Northwest Natural pany(NWN) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited financial information, management's discussion, market risk disclosures, and controls and procedures for the reporting period FORWARD-LOOKING STATEMENTS This section identifies forward-looking statements, highlighting their inherent uncertainties and risks, and cautions against undue reliance as actual results may differ materially - 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 of forward-looking statements include plans, projections, objectives, strategies, future events, economic conditions, earnings, dividends, capital expenditures, climate change initiatives, renewable natural gas, growth, customer rates, commodity costs, operational performance, energy policy, liquidity, acquisitions, and impacts of COVID-19[7] - Actual results may differ materially from forward-looking statements due to inherent uncertainties, risks, and changes in circumstances, as discussed in the 2020 Annual Report on Form 10-K and this report[8] UNAUDITED FINANCIAL STATEMENTS This section presents unaudited consolidated financial statements for NW Holdings and NW Natural, including comprehensive income, balance sheets, equity, and cash flows, with detailed explanatory notes NW Holdings: Consolidated Statements of Comprehensive Income This section provides NW Holdings' consolidated statements of comprehensive income for the three months ended March 31, 2021 and 2020 NW Holdings: Consolidated Statements of Comprehensive Income (Three Months Ended March 31, in thousands, except per share data) | In thousands, except per share data | 2021 | 2020 | | :---------------------------------- | :----- | :----- | | Operating revenues | $315,946 | $285,151 | | Total operating expenses | $221,240 | $208,705 | | Income from operations | $94,706 | $76,446 | | Income before income taxes | $80,038 | $62,403 | | Income tax expense | $20,521 | $14,127 | | Net income from continuing operations | $59,517 | $48,276 | | Loss from discontinued operations, net of tax | — | $(778) | | Net income | $59,517 | $47,498 | | Comprehensive income | $59,738 | $47,658 | | Basic EPS from continuing operations | $1.94 | $1.58 | | Diluted EPS from continuing operations | $1.94 | $1.58 | | Basic EPS | $1.94 | $1.56 | | Diluted EPS | $1.94 | $1.56 | NW Holdings: Consolidated Balance Sheets This section presents NW Holdings' consolidated balance sheets as of March 31, 2021, March 31, 2020, and December 31, 2020 NW Holdings: Consolidated Balance Sheets (As of March 31, 2021, March 31, 2020, and December 31, 2020, in thousands) | In thousands | March 31, 2021 | March 31, 2020 | December 31, 2020 | | :-------------------------------- | :------------- | :------------- | :---------------- | | Assets: | | | | | Total current assets | $302,792 | $720,267 | $323,245 | | Total property, plant, and equipment, net | $2,696,380 | $2,500,215 | $2,654,770 | | Total non-current assets | $3,455,833 | $3,281,260 | $3,433,134 | | Total assets | $3,758,625 | $4,001,527 | $3,756,379 | | Liabilities and Equity: | | | | | Total current liabilities | $585,665 | $798,870 | $627,083 | | Long-term debt | $860,654 | $953,962 | $860,081 | | Total deferred credits and other non-current liabilities | $1,375,982 | $1,346,954 | $1,380,482 | | Total equity | $936,324 | $901,741 | $888,733 | | Total liabilities and equity | $3,758,625 | $4,001,527 | $3,756,379 | NW Holdings: Consolidated Statements of Shareholders' Equity This section details NW Holdings' consolidated statements of shareholders' equity for the three months ended March 31, 2021 and 2020 NW Holdings: Consolidated Statements of Shareholders' Equity (Three Months Ended March 31, in thousands, except per share amounts) | In thousands, except per share amounts | 2021 | 2020 | | :------------------------------------- | :----- | :----- | | Total shareholders' equity, beginning balances | $888,733 | $865,999 | | Common stock, ending balances | $568,066 | $561,264 | | Retained earnings, ending balances | $380,939 | $351,050 | | Accumulated other comprehensive income (loss), ending balances | $(12,681) | $(10,573) | | Total shareholders' equity, ending balances | $936,324 | $901,741 | | Dividends per share of common stock | $0.4800 | $0.4775 | NW Holdings: Consolidated Statements of Cash Flows This section outlines NW Holdings' consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 NW Holdings: Consolidated Statements of Cash Flows (Three Months Ended March 31, in thousands) | In thousands | 2021 | 2020 | | :------------------------------------------ | :----- | :----- | | Cash provided by operating activities | $137,065 | $104,660 | | Cash used in investing activities | $(63,875) | $(101,429) | | Cash (used in) provided by financing activities | $(83,132) | $459,997 | | Increase (decrease) in cash, cash equivalents and restricted cash | $(9,942) | $463,228 | | Cash, cash equivalents and restricted cash, end of period | $25,512 | $475,864 | | Interest paid, net of capitalization | $8,976 | $8,368 | | Income taxes paid (refunded), net | $800 | $(256) | NW Natural: Consolidated Statements of Comprehensive Income This section provides NW Natural's consolidated statements of comprehensive income for the three months ended March 31, 2021 and 2020 NW Natural: Consolidated Statements of Comprehensive Income (Three Months Ended March 31, in thousands) | In thousands | 2021 | 2020 | | :-------------------------------- | :----- | :----- | | Operating revenues | $312,350 | $282,529 | | Total operating expenses | $217,232 | $205,508 | | Income from operations | $95,118 | $77,021 | | Income before income taxes | $80,663 | $63,597 | | Income tax expense | $20,552 | $14,418 | | Net income | $60,111 | $49,179 | | Comprehensive income | $60,332 | $49,339 | NW Natural: Consolidated Balance Sheets This section presents NW Natural's consolidated balance sheets as of March 31, 2021, March 31, 2020, and December 31, 2020 NW Natural: Consolidated Balance Sheets (As of March 31, 2021, March 31, 2020, and December 31, 2020, in thousands) | In thousands | March 31, 2021 | March 31, 2020 | December 31, 2020 | | :-------------------------------- | :------------- | :------------- | :---------------- | | Assets: | | | | | Total current assets | $281,507 | $667,780 | $282,997 | | Total property, plant, and equipment, net | $2,649,040 | $2,459,914 | $2,608,330 | | Total non-current assets | $3,338,061 | $3,157,616 | $3,316,339 | | Total assets | $3,619,568 | $3,825,396 | $3,599,336 | | Liabilities and Equity: | | | | | Total current liabilities | $508,095 | $692,321 | $529,053 | | Long-term debt | $857,365 | $917,146 | $857,265 | | Total deferred credits and other non-current liabilities | $1,372,543 | $1,358,190 | $1,377,834 | | Total equity | $881,565 | $857,739 | $835,184 | | Total liabilities and equity | $3,619,568 | $3,825,396 | $3,599,336 | NW Natural: Consolidated Statements of Shareholder's Equity This section details NW Natural's consolidated statements of shareholder's equity for the three months ended March 31, 2021 and 2020 NW Natural: Consolidated Statements of Shareholder's Equity (Three Months Ended March 31, in thousands) | In thousands | 2021 | 2020 | | :------------------------------------------ | :----- | :----- | | Total shareholder's equity, beginning balances | $835,184 | $822,196 | | Common stock | $319,506 | $319,557 | | Retained earnings, ending balances | $574,740 | $548,755 | | Accumulated other comprehensive income (loss), ending balances | $(12,681) | $(10,573) | | Total shareholder's equity, ending balances | $881,565 | $857,739 | NW Natural: Consolidated Statements of Cash Flows This section outlines NW Natural's consolidated statements of cash flows for the three months ended March 31, 2021 and 2020 NW Natural: Consolidated Statements of Cash Flows (Three Months Ended March 31, in thousands) | In thousands | 2021 | 2020 | | :------------------------------------------ | :----- | :----- | | Cash provided by operating activities | $136,273 | $105,859 | | Cash used in investing activities | $(62,229) | $(61,640) | | Cash (used in) provided by financing activities | $(71,760) | $383,914 | | Increase in cash, cash equivalents and restricted cash | $2,284 | $428,133 | | Cash, cash equivalents and restricted cash, end of period | $18,023 | $437,040 | | Interest paid, net of capitalization | $8,585 | $7,795 | | Income taxes paid (refunded), net | $2,880 | $950 | NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS This section provides detailed notes explaining significant accounting policies, segment information, revenue, leases, debt, and other financial details for the unaudited consolidated financial statements 1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION This section describes the organizational structure and consolidation principles for NW Holdings and NW Natural, including their primary business segments and discontinued operations - The report is a combined filing for Northwest Natural Holding Company (NW Holdings) and Northwest Natural Gas Company (NW Natural), presenting separate consolidated financial statements for each registrant[25] - NW Natural's core business is the regulated natural gas distribution (NGD) segment, serving customers in Oregon and southwest Washington. All other activities, including water businesses and other investments, are aggregated as 'other' for each registrant[26] - The results of Gill Ranch were presented as a discontinued operation for NW Holdings for all periods shown on the consolidated statements of comprehensive income and cash flows, with the sale closing on December 4, 2020[29] 2. SIGNIFICANT ACCOUNTING POLICIES This section details the significant accounting policies applied by NW Holdings and NW Natural, including regulatory accounting, cash and cash equivalents, uncollectible accounts, and recent accounting pronouncements - NW Holdings and NW Natural apply regulatory accounting principles, capitalizing or deferring certain costs and revenues as regulatory assets and liabilities based on orders from various Public Utilities Commissions (OPUC, WUTC, IPUC, PUCT)[32] NW Natural: Regulatory Assets (In thousands) | Category | March 31, 2021 | March 31, 2020 | December 31, 2020 | | :--------- | :------------- | :------------- | :---------------- | | Current | $47,789 | $37,815 | $31,745 | | Non-current | $338,652 | $328,024 | $348,887 | | Total NW Natural | $386,441 | $365,839 | $380,632 | NW Natural: Regulatory Liabilities (In thousands) | Category | March 31, 2021 | March 31, 2020 | December 31, 2020 | | :--------- | :------------- | :------------- | :---------------- | | Current | $81,314 | $47,137 | $50,362 | | Non-current | $635,515 | $622,375 | $638,793 | | Total NW Natural | $716,829 | $669,512 | $689,155 | - Cash and cash equivalents for NW Holdings decreased significantly from $471.1 million at March 31, 2020, to $17.9 million at March 31, 2021, while NW Natural's decreased from $432.3 million to $10.4 million over the same period[13][20][36] - The allowance for uncollectible accounts for NW Holdings increased from $3.2 million at December 31, 2020, to $3.5 million at March 31, 2021, with $2.6 million deferred to a regulatory asset for COVID-19 costs[41] - As of March 31, 2021, approximately $5.0 million in COVID-19 related costs were deferred to a regulatory asset, believed to be recoverable[43] - The adoption of ASU 2019-12 (Income Taxes) on January 1, 2021, did not materially affect the financial statements. ASUs 2020-04 and 2021-01 (Reference Rate Reform) are not expected to materially affect financial statements[45][48] 3. EARNINGS PER SHARE This section presents the calculation of basic and diluted earnings per share for NW Holdings, including net income from continuing and discontinued operations NW Holdings: Earnings Per Share (Three Months Ended March 31, in thousands, except per share data) | In thousands, except per share data | 2021 | 2020 | | :---------------------------------- | :----- | :----- | | Net income from continuing operations | $59,517 | $48,276 | | Loss from discontinued operations, net of tax | — | $(778) | | Net income | $59,517 | $47,498 | | Average common shares outstanding - basic | 30,614 | 30,491 | | Average common shares outstanding - diluted | 30,633 | 30,535 | | Basic EPS from continuing operations | $1.94 | $1.58 | | Diluted EPS from