NORTHWEST NATURAL GAS COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2023		2022		2023		2022

Operating revenues	$	228,348	$	190,251	$	682,861	$	536,875

Operating expenses:
Cost of gas	102,490		79,776		308,295		225,420
Operations and maintenance	60,238		48,879		125,627		102,756
Environmental remediation	2,140		2,267		7,515		6,970
General taxes	10,597		8,872		24,597		20,861
Revenue taxes	9,159		8,208		28,134		21,532
Depreciation	29,880		27,328		60,024		54,965
Other operating expenses	542		796		1,239		1,695
Total operating expenses	215,046		176,126		555,431		434,199
Income from operations	13,302		14,125		127,430		102,676
Other income (expense), net	3,832		17		6,277		(964)
Interest expense, net	15,028		10,599		29,639		21,430
Income before income taxes	2,106		3,543		104,068		80,282
Income tax expense	322		810		26,744		20,133


Net income	1,784		2,733		77,324		60,149
Other comprehensive income:
Amortization of non-qualified employee benefit plan liability, net of taxes of $37 and $71 for the three months ended and $74 and $142 for the six months ended June 30, 2023 and 2022, respectively	103		197		205		394

Comprehensive income	$	1,887	$	2,930	$	77,529	$	60,543

See Notes to Unaudited Consolidated Financial Statements

NORTHWEST NATURAL GAS COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	June 30,		June 30,		December 31,
In thousands	2023		2022		2022

Assets:
Current assets:
Cash and cash equivalents	$	131,778	$	10,267	$	12,977

Accounts receivable	67,454		66,186		165,607
Accrued unbilled revenue	19,669		17,840		87,482
Receivables from affiliates	529		300		634
Allowance for uncollectible accounts	(3,080)		(1,299)		(3,079)
Regulatory assets	111,819		92,803		117,491
Derivative instruments	11,691		60,652		194,236
Inventories	65,949		64,726		86,207


Other current assets	35,006		31,784		57,269

Total current assets	440,815		343,259		718,824
Non-current assets:
Property, plant, and equipment	4,261,100		4,052,467		4,148,547
Less: Accumulated depreciation	1,168,270		1,142,611		1,137,231
Total property, plant, and equipment, net	3,092,830		2,909,856		3,011,316
Regulatory assets	307,974		301,790		340,407
Derivative instruments	1,551		9,121		5,045
Other investments	87,848		81,486		80,110
Operating lease right of use asset, net	71,508		73,706		72,720
Assets under sales-type leases	132,045		136,673		134,302
Other non-current assets	95,343		74,106		89,994

Total non-current assets	3,789,099		3,586,738		3,733,894
Total assets	$	4,229,914	$	3,929,997	$	4,452,718

See Notes to Unaudited Consolidated Financial Statements

NORTHWEST NATURAL GAS COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


	June 30,		June 30,		December 31,
In thousands	2023		2022		2022

Liabilities and equity:
Current liabilities:
Short-term debt	$	—	$	78,700	$	170,200
Current maturities of long-term debt	89,982		—		89,942
Accounts payable	95,674		132,002		177,590
Payables to affiliates	5,072		7,259		9,175
Taxes accrued	10,000		11,289		15,426
Interest accrued	10,964		7,207		8,900
Regulatory liabilities	61,496		97,277		248,553
Derivative instruments	42,135		15,918		28,728
Operating lease liabilities	1,598		1,298		1,363
Other current liabilities	55,841		46,816		62,019

Total current liabilities	372,762		397,766		811,896
Long-term debt	1,234,577		986,762		1,035,935
Deferred credits and other non-current liabilities:
Deferred tax liabilities	371,762		352,606		362,353
Regulatory liabilities	671,263		657,943		688,599
Pension and other postretirement benefit liabilities	147,063		162,511		149,143
Derivative instruments	25,212		9,475		20,838
Operating lease liabilities	77,490		78,789		78,345
Other non-current liabilities	119,489		110,469		114,527

Total deferred credits and other non-current liabilities	1,412,279		1,371,793		1,413,805
Commitments and contingencies (Note 16)
Equity:
Common stock	614,903		601,032		614,903
Retained earnings	601,602		583,654		582,593
Accumulated other comprehensive loss	(6,209)		(11,010)		(6,414)
Total equity	1,210,296		1,173,676		1,191,082
Total liabilities and equity	$	4,229,914	$	3,929,997	$	4,452,718

See Notes to Unaudited Consolidated Financial Statements

NORTHWEST NATURAL GAS COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED)


In thousands	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Total shareholder's equity, beginning balances	$	1,250,180	$	1,021,609	$	1,191,082	$	977,807

Common stock:
Beginning balances	614,911		436,042		614,903		435,515


Capital contributions from parent	(8)		164,990		—		165,517


Ending balances	614,903		601,032		614,903		601,032

Retained earnings:
Beginning balances	641,581		596,774		582,593		553,696
Net income	1,784		2,733		77,324		60,149
Dividends on common stock	(41,763)		(15,853)		(58,315)		(30,191)

Ending balances	601,602		583,654		601,602		583,654

Accumulated other comprehensive income (loss):
Beginning balances	(6,312)		(11,207)		(6,414)		(11,404)
Other comprehensive income	103		197		205		394

Ending balances	(6,209)		(11,010)		(6,209)		(11,010)

Total shareholder's equity, ending balances	$	1,210,296	$	1,173,676	$	1,210,296	$	1,173,676

See Notes to Unaudited Consolidated Financial Statements

NORTHWEST NATURAL GAS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	Six Months Ended June 30,
In thousands	2023		2022

Operating activities:
Net income	$	77,324	$	60,149
Adjustments to reconcile net income to cash provided by operations:
Depreciation	60,024		54,965
Regulatory amortization of gas reserves	1,678		2,984
Deferred income taxes	4,172		10,308
Qualified defined benefit pension plan (benefit) expense	(1,129)		2,882

Deferred environmental expenditures, net	(9,732)		(9,608)
Environmental remediation expense	7,515		6,970
Asset optimization revenue sharing bill credits	(10,471)		(41,102)

Other	13,022		9,158
Changes in assets and liabilities:
Receivables, net	167,936		97,175
Inventories	20,438		(7,974)
Income and other taxes	6,078		16,069
Accounts payable	(52,366)		(16,341)
Deferred gas costs	(16,370)		2,607
Asset optimization revenue sharing	12,056		3,929
Decoupling mechanism	(9,554)		9,669
Cloud-based software	(7,229)		(414)
Other, net	24,613		(7,990)

Cash provided by operating activities	288,005		193,436
Investing activities:
Capital expenditures	(129,298)		(156,189)


Other	(2,428)		(1,991)

Cash used in investing activities	(131,726)		(158,180)
Financing activities:


Cash contributions received from parent	—		165,517
Long-term debt issued	200,000		—



Changes in other short-term debt, net	(170,200)		(166,800)
Cash dividend payments on common stock	(58,315)		(30,191)
Other	(3,358)		(1,521)

Cash used in financing activities	(31,873)		(32,995)
Increase in cash, cash equivalents and restricted cash	124,406		2,261
Cash, cash equivalents and restricted cash, beginning of period	24,671		20,832
Cash, cash equivalents and restricted cash, end of period	$	149,077	$	23,093

Supplemental disclosure of cash flow information:
Interest paid, net of capitalization	$	28,078	$	21,270
Income taxes paid, net of refunds	26,745		3,490

See Notes to Unaudited Consolidated Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements represent the respective, consolidated financial results of Northwest Natural Holding Company (NW Holdings) and Northwest Natural Gas Company (NW ~~Natural or the Company)~~Natural) and all respective companies wethat each registrant directly or indirectly ~~control,~~controls, either through majority ownership or otherwise. ~~We have two core businesses: our~~This is a combined report of NW Holdings and NW Natural, which includes separate consolidated financial statements for each registrant.

