Northwest Natural pany(NWN) - 2019 Q4 - Annual Report

PART I Business NW Holdings, primarily through NW Natural, focuses on natural gas distribution to 760,000 customers in Oregon and Washington, alongside water utilities and gas storage Overview NW Holdings, formed in 2018, operates primarily through its natural gas distribution subsidiary NW Natural, also engaging in water utilities and other activities, with the Gill Ranch sale reported as discontinued operations - NW Holdings was established as a holding company on October 1, 2018, with NW Natural becoming its largest subsidiary[22][23] - The company's main business is natural gas distribution (NGD), serving customers in Oregon and southwest Washington[24] - The pending sale of Gill Ranch Storage, LLC is treated as a discontinued operation[25] Natural Gas Distribution (NGD) Segment The NGD segment, NW Natural's core business, serves 760,000 customers in Oregon and Washington, facing competition but benefiting from diversified gas supply and extensive storage facilities NGD Customer and Margin Breakdown (as of Dec 31, 2019) | Customer Type | Number of Meters | % of Volumes | % of Margin | | :--- | :--- | :--- | :--- | | Residential | 692,012 | 38% | 63% | | Commercial | 69,858 | 22% | 24% | | Industrial | 1,007 | 40% | 8% | | Other | N/A | N/A | 5% | | Total | 762,877 | 100% | 100% | - The NGD business has no direct competition from other natural gas distributors but competes with other energy forms like electricity, fuel oil, and propane[33][34] Projected Gas Supply Sources for Design Day (2019-20 Winter) | Source of NGD Supply | Therms (millions) | Percent | | :--- | :--- | :--- | | Firm supply purchases | 3.4 | 34% | | Mist underground storage (NGD only) | 3.1 | 31% | | Company-owned LNG storage | 1.9 | 19% | | Off-system storage contract | 0.5 | 5% | | Pipeline segmentation capacity | 0.6 | 6% | | Recall agreements | 0.4 | 4% | | Peak day citygate deliveries | 0.1 | 1% | | Total | 10.0 | 100% | - In 2019, 58% of the gas supply originated from Canada, with the remainder primarily from the U.S. Rocky Mountain region[45] - The North Mist gas storage facility expansion was completed in May 2019 and is dedicated to serving Portland General Electric under a 30-year contract[64] Other The 'Other' segment includes NWN Water's expanding water and wastewater utilities, an equity investment in Trail West, and NW Natural's non-NGD gas storage and asset management activities - NW Holdings entered the water utility sector in 2017 and, through acquisitions, expects to serve approximately 62,000 people via 25,000 connections in the Pacific Northwest and Texas[69] - NW Natural's 'Other' activities include 5.4 Bcf of the Mist gas storage facility contracted to other utilities and third-party marketers[71][74] - Asset management services are provided by an independent energy marketing company, with results (net of sharing with NGD customers) included in the 'Other' segment[73] Environmental Matters The company addresses environmental regulations, including property remediation and GHG emissions, with a key strategy being the incorporation of Renewable Natural Gas (RNG) to support a low-carbon future - The company is investigating and remediating owned or previously owned properties, with costs expected to be recovered through customer rates via mechanisms in Oregon and Washington[74] - The company is actively managing its response to potential GHG regulations and has a multi-pronged strategy that includes energy efficiency, carbon offsets, and incorporating Renewable Natural Gas (RNG)[76][81] - Oregon Senate Bill 98, signed in 2019, allows the company to procure RNG with a voluntary target of up to 30% of gas distributed to retail customers by 2050[81] Employees As of December 31, 2019, the company employed 1,220 people, with NW Natural's workforce including 626 unionized members under a new collective bargaining agreement effective until May 2024 Employee Count as of December 31, 2019 | Category | Number of Employees | | :--- | :--- | | NW Natural | | | Unionized | 626 | | Non-unionized | 541 | | Total NW Natural | 1,167 | | Other Entities | | | Water company | 38 | | Other | 15 | | Total other entities | 53 | | Total Employees | 1,220 | - A new collective bargaining agreement with the OPEIU was ratified in November 2019 and is effective from December 1, 2019, to May 31, 2024[84] Risk Factors The company faces significant risks including regulatory challenges, environmental liabilities, climate change impacts, operational hazards, strategic transaction execution, business continuity threats, and reliance on subsidiary dividends and a single gas transportation pipeline - Regulatory Risk: Failure to get approval for rates that allow timely recovery of costs and an adequate return on capital could adversely impact financial results[91] - Environmental Risk: The company faces costs for remediating current and former properties, which are difficult to estimate and may not be fully recoverable through rates or insurance[95] - Public Policy Risk: Changes in public sentiment or policy against