continuing operations | $1.94 | $1.58 | | Basic EPS | $1.94 | $1.56 | | Diluted EPS | $1.94 | $1.56 | | Anti-dilutive shares | 12 | 3 | 4. SEGMENT INFORMATION This section provides disaggregated financial information by business segment for NW Holdings and NW Natural, including operating revenues, income from operations, and capital expenditures - The primary reportable segment is NW Natural's local gas distribution business (NGD), which includes the Mist underground storage facility, NWN Gas Reserves, and NW Natural RNG Holding Company, LLC[51][52] - NW Natural's 'Other' activities include Interstate Storage Services, third-party asset management, and appliance retail center operations. NW Holdings' 'Other' activities include NWN Water (water and wastewater utilities), NWN Gas Storage, and other pipeline assets[53][55] NW Holdings: Segment Information Summary (Three Months Ended March 31, in thousands) | In thousands | NGD (NW Natural) 2021 | Other (NW Natural) 2021 | NW Natural Total 2021 | Other (NW Holdings) 2021 | NW Holdings Total 2021 | | :----------- | :-------------------- | :---------------------- | :-------------------- | :----------------------- | :--------------------- | | Operating revenues | $301,338 | $11,012 | $312,350 | $3,596 | $315,946 | | Income (loss) from operations | $86,487 | $8,631 | $95,118 | $(412) | $94,706 | | Net income (loss) from continuing operations | $53,925 | $6,186 | $60,111 | $(594) | $59,517 | | Capital expenditures | $63,992 | $106 | $64,098 | $1,604 | $65,702 | | Total assets at March 31, 2021 | $3,570,153 | $49,415 | $3,619,568 | $139,057 | $3,758,625 | | | NGD (NW Natural) 2020 | Other (NW Natural) 2020 | NW Natural Total 2020 | Other (NW Holdings) 2020 | NW Holdings Total 2020 | | Operating revenues | $278,487 | $4,042 | $282,529 | $2,622 | $285,151 | | Income (loss) from operations | $75,258 | $1,763 | $77,021 | $(575) | $76,446 | | Net income (loss) from continuing operations | $47,943 | $1,236 | $49,179 | $(903) | $48,276 | | Capital expenditures | $56,157 | $77 | $56,234 | $1,212 | $57,446 | | Total assets at March 31, 2020 | $3,776,650 | $48,746 | $3,825,396 | $160,835 | $3,986,231 | NGD Margin Calculation (Three Months Ended March 31, in thousands) | In thousands | 2021 | 2020 | | :-------------------------- | :----- | :----- | | Total NGD operating revenues | $301,338 | $278,487 | | Less: NGD cost of gas | $112,266 | $108,595 | | Environmental remediation | $3,777 | $4,005 | | Revenue taxes | $12,655 | $11,743 | | NGD margin | $172,640 | $154,144 | 5. REVENUE This section disaggregates revenue from continuing operations for NW Holdings and NW Natural, detailing sources such as natural gas sales, gas storage, asset management, and leasing Disaggregated Revenue from Continuing Operations (Three Months Ended March 31, in thousands) | In thousands | NGD 2021 | Other (NW Natural) 2021 | NW Natural Total 2021 | Other (NW Holdings) 2021 | NW Holdings Total 2021 | | :----------- | :------- | :---------------------- | :-------------------- | :----------------------- | :--------------------- | | Natural gas sales | $296,083 | — | $296,083 | — | $296,083 | | Gas storage revenue, net | — | $2,495 | $2,495 | — | $2,495 | | Asset management revenue, net | — | $6,928 | $6,928 | — | $6,928 | | Appliance retail center revenue | — | $1,589 | $1,589 | — | $1,589 | | Other revenue | $415 | — | $415 | $3,596 | $4,011 | | Revenue from contracts with customers | $296,498 | $11,012 | $307,510 | $3,596 | $311,106 | | Alternative revenue | $453 | — | $453 | — | $453 | | Leasing revenue | $4,387 | — | $4,387 | — | $4,387 | | Total operating revenues | $301,338 | $11,012 | $312,350 | $3,596 | $315,946 | | | NGD 2020 | Other (NW Natural) 2020 | NW Natural Total 2020 | Other (NW Holdings) 2020 | NW Holdings Total 2020 | | Natural gas sales | $274,004 | — | $274,004 | — | $274,004 | | Gas storage revenue, net | — | $2,336 | $2,336 | — | $2,336 | | Asset management revenue, net | — | $150 | $150 | — | $150 | | Appliance retail center revenue | — | $1,556 | $1,556 | — | $1,556 | | Other revenue | $337 | — | $337 | $2,622 | $2,959 | | Revenue from contracts with customers | $274,341 | $4,042 | $278,383 | $2,622 | $281,005 | | Alternative revenue | $(472) | — | $(472) | — | $(472) | | Leasing revenue | $4,618 | — | $4,618 | — | $4,618 | | Total operating revenues | $278,487 | $4,042 | $282,529 | $2,622 | $285,151 | - NW Natural's primary revenue source is natural gas sales to NGD customers, recognized over time upon delivery. Alternative revenue programs like Weather Normalization (WARM) and decoupling mechanisms are considered contracts with the regulator and excluded from revenue from contracts with customers[63][65] - Unrecognized revenue for fixed components of gas storage and asset management contracts was approximately $83.8 million as of March 31, 2021, with $14.3 million expected in the remainder of 2021[69] 6. LEASES This section outlines lease arrangements for NW Holdings and NW Natural, including leasing revenue, future minimum lease payments, and lease expenses - Leasing revenue primarily comes from NW Natural's North Mist natural gas storage agreement with PGE, classified as a sales-type lease with regulatory accounting deferral. Total lease revenue for NW Natural was $4.387 million for the three months ended March 31, 2021, down from $4.618 million in 2020[73][76] NW Natural: Total Future Minimum Lease Payments to be Received (As of March 31, 2021, in thousands) | In thousands | Operating | Sales-Type | Total | | :---------------- | :-------- | :--------- | :---- | | Remainder of 2021 | $55 | $13,090 | $13,145 | | 2022 | $72 | $17,026 | $17,098 | | 2023 | $64 | $16,557 | $16,621 | | 2024 | $65 | $15,867 | $15,932 | | 2025 | $60 | $15,306 | $15,366 | | Thereafter | $229 | $251,724 | $251,953 | | Total lease revenue | $545 | $329,570 | $330,115 | | Less: imputed interest | | $186,352 | | | Total leases receivable | | $143,218 | | NW Holdings: Lease Expense (Three Months Ended March 31, in thousands) | In thousands | 2021 | 2020 | | :-------------------- | :----- | :----- | | Operating lease expense | $1,696 | $1,254 | | Short-term lease expense | $220 | $198 | - 