Northwest Natural Holding Company (NYSE:NWN) is a diversified utility company that operates primarily in the Pacific Northwest region. The company's core business is its natural gas distribution (NGD) segment, which serves residential, commercial, and industrial customers in Oregon and Washington. Additionally, NW Holdings has a growing water and wastewater utility business, as well as a renewable natural gas (RNG) development arm.

In the first quarter of 2024, NW Holdings reported net income of $63.8 million, or $1.69 per share, compared to $71.7 million, or $2.01 per share, in the same period of 2023. The decrease in earnings was primarily due to regulatory lag on investments and inflationary pressures impacting the company's gas utility operations. For the full year 2023, NW Holdings reported annual net income of $93.9 million on revenue of $1.20 billion, with operating cash flow of $279.9 million and negative free cash flow of $47.4 million.

Business Overview

NW Holdings' natural gas distribution segment is the core of the business, accounting for the majority of the company's revenue and earnings. The NGD segment serves approximately 800,000 customers in Oregon and Washington, with residential and commercial customers making up the majority of the customer base. The company's natural gas operations are regulated by the Oregon Public Utility Commission (OPUC) and the Washington Utilities and Transportation Commission (WUTC).

In addition to the natural gas distribution business, NW Holdings has a growing water and wastewater utility segment, NWN Water, which serves an estimated 183,000 people through approximately 74,000 connections across five states. NWN Water has been actively expanding through strategic acquisitions, with five businesses acquired in 2023. The company's water and wastewater operations are regulated by the utility commissions in the states where they operate.

NW Holdings also has a renewable natural gas (RNG) development arm, NW Natural Renewables, which is focused on providing cost-effective solutions to help various sectors decarbonize using existing waste streams and renewable energy sources. The company's first RNG project, a partnership with EDL to convert landfill waste gases to RNG, is currently in the testing and commissioning phase.

Financials

In the first quarter of 2024, NW Holdings reported a decrease in net income compared to the same period in 2023, primarily due to regulatory lag on investments and inflationary pressures impacting the gas utility operations. The company's natural gas distribution segment saw a $0.5 million increase in margin, driven by customer growth and the amortization of deferred balances, partially offset by the effects of warmer weather and lower gains on gas costs.

The company's other business segments, including water and RNG, contributed a net loss of $1.9 million, an increase of $1.6 million compared to the prior year period, primarily due to lower asset management revenues.

NW Holdings reaffirmed its 2024 annual earnings guidance range of $2.20 to $2.40 per share, assuming continued customer growth, average weather conditions, and no significant changes in regulatory policies or legislation. The company also reiterated its long-term earnings per share growth target of 4% to 6% compounded annually from 2022 through 2027.

Regulatory and Operational Highlights

During the first quarter of 2024, NW Holdings' natural gas utility experienced record-breaking peak day demand, delivering 8 million therms of natural gas to sales customers on January 13th, 2024. This was a new record, surpassing the previous high set in December 2022 and nearly double the utility's average daily winter send-out. The company's on-system gas storage facility at Mist also set a new record volume during this peak event, underscoring the critical role the natural gas system plays in providing reliable energy to the region.

In response to the regulatory lag and inflationary pressures impacting the gas utility, NW Holdings filed a general rate case with the OPUC in late 2023, seeking a $154.9 million annual revenue requirement increase. The company expects new rates to take effect on November 1, 2024, following the regulatory review process.

On the water and wastewater side, NWN Water continues to execute on its growth strategy, with four rate cases currently in process, including the company's largest utility in Arizona. NW Holdings is also working to refresh rates at multiple water companies to support ongoing capital investments needed to meet current and increasing quality standards and customer growth.

In the renewable natural gas segment, NW Natural Renewables' first RNG project with EDL is nearing completion, with the raw gas production at expected levels. However, there have been some technical issues with the conditioning equipment, which the company's partners are working to resolve. If successful, the two RNG production facilities are expected to begin commercial operations later this summer.

Liquidity

As of March 31, 2024, NW Holdings had approximately $72.4 million in cash and cash equivalents, and the company's consolidated capital structure, excluding short-term debt, consisted of 46.0% common equity and 54.0% long-term debt. NW Holdings maintains a strong balance sheet and ample liquidity, with access to a $200 million credit facility and an at-the-market (ATM) equity program, which had $31.0 million of equity available for issuance as of the end of the first quarter.

The company's regulated natural gas and water utilities are expected to require $500 million to $575 million in incremental capital needs from 2024 through 2026, which NW Holdings plans to fund through a combination of long-term debt and equity issuances, as well as cash flow from operations.

Risks and Challenges

NW Holdings faces several risks and challenges, including regulatory lag on investments, inflationary pressures, and the evolving regulatory landscape around greenhouse gas emissions and decarbonization efforts. The company's natural gas distribution business is subject to regulation by the OPUC and WUTC, which can impact the timing and recovery of capital investments and operating expenses.

Additionally, the company's water and wastewater utilities are subject to regulation by the utility commissions in the states where they operate, which can affect the timing and recovery of capital investments and operating costs for those businesses.

NW Holdings is also navigating the transition towards a lower-carbon future, with increasing regulatory and policy focus on reducing greenhouse gas emissions. The company's ability to successfully execute on its decarbonization initiatives, including the development of renewable natural gas and hydrogen projects, will be crucial in addressing these challenges and positioning the company for long-term success.

Conclusion

Northwest Natural Holding Company is a diversified utility company with a strong presence in the Pacific Northwest region. While the company's natural gas distribution segment remains the core of the business, NW Holdings is also actively expanding its water and wastewater utility operations and exploring opportunities in the renewable natural gas space.

Despite facing near-term challenges related to regulatory lag and inflationary pressures, NW Holdings remains financially strong, with a solid balance sheet and ample liquidity to support its growth initiatives. The company's long-term earnings growth target of 4% to 6% and its commitment to sustainable energy solutions position it well for the future. As NW Holdings continues to navigate the evolving regulatory landscape and execute on its strategic priorities, the company's diversified business model and focus on operational excellence should enable it to deliver value for shareholders over the long term.