NW Natural's regulated ~~local~~natural gas distribution activities are reported in the natural gas distribution (NGD) segment. The NGD segment is NW Natural's core operating business ~~referred to as the utility segment, which~~and serves residential, commercial, and industrial customers in Oregon and southwest ~~Washington;~~Washington. The NGD segment is the only reportable segment for NW Holdings and ~~our gas storage~~NW Natural. All other activities, water and wastewater businesses, referred to as the gas storage segment, which provides storage services for utilities, gas marketers, electric generators, and large industrial users from facilities located in Oregon and California. In addition, we have investments and other ~~non-utility activities we aggregate~~investments are aggregated and ~~report~~reported as ~~other.~~other at their respective registrant.

~~Our core utility business assets~~NW Holdings and ~~operating activities are largely included in the parent company, NW Natural. Our direct and indirect wholly-owned subsidiaries include~~ NW Natural Energy, LLC (NWN Energy), NW Natural Gas Storage, LLC (NWN Gas Storage), Gill Ranch Storage, LLC (Gill Ranch), NNG Financial Corporation (NNG Financial), Northwest Energy Corporation (Energy Corp), and NWN Gas Reserves LLC (NWN Gas Reserves).consolidate all entities in which they have a controlling financial interest. Investments in corporate joint ventures and partnerships ~~we do~~that NW Holdings does not directly or indirectly control, and for which ~~we are~~it is not the primary beneficiary, include NNG Financial's investment in Kelso-Beaver Pipeline and NWN Water's investment in Avion Water Company, Inc., which are accounted for under the equity method. NW Natural RNG Holding Company, LLC holds investments in Lexington Renewable Energy, LLC and Dakota City Renewable Energy LLC, which are also accounted for under the equity method. See Note 13 for activity related to equity method ~~which includes NWN Energy’s investment in Trail West~~investments. NW Holdings ~~LLC (TWH)~~ and ~~NNG Financial's investment in Kelso-Beaver (KB) Pipeline.~~its direct and indirect subsidiaries are collectively referred to herein as NW Holdings, and NW Natural and its ~~affiliated companies~~direct and indirect subsidiaries are collectively referred to herein as NW Natural. The consolidated financial statements of NW Holdings and NW Natural are presented after elimination of all intercompany balances and transactions. In this report, the term “utility” is used to describe our regulated gas distribution business, and the term “non-utility” is used to describe our gas storage businesses and other non-utility investments and business activities.

Information presented in these interim consolidated financial statements is unaudited, but includes all material adjustments management considers necessary for a fair statement of the results for each period reported including normal recurring accruals. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in ~~our 2016~~NW Holdings' and NW Natural's combined 2022 Annual Report on Form 10-K ~~(2016~~(2022 Form 10-K). A significant part of ~~our~~NW Holdings' and NW Natural's business is of a seasonal nature; therefore, NW Holdings and NW Natural results of operations for interim periods are not necessarily indicative of full year results. Seasonality affects the comparability of the results of other operations across quarters but not across years.

Notes to the consolidated financial statements reflect the activity for both NW Holdings and NW Natural for all periods presented, unless otherwise noted. Certain reclassifications have been made to conform prior ~~year balances in~~period information to the current presentation. The reclassifications did not have a material effect on our consolidated financial statements and notes have been reclassified to conform with the current presentation. These reclassifications had no effect on our prior year’s consolidated results of operations, financial condition, or cash flows.statements.

2. SIGNIFICANT ACCOUNTING POLICIES

~~Our significant~~

Significant accounting policies are described in Note 2 of the ~~2016~~2022 Form 10-K. There were no material changes to those accounting policies during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2023 other than those set forth in this Note 2. The following are current updates to certain critical accounting policy estimates and new accounting standards.

Industry Regulation

NW Holdings' principal business is to operate as a holding company for NW Natural and its other subsidiaries. NW Natural's principal business is the distribution of natural gas, which is regulated by the OPUC and WUTC. NW Natural also has natural gas storage services, which are regulated by the FERC, and to a certain extent by the OPUC and WUTC. Additionally, certain of NW Holdings' subsidiaries own water businesses, which are regulated by the public utility commission in the state in which the water utility is located, which is currently Oregon, Washington, Idaho, Texas and Arizona. Wastewater businesses, to the extent they are regulated, are generally regulated by the public utility commissions in the state in which the wastewater utility is located, which is currently Texas and Arizona.

In applying regulatory accounting principles, weNW Holdings and NW Natural capitalize or defer certain costs and revenues as regulatory assets and liabilities pursuant to orders of the ~~Public Utility Commission of Oregon (OPUC) or Washington Utilities and Transportation Commission (WUTC),~~applicable state public utility commission, which provide for the recovery of revenues or expenses from, or refunds to, utility customers in future periods, including a return or a carrying charge in certain cases.

~~Table of Contents~~

Amounts deferred as regulatory assets and liabilities for NW Holdings and NW Natural were as follows:


	Regulatory Assets							Regulatory Assets
	September 30,				December 31,			June 30,				December 31,
In thousands	2017		2016		2016		In thousands	2023		2022		2022
NW Natural:							NW Natural:
Current:							Current:
Unrealized loss on derivatives⁽¹⁾	$	8,887	$	5,205	$	1,315	Unrealized loss on derivatives(1)	$	42,135	$	15,918	$	28,728
Gas costs	1,851		10,164		6,830		Gas costs	24,782		48,218		61,223
Environmental costs⁽²⁾	6,362		9,734		9,989		Environmental costs(2)	6,749		6,975		7,392
Decoupling⁽³⁾	15,663		16,028		13,067		Decoupling(3)	1,520		212		—
Other⁽⁴⁾	16,741		14,149		11,161
Total current	$	49,504	$	55,280	$	42,362
Pension balancing(4)							Pension balancing(4)	7,131		7,131		7,131
Income taxes							Income taxes	2,208		2,276		2,208
Washington Climate Commitment Act compliance							Washington Climate Commitment Act compliance	10,379		—		—
Other(5)							Other(5)	16,915		12,073		10,809
Total current - NW Natural							Total current - NW Natural	$	111,819	$	92,803	$	117,491

Non-current:							Non-current:
Unrealized loss on derivatives⁽¹⁾	$	3,926	$	1,682	$	913	Unrealized loss on derivatives(1)	$	25,212	$	9,475	$	20,838
Pension balancing⁽⁵⁾	57,599		48,637		50,863
Pension balancing(4)							Pension balancing(4)	29,731		35,150		32,997
Income taxes	36,591		40,106		38,670		Income taxes	10,540		11,161		10,943
Pension and other postretirement benefit liabilities	172,687		174,282		183,035		Pension and other postretirement benefit liabilities	101,413		110,548		101,413
Environmental costs⁽²⁾	63,339		64,279		63,970		Environmental costs(2)	98,160		86,411		104,253
Gas costs	48		712		89		Gas costs	1,122		7,975		22,355
Decoupling⁽³⁾	1,025		1,006		5,860		Decoupling(3)	267		—		—
Other⁽⁴⁾	10,137		10,484		14,130
Total non-current	$	345,352	$	341,188	$	357,530
Washington Climate Commitment Act compliance							Washington Climate Commitment Act compliance	1,823		—		—
Other(5)							Other(5)	39,706		41,070		47,608
Total non-current - NW Natural							Total non-current - NW Natural	$	307,974	$	301,790	$	340,407
Other (NW Holdings)							Other (NW Holdings)	25		65		25
Total non-current - NW Holdings							Total non-current - NW Holdings	$	307,999	$	301,855	$	340,432

