Northwest Natural pany(NWN) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Forward-Looking Statements This section identifies forward-looking statements by specific terminology, emphasizing their inherent uncertainties and risks, and disclaims any obligation to update them - Forward-looking statements are identified by words such as 'anticipates,' 'assumes,' 'intends,' 'plans,' 'seeks,' 'believes,' 'estimates,' 'expects,' and similar references to future periods[6] - Examples include plans, projections, objectives, strategies, future events, economic conditions, earnings, dividends, capital expenditures, climate change, growth, customer rates, and impacts of COVID-19[7] - The company cautions against relying on these statements as actual results may differ materially due to inherent uncertainties and risks[8] ITEM 1. Unaudited Financial Statements This section presents unaudited consolidated financial statements for NW Holdings and NW Natural, including comprehensive income, balance sheets, shareholders' equity, and cash flow statements, with detailed notes Consolidated Statements of Comprehensive Income (NW Holdings) NW Holdings: Consolidated Statements of Comprehensive Income (Unaudited) | In thousands, except per share data | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating revenues | $134,971 | $123,443 | $420,122 | $408,791 | | Total operating expenses | $126,029 | $107,345 | $334,734 | $316,648 | | Income from operations | $8,942 | $16,098 | $85,388 | $92,143 | | Net income (loss) | $(4,852) | $1,095 | $42,646 | $44,296 | | Comprehensive income (loss) | $(4,692) | $1,210 | $42,966 | $44,526 | | Basic EPS | $(0.16) | $0.04 | $1.40 | $1.52 | | Diluted EPS | $(0.16) | $0.04 | $1.40 | $1.52 | Consolidated Balance Sheets (NW Holdings) NW Holdings: Consolidated Balance Sheets (Unaudited) | In thousands | June 30, 2020 | June 30, 2019 | December 31, 2019 | | :----------- | :------------ | :------------ | :---------------- | | Total current assets | $316,436 | $239,058 | $293,692 | | Total non-current assets | $3,324,911 | $2,999,073 | $3,134,762 | | Total assets | $3,641,347 | $3,238,131 | $3,428,454 | | Total current liabilities | $486,902 | $307,030 | $482,173 | | Long-term debt | $918,887 | $806,001 | $805,955 | | Total deferred credits and other non-current liabilities | $1,351,557 | $1,248,354 | $1,274,327 | | Total equity | $884,001 | $876,746 | $865,999 | | Total liabilities and equity | $3,641,347 | $3,238,131 | $3,428,454 | Consolidated Statements of Shareholders' Equity (NW Holdings) NW Holdings: Consolidated Statements of Shareholders' Equity (Unaudited) | In thousands, except per share amounts | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total shareholders' equity, beginning balances | $901,741 | $794,227 | $865,999 | $762,634 | | Net income (loss) | $(4,852) | $1,095 | $42,646 | $44,296 | | Dividends on common stock | $(14,550) | $(13,811) | $(29,448) | $(27,826) | | Total shareholders' equity, ending balances | $884,001 | $876,746 | $884,001 | $876,746 | | Dividends per share of common stock | $0.4775 | $0.4750 | $0.9550 | $0.9500 | Consolidated Statements of Cash Flows (NW Holdings) NW Holdings: Consolidated Statements of Cash Flows (Unaudited) | In thousands | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Cash provided by operating activities | $159,546 | $155,109 | | Cash used in investing activities | $(160,419) | $(153,397) | | Cash provided by financing activities | $128,282 | $46,540 | | Increase in cash and cash equivalents | $127,409 | $48,252 | | Cash and cash equivalents, end of period | $137,057 | $60,885 | Consolidated Statements of Comprehensive Income (NW Natural) NW Natural: Consolidated Statements of Comprehensive Income (Unaudited) | In thousands | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating revenues | $131,157 | $122,242 | $413,686 | $407,088 | | Total operating expenses | $122,258 | $105,002 | $327,766 | $313,204 | | Income from operations | $8,899 | $17,240 | $85,920 | $93,884 | | Net income (loss) | $(4,712) | $3,054 | $44,467 | $46,949 | | Comprehensive income (loss) | $(4,552) | $3,169 | $44,787 | $47,179 | Consolidated Balance Sheets (NW Natural) NW Natural: Consolidated Balance Sheets (Unaudited) | In thousands | June 30, 2020 | June 30, 2019 | December 31, 2019 | | :----------- | :------------ | :------------ | :---------------- | | Total current assets | $282,046 | $221,589 | $270,159 | | Total non-current assets | $3,198,658 | $2,917,104 | $3,051,328 | | Total assets | $3,480,704 | $3,138,693 | $3,321,487 | | Total current liabilities | $361,975 | $277,121 | $442,426 | | Long-term debt | $917,012 | $768,947 | $769,081 | | Total deferred credits and other non-current liabilities | $1,362,348 | $1,262,510 | $1,287,784 | | Total equity | $839,369 | $830,115 | $822,196 | | Total liabilities and equity | $3,480,704 | $3,138,693 | $3,321,487 | Consolidated Statements of Shareholder's Equity (NW Natural) NW Natural: Consolidated Statements of Shareholder's Equity (Unaudited) | In thousands | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total shareholder's equity, beginning balances | $857,739 | $746,743 | $822,196 | $715,668 | | Net income (loss) | $(4,712) | $3,054 | $44,467 | $46,949 | | Dividends on common stock | $(13,818) | $(12,979) | $(27,614) | $(25,914) | | Total shareholder's equity, ending balances | $839,369 | $830,115 | $839,369 | $830,115 | Consolidated Statements of Cash Flows (NW Natural) NW Natural: Consolidated Statements of Cash Flows (Unaudited) | In thousands | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Cash provided by operating activities | $159,791 | $156,136 | | Cash used in investing activities | $(117,572) | $(96,064) | | Cash provided by (used in) financing activities | $72,146 | $(10,155) | | Increase in cash and cash equivalents | $114,365 | $49,917 | | Cash and cash equivalents, end of period | $120,284 | $57,864 | Notes to Unaudited Consolidated Financial Statements 1. Organization and Principles of Consolidation This note clarifies that the consolidated financial statements represent NW Holdings and NW Natural, with NGD as the sole reportable segment, and details the pending sale of Gill Ranch Storage as a discontinued operation - NW Natural's core operating business is the natural gas distribution (NGD) segment, serving residential, commercial, and industrial customers in Oregon and southwest Washington[29] - NW Holdings has reported discontinued operations results related to the pending sale of Gill Ranch Storage, LLC, with its results presented as a discontinued operation for all periods[30][33] - The financial statements are unaudited and include all material adjustments management considers necessary, with interim results not necessarily indicative of full-year results due to seasonality[31][32] 2. Significant Accounting Policies This note details regulatory accounting principles, updates on recently adopted pronouncements, and the impact of COVID-19 on the allowance for uncollectible accounts - NW Holdings and NW Natural capitalize or defer certain costs and revenues as regulatory assets and liabilities based on public utility commission orders, providing for future recovery or refunds[36] Regulatory Assets (in thousands) | Category | June 30, 2020 | June 30, 2019 | December 31, 2019 | | :------- | :------------ | :------------ | :---------------- | | Total current | $30,021 | $46,688 | $41,929 | | Total non-current | $324,358 | $318,340 | $343,146 | Regulatory Liabilities (in thousands) | Category | June 30, 2020 | June 30, 2019 | December 31, 2019 | | :------- | :------------ | :------------ | :---------------- | | Total current | $41,126 | $32,484 | $44,657 | | Total non-current | $632,400 | $605,036 | $625,717 | - The company applied for regulatory deferrals to recover COVID-19 related costs, identifying approximately $4.0 million in eligible costs as of June 30, 2020[42] Allowance for Uncollectible Accounts Activity (NW Holdings, in thousands) | Category | December 31, 2019 (Beginning Balance) | Six Months Ended June 30, 2020 (Provision recorded net of recoveries) | June 30, 2020 (Ending Balance) | | :--------- | :------------------------------------ | :------------------------------------------------------------------ | :----------------------------- | | Residential | $432 | $817 | $1,013 | | Commercial | $57 | $349 | $337 | | Industrial | $72 | $34 | $100 | | Accrued unbilled and other | $112 | $32 | $142 | | Total | $673 | $1,232 | $1,592 | 3. Earnings Per Share This note details the calculation of basic and diluted earnings per share for NW Holdings, including a breakdown from continuing and discontinued operations NW Holdings: Earnings Per Share (Unaudited) | In thousands, except per share data | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $(4,852) | $1,095 | $42,646 | $44,296 | | Basic EPS | $(0.16) | $0.04 | $1.40 | $1.52 | | Diluted EPS | $(0.16) | $0.04 | $1.40 | $1.52 | | Basic EPS from continuing operations | $(0.17) | $0.07 | $1.41 | $1.56 | | Diluted EPS from continuing operations | $(0.17) | $0.07 | $1.41 | $1.56 | 4. Segment Information This note outlines the Natural Gas Distribution (NGD) segment as the primary reportable business and describes other activities for both NW Natural and NW Holdings, including the NGD margin calculation - The primary reportable business segment is NW Natural's local gas distribution business (NGD), serving customers in Oregon and southwest Washington[59][60] - NW Holdings' 'Other' activities include NWN Water (water and wastewater utility operations), NWN Gas Storage, and NWN Energy's equity investment in Trail West Holdings, LLC (TWH)[63] NW Holdings: Segment Operating Revenues and Income from Operations (Unaudited, in thousands) | Segment | Three Months Ended June 30, 2020 (Operating Revenues) | Three Months Ended June 30, 2020 (Income from Operations) | Six Months Ended June 30, 2020 (Operating Revenues) | Six Months Ended June 30, 2020 (Income from Operations) | | :------ | :---------------------------------------------------- | :-------------------------------------------------------- | :-------------------------------------------------- | :------------------------------------------------------ | | NGD | $126,992 | $6,434 | $405,479 | $81,692 | | Other (NW Natural) | $4,165 | $2,465 | $8,207 | $4,228 | | Other (NW Holdings) | $3,814 | $43 | $6,436 | $(532) | | Total NW Holdings | $134,971 | $8,942 | $420,122 | $85,388 | NGD Margin Calculation (Unaudited, in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total