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. A regulatory asset of $4.6 million was recorded for the timing difference between minimum lease payments and expense recognition[80][81] NW Holdings: Maturities of Operating Lease Liabilities (As of March 31, 2021, in thousands) | In thousands | NW Natural | Other (NW Holdings) | NW Holdings | | :---------------- | :--------- | :------------------ | :---------- | | Remainder of 2021 | $5,161 | $41 | $5,202 | | 2022 | $6,933 | $24 | $6,957 | | 2023 | $6,986 | $6 | $6,992 | | 2024 | $7,150 | $6 | $7,156 | | 2025 | $7,185 | $6 | $7,191 | | Thereafter | $123,784 | $24 | $123,808 | | Total lease payments | $157,199 | $107 | $157,306 | | Less: imputed interest | $75,674 | $5 | $75,679 | | Total lease obligations | $81,525 | $102 | $81,627 | | Less: current obligations | $1,167 | $46 | $1,213 | | Long-term lease obligations | $80,358 | $56 | $80,414 | 7. STOCK-BASED COMPENSATION This section describes the stock-based compensation plans for NW Holdings, including the Long Term Incentive Plan and Employee Stock Purchase Plan, and associated compensation costs - Stock-based compensation plans include a Long Term Incentive Plan (LTIP), an Employee Stock Purchase Plan (ESPP), and a Restated Stock Option Plan (terminated for new grants in 2012)[85][90] - For the 2019 LTIP, 31,986 performance-based shares were granted, with $0.4 million of unrecognized compensation cost expected to be recognized through 2021[86][88] - 38,160 Restricted Stock Units (RSUs) were granted under the LTIP during Q1 2021, with a weighted-average grant date fair value of $49.16 per share. Unrecognized compensation cost from RSUs was $4.5 million, expected to be recognized through 2025[89] 8. DEBT This section details the short-term and long-term debt outstanding for NW Holdings and NW Natural, including interest rates, maturity dates, and fair value estimates Short-Term Debt Outstanding (As of March 31, 2021, in millions) | Registrant | Amount (in millions) | | :--------- | :------------------- | | NW Holdings | $236.2 | | NW Natural | $175.2 | - NW Holdings' short-term debt included $61.0 million in revolving credit agreement loans and $175.2 million of commercial paper outstanding at NW Natural. The weighted average interest rate on the revolving credit agreement was 1.19% for NW Holdings, and 0.43% for NW Natural's commercial paper[91] Long-Term Debt Outstanding (As of March 31, 2021, in millions) | Registrant | Amount (in millions) | | :--------- | :------------------- | | NW Holdings | $955.9 | | NW Natural | $917.3 | - NW Natural's long-term debt consists of first mortgage bonds with maturity dates from 2021 to 2050, interest rates from 2.82% to 9.05%, and a weighted average interest rate of 4.60%[92] - NW Natural Water, a subsidiary of NW Holdings, has a $35.0 million term loan due in 2021, with an interest rate of 0.66% at March 31, 2021. NW Holdings was in compliance with its consolidated indebtedness to total capitalization ratio covenant of 56.0% (limit 70%)[93] Estimated Fair Value of Long-Term Debt (In thousands) | Registrant | March 31, 2021 (Carrying Amount, in thousands) | March 31, 2021 (Estimated Fair Value, in thousands) | December 31, 2020 (Carrying Amount, in thousands) | December 31, 2020 (Estimated Fair Value, in thousands) | | :--------- | :------------------------------- | :------------------------------------ | :---------------------------------- | :----------------------------------- | | NW Holdings | $955,919 | $1,053,036 | $955,425 | $1,136,311 | | NW Natural | $917,336 | $1,014,527 | $917,220 | $1,097,348 | 9. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS This section outlines the pension and other postretirement benefit plans for NW Natural, including net periodic benefit costs and employer contributions - NW Natural maintains a qualified non-contributory defined benefit pension plan, non-qualified supplemental pension plans, and other postretirement employee benefit plans. Service costs are recognized in operations and maintenance, while other non-service costs are in other income (expense), net[97][98] Net Periodic Benefit Cost (Three Months Ended March 31, in thousands) | Component | Pension Benefits 2021 (in thousands) | Pension Benefits 2020 (in thousands) | Other Postretirement Benefits 2021 (in thousands) | Other Postretirement Benefits 2020 (in thousands) | | :------------------------ | :-------------------- | :-------------------- | :--------------------------------- | :--------------------------------- | | Service cost | $1,714 | $1,657 | $55 | $64 | | Interest cost | $3,343 | $4,011 | $165 | $223 | | Expected return on plan assets | $(6,099) | $(5,496) | — | — | | Amortization of prior service credit | — | — | $(117) | $(117) | | Amortization of net actuarial loss | $5,501 | $4,778 | $131 | $143 | | Net periodic benefit cost | $4,459 | $4,950 | $234 | $313 | | Net amount charged to expense | $6,534 | $7,083 | $213 | $290 | - NW Natural made cash contributions of $4.5 million to qualified defined benefit pension plans for the three months ended March 31, 2021, and expects further contributions of $15.6 million during the remainder of 2021[101] - Employer contributions to the Retirement K Savings Plan (defined contribution) totaled $2.6 million for the three months ended March 31, 2021, up from $2.5 million in 2020[103] 10. INCOME TAX This section provides a reconciliation of the effective income tax rate for NW Holdings and NW Natural, detailing components and the impact of regulatory adjustments Effective Income Tax Rate Reconciliation (Three Months Ended March 31, in thousands) | Component | NW Holdings 2021 (in thousands) | NW Holdings 2020 (in thousands) | NW Natural 2021 (in thousands) | NW Natural 2020 (in thousands) | | :------------------------ | :--------------- | :--------------- | :-------------- | :-------------- | | Income tax at statutory rate (federal) | $16,808 | $13,105 | $16,939 | $13,355 | | State income tax | $7,308 | $3,677 | $7,325 | $3,737 | | Differences required to be flowed-through by regulatory commissions | $(3,605) | $(2,525) | $(3,605) | $(2,525) | | Other, net | $10 | $(130) | $(107) | $(149) | | Total