natural gas, such as restrictions on new gas hookups or cap-and-trade legislation, could reduce demand and impact growth[104][106] - Operating Risk: Transporting and storing natural gas involves inherent risks like leaks, explosions, and natural disasters, which may not be fully covered by insurance[116] - Holding Company Dividend Risk: As a holding company, NW Holdings depends on dividends from its subsidiaries, primarily NW Natural, whose ability to pay is subject to regulatory restrictions based on credit ratings and capital structure[121][123] - Single Transportation Pipeline Risk: The company relies on a single pipeline company (Northwest Pipeline) for gas transportation to its service territory, and a disruption could significantly impact its ability to meet customer demand[170] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[180] Properties NW Natural's properties include an extensive 24,000-mile natural gas pipeline system, LNG and underground gas storage, and NWN Water's infrastructure, all considered well-maintained and adequate - NW Natural's gas pipeline system consists of approximately 14,000 miles of distribution and transmission mains and 10,000 miles of service lines[182] - The company holds property interests in approximately 12,000 net acres for underground natural gas storage in Oregon[187] - NWN Water owns and maintains water and wastewater infrastructure in Oregon, Washington, and Idaho[189] Legal Proceedings The company reports only nonmaterial litigation in the ordinary course of business, excluding proceedings disclosed in Note 18 - The company has only nonmaterial litigation in the ordinary course of business, apart from proceedings disclosed in Note 18[191] Mine Safety Disclosures This item is not applicable to the company - Not applicable[192] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities NW Holdings' common stock trades on the NYSE under NWN, with 4,739 holders as of February 2020, while NW Natural's stock is not publicly traded, and the company purchased shares for compensation programs - NW Holdings' common stock is listed on the NYSE under the symbol NWN. NW Natural's common stock has no public trading market[194][195] - As of February 24, 2020, there were 4,739 holders of record of NW Holdings' common stock[195] - During Q4 2019, 637 shares of NW Holdings common stock were purchased on the open market for share-based compensation programs[195] Selected Financial Data This section provides a five-year summary of selected financial data for NW Holdings and NW Natural, including revenues, earnings, EPS, dividends, assets, equity, and debt NW Holdings Selected Financial Data (2017-2019) | In thousands, except per share data | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Operating revenues | $746,372 | $706,143 | $755,038 | | Earnings from continuing operations | $65,311 | $67,311 | $72,073 | | Net income (loss) | $61,735 | $64,569 | $(55,623) | | Diluted EPS from continuing operations | $2.19 | $2.33 | $2.51 | | Diluted EPS (loss) | $2.07 | $2.24 | $(1.93) | | Dividends paid per share | $1.90 | $1.89 | $1.88 | | Total assets, end of period | $3,428,454 | $3,242,662 | $3,039,746 | NW Natural Selected Financial Data (2017-2019) | In thousands | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Operating revenues | $739,944 | $705,571 | $755,038 | | Earnings from continuing operations | $68,974 | $68,049 | $71,720 | | Net income (loss) | $68,974 | $66,326 | $(55,623) | | Total assets, end of period | $3,321,487 | $3,192,736 | $3,043,676 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's detailed assessment of financial condition and operations for NW Holdings and NW Natural, covering performance, outlook, regulatory matters, segment analysis, the Gill Ranch sale, financial condition, and critical accounting policies Executive Summary Key 2019 achievements included customer growth, infrastructure investment, and water utility expansion, while financial results were impacted by pension recovery orders and water business development costs - Key 2019 achievements include a 1.7% natural gas customer growth rate, completion of the North Mist facility, and continued acquisition of water utilities[209] NW Holdings Financial Highlights (2018 vs 2019) | In millions, except per share data | 2019 | 2018 | | :--- | :--- | :--- | | Net income from continuing operations | $65.3 | $67.3 | | Per Share | $2.19 | $2.33 | | Consolidated net income (loss) | $61.7 | $64.6 | | Per Share | $2.07 | $2.24 | | Natural gas distribution margin | $422.7 | $383.7 | - A March 2019 OPUC order regarding pension balancing account recovery and TCJA benefits significantly impacted 2019 results, leading to the recognition of $12.5 million in previously deferred pension expenses offset by revenue and tax benefits, and a separate $10.5 million pension disallowance[211][212] 2020 Outlook The 2020 outlook focuses on five strategic pillars: safety, customer experience, policy advocacy, customer growth, and leading in a low-carbon future through RNG and innovative solutions - The company's 2020 strategy is built