NGD operating revenues | $126,992 | $117,984 | $405,479 | $397,025 | | Less: NGD cost of gas | $41,265 | $35,163 | $149,860 | $140,676 | | Less: Environmental remediation | $1,622 | $(2,656) | $5,627 | $6,291 | | Less: Revenue taxes | $4,454 | $4,496 | $16,197 | $16,422 | | NGD margin | $79,651 | $80,981 | $233,795 | $233,636 | 5. Revenue This note disaggregates revenue from continuing operations for NW Holdings and NW Natural, detailing sources like natural gas sales, gas storage, and alternative revenue programs, and explains revenue recognition policies NW Holdings: Disaggregated Revenue from Continuing Operations (Unaudited, in thousands) | Revenue Type | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Natural gas sales | $116,682 | $112,015 | $390,686 | $408,201 | | Gas storage revenue, net | $2,449 | $2,740 | $4,785 | $5,523 | | Asset management revenue, net | $910 | $460 | $1,060 | $1,966 | | Appliance retail center revenue | $806 | $1,058 | $2,362 | $2,574 | | Other revenue | $4,146 | $1,305 | $7,105 | $1,807 | | Alternative revenue | $5,365 | $3,733 | $4,893 | $(13,520) | | Leasing revenue | $4,613 | $2,132 | $9,231 | $2,240 | | Total operating revenues | $134,971 | $123,443 | $420,122 | $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[74] - Alternative revenue programs like Weather Normalization (WARM) and decoupling mechanisms are considered contracts with the regulator and are excluded from revenue from contracts with customers[76] - Unrecognized revenue for fixed components of gas storage and asset management was approximately $65.8 million as of June 30, 2020, with $8.4 million expected in the remainder of 2020[80] 6. Leases This note details NW Natural's lease accounting, distinguishing between lease revenue from sales-type leases (e.g., North Mist storage) and lease expense from operating leases, including a new corporate operations center - Leasing revenue primarily stems from NW Natural's North Mist natural gas storage agreement with Portland General Electric (PGE), classified as a sales-type lease with regulatory accounting deferral[85] NW Natural: Lease Revenue (Unaudited, in thousands) | Lease Type | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating leases | $25 | $47 | $53 | $95 | | Sales-type leases | $4,588 | $2,085 | $9,178 | $2,145 | | Total lease revenue | $4,613 | $2,132 | $9,231 | $2,240 | NW Holdings: Lease Expense (Unaudited, in thousands) | Lease Type | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease expense | $954 | $1,201 | $2,208 | $2,389 | | Short-term lease expense | $285 | $331 | $483 | $491 | - NW Natural commenced a 20-year operating lease for a new corporate operations center in March 2020, with total estimated base rent payments of $159.4 million over the lease life[91] 7. Stock-Based Compensation This note describes NW Holdings' stock-based compensation plans, including LTIP, ESPP, and Restated Stock Option Plan, and details unrecognized compensation costs from RSU grants - Stock-based compensation plans include LTIP, ESPP, and a Restated Stock Option Plan, designed to promote stock ownership[97] - For 2019 and 2020 LTIP awards, expense recognition is deferred until the first quarter of the third year of the award period when the final performance factor is approved[98] - As of June 30, 2020, there was $4.3 million of unrecognized compensation cost from RSU grants, expected to be recognized through 2025[101] 8. Debt This note provides details on NW Holdings' and NW Natural's short-term and long-term debt, including new issuances, retirements, fair value estimation, and compliance with debt covenants Short-Term Debt Outstanding (in thousands) | Entity | June 30, 2020 | June 30, 2019 | | :----- | :------------ | :------------ | | NW Holdings | $233,000 | $20,080 | | NW Natural | $153,000 | $0 | - NW Natural entered into a $150.0 million 364-day term loan credit agreement in March 2020 and issued $150.0 million of FMBs with a 3.60% interest rate due in 2050[103][105] - NW Natural retired $75.0 million of FMBs with a 5.37% interest rate in February 2020[105] Long-Term Debt Outstanding (in thousands) | Entity | June 30, 2020 | June 30, 2019 | | :----- | :------------ | :------------ | | NW Holdings | $954,096 | $910,397 | | NW Natural | $917,012 | $873,306 | - NW Natural was in compliance with its debt covenant, maintaining a consolidated indebtedness to total capitalization ratio of 56.0% as of June 30, 2020 (covenant limit 70%)[103] 9. Pension and Other Postretirement Benefit Costs This note details NW Natural's pension and postretirement benefit plans, outlining net periodic benefit cost components, regulatory impacts, and employer contributions - NW Natural maintains a qualified non-contributory defined benefit pension plan and non-qualified supplemental pension plans[110] Net Periodic Benefit Cost (Unaudited, in thousands) | Component | Three Months Ended June 30, 2020 (Pension Benefits) | Three Months Ended June 30, 2019 (Pension Benefits) | Six Months Ended June 30, 2020 (Pension Benefits) | Six Months Ended June 30, 2019 (Pension Benefits) | | :-------- | :-------------------------------------------------- | :-------------------------------------------------- | :------------------------------------------------ | :------------------------------------------------- | | Service cost | $1,658 | $1,516 | $3,315 | $3,033 | | Interest cost | $4,011 | $4,661 | $8,022 | $9,323 | | Expected return on plan assets | $(5,496) | $(5,207) | $(10,992) | $(10,414) | | Amortization of net actuarial loss | $4,778 | $3,603 | $9,556 | $7,206 | | Net periodic benefit cost | $4,951 | $4,575 | $9,901 | $9,152 | - In March 2019, the OPUC ordered the recovery of $12.5 million of deferred pension expenses by applying deferred tax benefits against the pension balancing account, and an additional $10.5 million regulatory pension disallowance was recognized[115] - NW Natural contributed $8.5 million to qualified defined benefit pension plans for the six months ended June 30, 2020, and expects further contributions of $19.7 million during the remainder of 2020[117] 10. Income Tax This note outlines the calculation of interim income tax expense using an estimated annual effective tax rate, details factors causing variations from the federal statutory rate, and provides an update on IRS CAP examinations Effective Income Tax Rate for Continuing Operations (Unaudited) | Entity | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | NW Holdings | 24.6% | 23.4% | 22.4% | 17.0% | | NW Natural | 23.1% | 24.4% | 22.6% | 17.3% | - The effective income tax rate varied from the federal statutory rate primarily due to state taxes and differences required to be flowed-through by regulatory commissions[121] - The IRS CAP examination for the 2018 tax year was completed in Q2 2020 with no material changes, and the 2019 tax year is subject to examination[122] 11. Property, Plant, and Equipment This note presents major classifications of property, plant, and equipment and accumulated depreciation for NW Natural and NW Holdings, highlighting the de-recognition of the North Mist gas storage expansion project upon lease commencement Property, Plant, and Equipment, Net (Unaudited, in thousands) | Entity | June 30, 2020 | June 30, 2019 | December 31, 2019 | | :----- | :------------ | :------------ | :---------------- | | NW Natural | $2,504,947 | $2,321,244 | $2,419,482 | | Other (NW Holdings) | $41,656 | $18,382 | $19,417 | | Total NW Holdings | $2,546,603 | $2,339,626 | $2,438,899 | - The North Mist gas storage expansion project was placed into service in May 2019 and de-recognized from property, plant, and equipment, with its investment balance presented within assets under sales-type leases[127] - A total of $146.0 million was de-recognized from plant on the North Mist lease commencement date[127] 12. Gas Reserves This note details NW Natural's $188 million investment in the Jonah Field gas reserves program, explaining that these reserves provide long-term price protection for NGD customers and costs are recovered through the annual Oregon PGA filing - NW Natural has invested $188 million in the Jonah Field gas reserves program in Wyoming as of June 30, 2020[128] - Gas reserves provide long-term price protection for NGD customers, and their costs, including a carrying cost for the rate base investment, are recovered through the annual Oregon PGA filing[128][129] NW Natural's Net Gas Reserves Investment (Unaudited, in thousands) | Category | June 30, 2020 | June 30, 2019 | December 31, 2019 | | :------- | :------------ | :------------ | :---------------- | | Gas reserves, current | $13,646 | $17,206 | $15,278 | | Gas reserves, non-current | $173,661 | $170,101 | $172,029 | | Less: Accumulated amortization | $132,202 | $113,930 | $123,635 | | Total gas reserves | $55,105 | $73,377 | $63,672 | | Less: Deferred taxes on gas reserves | $13,324 | $26,995 | $15,515 | | Net investment in gas reserves | $41,781 | $46,382 | $48,157 | 13. Investments This note discusses NW Holdings' equity method investment in Trail West Holdings, LLC (TWH), a Variable Interest Entity, and reports the subsequent sale of its interest in TWH for $14.0 million - NW Holdings' investment in Trail West Holdings, LLC (TWH), which is developing a gas transmission pipeline, is accounted for under the equity method[134][135] - NWN Energy sold its 100% interest in TWH for $14.0 million on August 6, 2020, resulting in an after-tax book gain of less than $0.5 million[136][137] - The maximum loss exposure related to TWH is limited to NW Holdings' equity investment balance of $13.4 million as of June 30, 2020[135] 14. Business Combinations This note details NW Holdings' water utility acquisitions in 2020 and 2019, including preliminary cash considerations and recognized goodwill, and mentions the annual impairment assessment of goodwill - In 2020, NWN Water completed two significant acquisitions for an aggregate preliminary cash consideration of $38.1 million, recognizing $19.2 million in goodwill[139][141] - In 2019, NWN Water of Oregon acquired Sunriver Water LLC and Sunriver Environmental LLC for approximately $55.0 million in cash, resulting in final goodwill of $41.1 million[143][145] - Total goodwill increased to $70.2 million as of June 30, 2020, primarily due to water sector acquisitions, with no impairments recognized to date[150] 15. Derivative Instruments This note describes NW Natural's use of financial derivative contracts to hedge natural gas sales and foreign currency risk, detailing regulatory accounting, notional