Regulatory Liabilities
September 30, December 31,
In thousands 2017 2016 2016
Current:
Gas costs $ 16,459
$ 12,001
$ 8,054
Unrealized gain on derivatives⁽¹⁾
2,020
4,857
16,624
Decoupling⁽³⁾
314
—
—
Other⁽⁴⁾
15,866
11,063
15,612
Total current $ 34,659
$ 27,921
$ 40,290
Non-current:
Gas costs $ 1,015
$ 765
$ 1,021
Unrealized gain on derivatives⁽¹⁾
1,555
1,151
3,265
Accrued asset removal costs⁽⁶⁾
356,106
336,699
341,107
Other⁽⁴⁾
5,162
3,528
3,926
Total non-current $ 363,838
$ 342,143
$ 349,319


⁽¹⁾	Unrealized gains or losses on derivatives are non-cash items and, therefore, do not earn a rate of return or a carrying charge. These amounts are recoverable through utility rates as part of the annual Purchased Gas Adjustment (PGA) mechanism when realized at settlement.

⁽²⁾

Environmental costs relate to specific sites approved for regulatory deferral by the OPUC and WUTC. In Oregon, we earn a carrying charge on cash amounts paid, whereas amounts accrued but not yet paid do not earn a carrying charge until expended. We also accrue a carrying charge on insurance proceeds for amounts owed to customers. In Washington, recovery of deferred amounts will be determined in a future proceeding. Current environmental costs represent remediation costs management expects to collect from Oregon customers in the next 12 months. Amounts included in this estimate are still subject to a prudence and earnings test review by the OPUC and do not include the $5 million tariff rider. The amounts allocable to Oregon are recoverable through utility rates, subject to the aforementioned earnings test. See Note 13.


⁽³⁾	~~This deferral represents the margin adjustment resulting from differences between actual and expected volumes.~~


⁽⁴⁾	~~These balances primarily consist of deferrals and amortizations under approved regulatory mechanisms. The accounts being amortized typically earn a rate of return or carrying charge.~~


⁽⁵⁾	The deferral of certain pension expenses above or below the amount set in rates was approved by the OPUC, with recovery of these deferred amounts through the implementation of a balancing account, which includes the expectation of lower net

~~Table~~


	Regulatory Liabilities
	June 30,				December 31,
In thousands	2023		2022		2022
NW Natural:
Current:
Gas costs	$	5,603	$	1,898	$	4,121
Unrealized gain on derivatives(1)	11,691		60,652		194,236
Decoupling(3)	8,715		14,242		14,026
Income taxes	5,158		7,318		7,166
Asset optimization revenue sharing	23,327		9,761		26,368
Other(5)	7,002		3,406		2,636
Total current - NW Natural	$	61,496	$	97,277	$	248,553
Other (NW Holdings)	50		—		29
Total current - NW Holdings	$	61,546	$	97,277	$	248,582
Non-current:
Gas costs	$	731	$	353	$	12,644
Unrealized gain on derivatives(1)	1,551		9,121		5,045
Decoupling(3)	1,358		2,557		3,814
Income taxes(6)	170,318		176,358		174,212
Accrued asset removal costs(7)	481,851		455,794		467,742
Asset optimization revenue sharing	—		—		8,401
Other(5)	15,454		13,760		16,741
Total non-current - NW Natural	$	671,263	$	657,943	$	688,599
Other (NW Holdings)	952		982		979
Total non-current - NW Holdings	$	672,215	$	658,925	$	689,578

(1)Unrealized gains or losses on derivatives are non-cash items and therefore do not earn a rate of ~~Contents~~return or a carrying charge. These amounts are recoverable through NGD rates as part of the annual Purchased Gas Adjustment (PGA) mechanism when realized at settlement.

(2)Refer to the Environmental Cost Deferral and Recovery table in Note 16 for a description of environmental costs.

(3)This deferral represents the margin adjustment resulting from differences between actual and expected volumes.

(4)Balance represents deferred net periodic benefit costs ~~in future years. Deferred pension expense balances include accrued interest at~~as approved by the ~~utility’s authorized~~OPUC.

(5)Balances consist of deferrals and amortizations under approved regulatory mechanisms and typically earn a rate of return ~~with the equity portion~~or carrying charge.

(6)Balance represents excess deferred income tax benefits subject to regulatory flow-through.

(7)Estimated costs of ~~interest income recognized when amounts~~removal on certain regulated properties are collected inthrough rates.


⁽⁶⁾	~~Estimated costs of removal on certain regulated properties are collected through rates.~~

We believe all costs incurred and deferred at ~~September~~June 30, ~~2017~~2023 are prudent. ~~We annually review all~~All regulatory assets ~~and liabilities~~are reviewed annually for recoverability, ~~and~~or more often if circumstances warrant. If we should determine that all or a portion of these regulatory assets ~~or liabilities~~ no longer meet the criteria for continued application of regulatory accounting, then weNW Holdings and NW Natural would be required to write-off the net unrecoverable balances in the period such determination is made.

Supplemental Cash Flow Information

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand plus highly liquid investment accounts with original maturity dates of three months or less. These investments are readily convertible to cash with fair value approximating cost. As of June 30, 2023, the amount invested in money market funds was $116.5 million at NW Natural and NW Holdings. These investments are measured using net asset value per share.

Restricted Cash

Restricted cash is primarily comprised of funds from public purpose charges for programs that assist low-income customers with bill payments or energy efficiency.

The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Holdings as of June 30, 2023 and 2022 and December 31, 2022:


	June 30,				December 31,
In thousands	2023		2022		2022
Cash and cash equivalents	$	137,759	$	17,209	$	29,270
Restricted cash included in other current and non-current assets	17,324		12,826		11,694
Cash, cash equivalents and restricted cash	$	155,083	$	30,035	$	40,964

The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Natural as of June 30, 2023 and 2022 and December 31, 2022:


	June 30,				December 31,
In thousands	2023		2022		2022
Cash and cash equivalents	$	131,778	$	10,267	$	12,977
Restricted cash included in other current assets	17,299		12,826		11,694
Cash, cash equivalents and restricted cash	$	149,077	$	23,093	$	24,671

Intercompany Dividend

In April 2023, NW Natural made a dividend to NW Holdings for $25.0 million, returning additional equity contributed from NW Holdings to NW Natural in 2022.

Accounts Receivable and Allowance for Uncollectible Accounts

Accounts receivable consist primarily of amounts due for natural gas sales and transportation services to NGD customers, plus amounts due for gas storage services. NW Holdings and NW Natural establish allowances for uncollectible accounts (allowance) for trade receivables, including accrued unbilled revenue, based on the aging of receivables, collection experience of past due account balances including payment plans, and historical trends of write-offs as a percent of revenues. A specific allowance is established and recorded for large individual customer receivables when amounts are identified as unlikely to be partially or fully recovered. Inactive accounts are written-off against the allowance after they are 120 days past due or when deemed uncollectible. Differences between the estimated allowance and actual write-offs will occur based on a number of factors, including changes in economic conditions, customer creditworthiness, and natural gas prices. The allowance for uncollectible accounts is adjusted quarterly, as necessary, based on information currently available.

Allowance for Trade Receivables

The payment term of our NGD receivables is generally 15 days. For these short-term receivables, it is not expected that forecasted economic conditions would significantly affect the loss estimates under stable economic conditions. For extreme situations like a financial crisis, natural disaster, and the economic slowdown caused by the COVID-19 pandemic, we enhanced our review and analysis.