on five pillars: Safety & Reliability, Customer Experience, Constructive Policy & Regulation, Customer Growth, and Leading in a Low-Carbon Future[219] - A key focus for 2020 is advancing renewable natural gas (RNG) initiatives following the passage of Oregon Senate Bill 98, with plans to begin procuring RNG for customers[221][223] Results of Operations Operational results detail regulatory matters and segment performance, with NGD net income increasing due to new rates and customer growth, while the 'Other' segment's income decreased due to lower asset management revenues and water business development costs - New rates became effective in Oregon on Nov 1, 2018 (9.4% ROE) and in Washington on Nov 1, 2019 (9.4% ROE). A new Oregon rate case was filed in Dec 2019[229][230][231] - Oregon Senate Bill 98, passed in 2019, enables the procurement of renewable natural gas (RNG) for customers, with rulemaking expected to be complete by July 2020[266][268] NGD Segment Performance (2018 vs 2019) | In millions | 2019 | 2018 | | :--- | :--- | :--- | | NGD net income | $60.8 | $57.5 | | NGD margin | $422.7 | $383.7 | | Gas sold and delivered (therms) | 1,215 | 1,128 | - The $39.0 million increase in 2019 NGD margin was primarily due to new rates ($16.2M), customer growth ($6.1M), and North Mist storage revenue ($11.8M)[276] Pending Sale of Gill Ranch Storage The pending sale of Gill Ranch Storage, approved by CPUC in December 2019 for $25.0 million cash plus contingent payments, is reported as a discontinued operation, with PG&E's bankruptcy impact being monitored - The sale of Gill Ranch was agreed upon in June 2018 and received CPUC approval in December 2019[326][329] - The sale price is $25.0 million in cash plus up to $26.5 million in performance-based contingent payments[328] - The financial results of Gill Ranch are classified and reported as discontinued operations[331] Financial Condition The company maintains a balanced capital structure and liquidity through cash and credit facilities, with NW Natural's dividends to NW Holdings subject to regulatory restrictions, and significant contractual obligations Consolidated Capital Structure (Excluding Short-Term Debt) | | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | NW Holdings | | | | Common equity | 49.6% | 50.9% | | Long-term debt | 50.4% | 49.1% | | NW Natural | | | | Common equity | 49.3% | 49.4% | | Long-term debt | 50.7% | 50.6% | - NW Holdings has a $100 million credit agreement and NW Natural has a $300 million credit agreement, both maturing in October 2023[365][371] - NW Natural's ability to pay dividends to NW Holdings is restricted by 'ring-fencing' conditions based on credit ratings and common equity ratios, which were satisfied as of year-end 2019[341][343] - In June 2019, NW Natural issued $140 million of First Mortgage Bonds, and NWN Water entered into a $35 million two-year term loan[379][380] Application of Critical Accounting Policies and Estimates Management's critical accounting policies involve significant judgment in regulatory accounting, revenue recognition, derivatives, pensions, income taxes, environmental contingencies, and asset impairment assessments - Key critical accounting policies involve significant management judgment and include regulatory accounting, revenue recognition, derivatives, pensions, income taxes, environmental contingencies, and impairment testing[402] - Regulatory Accounting: The company defers certain costs and revenues as regulatory assets and liabilities based on the probability of future recovery from or refund to customers. As of Dec 31, 2019, the net balance was a liability of $285.3 million[403][407] - Pensions: Benefit costs and obligations are sensitive to assumptions. A 0.25% decrease in the discount rate would increase 2019 retirement benefit costs by $1.5 million and the year-end benefit obligation by $17.9 million[414][420] - Environmental Contingencies: Liabilities are accrued when probable and reasonably estimable. At Dec 31, 2019, the total estimated liability for environmental sites was $136.0 million[399][430] Quantitative and Qualitative Disclosures About Market Risk The company manages market risks including commodity price, interest rate, foreign currency, credit, and weather risks through various strategies like financial swaps, fixed-rate debt, and weather normalization mechanisms - The company manages commodity price risk using financial swaps and physical gas reserves. The fair value of financial swaps at year-end 2019 was an unrealized gain of $5.6 million[442] - Credit exposure to financial derivative counterparties is managed through master netting arrangements and collateral provisions. At year-end 2019, the net fair value of these positions was an asset of $5.6 million[446][447] - Weather risk affects NGD operations. While a weather normalization mechanism (WARM) exists in Oregon, about 18% of residential and commercial customers (those in Washington and Oregon opt-outs) are not covered[451] Financial Statements and Supplementary Data This section presents the complete consolidated financial statements