amounts, and realized/unrealized gains/losses - NW Natural uses financial derivative contracts (swaps, options) to hedge natural gas sales requirements and foreign currency exchange contracts to manage currency risk[151][152] Notional Amounts of Open Derivative Positions (Unaudited, in thousands) | Category | June 30, 2020 | December 31, 2019 | | :------- | :------------ | :---------------- | | Natural gas (therms) - Financial | 654,145 | 651,540 | | Natural gas (therms) - Physical | 570,600 | 512,849 | | Foreign exchange | $7,176 | $6,650 | - Derivatives for regulated NGD operations generally receive regulatory deferral accounting, with costs above or below the current year PGA subject to deferral as a regulatory asset or liability[157] - NW Natural realized net losses of $1.1 million and $3.2 million from natural gas financial derivative settlements for the three and six months ended June 30, 2020, respectively[158] - As of June 30, 2020, NW Natural's outstanding commodity financial swap and option contracts reflected unrealized gains of $5.3 million[162] 16. Environmental Matters This note addresses NW Natural's environmental liabilities for remediation of current and former properties, detailing estimated loss ranges, regulatory recovery mechanisms, and total deferred regulatory assets for environmental costs - NW Natural owns or previously owned properties that may require environmental remediation, with potential liabilities estimated based on current technology and regulations[165] - NW Natural has recovery mechanisms in Oregon (SRRM) and Washington (ECRM) to collect 96.68% and 3.32% respectively of remediation costs allocable to customers[165][184] Environmental Liabilities (Unaudited, in thousands) | Site | June 30, 2020 (Current Liabilities) | June 30, 2020 (Non-Current Liabilities) | | :--- | :---------------------------------- | :-------------------------------------- | | Portland Harbor site: Gasco/Siltronic Sediments | $10,431 | $41,945 | | Portland Harbor site: Other Portland Harbor | $2,434 | $6,228 | | Gasco/Siltronic Upland site | $10,979 | $41,878 | | Front Street site | $10,222 | $1,059 | | Total | $34,066 | $91,289 | Total Regulatory Asset Deferral for Environmental Costs (Unaudited, in thousands) | Category | June 30, 2020 | June 30, 2019 | December 31, 2019 | | :------- | :------------ | :------------ | :---------------- | | Deferred costs and interest | $42,098 | $43,222 | $36,673 | | Accrued site liabilities | $124,981 | $120,226 | $135,662 | | Insurance proceeds and interest | $(81,146) | $(90,119) | $(79,949) | | Total regulatory asset deferral | $85,933 | $73,329 | $92,386 | 17. Discontinued Operations This note details the pending sale of Gill Ranch Storage, LLC, including the initial cash purchase price and potential additional payments, with its results presented as discontinued operations for NW Holdings - NWN Gas Storage entered into an agreement to sell all membership interests in Gill Ranch Storage, LLC for an initial cash purchase price of $25.0 million, plus potential additional payments up to $26.5 million[192][193] - The sale of Gill Ranch was approved by the CPUC in December 2019, and the agreement was amended to extend the termination date to August 17, 2020[194][195] NW Holdings: Discontinued Operations Assets and Liabilities (Unaudited, in thousands) | Category | June 30, 2020 | June 30, 2019 | December 31, 2019 | | :------- | :------------ | :------------ | :---------------- | | Total discontinued operations assets - current assets | $16,392 | $14,001 | $15,134 | | Total discontinued operations liabilities - current liabilities | $13,574 | $13,279 | $13,709 | NW Holdings: Operating Results of Discontinued Operations (Unaudited, in thousands) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenues | $3,374 | $1,748 | $4,282 | $3,469 | | Total expenses | $2,991 | $3,046 | $4,955 | $5,061 | | Income (loss) from discontinued operations, net of tax | $280 | $(956) | $(498) | $(1,173) | 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 for the three and six months ended June 30, 2020 and 2019, covering key highlights, COVID-19 impact, regulatory matters, segment performance, and consolidated operations Executive Summary This summary highlights NW Holdings' and NW Natural's strategic focus, key financial results, and the impact of the COVID-19 pandemic on operations and customer service - NW Holdings' net income from continuing operations decreased by $7.2 million (QTD) and $2.3 million (YTD) compared to the prior year[202][205] - NW Natural's net income from continuing operations decreased by $7.8 million (QTD) and $2.5 million (YTD) compared to the prior year[202][205] - Key factors for the decrease include a $1.3 million decrease in NGD utility margin (QTD), a $3.9 million increase in operations and maintenance (QTD), a $2.7 million increase in depreciation (QTD), and a $1.5 million increase in interest expense (QTD) for NW Natural[204] - The NGD business added over 13,000 meters in the past twelve months, achieving a 1.7% growth rate at June 30, 2020[203] - In response to COVID-19, NW Natural temporarily stopped charging late fees and disconnecting customers for nonpayment, and increased its bad debt allowance by $0.9 million to $1.6 million for the first