provision for income taxes on continuing operations | $20,521 | $14,127 | $20,552 | $14,418 | | Effective income tax rate for continuing operations | 25.6% | 22.8% | 25.5% | 22.8% | - The effective income tax rate for NW Holdings and NW Natural increased primarily due to the Oregon Corporate Activity Tax (CAT), changes in pre-tax income, and regulatory amortization of deferred Tax Cuts and Jobs Act benefits[106] - The IRS Compliance Assurance Process (CAP) examination for the 2019 tax year was completed in Q1 2021 with no material changes. The 2020 and 2021 tax years are subject to CAP examination[107] 11. PROPERTY, PLANT, AND EQUIPMENT This section presents the net property, plant, and equipment for NW Holdings and NW Natural, categorized by registrant and type of asset Property, Plant, and Equipment, Net (In thousands) | Registrant | March 31, 2021 | March 31, 2020 | December 31, 2020 | | :--------- | :------------- | :------------- | :---------------- | | NW Natural | $2,649,040 | $2,459,914 | $2,608,330 | | Other (NW Holdings) | $47,340 | $40,301 | $46,440 | | NW Holdings Total | $2,696,380 | $2,500,215 | $2,654,770 | - NW Holdings' 'Other plant' includes long-lived assets from water and wastewater utility operations and non-regulated activities. NW Natural's 'Other plant' primarily includes non-utility gas storage assets at the Mist facility[110][111] 12. GAS RESERVES This section details NW Natural's investment in gas reserves, including the Jonah Field program, and its recovery mechanisms for NGD customers - NW Natural has invested $188 million in the Jonah Field gas reserves program in Wyoming as of March 31, 2021, providing long-term price protection for NGD customers[112] - The cost of gas, including a carrying cost for the rate base investment, is recovered through the annual Oregon PGA filing. Gas produced from additional wells is included in the Oregon PGA at a fixed rate of $0.4725 per therm[113][114] NW Natural's Net Gas Reserves Investment (In thousands) | Component | March 31, 2021 | March 31, 2020 | December 31, 2020 | | :------------------------ | :------------- | :------------- | :---------------- | | Gas reserves, current | $10,659 | $14,351 | $11,409 | | Gas reserves, non-current | $176,648 | $172,956 | $175,898 | | Less: Accumulated amortization | $145,048 | $127,722 | $141,414 | | Total gas reserves | $42,259 | $59,585 | $45,893 | | Less: Deferred taxes on gas reserves | $9,831 | $14,522 | $10,572 | | Net investment in gas reserves | $32,428 | $45,063 | $35,321 | 13. INVESTMENTS This section describes other investments held by NW Holdings, including financial investments in life insurance policies and the sale of an interest in Trail West Holdings, LLC - Other investments include financial investments in life insurance policies, accounted for at cash surrender value, net of policy loans[116] - NWN Energy completed the sale of its interest in Trail West Holdings, LLC (TWH) on August 6, 2020, for $14.0 million, resulting in an after-tax gain of approximately $0.5 million[117] 14. BUSINESS COMBINATIONS This section outlines recent business acquisitions by NWN Water, a subsidiary of NW Holdings, and the resulting goodwill recognized - During Q1 2021, NWN Water completed one immaterial acquisition of a water system. In 2020, NWN Water completed two significant acquisitions (Suncadia Water Company, LLC and T&W Water Service Company) for $38.1 million, aligning with its water sector strategy[119][120] - Final goodwill of $18.2 million was recognized from 2020 acquisitions, attributable to regulated water utility service territories, experienced workforces, and strategic growth benefits. Total goodwill was $69.3 million as of March 31, 2021[121][124] - The annual impairment assessment of goodwill occurs in the fourth quarter of each year, with no impairments recognized to date[124] 15. DERIVATIVE INSTRUMENTS This section details NW Natural's use of derivative instruments to hedge natural gas and foreign currency risks, including 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 for pipeline demand charges paid in Canadian dollars[125][126] Notional Amounts of Open Derivative Positions (In thousands) | Instrument | March 31, 2021 | December 31, 2020 | | :--------- | :------------- | :---------------- | | Natural gas (financial, in therms) | 597,495 | 784,400 | | Natural gas (physical, in therms) | 187,595 | 457,593 | | Foreign exchange | $5,954 | $5,896 | Unrealized and Realized Gain/Loss from Derivative Instruments (Three Months Ended March 31, in thousands) | Category | Natural gas commodity 2021 (in thousands) | Foreign exchange 2021 (in thousands) | Natural gas commodity 2020 (in thousands) | Foreign exchange 2020 (in thousands) | | :------- | :------------------------- | :-------------------- | :------------------------- | :-------------------- | | Benefit (expense) to cost of gas | $20,482 | $77 | $(5,343) | $(466) | | Operating expense | $(27) | — | $(2,433) | — | | Amounts deferred to regulatory accounts on balance sheet | $(20,459) | $(77) | $7,405 | $466 | | Total loss in pre-tax earnings | $(4) | — | $(371) | — | - NW Natural realized net gains of $5.1 million from natural gas financial derivative contract settlements for the three months ended March 31, 2021, compared to net losses of $2.1 million in the prior year[133] - NW Natural's net fair value of derivatives was an asset of $20.7 million at March 31, 2021, compared to a liability of $1.3 million at March 31, 2020, and an asset of $12.8 million at December 31, 2020[140] 16. ENVIRONMENTAL MATTERS This section addresses NW Natural's environmental remediation liabilities, including specific site costs and the regulatory asset deferred for these expenses - NW Natural owns or previously owned properties requiring environmental remediation. Recovery mechanisms are in place to collect 96.7% of allocable costs from Oregon customers and 3.3% from Washington customers[141] Environmental Liabilities (In thousands) | Site Category | Current Liabilities (March 31, 2021, in thousands) | Non-Current Liabilities (March 31, 2021, in thousands) | | :------------ | :----------------------------------- | :--------------------------------------- | | Portland