For the residential and commercial uncollectible provision, we primarily followed our standard methodology, which includes assessing historical write-off trends and current information on delinquent accounts. Beginning October 1, 2022, new collection rules from the OPUC applied to residential and commercial customers. This included enhanced protections for low-income customers, a return to pre-pandemic time payment arrangements terms, revised disconnection rules during the heating season, and other items. As a result of these Oregon rule changes and our recent collection process experience, we augmented our provision review for Oregon accounts in the following categories: closed or inactive accounts aged less than 120 days, accounts on payment plans, and all other open accounts not on payment plans. For industrial accounts, we continue to assess the provision on an account-by-account basis with specific reserves taken as necessary. NW Natural will continue to closely monitor and evaluate our accounts receivable and the provision for uncollectible accounts.

The following table presents the activity related to the NW Holdings provision for uncollectible accounts by pool:


	As of						As of
	December 31, 2022		Six Months Ended June 30, 2023				June 30, 2023
In thousands	Beginning Balance		Provision recorded, net of adjustments		Write-offs recognized, net of recoveries		Ending Balance
Allowance for uncollectible accounts:
Residential	$	2,155	$	1,612	$	(1,436)	$	2,331
Commercial	400		219		(224)		395
Industrial	188		(97)		(1)		90
Accrued unbilled and other	336		3		(75)		264
Total NW Natural	3,079		1,737		(1,736)		3,080
Other - NW Holdings	217		—		—		217
Total NW Holdings	$	3,296	$	1,737	$	(1,736)	$	3,297

Allowance for Net Investments in Sales-Type Leases

NW Natural currently holds two net investments in sales-type leases, with substantially all of the net investment balance related to the North Mist natural gas storage agreement with Portland General Electric (PGE) which is billed under an OPUC-approved rate schedule. See Note 7 for more information on the North Mist lease. Due to the nature of this service, PGE may recover the costs of the lease through general rate cases. Therefore, we expect the risk of loss due to the credit of this lessee to be remote. As such, no allowance for uncollectibility was recorded for our sales-type lease receivables. NW Natural will continue monitoring

the credit health of the lessees and the overall economic environment, including the economic factors closely tied to the financial health of our current and future lessees.

Greenhouse Gas Allowances

NW Natural is subject to greenhouse gas (GHG) emission reduction requirements in Oregon and Washington. In Oregon, emission reduction compliance mechanisms include: 1) free compliance instruments distributed by the state, 2) Community Climate Investment (CCI) Credits, which act similar to carbon offsets, and 3) renewable natural gas. In Washington, NW Natural will either purchase or be allocated free emission allowances from the state for compliance. NW Natural will account for all purchased Oregon CCI Credits and Washington allowances as inventory at the lower of cost or market. Any compliance instruments or allowances that are acquired through government allocations will be accounted for as inventory at no cost. The compliance programs allow for the sale of the compliance instruments or allowances, and as a result, should NW Natural sell these it will recognize revenue when title to the instrument or allowance is transferred to a counterparty and NW Natural will recognize expense at the time of recognition of the related sale. As of June 30, 2023, NW Natural had $11.1 million of emissions allowances for compliance in Washington recorded as inventory and no CCI Credits in Oregon.

We measure the compliance obligation, which is based on emissions, at the carrying value of inventory held plus the fair value of any additional CCI Credits or emission allowances NW Natural would need to purchase to satisfy the obligations. As of June 30, 2023, NW Natural has not recognized a liability under the Oregon program for the purchase of CCI Credits. Under the Washington program, NW Natural has recognized a $12.1 million liability as of June 30, 2023. We expect that the costs to comply with the Oregon and Washington programs will be recovered from utility customers through rates. As a result, NW Natural recognized $12.2 million of deferred costs as of June 30, 2023.

New Accounting Standards

WeNW Natural and NW Holdings consider the applicability and impact of all accounting standards updates (ASUs) issued by the Financial Accounting Standards Board (FASB). ~~Accounting standards updates~~ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on ~~our~~ consolidated financial position or results of operations.

~~Recently Adopted Accounting Pronouncements~~Recent Securities and Exchange Commission (SEC) Final Rules

~~There were no material changes~~SHARE REPURCHASES. In May 2023, the SEC adopted the final rule under SEC Release No. 34-97424, Share Repurchase Disclosure Modernization, requiring disclosures related to issuers’ share repurchases that will provide investors with enhanced information to assess the ~~recently adopted accounting policies described in Note 2~~purposes and effects of the ~~2016 Form 10-K during the nine months ended September 30, 2017.~~

~~Recently Issued Accounting Pronouncements~~

~~DERIVATIVES AND HEDGING.~~ ~~On August 28, 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities."~~repurchases. The purpose of the amendment is to more closely align hedge accounting with companies’ risk management strategies. The ASU amends the accounting for risk component hedging, the hedged item in fair value hedges of interest rate risk, and amounts excluded from the assessment of hedge effectiveness. The guidance also amends the recognition and presentation of the effect of hedging instruments and includes other simplifications of hedge accounting. The amendments in this update are effective for us beginning January 1, 2019. Early adoption ~~is permitted. The amended presentation and disclosure guidance is required prospectively. We are currently assessing the effect~~ of this ~~standard on our financial statements and disclosures.~~

~~STOCK COMPENSATION.~~ ~~On May 10, 2017, the FASB issued ASU 2017-09, "Stock Compensation - Scope of Modification Accounting." The purpose of the amendment~~final rule is to provide clarity, reduce diversity in practice and reduce the cost and complexity when applying the guidance in Topic 718, related to a change to the terms or conditions of a share-based payment award. The ASU amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. The amendments in this update are effective for us beginning January 1, 2018. The amendments in this update should be applied prospectivelyanticipated to ~~an award modified on or after the adoption date. We do not expect this standard to materially affect our financial statements and disclosures.~~

~~RETIREMENT BENEFITS.~~ On March 10, 2017, the FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost." The ASU requires entities to disaggregate current service cost from the other components of net periodic benefit cost and present it with other current compensation costs for related employees in the income statement and to present the other components elsewhere in the income statement and outside of income from operations if that subtotal is presented. Only the service cost component of the net periodic benefit cost is eligible for capitalization. The amendments in this update are effective for us beginning January 1, 2018. Upon adoption, the ASU requires that changes to the income statement presentation of net periodic benefit cost be applied retrospectively, while changes to amounts capitalized must be applied prospectively. During the third quarter 2017, the FERC indicated that it will allow entities to change their capitalization policy for regulatory accounting and reporting purposes to be consistent with the new US GAAP requirements. This change will be allowed as a one-time policy election upon adoption of the guidance. We are currently evaluating whether or not to adopt the new ASU for FERC regulatory accounting and reporting purposes and assessing the effect of this standard on our financial statements and disclosures.

~~Table of Contents~~

~~STATEMENT OF CASH FLOWS.~~ On August 26, 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." The ASU adds guidance pertaining to the classification of certain cash receipts and payments on the statement of cash flows. The purpose of the amendment is to clarify issues that have been creating diversity in practice, including the classification of proceeds from the settlement of insurance claims and proceeds from the settlement of corporate-owned life insurance policies. The amendments in this standard are effective for us beginning January 1, 2018. Early adoption is permitted in any interim or annual period. We are currently assessing the effect of this standard and do not expect this standard to materially affect our financial statements and disclosures.

