :-------------------------------- | :------------------ | :------------------ | :----------- | | NW Holdings income tax expense | $8,675 | $15,632 | -$6,957 | | NW Natural income tax expense | $8,848 | $15,635 | -$6,787 | - Income tax expense decreased by approximately **$7.0 million** for NW Holdings and **$6.8 million** for NW Natural, mainly due to the March 2019 OPUC order, including regulatory pension disallowance and excess deferred income tax amortization[280](index=280&type=chunk) [Pending sale of Gill Ranch Storage](index=61&type=section&id=Pending%20sale%20of%20Gill%20Ranch%20Storage) - NW Holdings is selling its **75%** interest in Gill Ranch Storage, LLC for an initial **$25.0 million** cash, plus potential additional payments up to **$26.5 million**[284](index=284&type=chunk) - A settlement agreement for the sale was filed with the CPUC on February 14, 2019, with an order expected by the end of June 2019[286](index=286&type=chunk) - PG&E's chapter 11 bankruptcy filing on January 29, 2019, is being monitored for potential impacts on the sale, though no immediate effect is anticipated[287](index=287&type=chunk) [Financial Condition](index=62&type=section&id=Financial%20Condition) This section discusses the capital structure, liquidity, and capital resources of NW Holdings and NW Natural, including short-term and long-term debt, credit agreements, credit ratings, and cash flow activities [Capital Structure](index=62&type=section&id=Capital%20Structure) | Metric | 2019 | 2018 | | :-------------------------------- | :----- | :----- | | Common stock equity | 46.5% | 48.9% | | Long-term debt | 37.0% | 43.2% | | Short-term debt, including current maturities of long-term debt | 16.5% | 7.9% | | Total | 100.0% | 100.0% | | Metric | 2019 | 2018 | | :-------------------------------- | :----- | :----- | | Common stock equity | 45.1% | 48.9% | | Long-term debt | 38.0% | 43.2% | | Short-term debt, including current maturities of long-term debt | 16.9% | 7.9% | | Total | 100.0% | 100.0% | - NW Holdings aims to maintain a strong consolidated capital structure with a long-term target utility capital structure of **50%** common stock and **50%** long-term debt at NW Natural[291](index=291&type=chunk) [Liquidity and Capital Resources](index=62&type=section&id=Liquidity%20and%20Capital%20Resources) - NW Holdings' short-term liquidity is primarily provided by cash balances, dividends from its operating subsidiaries (in particular NW Natural), and available cash from a multi-year credit facility[294](index=294&type=chunk) - NW Natural's short-term liquidity is primarily from the sale of commercial paper and bank loans, used to meet working capital requirements, including seasonal gas purchases and accounts receivable[305](index=305&type=chunk) - Regulatory ring-fencing provisions restrict NW Natural's dividend payments to NW Holdings if NW Natural's credit ratings and common equity ratio fall below specified levels[295](index=295&type=chunk) - NW Natural was in compliance with the ring-fencing provisions as of March 31, 2019[297](index=297&type=chunk) [Credit Agreements](index=63&type=section&id=Credit%20Agreements) - NW Holdings has a **$100.0 million** credit agreement, maturing October 2, 2023, which requires maintaining a consolidated indebtedness to total capitalization ratio of **70%** or less (**53.5%** at March 31, 2019)[307](index=307&type=chunk)[309](index=309&type=chunk) - NW Natural has a **$300.0 million** credit agreement, maturing October 2, 2023, also requiring a consolidated indebtedness to total capitalization ratio of **70%** or less (**54.9%** at March 31, 2019)[312](index=312&type=chunk)[313](index=313&type=chunk) - Interest rates on any loans outstanding under the credit agreements are tied to debt ratings; a change in the debt rating would increase or decrease the cost of any loans[310](index=310&type=chunk)[315](index=315&type=chunk) [Credit Ratings](index=65&type=section&id=Credit%20Ratings) | Rating Agency | Commercial paper | Senior secured | Senior unsecured | Corporate credit rating | Ratings outlook | | :-------------------------------- | :--------------- | :------------- | :--------------- | :---------------------- | :-------------- | | S&P | A-1 | AA- | n/a | A+ | Stable | | Moody's | P-2 | A1 | A3 | n/a | Negative | - NW Natural's credit ratings are a factor of liquidity, potentially affecting access to capital markets, the cost of funds, and the need to post collateral under derivative contracts[316](index=316&type=chunk) - If NW Natural's long-term debt ratings dropped to non-investment grade levels, it could have been required to post **$0.6 million** in collateral at March 31, 2019[302](index=302&type=chunk) [Long-Term Debt](index=65&type=section&id=Long-Term%20Debt) - NW Natural has **$10.0 million** of FMBs maturing in November 2019 (**8.310%** coupon), **$20.0 million** in December 2019 (**7.630%** coupon), and **$75.0 million** in February 2020 (**5.370%** coupon)[318](index=318&type=chunk) [Bankruptcy Ring-Fencing Restrictions](index=65&type=section&id=Bankruptcy%20Ring-Fencing%20Restrictions) - NW Natural is required to have one director independent from NW Natural management and NW Holdings, and to issue one share of preferred stock to an independent third party as part of ring-fencing conditions[320](index=320&type=chunk) - Voluntary bankruptcy for NW Natural may only be filed if approved unanimously by its Board of Directors (including the independent director) and by the holder of the preferred share[320](index=320&type=chunk) [Cash Flows](index=65&type=section&id=Cash%20Flows) This section provides a detailed analysis of cash flows from operating, investing, and financing activities for NW Holdings and NW Natural, highlighting key changes and future capital expenditure plans [Operating Activities](index=65&type=section&id=Operating%20Activities) | Metric | 2019 (in thousands) | 2018 (in thousands) | QTD Change | | :-------------------------------- | :------------------ | :------------------ | :----------- | | NW Holdings cash provided by operating activities | $104,794 | $104,521 | +$273 | | NW Natural cash provided by operating activities | $104,703 | $104,571 | +$132 | - The increase in operating cash flows was primarily due to a **$9.9 million** increase from an income tax refund and an **$8.2 million** increase from higher sales volumes due to comparatively colder weather in 2019[321](index=321&type=chunk) - This was partially offset by a **$22.7 million** decrease in cash flow benefits from changes in deferred gas cost balances[322](index=322&type=chunk) [Investing Activities](index=66&type=section&id=Investing%20Activities) | Metric | 2019 (in thousands) | 2018 (in thousands) | QTD Change | | :-------------------------------- | :------------------ | :------------------ | :----------- | | NW Holdings cash used in investing activities | $(51,056) | $(57,488) | +$6,432 | | NW Natural cash used in investing activities | $(50,649) | $(57,487) | +$6,838 | - Cash used in investing activities decreased by **$6.4 million** for NW Holdings and **$6.8 million** for NW Natural, primarily due to lower expenditures related to NW Natural's North Mist Expansion Project[324](index=324&type=chunk) - NW Natural expects to invest **$820 million** to **$910 million** in NGD capital expenditures from 2019 to 2023, and NW Holdings' water subsidiaries expect **$30 million** to **$40 million** in investments[325](index=325&type=chunk)[326](index=326&type=chunk) [Financing Activities](index=68&type=section&id=Financing%20Activities) | Metric | 2019 (in thousands) | 2018 (in thousands) | QTD Change | | :-------------------------------- | :------------------ | :------------------ | :----------- | | NW Holdings cash used in financing activities | $(53,554) | $(39,290) | -$14,264 | | NW Natural cash used in financing activities | $(55,168) | $(39,290) | -$15,878 | - Cash used in financing activities increased by **$14.3 million** for NW Holdings and **$15.9 million** for NW Natural, mainly due to higher repayments of **$37.0 million** of short-term debt, partially offset by lower repayments of **$22.0 million** of long-term debt[329](index=329&type=chunk) [Contingent Liabilities](index=68&type=section&id=Contingent%20Liabilities) - NW Natural's total estimated liability related to environmental sites was **$124.5 million** as of March 31, 2019[330](index=330&type=chunk) [Application of Critical Accounting Policies and Estimates](index=69&type=section&id=Application%20of%20Critical%20Accounting%20Policies%20and%20Estimates) This section reaffirms that there have been no material changes to the critical accounting policies and estimates discussed in the 2018 Form 10-K, which include regulatory accounting, revenue recognition, derivatives, pensions, income taxes, environmental contingencies, and impairment - There have been no material changes to the information provided in the 2018 Form 10-K with respect to the application of critical accounting policies and estimates, including regulatory accounting, revenue recognition, derivative instruments and hedging activities, pensions and postretirement benefits, income taxes, environmental contingencies, and impairment of long-lived assets and goodwill[331](index=331&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=69&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states that there were no material changes to market risk disclosures for the three months ended March 31, 2019, covering commodity supply/price, interest rate, foreign currency, credit, and weather risks - No material changes occurred related to disclosures about market risk for the three months ended March 31, 2019, covering commodity supply risk, commodity price risk, interest rate risk, foreign currency risk, credit risk, and weather risk[333](index=333&type=chunk) [Item 4. Controls and Procedures](index=69&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of disclosure controls and procedures and states that there were no material changes in internal control over financial reporting during the quarter ended March 31, 2019 - Management concluded that disclosure controls and procedures were effective as of March 31, 2019[334](index=334&type=chunk) - There have been no changes in NW Natural's or NW Holdings' internal control over financial reporting that occurred during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[336](index=336&type=chunk) [PART II. OTHER INFORMATION](index=70&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=70&type=section&id=Item%201.%20Legal%20Proceedings) This section states that, other than environmental matters discussed in Note 16, there is only routine nonmaterial litigation in the ordinary course of business - Other than the proceedings disclosed in Note 16, NW Holdings and NW Natural have only routine nonmaterial litigation that occurs in the ordinary course of business[337](index=337&type=chunk) [Item 1A. Risk Factors](index=70&type=section&id=Item%201A.%20Risk%20Factors) This section confirms that there were no material changes to the risk factors discussed in the 2018 Form 10-K - There were no material changes from the risk factors discussed in Part I, Item 1A, "Risk Factors" in the 2018 Form 10-K[338](index=338&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=70&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section provides information on purchases of NW Holdings' equity securities during the quarter, primarily for share-based compensation programs | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------------- | :----------------------------- | :--------------------------- | | 03/01/19-03/31/19 | 8,469 | $64.86 | | Total | 8,469 | N/A | - During the quarter ended March 31, 2019, **8,469 shares** of NW Holdings common stock were purchased on the open market to meet the requirements of share-based compensation programs[339](index=339&type=chunk) [Item 6. Exhibits](index=70&type=section&id=Item%206.