Harbor site: | | | | Gasco/Siltronic Sediments | $7,026 | $42,374 | | Other Portland Harbor | $2,175 | $6,954 | | Gasco/Siltronic Upland site | $13,135 | $39,302 | | Front Street site | $1,258 | $1,132 | | Oregon Steel Mills | — | $179 | | Total | $23,594 | $89,941 | - NW Natural has recorded a liability of $49.4 million for the Gasco sediment clean-up, representing the low end of the estimated range of $49.4 million to $350 million[150] Total Regulatory Asset Deferred for Environmental Costs (In thousands) | Component | March 31, 2021 | March 31, 2020 | December 31, 2020 | | :------------------------ | :------------- | :------------- | :---------------- | | Deferred costs and interest | $46,409 | $37,586 | $44,516 | | Accrued site liabilities | $113,456 | $129,977 | $120,352 | | Insurance proceeds and interest | $(69,492) | $(80,613) | $(69,253) | | Total regulatory asset deferral | $90,373 | $86,950 | $95,615 | | Current regulatory assets | $5,396 | $4,459 | $4,992 | | Long-term regulatory assets | $84,977 | $82,491 | $90,623 | - NW Natural concluded there was no earnings test adjustment for 2020 based on the environmental earnings test submitted in April 2021[213] 17. DISCONTINUED OPERATIONS This section reports on NW Holdings' sale of its interest in Gill Ranch Gas Storage Facility, presenting its financial results as discontinued operations - NW Holdings completed the sale of its 75% interest in Gill Ranch Gas Storage Facility on December 4, 2020, for an initial cash purchase price of $13.5 million (less $1.0 million deposit), resulting in an after-tax gain of $5.9 million for 2020[168] - As of March 31, 2021, there were no assets or liabilities classified as held for sale, and no activity in the consolidated statement of comprehensive income for discontinued operations[169] NW Holdings Discontinued Operations (Three Months Ended March 31, 2020, in thousands) | Category | Amount | | :-------------------------------------- | :----- | | Revenues | $908 | | Total expenses | $1,964 | | Loss from discontinued operations before income taxes | $(1,056) | | Income tax benefit | $(278) | | Loss from discontinued operations, net of tax | $(778) | | Loss from discontinued operations per share of common stock: Basic | $(0.02) | | Loss from discontinued operations per share of common stock: Diluted | $(0.02) | 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, covering key highlights, regulatory matters, segment performance, capital structure, liquidity, and cash flows EXECUTIVE SUMMARY This section provides an overview of NW Holdings' and NW Natural's financial performance, including diluted EPS, net income, customer growth, and the impact of a cold weather event and COVID-19 - NW Holdings reported diluted EPS of $1.94 for Q1 2021, up from $1.56 in Q1 2020, with consolidated net income increasing by $12.0 million[177] - NW Natural's consolidated net income increased by $10.9 million, driven by an $18.5 million increase in NGD segment margin due to the 2020 Oregon rate case and residential customer growth, and a $6.9 million increase in asset management revenue[178] - A February 2021 cold weather event led to approximately $29 million in higher commodity costs, with $27 million deferred for future recovery, resulting in a $2 million lower natural gas utility margin. This was offset by $39 million in asset management revenue, with $33 million deferred for customer benefit[178] - NW Natural added over 11,000 meters in the past twelve months, achieving a 1.4% growth rate by March 31, 2021. The company continues to focus on its water utility strategy with new acquisitions[177] - The COVID-19 pandemic has led to deferred financial impacts (bad debt, financing costs, lost revenues) and potential delays in late and disconnection fee revenue recognition. Approximately $5.0 million in incurred COVID-19 costs were deferred to a regulatory asset, with an additional $1.8 million in forgone late fee revenue expected to be recognized later[183][220] DIVIDENDS This section reports on dividends paid per common share by NW Holdings, including the declared quarterly dividend and historical dividend growth Dividends Paid Per Common Share (Three Months Ended March 31) | Per common share | 2021 | 2020 | YTD Change | | :--------------- | :--- | :--- | :--------- | | Dividends paid | $0.4800 | $0.4775 | $0.0025 | - In April 2021, NW Holdings declared a quarterly dividend of $0.4800 per share, reflecting an annual indicated dividend rate of $1.92 per share[185] - Annual common stock dividend payments per share have increased each year since 1956[262] RESULTS OF OPERATIONS This section analyzes the results of operations for NW Holdings and NW Natural, covering regulatory matters, business segment performance, and consolidated operational expenses Regulatory Matters This section details the regulatory environment for NW Natural's NGD business, including rate cases, authorized rate structures, and initiatives related to renewable natural gas and climate change - NW Natural's NGD business is regulated by the OPUC (88% of customers) and WUTC (12% of customers) regarding rates and terms of service[186] - The 2020 Oregon rate case, effective October 16, 2020, provided a $45 million revenue requirement increase, based on a 9.4% ROE, 6.965% cost of capital, and $1.44 billion average rate base[189][195] - NW Natural filed a request for a general rate increase with the WUTC on December 18, 2020, seeking an 8.0% ($6.3 million) increase in Year One (Nov 1, 2021) and 3.7% ($3.2 million) in Year Two (Nov 1, 2022)[196] Key Regulatory Mechanisms and Authorized Rate Structure | Mechanism/Rate | Oregon (2018 Rate Case) | Oregon (2020 Rate Case, effective 11/1/2020) | Washington (2019 Rate Case, effective 11/1/2019) | | :------------- | :---------------------- | :------------------------------------------- | :--------------------------------------------- | | ROE | 9.4% | 9.4% | 9.4% | | ROR | 7.3% | 7.0% | 7.2% | | Debt/Equity Ratio | 50%/50% | 50%/50% | 51%/49% | | PGA | X | X | X | | Gas Cost Incentive Sharing | X | X | | | Decoupling | X | X | | | WARM | X | X | | | Environmental Cost Recovery | X | X | X | | Interstate Storage and Asset Management Sharing | X | X | X | - NW Natural entered the 2020-21 gas year with 40% of forecasted sales volumes hedged in financial swap and option contracts (38% in Oregon, 58% in Washington)[199] - The Oregon decoupling mechanism was reset in the 2020 rate case and extended to include April, adjusting margin revenues for differences between actual and expected customer volumes[207] - In Q1 2021, NW Natural refunded approximately $9.1 million in interstate storage and asset management sharing credit to Oregon customers[217] - Oregon's Senate Bill 98 (SB98) sets voluntary goals for adding up to 30% renewable natural gas (RNG) into the state's pipeline system by 2050 and allows utilities to invest in RNG infrastructure[222][223] - NW Natural exercised its option for the first RNG development project in Nebraska in December 2020, initiating an estimated $8 million investment expected to produce RNG in late 2021[225] - The Oregon Corporate Activity Tax (CAT), effective January 1, 2020, imposes a 0.57% tax on certain Oregon gross receipts. NW Natural is authorized to recover this expense through base rates and annual PGA adjustments[226] - Oregon's Executive Order (EO) establishes GHG emissions reduction goals of 45% below 1990 levels by 2035 and 80% by 2050, directing state agencies to advance decarbonization in the utility sector[229] Business Segment - Natural Gas Distribution (NGD) This section highlights the financial performance of NW Natural's NGD segment, including net income, diluted EPS, gas volumes, and margin composition NGD Segment Highlights (Three Months Ended March 31, in thousands, except EPS data) | In thousands, except EPS data | 2021 | 2020 | YTD Change | | :---------------------------- | :----- | :----- | :--------- | | NGD net income | $53,925 | $47,943 | $5,982 | | Diluted EPS - NGD segment | $1.76 | $1.57 | $0.19 | | Gas sold and delivered (in therms) | 431,120 | 420,917 | 10,203 | | NGD margin | $172,640 | $154,144 | $18,496 | - NGD net income increased by $6.0 million, or $0.19 per share, primarily due to an $18.5 million increase in NGD margin from new customer rates (2020 Oregon rate case) and customer growth[234] - NGD margin was negatively impacted by a $2.7 million decrease due to additional market gas purchases and other expenses during the 2021 cold weather event, with $27 million of $29 million higher commodity costs deferred[234] NGD Margin Composition (Three Months Ended March 31, in thousands, except degree day and customer data) | In thousands, except degree day and customer data | 2021 | 2020 | Favorable/ (Unfavorable) YTD Change | | :------------------------------------------------ | :----- | :----- | :---------------------------------- | | Residential and commercial sales (margin) | $160,772 | $139,144 | $21,628 | | Industrial sales and transportation (margin) | $8,754 | $8,582 | $172 | | Gain (loss) from gas cost incentive sharing | $(2,263) | $448 | $(2,711) | | Other margin | $595 | $1,044 | $(449) | | Other regulated services | $4,782 | $4,926 | $(144) | | Total NGD Margin | $172,640 | $154,144 | $18,496 | | Total number of meters (end of period) | 777,966 | 766,863 | 11,103 (1.4% growth) | - Residential and commercial margin increased $21.6 million, driven by new Oregon rates and 1.8% growth in residential meters. Industrial sales and transportation margin increased $0.2 million[237][238] - Cost of gas increased $3.7 million, primarily due to a $2.7 million higher loss from gas cost incentive sharing related to the 2021 cold weather event, and a 4% increase in volumes sold[240] Other (NW Natural & NW Holdings) This section reports on the net income from 'Other' activities for both NW Natural and NW Holdings, detailing the drivers of changes in performance Other Net Income (Three Months Ended March 31, in thousands) | Registrant | 2021 | 2020 | YTD Change | | :--------- | :----- | :----- | :--------- | | NW Natural other - net income | $6,186 | $1,236 | $4,950 | | Other NW Holdings activity | $(594) | $(903) | $309 | | NW Holdings other - net income | $5,592 | $333 | $5,259 | | Diluted EPS - NW Holdings - other | $0.18 | $0.01 | $0.17 | - NW Holdings' 'Other' net income increased $5.3 million, primarily driven by NW Natural's $5.0 million increase due to $6.9 million higher asset management revenue from the 2021 cold weather event, partially offset by $1.7 million in income tax expense[243] Consolidated Operations This section analyzes consolidated operational expenses for NW Holdings and NW Natural, including operations and maintenance, depreciation, interest, and income tax expenses Operations and Maintenance Expense (Three Months Ended March 31, in thousands) | Registrant | 2021 | 2020 | YTD Change | | :--------- | :----- | :----- | :--------- | | NW Natural | $49,187 | $46,256 | $2,931 | | Other NW Holdings operations and maintenance | $3,004 | $2,665 | $339 | | NW Holdings | $52,191 | $48,921 | $3,270 | - NW Holdings' operations and maintenance expense increased $3.3 million, with NW Natural's increase of $2.9 million driven by higher compensation costs ($1.9 million), lease expense ($0.9 million), and professional service expenses ($0.8 million)[244] Depreciation and Amortization Expense (Three Months Ended March 31, in thousands) | Registrant | 2021 | 2020 | YTD Change | | :--------- | :----- | :----- | :--------- | | NW Natural | $27,169 | $24,190 | $2,979 | | Other NW Holdings depreciation and amortization | $928 | $485 | $443 | | NW Holdings | $28,097 | $24,675 | $3,422 | - Depreciation and amortization expense increased $3.4 million at NW Holdings and $3.0 million at NW Natural, primarily due to property, plant, and equipment additions[246] Interest Expense, Net (Three Months Ended March 31, in thousands) | Registrant | 2021 | 2020 | YTD Change | | :--------- | :----- | :----- | :--------- | | NW Natural | $10,790 | $9,861 | $929 | | Other NW Holdings interest expense, net | $336 | $607 | $(271) | | NW Holdings | $11,126 | $10,468 | $658 | - Interest expense, net, increased $0.7 million at NW Holdings and $0.9 million at NW Natural, mainly due to a $1.0 million increase in long-term debt interest and $0.6 