for NW Holdings and NW Natural for 2017-2019, including management and auditor reports, core financial statements, detailed notes, and supplementary quarterly data Consolidated Financial Statements This subsection presents the primary consolidated financial statements for NW Holdings and NW Natural, detailing key 2019 metrics such as operating revenues, net income from continuing operations, and total assets NW Holdings Key Financials (2019) | Metric | Amount (in thousands) | | :--- | :--- | | Operating revenues | $746,372 | | Net income from continuing operations | $65,311 | | Net income (loss) | $61,735 | | Total assets | $3,428,454 | | Total equity | $865,999 | NW Natural Key Financials (2019) | Metric | Amount (in thousands) | | :--- | :--- | | Operating revenues | $739,944 | | Net income from continuing operations | $68,974 | | Net income (loss) | $68,974 | | Total assets | $3,321,487 | | Total equity | $822,196 | Notes to Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial figures, covering organization, significant policies, segments, debt, pensions, income taxes, environmental matters, and discontinued operations - Note 2: The company adopted new lease accounting standard ASC 842 in 2019, resulting in the recognition of right-of-use assets and lease liabilities on the balance sheet[533][534] - Note 10: The qualified defined benefit pension plan was underfunded by $164.3 million at December 31, 2019. The company plans to contribute approximately $29.0 million in 2020[693] - Note 18: Total estimated liability for environmental sites was $136.0 million at year-end 2019, primarily related to the Portland Harbor Superfund site and the former Gasco uplands site[782][399] - Note 19: The sale of Gill Ranch is pending. For 2019, discontinued operations resulted in a net loss of $3.6 million for NW Holdings[809][813] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, practices, or financial disclosure - None[838] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of December 31, 2019, with no material changes to internal control over financial reporting during Q4 2019 - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[838] - No material changes to internal control over financial reporting occurred during the fourth quarter of 2019[839] Other Information On February 27, 2020, the Boards amended change-in-control severance agreements for named executive officers, removing age-based benefit reduction provisions - On February 27, 2020, the company amended its change-in-control severance agreements for named executive officers to remove age-based benefit reduction provisions[841] PART III Directors, Executive Officers and Corporate Governance Information on directors and corporate governance is incorporated by reference from the 2020 Proxy Statement, with executive officers of NW Holdings and NW Natural listed - Information concerning directors and corporate governance is incorporated by reference from the 2020 Proxy Statement[844] - The report provides a list of executive officers for both NW Holdings and NW Natural, with David H. Anderson as President and CEO and Frank H. Burkhartsmeyer as SVP and CFO for both[845] Executive Compensation Detailed information on executive compensation is incorporated by reference from NW Holdings' 2020 Proxy Statement - All information regarding executive compensation is incorporated by reference from the 2020 Proxy Statement[850] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2020 Proxy Statement, detailing securities to be issued and those available under equity compensation plans - NW Holdings owns 100% of the outstanding common stock of NW Natural[851] Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 208,892 | 696,499 | | Equity compensation plans not approved by security holders | 248,595 | N/A | | Total | 457,487 | 696,499 | Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from NW Holdings' 2020 Proxy Statement - Information on related transactions and director independence is incorporated by reference from the 2020 Proxy Statement[854] Principal Accountant Fees and Services Accountant fees for NW Holdings are incorporated by reference from the 2020 Proxy Statement, while NW Natural's fees to PricewaterhouseCoopers LLP, primarily for audit services, were pre-approved by the Audit Committee NW Natural Principal Accountant Fees (PricewaterhouseCoopers LLP) | In thousands | 2019 | 2018 | | :--- | :--- | :--- | | Audit Fees | $1,222 | $1,379 | | Audit-Related Fees | $31 | $30 | | Tax Fees | $22 | $34 | | All Other Fees | $3 | $4 | | Total | $1,278 | $1,447 | - 100% of the services provided by the principal accountant in 2019 and 2018 were pre-approved by the Audit Committee of NW Natural[859] PART IV Exhibits and Financial Statement Schedules This section references the Exhibit Index, which lists all documents filed as part of the Form 10-K - A list of all financial statements, supplemental schedules, and exhibits is provided, with reference to the Exhibit Index[860] Form 10-K Summary The company indicates that no Form 10-K summary is provided in this report - None[861]