~~LEASES.~~ On February 25, 2016, the FASB issued ASU 2016-02, "Leases," which revises the existing lease accounting guidance. Pursuant to the new standard, lessees will be required to recognize all leases, including operating leases that are greater than 12 months at lease commencement, on the balance sheet and record corresponding right-of-use assets and lease liabilities. Lessor accounting will remain substantially the same under the new standard. Quantitative and qualitative disclosures are also required for users of the financial statements to have a clear understanding of the nature of our leasing activities. The standard is effective for us beginning January 1, 2019, and early adoption is permitted. The new standard must be adopted using a modified retrospective transition and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently assessing the effect of this standard on our financial statements and disclosures. Refer to Note 14 herein and Note 14 of the 2016 Form 10-K for our current lease commitments.

~~FINANCIAL INSTRUMENTS.~~ On January 5, 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The ASU enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation, and disclosure. The new standard is effective for us beginning January 1, 2018. Upon adoption, we will be required to make a cumulative-effect adjustment to the consolidated balance sheet in the first quarter of 2018. We do not expect this standard to have a material impact to our financial statements and disclosures.

~~REVENUE RECOGNITION.~~ On May 28, 2014, the FASB issued ASU 2014-09 "Revenue From Contracts with Customers." Subsequently, the FASB issued additional, clarifying amendments to address issues and questions regarding implementation of the new revenue recognition standard. The underlying principle of the guidance requires entities to recognize revenue depicting the transfer of goods or services to customers at amounts the entity is expected to be entitled to in exchange for those goods or services. The ASU also prescribes a five-step approach to revenue recognition: (1) identify the contract(s) with the customer; (2) identify the separate performance obligations in the contract(s); (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenue when, or as, each performance obligation is satisfied. The guidance also requires additional disclosures, both qualitative and quantitative, regarding the nature, amount, timing and uncertainty of revenue and cash flows. The new requirements prescribe either a full retrospective or simplified transition adoption method. We are currently analyzing our revenue streams, material contracts with customers, and the expanded disclosure requirements under the new standard and do not believe the standard will have a material impact on our ~~financial position, net income~~results of operations, liquidity or ~~cash flows. We are also evaluating~~capital resources.

INSIDER TRADING ARRANGEMENTS. In December 2022, the SEC adopted the final rule under SEC Release No. 33-11138, Insider Trading Arrangements and Related Disclosures, which requires new disclosures regarding insider trading policies and procedures, the use of certain insider trading plans and director and executive compensation regarding equity compensation awards made close in time to disclosure of material nonpublic information. The adoption of this final rule is not anticipated to have a material impact on our ~~method~~results of adoption and potential changes to our accounting policies, processes, systems and internal controls that may be required under the new standard. The new standard is effective for us beginning January 1, 2018.operations, liquidity or capital resources.

~~Accounting Policies~~

~~Subsequent Events~~

We monitor significant events occurring after the balance sheet date and prior to the issuance of the financial statements to determine the impacts, if any, of events on the financial statements to be issued. See Note 14.

~~Table of Contents~~

3. EARNINGS PER SHARE

Basic earnings or loss per share are computed using NW Holdings' net income or loss and the weighted average number of common shares outstanding for each period presented. Diluted earnings per share are computed in the same manner, except ~~it uses~~using the weighted average number of common shares outstanding plus the effects of the assumed exercise of stock options and the payment of estimated stock awards from other stock-based compensation plans that are outstanding at the end of each period presented. ~~Antidilutive~~Anti-dilutive stock awards are excluded from the calculation of diluted earnings or loss per common share. ~~Diluted~~

NW Holdings' diluted earnings ~~(loss)~~or loss per share are calculated as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
In thousands, except per share data	2023		2022		2023		2022


Net income	$	1,244	$	1,715	$	72,915	$	57,954
Average common shares outstanding - basic	36,019		34,307		35,815		32,756
Additional shares for stock-based compensation plans (See Note 8)	43		45		30		49
Average common shares outstanding - diluted	36,062		34,352		35,845		32,805






Earnings per share of common stock:
Basic	$	0.03	$	0.05	$	2.04	$	1.77
Diluted	$	0.03	$	0.05	$	2.03	$	1.77
Additional information:
Anti-dilutive shares	2		1		1		1

Three Months Ended September 30, Nine Months Ended September 30,
In thousands, except per share data 2017 2016 2017 2016
Net income (loss) $ (8,495 ) $ (8,040 ) $ 34,544
$ 30,620
Average common shares outstanding - basic 28,678
27,554
28,653
27,504
Additional shares for stock-based compensation plans
(See Note 5)
—
—
81
125
Average common shares outstanding - diluted 28,678
27,554
28,734
27,629
Earnings (loss) per share of common stock - basic $ (0.30 ) $ (0.29 ) $ 1.21
$ 1.11
Earnings (loss) per share of common stock - diluted $ (0.30 ) $ (0.29 ) $ 1.20

$ 1.11
Additional information:
Antidilutive shares 96
159
15
5

4. SEGMENT INFORMATION

We primarily operate in ~~two~~one reportable business ~~segments:~~segment, which is NW Natural's local gas distribution business and ~~gas storage. We~~is referred to as the NGD segment. NW Natural and NW Holdings also have ~~other~~ investments and business activities not specifically related to ~~one of these two reporting segments,~~the NGD segment, which are aggregated and reported as ~~other. We refer~~other and described below for each entity.

Natural Gas Distribution

NW Natural's local gas distribution segment is a regulated utility principally engaged in the purchase, sale, and delivery of natural gas and related services to ~~our~~customers in Oregon and southwest Washington. In addition to NW Natural's local gas distribution business, as the ~~utility, and our gas storage segment and other as non-utility. Our utility~~NGD segment also includes the ~~utility~~ portion of ~~our~~the Mist underground storage facility ~~and our~~used to serve NGD customers, the North Mist gas storage expansion in Oregon, ~~and~~ NWN Gas Reserves, which is a wholly-owned subsidiary of Energy ~~Corp. Our~~Corp, and NW Natural RNG Holding Company, LLC, a holding company established to invest in the development and procurement of regulated renewable natural gas for NW Natural.

NW Natural

NW Natural's activities in Other include Interstate Storage Services and third-party asset management services, appliance retail center operations, and corporate operating and non-operating revenues and expenses that cannot be allocated to NGD operations.

Earnings from Interstate Storage Services assets are primarily related to firm storage ~~segment includes~~ capacity revenues. Earnings from third-party asset management services also include revenue, net of amounts shared with NGD customers, from management of NGD assets at Mist and upstream pipeline capacity when not needed to serve NGD customers. Under the Oregon sharing mechanism, NW Natural retains 80% of the pre-tax income from these services when the costs of the capacity were not included in NGD rates, or 10% of the pre-tax income when the costs have been included in these rates. The remaining 20% and 90%, respectively, are recorded to a deferred regulatory account for crediting back to NGD customers.

NW Holdings

NW Holdings' activities in Other include all remaining activities not associated with NW Natural, specifically: NW Natural Water Company, LLC (NW Natural Water or NWN Water), which consolidates the water and wastewater utility operations and is pursuing other investments in the water and wastewater sector through itself and wholly-owned subsidiaries; NW Natural Water's equity investment in Avion Water Company, Inc.; NWN Gas Storage, ~~which is~~ a wholly-owned subsidiary of NWN ~~Energy, Gill Ranch, which is~~Energy; other pipeline assets in NNG Financial; and NW Natural Renewables Holdings, LLC (NW Natural Renewables) and its non-regulated renewable natural gas activities. Other a ~~wholly-owned subsidiary of NWN Gas Storage, the non-utility portion of Mist,~~lso includes corporate revenues and ~~all third-party asset management services. Other includes NNG Financial and NWN Energy's equity investment in TWH, which is pursuing~~expenses that cannot be allocated to other operations, including certain business development ~~of a cross-Cascades transmission pipeline project. See Note 4 in the 2016 Form 10-K for further discussion of our segments.~~activities.