%20Exhibits) This section refers to the Exhibit Index for a list of documents filed as exhibits to the quarterly report - The Exhibit Index provides a list of documents filed as exhibits, including certifications from principal executive and financial officers and XBRL materials[340](index=340&type=chunk)[343](index=343&type=chunk) [Signature](index=72&type=section&id=Signature) This section contains the signatures of the Principal Accounting Officer for both Northwest Natural Gas Company and Northwest Natural Holding Company, certifying the report - The report is signed by Brody J. Wilson, Principal Accounting Officer, for both Northwest Natural Gas Company and Northwest Natural Holding Company[345](index=345&type=chunk)

Northwest Natural Holding Company (NYSE:NWN) Q1 2019 Earnings Conference Call May 7, 2019 11:00 AM ET Company Participants Nikki Sparley - Director of Investor Relations David Anderson - President & Chief Executive Officer Frank Burkhartsmeyer - Senior Vice President & Chief Financial Officer Conference Call Participants Operator Good day and welcome to the Northwest Natural Holding Company First Quarter 2019 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After toda ...

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2018 220 N.W. Second Avenue, Portland, Oregon 97209 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (503) 226-4211 Securities registered pursuant to Section 12(b) of the Act: Northwest Natural Holding Company Common Stock New York Stock Exchange Northwest Natural Gas ...

Financial Data and Key Metrics Changes - For Q4 2018, the company reported consolidated net income of $35.8 million, or $1.24 per share, compared to a net loss of $90.2 million, or $3.13 per share for the same period in 2017 [22] - For the full year 2018, consolidated net income was $64.6 million, or $2.24 per share, compared to a net loss of $55.6 million, or $1.93 per share for 2017 [23] - The net income from continuing operations for 2018 was $67.3 million, or $2.33 per share, compared to $68.7 million, or $2.39 per share for 2017 [26] Business Line Data and Key Metrics Changes - Annual earnings from the Natural Gas Distribution segment declined by $0.14, while results from other segments improved by $0.08 due to asset optimization benefits [27] - In Q4 2018, earnings from the Natural Gas Distribution segment increased by $0.09, while results from other segments also increased by $0.09 [30] - The margin for the Natural Gas Distribution segment increased by $2.1 million from customer growth, new Oregon rates, and higher margins from industrial customers [31] Market Data and Key Metrics Changes - The statewide unemployment rate in Oregon was about 4%, with average wages growing by 3% and job growth around 2% [11] - The company connected more than 12,500 new customers in 2018, resulting in a growth rate of 1.7% [12] Company Strategy and Development Direction - The company continues to execute its long-term strategy by maximizing returns from its regulated natural gas utility and diversifying into the water sector [10] - The company is pursuing a decoupling mechanism for Washington customers to adjust for deviations from normal usage, including weather-related factors [18] - The company is focusing on renewable natural gas and plans to procure up to 4.5 million tons annually as part of its decarbonization strategy [43] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the all-party settlement regarding regulatory matters, which is expected to provide tax savings and cash flow certainty moving forward [15][16] - The company anticipates capital expenditures for 2019 to range from $230 million to $270 million, with a five-year estimate of $850 million to $950 million [37][38] - The company initiated 2019 earnings guidance for continuing operations in the range of $2.25 to $2.45 per share, assuming continued customer growth and average weather conditions [39] Other Important Information - The company achieved its 63rd consecutive year of annual dividend increases, making it one of only three companies on the NYSE with this record [21] - The Oregon Commission acknowledged the company's 2018 integrated resource plan, marking a significant step in long-term planning [42] Q&A Session Summary Question: What is the expected regulatory lag to recover the higher CapEx and what do you expect broad-based growth to be for 2023? - Management indicated that there will be some lag on capital expenditures, but about $60 million related to customer growth has no lag [58][60] Question: Is there any change to the five-year outlook with respect to EPS growth? - Management confirmed that the five-year outlook remains unchanged despite the increase in core utility CapEx [66] Question: Can you talk about some of the expense pressures that are baked into 2019 guidance? - Management noted that fourth quarter 2018 expense levels are indicative of 2019, with some inflationary pressure expected [94] Question: What does your financing plan look like for 2019? - Management stated that financing needs will arise over the next couple of years, but specific timing is not yet determined [98][100] Question: Can you review the water acquisition strategy and potential state regulation changes? - Management confirmed that they are targeting acquisitions in Oregon, Washington, and Idaho, and are monitoring regulatory changes that could affect future acquisitions [104][106]