six months of 2020[208][213] Dividends This section reports on NW Holdings' dividend payments, noting a quarterly dividend of $0.4775 per share declared in July 2020, reflecting an annual indicated dividend rate of $1.91 per share, and highlights the company's history of increasing annual common stock dividends since 1956 Dividends Paid Per Common Share (Unaudited) | Period | 2020 | 2019 | Change | | :----- | :--- | :--- | :----- | | Three Months Ended June 30, | $0.4775 | $0.4750 | $0.0025 | | Six Months Ended June 30, | $0.9550 | $0.9500 | $0.0050 | - In July 2020, NW Holdings declared a quarterly dividend of $0.4775 per share, reflecting an annual indicated dividend rate of $1.91 per share[220] - Annual common stock dividend payments per share have increased each year since 1956[329] Results of Operations This section analyzes the results of operations, covering regulatory matters, NGD segment performance, other business activities, and consolidated financial performance, including the impact of new rates, customer growth, weather, and the COVID-19 pandemic Regulatory Matters This subsection details the regulatory environment for NW Natural's gas distribution and interstate storage, and NW Holdings' water businesses, covering rate cases, key regulatory mechanisms, and the impact of new legislation like Oregon Senate Bill 98 and the Corporate Activity Tax - NW Natural's NGD business is regulated by the OPUC and WUTC, with 89% of customers in Oregon and 11% in Washington[223] Authorized Rate Structure and Key Regulatory Mechanisms | Metric | Oregon (2018 Rate Case) | Washington (2019 Rate Case) | | :----- | :---------------------- | :-------------------------- | | ROE | 9.4% | 9.4% | | ROR | 7.3% | 7.2% | | Debt/Equity Ratio | 50%/50% | 51%/49% | | Key Regulatory Mechanisms | PGA, Gas Cost Incentive Sharing, Decoupling, WARM, Environmental Cost Recovery, Interstate Storage and Asset Management Sharing | PGA, Environmental Cost Recovery, Interstate Storage and Asset Management Sharing | - NW Natural filed an all-party comprehensive settlement in its 2020 Oregon general rate case on July 31, 2020, proposing a $45.8 million annual revenue requirement increase based on a 9.4% ROE and 6.965% cost of capital[261][263][264] - Oregon Senate Bill 98 (SB98) enables natural gas utilities to procure or develop renewable natural gas (RNG) for customers, with voluntary goals up to 30% by 2050 and allowing investment up to 5% of a utility's revenue requirement for RNG infrastructure[267][268] - NW Natural deferred $1.9 million related to the Oregon Corporate Activity Tax (CAT) as of June 30, 2020, with recovery to be determined in future rate case proceedings[270] Business Segment - Natural Gas Distribution (NGD) This subsection analyzes the NGD segment's performance, noting an increased net loss QTD and decreased YTD, driven by higher expenses, depreciation, and interest, with NGD margin influenced by customer growth, new rates, and weather NGD Segment Financial Highlights (Unaudited, in thousands, except EPS and therms) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | NGD net income (loss) | $(6,347) | $1,212 | $41,596 | $42,418 | | EPS - NGD segment | $(0.21) | $0.04 | $1.36 | $1.45 | | Gas sold and delivered (therms) | 207,213 | 214,047 | 628,130 | 661,785 | | NGD margin | $79,651 | $80,981 | $233,795 | $233,636 | - NGD net loss increased by $7.6 million (QTD) primarily due to higher operations and maintenance expenses ($3.8 million), increased depreciation ($2.7 million), and higher interest expense ($1.6 million)[275] - NGD margin decreased by $1.3 million (QTD) but increased by $0.2 million (YTD), driven by new customer rates in Washington, customer growth, and North Mist storage contract revenues, partially offset by weather effects and pension-related adjustments[275][276] - Total NGD volumes sold and delivered decreased by 3% (QTD) and 5% (YTD), with the YTD decrease primarily due to 15% warmer than average weather in 2020[275][277] Other This subsection covers the 'Other' activities for NW Natural and NW Holdings, noting that NW Holdings' 'Other' net income remained flat QTD but decreased YTD, primarily due to lower earnings from non-NGD gas storage operations and increased financing costs Other Activities Net Income (Unaudited, in thousands, except EPS) | Entity | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | NW Natural other - net income | $1,635 | $1,842 | $2,871 | $4,531 | | Other NW Holdings activity | $(420) | $(1,003) | $(1,323) | $(1,480) | | NW Holdings other - net income | $1,215 | $839 | $1,548 | $3,051 | | EPS - NW Holdings - other | $0.04 | $0.03 | $0.05 | $0.10 | - NW Holdings' 'Other' net income decreased $1.5 million (YTD) and NW Natural's 'Other' net income decreased $1.7 million (YTD)[296] - The decrease was primarily due to lower earnings from non-NGD gas storage operations at Mist and increased financing costs[296] Consolidated Operations This subsection provides a consolidated view of operations, detailing changes in operations and maintenance, depreciation, other income, and interest expense, highlighting increases due to compensation, plant additions, pension adjustments, and COVID-19 precautionary financings Operations and Maintenance Expense (Unaudited, in thousands) | Entity | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | NW Natural | $41,198 | $37,292 | $87,454 | $87,726 | | Other NW Holdings operations and maintenance | $2,785 | $2,194 | $5,450 | $3,242 | | NW Holdings | $43,983 | $39,486 | $92,904 | $90,968 | - Operations and maintenance expense increased by $4.5 million (QTD) for NW Holdings, driven by higher employee costs, contractor services, moving expenses, and COVID-19 related costs[297] Depreciation and Amortization Expense (Unaudited, in thousands) | Entity | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | NW Natural | $24,986 | $22,243 | $49,176 | $43,747 | | Other NW Holdings depreciation and amortization | $850 | $144 | $1,335 | $212 | | NW Holdings | $25,836 | $22,387 | $50,511 | $43,959 | - Depreciation and amortization expense increased by $6.6 million (YTD) for NW Holdings, primarily due to NGD plant additions and the North Mist gas storage facility[302] Interest Expense, Net (Unaudited, in thousands) | Entity | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | NW Natural | $11,851 | $10,387 | $21,712 | $20,520 | | Other NW Holdings interest expense, net | $855 | $267 | $1,462 | $339 | | NW Holdings | $12,706 | $10,654 | $23,174 | $20,859 | - Interest expense, net, increased by $2.3 million (YTD) for NW Holdings, driven by higher long-term debt balances and short-term financings undertaken as a precaution during COVID-19[306] Pending Sale of Gill Ranch Storage This subsection updates on the pending sale of Gill Ranch Storage, LLC, including the initial cash purchase price, CPUC approval, extended termination date, and its presentation as discontinued operations for NW Holdings - The sale of Gill Ranch Storage, LLC, by NWN Gas Storage has an initial cash purchase price of $25.0 million, with potential additional payments up to $26.5 million[312] - The CPUC approved the transaction in December 2019, and the termination date for the sale agreement was extended to August 17, 2020[313] - The results of Gill Ranch Storage are presented as discontinued operations for NW Holdings[315] Financial Condition This section analyzes the financial condition of NW Holdings and NW Natural, focusing on capital structure, liquidity, and capital resources, including proactive measures taken during the COVID-19 pandemic and compliance with regulatory provisions Capital Structure This subsection outlines the capital structure goals for NW Holdings and NW Natural, aiming for a strong and balanced consolidated capital structure, with NW Natural targeting a regulatory capital structure of 50% common equity and 50% long-term debt - NW Holdings' long-term goal is to maintain a strong and balanced consolidated capital structure, with NW Natural targeting a regulatory capital structure of 50% common equity and 50% long-term debt[318] NW Holdings: Consolidated Capital Structure (Unaudited) | Component | June 30, 2020 | December 31, 2019 | | :-------- | :------------ | :---------------- | | Common equity | 48.1% | 49.6% | | Long-term debt (including current maturities) | 51.9% | 50.4% | | Total | 100.0% | 100.0% | NW Natural: Consolidated Capital Structure (Unaudited) | Component | June 30, 2020 | December 31, 2019 | | :-------- | :------------ | :---------------- | | Common equity | 47.8% | 49.3% | | Long-term debt (including current maturities) | 52.2% | 50.7% | | Total | 100.0% | 100.0% | Liquidity and Capital Resources This subsection details the liquidity and capital resources for NW Holdings and NW Natural, highlighting proactive measures taken during the COVID-19 pandemic, credit agreements, credit ratings, and compliance with regulatory ring-fencing provisions - As of June 30, 2020, NW Holdings had $137.1 million in cash and cash equivalents, and NW Natural had $120.3 million, reflecting proactive measures to increase liquidity during COVID-19[322][323] - NW Natural secured a $150.0 million 364-day term loan and issued $150.0 million in 3.60% FMBs in March 2020 as precautionary measures[323] - NW Holdings and NW Natural maintain separate credit agreements, with NW Holdings having a $100 million facility and NW Natural a $300 million facility, both with investment-grade lenders[338][341] NW Natural's Credit Ratings | Rating Agency | Commercial paper (short-term debt) | Senior secured (long-term debt) | Senior unsecured (long-term debt) | Corporate credit rating | Ratings outlook | | :------------ | :--------------------------------- | :------------------------------ | :-------------------------------- | :---------------------- | :-------------- | | S&P | A-1 | AA- | n/a | A+ | Stable | | Moody's | P-2 | A2 | Baa1 | n/a | Stable | - NW Natural was in compliance with all ring-fencing provisions and debt covenants as of June 30, 2020, including maintaining a consolidated indebtedness to total capitalization ratio of 56.0% (covenant limit 70%)[328][336][343] Cash Flows This section analyzes cash flows from operating, investing, and financing activities for NW Holdings and NW Natural, highlighting increases in operating cash due to deferred gas costs, increased investing cash use for capital expenditures, and significantly increased financing cash from debt borrowings and FMB issuances Operating Activities Cash Provided by Operating Activities (Unaudited, in