Northwest Natural pany(NWN) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Forward-Looking Statements 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] - 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] Item 1. Unaudited Financial Statements 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] - Financial statements are unaudited and include all material adjustments management considers necessary for a fair statement, including normal recurring accruals[35] - 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] Consolidated Statements of Comprehensive Income of Northwest Natural Holding Company | 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] Consolidated Balance Sheets of Northwest Natural Holding Company | 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] - Total equity for NW Holdings increased by $31.6 million from December 31, 2018, to March 31, 2019[17] Consolidated Statements of Shareholders' Equity of Northwest Natural Holding Company | 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] Consolidated Statements of Cash Flows of Northwest Natural Holding Company | 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] Consolidated Statements of Comprehensive Income of Northwest Natural Gas Company | 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] Consolidated Balance Sheets of Northwest Natural Gas Company | 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] - Total equity for NW Natural increased by $31.1 million from December 31, 2018, to March 31, 2019[25] Consolidated Statements of Shareholder's Equity of Northwest Natural Gas Company | 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] Consolidated Statements of Cash Flows of Northwest Natural Gas Company | 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] Notes to Unaudited Consolidated Financial Statements 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 - 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][201] - 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][36] - 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] 2. SIGNIFICANT ACCOUNTING POLICIES - 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] - 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] - 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] 3. EARNINGS PER SHARE | 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] 4. SEGMENT INFORMATION - The primary reportable business segment is NW Natural's local gas distribution (NGD) business, serving customers in Oregon and southwest Washington[62][63] - NW Holdings' 'Other' activities include water operations (NWN Water), equity investments in pipeline projects (TWH), and other non-NGD corporate activities[66] | 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][208] 5. REVENUE | 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] - Unrecognized revenue for the fixed component of gas storage and asset management contracts was approximately $52.2 million as of March 31, 2019[82] 6. LEASES - 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] - 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] - 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][94] - 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] 7. STOCK-BASED COMPENSATION - 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] - 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] - 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] 8. DEBT | 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] 9. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS | 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] - 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] 10. INCOME TAX | 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][122] - 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] 11. PROPERTY, PLANT, AND EQUIPMENT | 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] 12. GAS RESERVES - 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] - 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] | 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 - 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] - 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] 14. BUSINESS COMBINATIONS - 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] - Preliminary goodwill of $6.4 million was recognized from the Falls Water acquisition, attributable to its regulated service territory and experienced workforce[140] - Total goodwill from all acquisitions completed in 2018 was $9.0 million as of March 31, 2019, with no impairments recognized to date[143] 15. DERIVATIVE INSTRUMENTS - 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] - 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] - 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] - 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] 16. ENVIRONMENTAL MATTERS - 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] - 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] | 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] 17. DISCONTINUED OPERATIONS - 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] - The sale is expected to close in 2019, subject to CPUC approval, with an order anticipated by the end of June 2019[191] | 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] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - NW Natural added over 12,500 meters during the past twelve months, achieving a 1.7% growth rate as of March 31, 2019[207] - 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] Executive Summary | 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] - 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] 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] Results of Operations - Regulatory Matters - 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] - 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][248] - 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][251][252] - 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][249] Results of Operations - Business Segment - Natural Gas Distribution (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] - 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][261] | 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 | 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] Results of Operations - Other | 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] Results of Operations - Consolidated Operations 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 | 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] Depreciation and Amortization | 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] Other Income (Expense), Net | 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] - This decrease was partially offset by a $3.8 million increase in regulatory interest income related to the pension balancing account[279] Interest Expense, Net | 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] Income Tax Expense | 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] Pending sale of Gill Ranch Storage - 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] - 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] - 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] Financial Condition 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 | 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] Liquidity and Capital Resources - 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] - 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] - 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] - NW Natural was in compliance with the ring-fencing provisions as of March 31, 2019[297] Credit Agreements - 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][309] - 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][313] - 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][315] 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 | 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] - 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] Long-Term Debt - 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] Bankruptcy Ring-Fencing Restrictions - 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] - 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] Cash Flows 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 | 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] - This was partially offset by a $22.7 million decrease in cash flow benefits from changes in deferred gas cost balances[322] Investing Activities | 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] - 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][326] Financing Activities | 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] Contingent Liabilities - NW Natural's total estimated liability related to environmental sites was $124.5 million as of March 31, 2019[330] Application of Critical Accounting Policies and Estimates 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] Item 4. Controls and Procedures 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] - 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] PART II. OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 6. Exhibits 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][343] 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]