Segment Information Summary

Inter-segment transactions were immaterial for the periods presented. The following table presents summary financial information concerning the reportable ~~segments:~~segment and other.


	Three Months Ended June 30,
In thousands	NGD		Other (NW Natural)		NW Natural		Other (NW Holdings)		NW Holdings
2023
Operating revenues	$	223,714	$	4,634	$	228,348	$	9,511	$	237,859
Depreciation	29,623		257		29,880		1,413		31,293
Income (loss) from operations	10,390		2,912		13,302		541		13,843
Net income (loss)	(271)		2,055		1,784		(540)		1,244
Capital expenditures	65,215		485		65,700		7,898		73,598
2022
Operating revenues	$	184,634	$	5,617	$	190,251	$	4,709	$	194,960
Depreciation	27,062		266		27,328		782		28,110
Income (loss) from operations	10,575		3,550		14,125		(586)		13,539
Net income (loss)	157		2,576		2,733		(1,018)		1,715
Capital expenditures	91,122		750		91,872		7,310		99,182

Three Months Ended September 30,
In thousands Utility Gas Storage Other Total
2017
Operating revenues $ 81,126
$ 7,006
$ 58
$ 88,190
Depreciation and amortization 20,023
1,461
—
21,484
Income (loss) from operations (9,977 ) 3,543
(222 ) (6,656 )
Net income (loss) (10,349 ) 1,899
(45 ) (8,495 )
Capital expenditures 50,009
164
950
51,123
2016
Operating revenues $ 80,378
$ 7,293
$ 56
$ 87,727
Depreciation and amortization 19,173
1,455
—
20,628
Income (loss) from operations (7,264 ) 3,502
(675 ) (4,437 )
Net income (loss) (9,511 ) 1,813
(342 ) (8,040 )
Capital expenditures 36,238
437
—
36,675

~~Table of Contents~~


	Six Months Ended June 30,
In thousands	NGD		Other (NW Natural)		NW Natural		Other (NW Holdings)		NW Holdings
2023
Operating revenues	$	671,484	$	11,377	$	682,861	$	17,421	$	700,282
Depreciation	59,481		543		60,024		2,734		62,758
Income (loss) from operations	119,549		7,881		127,430		(79)		127,351
Net income (loss)	71,680		5,644		77,324		(4,409)		72,915
Capital expenditures	128,857		441		129,298		15,565		144,863
Total assets at June 30, 2023	4,176,376		53,538		4,229,914		306,791		4,536,705
2022
Operating revenues	$	526,032	$	10,843	$	536,875	$	8,386	$	545,261
Depreciation	54,435		530		54,965		1,574		56,539
Income (loss) from operations	96,238		6,438		102,676		(1,499)		101,177
Net income (loss)	55,547		4,602		60,149		(2,195)		57,954
Capital expenditures	155,402		787		156,189		11,507		167,696
Total assets at June 30, 2022	3,875,237		54,760		3,929,997		170,521		4,100,518
Total assets at December 31, 2022	4,392,699		60,019		4,452,718		295,608		4,748,326

Nine Months Ended September 30,
In thousands Utility Gas Storage Other Total
2017
Operating revenues $ 503,947
$ 17,635
$ 169
$ 521,751
Depreciation and amortization 59,541
4,383
—
63,924
Income (loss) from operations 77,706
5,748
(725 ) 82,729
Net income (loss) 31,980
2,716
(152 ) 34,544
Capital expenditures
143,128

1,363

950

145,441
Total assets at September 30, 2017 2,835,860
252,041
17,706
3,105,607
2016

Operating revenues $ 422,617
$ 19,654
$ 168
$ 442,439
Depreciation and amortization 56,894
4,541
—
61,435
Income from operations 74,745
8,107
(611 ) 82,241
Net income 26,848
3,988
(216 ) 30,620
Capital expenditures 96,710
1,401
—
98,111
Total assets at September 30, 2016 2,684,618
259,483
15,783
2,959,884

Total assets at December 31, 2016 2,806,627
256,333
16,841
3,079,801

~~Utility~~Natural Gas Distribution Margin

~~Utility~~NGD margin is athe primary financial measure used by the Chief Operating Decision Maker (CODM),consisting of ~~utility~~NGD operating revenues, ~~which are~~ reduced by ~~revenue taxes,~~ the associated cost of gas, environmental remediation expense, and ~~environmental recovery revenues.~~revenue taxes. The cost of gas purchased for ~~utility~~NGD customers is generally a pass-through cost in the amount of revenues billed to regulated ~~utility~~NGD customers. Environmental ~~recovery revenues represent~~remediation expense represents collections received from customers through ~~our~~ environmental recovery ~~mechanism~~mechanisms in ~~Oregon. These~~Oregon and Washington as well as adjustments for the Oregon environmental earnings test when applicable. This is offset by environmental remediation expense presented in operating expenses. Revenue taxes are collected from NGD customers and remitted to taxing authorities. The collections from customers are offset by the ~~amortization~~expense recognition of ~~environmental liabilities, which is presented as environmental remediation expense in our operating expenses.~~the obligation to the taxing authority. By subtracting cost of gas, ~~and~~ environmental remediation expense, and revenue taxes from ~~utility~~NGD operating revenues, ~~utility~~NGD margin provides a key metric used by ~~our chief operating decision maker~~the CODM in assessing the performance of the ~~utility~~NGD segment. The gas storage segment and other emphasize growth in operating revenues as opposed to margin because they do not incur a product cost (i.e. cost of gas sold) like the utility and, therefore, use operating revenues and net income to assess performance.

The following table presents additional segment information concerning ~~utility~~NGD margin:


	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2023		2022		2023		2022
NGD margin calculation:
NGD distribution revenues	$	218,988	$	179,727	$	662,049	$	516,214
Other regulated services	4,726		4,907		9,435		9,818
Total NGD operating revenues	223,714		184,634		671,484		526,032
Less: NGD cost of gas	102,490		79,776		308,295		225,420
Environmental remediation	2,140		2,272		7,515		6,970
Revenue taxes	9,159		8,208		28,134		21,532
NGD margin	$	109,925	$	94,378	$	327,540	$	272,110

5. COMMON STOCK

Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2017 2016 2017 2016
Utility margin calculation:
Utility operating revenues ⁽¹⁾
$ 81,126
$ 80,378
$ 503,947
$ 422,617
Less: Utility cost of gas 27,239
28,264
223,855
157,546
Environmental remediation expense 1,355
1,191
10,920
8,113
Utility margin $ 52,532
$ 50,923
$ 269,172

$ 256,958


⁽¹⁾			Utility operating revenues include environmental recovery revenues, which are collections received from customers through our environmental recovery mechanism in Oregon, offset by environmental remediation expense.

In August 2021, NW Holdings initiated an at-the-market (ATM) equity program by entering into an equity distribution agreement under which NW Holdings may issue and sell from time to time shares of common stock, no par value, having an aggregate gross sales price of up to $200 million. NW Holdings is under no obligation to offer and sell common stock under the ATM equity program, which expires in August 2024. Any shares of common stock offered under the ATM equity program are registered on NW Holdings’ universal shelf registration statement filed with the SEC. During the three months ended June 30, 2023, NW Holdings issued and sold 119,329 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $5.4 million, net of fees and commissions paid to agents of $0.2 million. During the six months ended June 30, 2023, NW Holdings issued and sold 479,593 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $22.1 million, net of fees and commissions paid to agents of $0.4 million. As of June 30, 2023, NW Holdings had $88.6 million of equity available for issuance under the program. The ATM equity program was initiated to raise funds for general corporate purposes, including equity contributions to NW Holdings’ subsidiaries, NW Natural and NW Natural Water. We intend that contributions to NW Natural and NW Natural Water will be used for general corporate purposes.