thousands) | Entity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :----------------------------- | :----------------------------- | | NW Holdings | $159,546 | $155,109 | | NW Natural | $159,791 | $156,136 | - Cash provided by operating activities increased by $4.4 million for NW Holdings and $3.7 million for NW Natural, primarily due to a net decrease in net deferred gas costs[351] - NW Natural contributed $8.5 million to its qualified defined benefit pension plan during the first six months of 2020, compared to $4.7 million in the prior year[352] Investing Activities Cash Used in Investing Activities (Unaudited, in thousands) | Entity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :----------------------------- | :----------------------------- | | NW Holdings | $(160,419) | $(153,397) | | NW Natural | $(117,572) | $(96,064) | - Cash used in investing activities increased by $7.0 million for NW Holdings and $21.5 million for NW Natural, primarily due to higher capital expenditures related to system replacements, enhancements, and information technology projects[353] - NW Holdings anticipates capital expenditures between $240 million and $280 million in 2020, with $230 million to $270 million for the NGD business[354] Financing Activities Cash Provided by Financing Activities (Unaudited, in thousands) | Entity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----- | :----------------------------- | :----------------------------- | | NW Holdings | $128,282 | $46,540 | | NW Natural | $72,146 | $(10,155) | - Cash provided by financing activities increased by $81.7 million for NW Holdings and $82.3 million for NW Natural[356] - The increase for NW Natural was driven by $245.4 million in higher borrowings on short-term debt and long-term FMBs issued as a precaution during COVID-19, partially offset by $75 million in long-term debt retirement[357] Contingent Liabilities - As of June 30, 2020, NW Natural's total estimated liability related to environmental sites is $125.4 million[359] Application of Critical Accounting Policies and Estimates This section confirms that management's financial statements rely on significant judgments and estimates, and that no material changes to these policies or estimates occurred during the six months ended June 30, 2020, including due to the COVID-19 pandemic - Critical accounting policies and estimates include 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[361] - No material changes to critical accounting policies and estimates occurred during the six months ended June 30, 2020, and no significant changes were required due to the COVID-19 pandemic[361] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk This section states that NW Holdings and NW Natural are exposed to various market risks, including commodity, interest rate, foreign currency, credit, and weather risks, which are actively managed, with no material changes reported for the six months ended June 30, 2020 - NW Holdings and NW Natural are exposed to market risks such as commodity supply and price, interest rate, foreign currency, credit, and weather risks[363] - No material changes occurred related to market risk disclosures for the six months ended June 30, 2020[363] ITEM 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures as of June 30, 2020, following evaluation by management, and reports no material changes in internal control over financial reporting during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of June 30, 2020, ensuring timely and accurate reporting[364] - No material changes in internal control over financial reporting occurred during the quarter ended June 30, 2020[366] PART II. OTHER INFORMATION ITEM 1. Legal Proceedings This section states that, apart from environmental proceedings, NW Holdings and NW Natural are not currently party to any material direct claims or litigation, with other litigation considered nonmaterial and arising in the ordinary course of business - NW Holdings is not currently party to any direct claims or litigation, though it may be subject to claims in the ordinary course of business[189] - NW Natural is subject to claims and litigation arising in the ordinary course of business, but the ultimate disposition of these matters is not expected to have a material effect on financial condition, results of operations, or cash flows[190] ITEM 1A. Risk Factors This section updates risk factors, focusing on the significant public health risk posed by the COVID-19 pandemic and its potential adverse effects on business, as well as compliance risks related to Oregon's greenhouse gas emissions reduction goals - The COVID-19 pandemic poses a widespread, severe, and unpredictable public health risk that could materially and adversely affect NW Holdings' and NW Natural's business, results of operations, or financial condition[369] - Potential adverse effects of COVID-19 include disrupting access to capital markets, reducing demand for natural gas, decreasing customer growth, limiting ability to collect on overdue accounts, increasing operating costs, and impacting capital expenditures[371] - NW Holdings and NW Natural are subject to environmental regulations, including Oregon's executive order establishing greenhouse gas (GHG) emissions reduction goals (45% bel