Northwest Natural pany(NWN) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION FORWARD-LOOKING STATEMENTS 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] - Examples of forward-looking statements include plans, projections, objectives, future events, earnings, dividends, capital expenditures, climate change, customer rates, and regulatory outcomes[6] - 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] ITEM 1. UNAUDITED FINANCIAL STATEMENTS 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 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] NW Holdings Consolidated Balance Sheets 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][15] NW Holdings Consolidated Statements of Shareholders' Equity 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] - 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] NW Holdings Consolidated Statements of Cash Flows 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] - 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] NW Natural Gas Company Consolidated Statements of Comprehensive Income 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] NW Natural Gas Company Consolidated Balance Sheets 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][25] NW Natural Gas Company Consolidated Statements of Shareholder's Equity 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] NW Natural Gas Company Consolidated Statements of Cash Flows 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] - 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] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) This section provides detailed notes to the unaudited consolidated financial statements, explaining accounting policies and financial details 1. Organization and Principles of Consolidation 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] - 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] - The pending sale of Gill Ranch Storage, LLC is presented as discontinued operations for NW Holdings, with prior period amounts retrospectively adjusted[33][37] 2. Significant Accounting Policies 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] 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][56] - 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] 3. Earnings Per Share 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] 4. Segment Information 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] - 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] - NW Holdings' 'Other' activities include water and wastewater operations (NWN Water), equity investments in pipeline projects (TWH), and other pipeline assets (NNG Financial)[68] 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 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] - The issuance generated net proceeds of $92.8 million for NW Holdings, intended for general corporate purposes and equity transfers to subsidiaries[75] 6. Revenue 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] - 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] - Leasing revenue, primarily from the North Mist Storage contract, is accounted for as a sales-type lease with regulatory accounting deferral treatment[84] 7. Leases 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] 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] 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 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] - 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] - 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] 9. Debt 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] - 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] - 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] 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 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] 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] - 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] 11. Income Tax 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] - 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] 12. Property, Plant, and Equipment 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] - 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] 13. Gas Reserves 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] - 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] 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 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] - 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] 15. Business Combinations 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] - 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] 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] 16. Derivative Instruments 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][159] 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] - 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] 17. Environmental Matters 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] 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] - 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] 18. Discontinued Operations 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][201] - 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][203] 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] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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] - 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] - The business is seasonal, with results for interim periods not necessarily indicative of full-year results[212] Executive Summary 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] - 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] 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] 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] Results of Operations This section analyzes the financial results of NW Holdings and NW Natural, covering regulatory matters, segment performance, and consolidated operations Regulatory Matters 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] - 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][239] - 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][269][270] - 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][278] Business Segment - Natural Gas Distribution (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][285] - 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] 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 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][308] Consolidated Operations 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][310] 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][317] 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][319] Pending sale of Gill Ranch Storage 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] - 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][327] - The results of Gill Ranch Storage are classified as discontinued operations and presented separately from continuing operations for NW Holdings[329] Financial Condition This section analyzes the financial condition of NW Holdings and NW Natural, focusing on capital structure, liquidity, and cash flows Capital Structure 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] 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 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][335] - 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][341] - 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] 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] Cash Flows 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][366] 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] 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] Application of Critical Accounting Policies and Estimates 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] - There have been no material changes to the application of critical accounting policies and estimates since the 2018 Form 10-K[376] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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] - No material changes related to market risk disclosures occurred for the six months ended June 30, 2019[378] ITEM 4. CONTROLS AND PROCEDURES 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] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2019[381] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 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] ITEM 1A. RISK FACTORS 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] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 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] - No shares were repurchased under the Board-Approved share repurchase program during Q2 2019, but the program was extended through May 2022[385] ITEM 6. EXHIBITS 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] - Certifications from principal executive and financial officers for both registrants, pursuant to Sarbanes-Oxley Act sections 302 and 906, are included[388] - The report also includes financial statements formatted in Inline Extensible Business Reporting Language (iXBRL)[388] 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]