million lower AFUDC debt interest income, partially offset by lower commercial paper interest[248] Income Tax Expense (Three Months Ended March 31, in thousands) | Registrant | 2021 | 2020 | YTD Change | | :--------- | :----- | :----- | :--------- | | NW Natural income tax expense | $20,552 | $14,418 | $6,134 | | NW Holdings income tax expense | $20,521 | $14,127 | $6,394 | - Income tax expense increased $6.1 million at NW Natural and $6.4 million at NW Holdings, primarily due to higher pre-tax income and the Oregon Corporate Activity Tax, partially offset by TCJA benefits amortization[249] Discontinued Operations This section provides an update on the sale of Gill Ranch Gas Storage Facility and its presentation as discontinued operations for NW Holdings - The sale of Gill Ranch Gas Storage Facility by NW Holdings closed on December 4, 2020, resulting in an after-tax gain of $5.9 million for the year ended December 31, 2020[251] - The results of Gill Ranch Storage are presented separately as discontinued operations, net of tax, from NW Holdings' continuing operations for all periods presented[252] FINANCIAL CONDITION This section assesses the financial condition of NW Holdings and NW Natural, focusing on capital structure, liquidity, cash flows, and contingent liabilities Capital Structure This section details the consolidated capital structure for NW Holdings and NW Natural, including common equity and long-term debt ratios - NW Holdings aims 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[253] Consolidated Capital Structure (As of March 31, 2021 and December 31, 2020) | Registrant | Component | March 31, 2021 | December 31, 2020 | | :--------- | :-------- | :------------- | :---------------- | | NW Holdings | Common equity | 49.5% | 48.2% | | | Long-term debt (including current maturities) | 50.5% | 51.8% | | | Total | 100.0% | 100.0% | | NW Natural | Common equity | 49.0% | 47.7% | | | Long-term debt (including current maturities) | 51.0% | 52.3% | | | Total | 100.0% | 100.0% | - Including short-term debt, NW Holdings' capital structure at March 31, 2021, was 44.0% common equity, 40.4% long-term debt, and 15.6% short-term debt. NW Natural's was 44.7% common equity, 43.4% long-term debt, and 11.9% short-term debt[255] Liquidity and Capital Resources This section discusses the liquidity and capital resources of NW Holdings and NW Natural, including cash and cash equivalents, short-term debt, credit agreements, and credit ratings Cash and Cash Equivalents (In millions) | Registrant | March 31, 2021 (in millions) | March 31, 2020 (in millions) | | :--------- | :------------- | :------------- | | NW Holdings | $17.9 | $471.1 | | NW Natural | $10.4 | $432.3 | - NW Holdings and NW Natural increased cash on hand in March 2020 due to market volatility from the COVID-19 pandemic to ensure ample liquidity[256] - NW Natural must comply with ring-fencing provisions, including credit ratings and common equity ratio requirements, to pay dividends to NW Holdings. NW Natural was in compliance at March 31, 2021[258][261] Short-Term Debt Outstanding (In millions) | Registrant | March 31, 2021 (in millions) | March 31, 2020 (in millions) | | :--------- | :------------- | :------------- | | NW Holdings | $236.2 | $550.0 | | NW Natural | $175.2 | $450.0 | - NW Holdings has a $100 million credit agreement (expandable to $150 million) maturing October 2, 2023, with $61.0 million drawn at March 31, 2021. NW Natural has a $300 million credit agreement (expandable to $450 million) maturing October 2, 2023, with no outstanding balances drawn at March 31, 2021[271][274] - Both NW Holdings and NW Natural were in compliance with their credit agreement covenant requiring a consolidated indebtedness to total capitalization ratio of 70% or less (NW Holdings: 56.0%; NW Natural: 55.3% at March 31, 2021)[272][275] NW Natural's Credit Ratings (As of March 31, 2021) | Rating Type | S&P | Moody's | | :---------- | :-- | :------ | | Commercial paper (short-term debt) | A-1 | P-2 | | Senior secured (long-term debt) | AA- | A2 | | Senior unsecured (long-term debt) | n/a | Baa1 | | Corporate credit rating | A+ | n/a | | Ratings outlook | Stable | Stable | - NW Natural Water's $35.0 million term loan matures in June 2021. NW Natural has $10.0 million of FMBs maturing in August 2021 and $50.0 million in September 2021[279][281] Cash Flows This section analyzes the cash flows from operating, investing, and financing activities for NW Holdings and NW Natural, highlighting key drivers of changes Cash Provided by Operating Activities (Three Months Ended March 31, in thousands) | Registrant | 2021 | 2020 | YTD Change | | :--------- | :----- | :----- | :--------- | | NW Natural | $136,273 | $105,859 | $30,414 | | NW Holdings | $137,065 | $104,660 | $32,405 | - NW Holdings' operating cash flows increased $32.4 million, driven by a $36.2 million increase in regulatory incentive sharing from asset management activities (cold weather event) and a $12.0 million increase in net income, partially offset by a $37.2 million net increase in deferred gas costs[284][286] Cash Used in Investing Activities (Three Months Ended March 31, in thousands) | Registrant | 2021 | 2020 | YTD Change | | :--------- | :----- | :----- | :--------- | | NW Natural | $(62,229) | $(61,640) | $(589) | | NW Holdings | $(63,875) | $(101,429) | $37,554 | - NW Holdings' cash used in investing activities decreased $37.6 million, primarily due to $37.9 million less cash used for water and wastewater acquisitions in Q1 2020. NW Natural's cash used increased $0.6 million due to higher capital expenditures[287] - NW Natural's capital expenditures are anticipated to be $280-$320 million in 2021 and $1.0-$1.2 billion for 2021-2025. NW Natural Water expects to invest $15 million in 2021 and $40-$50 million for 2021-2025[288] Cash (Used in) Provided by Financing Activities (Three Months Ended March 31, in thousands) | Registrant | 2021 | 2020 | YTD Change | | :--------- | :----- | :----- | :--------- | | NW Natural | $(71,760) | $383,914 | $(455,674) | | NW Holdings | $(83,132) | $459,997 | $(543,129) | | Repayments of commercial paper, maturities greater than 90 days | $(100,000)