~~5. STOCK-BASED COMPENSATION~~

6. REVENUE

The following tables present disaggregated revenue:


	Three Months Ended June 30,
In thousands	NGD		Other (NW Natural)		NW Natural		Other (NW Holdings)		NW Holdings
2023
Natural gas sales	$	215,108	$	—	$	215,108	$	—	$	215,108
Gas storage revenue, net	—		3,201		3,201		—		3,201
Asset management revenue, net	—		502		502		—		502
Appliance retail center revenue	—		932		932		—		932
Other revenue	732		—		732		9,511		10,243
Revenue from contracts with customers	215,840		4,635		220,475		9,511		229,986

Alternative revenue	3,861		—		3,861		—		3,861
Leasing revenue	4,012		—		4,012		—		4,012
Total operating revenues	$	223,713	$	4,635	$	228,348	$	9,511	$	237,859

2022
Natural gas sales	$	190,041	$	—	$	190,041	$	—	$	190,041
Gas storage revenue, net	—		3,039		3,039		—		3,039
Asset management revenue, net	—		1,142		1,142		—		1,142
Appliance retail center revenue	—		1,436		1,436		—		1,436
Other revenue	628		—		628		4,709		5,337
Revenue from contracts with customers	190,669		5,617		196,286		4,709		200,995

Alternative revenue	(10,333)		—		(10,333)		—		(10,333)
Leasing revenue	4,298		—		4,298		—		4,298
Total operating revenues	$	184,634	$	5,617	$	190,251	$	4,709	$	194,960


	Six Months Ended June 30,
In thousands	NGD		Other (NW Natural)		NW Natural		Other (NW Holdings)		NW Holdings
2023
Natural gas sales	$	666,502	$	—	$	666,502	$	—	$	666,502
Gas storage revenue, net	—		6,000		6,000		—		6,000
Asset management revenue, net	—		3,256		3,256		—		3,256
Appliance retail center revenue	—		2,122		2,122		—		2,122
Other revenue	1,462		—		1,462		17,421		18,883
Revenue from contracts with customers	667,964		11,378		679,342		17,421		696,763

Alternative revenue	(4,491)		—		(4,491)		—		(4,491)
Leasing revenue	8,010		—		8,010		—		8,010
Total operating revenues	$	671,483	$	11,378	$	682,861	$	17,421	$	700,282

2022
Natural gas sales	$	527,337	$	—	$	527,337	$	—	$	527,337
Gas storage revenue, net	—		5,796		5,796		—		5,796
Asset management revenue, net	—		1,894		1,894		—		1,894
Appliance retail center revenue	—		3,153		3,153		—		3,153
Other revenue	1,258		—		1,258		8,386		9,644
Revenue from contracts with customers	528,595		10,843		539,438		8,386		547,824

Alternative revenue	(11,160)		—		(11,160)		—		(11,160)
Leasing revenue	8,597		—		8,597		—		8,597
Total operating revenues	$	526,032	$	10,843	$	536,875	$	8,386	$	545,261

NW Natural's revenue represents substantially all of NW Holdings' revenue and is recognized for both registrants when the obligation to customers is satisfied and in the amount expected to be received in exchange for transferring goods or providing services. Revenue from contracts with customers contains one performance obligation that is generally satisfied over time, using the output method based on time elapsed, due to the continuous nature of the service provided. The transaction price is determined by a set price agreed upon in the contract or dependent on regulatory tariffs. Customer accounts are settled on a monthly basis or paid at time of sale and based on historical experience. It is probable that we will collect substantially all of the consideration to which we are entitled. We evaluated the probability of collection in accordance with the current expected credit losses standard.

NW Holdings and NW Natural do not have any material contract assets, as net accounts receivable and accrued unbilled revenue balances are unconditional and only involve the passage of time until such balances are billed and collected. NW Holdings and NW Natural do not have any material contract liabilities.

Revenue taxes are included in operating revenues with an equal and offsetting expense recognized in operating expenses in the consolidated statements of comprehensive income. Revenue-based taxes are primarily franchise taxes, which are collected from NGD customers and remitted to taxing authorities.

Natural Gas Distribution

Natural Gas Sales

NW Natural's primary source of revenue is providing natural gas to customers in the NGD service territory, which includes residential, commercial, industrial and transportation customers. NGD revenue is generally recognized over time upon delivery of the gas commodity or service to the customer, and the amount of consideration received and recognized as revenue is dependent on the Oregon and Washington tariffs. Customer accounts are to be paid in full each month, and there is no right of return or warranty for services provided. Revenues include firm and interruptible sales and transportation services, franchise taxes recovered from the customer, late payment fees, service fees, and accruals for gas delivered but not yet billed (accrued unbilled revenue). The accrued unbilled revenue balance is based on estimates of deliveries during the period from the last meter reading and management judgment is required for a number of factors used in this calculation, including customer use and weather factors.

We applied the significant financing practical expedient and have not adjusted the consideration NW Natural expects to receive from NGD customers for the effects of a significant financing component as all payment arrangements are settled annually. Due to the election of the right to invoice practical expedient, we do not disclose the value of unsatisfied performance obligations.

Alternative Revenue

Weather normalization (WARM) and decoupling mechanisms are considered to be alternative revenue programs. Alternative revenue programs are considered to be contracts between NW Natural and its regulator and are excluded from revenue from contracts with customers.

Leasing Revenue

Leasing revenue primarily consists of revenues from NW Natural's North Mist Storage contract with PGE in support of PGE's gas-fired electric power generation facilities under an initial 30-year contract with options to extend, totaling up to an additional 50 years upon mutual agreement of the parties. The facility is accounted for as a sales-type lease with regulatory accounting deferral treatment. The investment is included in rate base under an established cost-of-service tariff schedule, with revenues recognized according to the tariff schedule and as such, profit upon commencement was deferred and will be amortized over the lease term. Leasing revenue also contains rental revenue from small leases of property owned by NW Natural to third parties. The majority of these transactions are accounted for as operating leases and the revenue is recognized over the term of the lease agreement. Lease revenue is excluded from revenue from contracts with customers. See Note 7 for additional information.

NW Natural Other

Gas Storage Revenue

NW Natural's other revenue includes gas storage activity, which includes Interstate Storage Services used to store natural gas for customers. Gas storage revenue is generally recognized over time as the gas storage service is provided to the customer and the amount of consideration received and recognized as revenue is dependent on set rates defined per the storage agreements. Noncash consideration in the form of dekatherms of natural gas is received as consideration for providing gas injection services to gas storage customers. This noncash consideration is measured at fair value using the average spot rate. Customer accounts are generally paid in full each month, and there is no right of return or warranty for services provided. Revenues include firm and interruptible storage services, net of the profit sharing amount refunded to NGD customers.

Asset Management Revenue

Revenues include the optimization of storage assets and pipeline capacity by a third-party and are provided net of the profit sharing amount refunded to NGD customers. Certain asset management revenues received are recognized over time using a straight-line approach over the term of each contract, and the amount of consideration received and recognized as revenue is dependent on a variable pricing model. Variable revenues earned above guaranteed amounts are estimated and recognized at the end of each period using the most likely amount approach. Additionally, other asset management revenues may be based on a fixed rate. Generally, asset management accounts are settled on a monthly basis.

As of June 30, 2023, unrecognized revenue for the fixed component of the transaction price related to gas storage and asset management revenue was approximately $72.3 million. Of this amount, approximately $10.8 million will be recognized during the remainder of 2023, $16.6 million in 2024, $13.5 million in 2025, $9.4 million in 2026, $5.1 million in 2027 and $16.9 million thereafter. The amounts presented here are calculated using current contracted rates.

Appliance Retail Center Revenue

NW Natural owns and operates an appliance store that is open to the public, where customers can purchase natural gas home appliances. Revenue from the sale of appliances is recognized at the point in time in which the appliance is transferred to the third party responsible for delivery and installation services and when the customer has legal title to the appliance. It is required that the sale be paid for in full prior to transfer of legal title. The amount of consideration received and recognized as revenue varies with changes in marketing incentives and discounts offered to customers.

NW Holdings Other

NW Holdings' primary source of other revenue is providing water and wastewater services to customers. Water and wastewater service revenue is generally recognized over time upon delivery of the water commodity or service to the customer, and the amount of consideration received and recognized as revenue is dependent on the tariffs established in the states we operate. Customer accounts are to be paid in full each month, bi-monthly, or quarterly, and there is no right of return or warranty for services provided.

We applied the significant financing practical expedient and have not adjusted the consideration we expect to receive from water distribution and wastewater collection customers for the effects of a significant financing component as all payment arrangements are settled annually. Due to the election of the right to invoice practical expedient, we do not disclose the value of unsatisfied performance obligations.

7. LEASES

Lease Revenue

Leasing revenue primarily consists of NW Natural's North Mist natural gas storage agreement with PGE, which is billed under an OPUC-approved rate schedule and includes an initial 30-year term beginning May 2019 with options to extend, totaling up to an additional 50 years upon mutual agreement of the parties. Under U.S. GAAP, this agreement is classified as a sales-type lease and qualifies for regulatory accounting deferral treatment. The investment in the storage facility is included in rate base under a separately established cost-of-service tariff, with revenues recognized according to the tariff schedule. As such, the selling profit that was calculated upon commencement as part of the sale-type lease recognition was deferred and will be amortized over the lease term. Billing rates under the cost-of-service tariff will be updated annually to reflect current information including depreciable asset levels, forecasted operating expenses, and the results of regulatory proceedings, as applicable, and revenue received under this agreement is recognized as operating revenue on the consolidated statements of comprehensive income. There are no variable payments or residual value guarantees. The lease does not contain an option to purchase the underlying assets.

NW Natural also maintains a sales-type lease for specialized compressor facilities to provide high pressure compressed natural gas (CNG) services. Lease payments are outlined in an OPUC-approved rate schedule over a 10-year term. There are no variable payments or residual value guarantees. The selling profit computed upon lease commencement was not significant.

Our ~~stock-based~~lessor portfolio also contains small leases of property owned by NW Natural and NW Holdings to third parties. These transactions are accounted for as operating leases and the revenue is recognized over the term of the lease agreement.

The components of lease revenue at NW Natural were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2023		2022		2023		2022
Lease revenue
Operating leases	$	19	$	19	$	38	$	37
Sales-type leases	3,993		4,279		7,972		8,560
Total lease revenue	$	4,012	$	4,298	$	8,010	$	8,597

Additionally, lease revenue of $0.2 million and $0.1 million was recognized for the three months ended June 30, 2023 and 2022, respectively, and lease revenue of $0.3 million was recognized for each of the six months ended June 30, 2023 and 2022 related to operating leases associated with non-utility property rentals. Lease revenue related to these leases was presented in other income (expense), net on the consolidated statements of comprehensive income as it is non-operating income.

Total future minimum lease payments to be received under non-cancelable leases at June 30, 2023 are as follows:


In thousands	Operating		Sales-Type		Total
NW Natural:
Remainder of 2023	$	311	$	8,225	$	8,536
2024	613		15,867		16,480
2025	604		15,306		15,910
2026	36		14,901		14,937
2027	22		14,521		14,543
Thereafter	—		222,299		222,299
Total minimum lease payments	$	1,586	$	291,119	$	292,705
Less: imputed interest			159,445
Total leases receivable			$	131,674

Other (NW Holdings):
Remainder of 2023	$	26	$	—	$	26
2024	52		—		52
2025	53		—		53
2026	56		—		56
2027	57		—		57
Thereafter	857		—		857
Total minimum lease payments	$	1,101	$	—	$	1,101

NW Holdings:
Remainder of 2023	$	337	$	8,225	$	8,562
2024	665		15,867		16,532
2025	657		15,306		15,963
2026	92		14,901		14,993
2027	79		14,521		14,600
Thereafter	857		222,299		223,156
Total minimum lease payments	$	2,687	$	291,119	$	293,806
Less: imputed interest			159,445
Total leases receivable			$	131,674

The total leases receivable above is reported under the NGD segment and the short- and long-term portions are included within other current assets and assets under sales-type leases on the consolidated balance sheets, respectively. The total amount of unguaranteed residual assets was $5.3 million, $4.9 million and $5.1 million at June 30, 2023 and 2022 and December 31, 2022, respectively, and is included in assets under sales-type leases on the consolidated balance sheets. Additionally, under regulatory accounting, the revenues and expenses associated with these agreements are presented on the consolidated statements of comprehensive income such that their presentation aligns with similar regulated activities at NW Natural.

Lease Expense

Operating Leases

We have operating leases for land, buildings and equipment. Our primary lease is for NW Natural's headquarters and operations center. Our leases have remaining lease terms of 3 months to 17 years. Many of our lease agreements include options to extend the lease, which we do not include in our minimum lease terms unless they are reasonably certain to be exercised. Short-term leases with a term of 12 months or less are not recorded on the balance sheet. As most of our leases do not provide an implicit rate and are entered into by NW Natural, we use an estimated discount rate representing the rate we would have incurred to finance the funds necessary to purchase the leased asset and is based on information available at the lease commencement date in determining the present value of lease payments.

The components of lease expense, a portion of which is capitalized, were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2023		2022		2023		2022
NW Natural:
Operating lease expense	$	1,790	$	1,741	$	3,565	$	3,468
Short-term lease expense	278		416		358		579

Other (NW Holdings):
Operating lease expense	$	40	$	8	$	80	$	15


NW Holdings:
Operating lease expense	$	1,830	$	1,749	$	3,645	$	3,483
Short-term lease expense	278		416		358		579

Supplemental balance sheet information related to operating leases as of June 30, 2023 and 2022 and December 31, 2022 is as follows:


In thousands	June 30,				December 31,
	2023		2022		2022
NW Natural:
Operating lease right of use asset	$	71,508	$	73,706	$	72,720

Operating lease liabilities - current liabilities	$	1,598	$	1,298	$	1,363
Operating lease liabilities - non-current liabilities	77,490		78,789		78,345
Total operating lease liabilities	$	79,088	$	80,087	$	79,708

Other (NW Holdings):
Operating lease right of use asset	$	588	$	48	$	709

Operating lease liabilities - current liabilities	$	134	$	17	$	151
Operating lease liabilities - non-current liabilities	461		37		620
Total operating lease liabilities	$	595	$	54	$	771

NW Holdings:
Operating lease right of use asset	$	72,096	$	73,754	$	73,429

Operating lease liabilities - current liabilities	$	1,732	$	1,315	$	1,514
Operating lease liabilities - non-current liabilities	77,951		78,826		78,965
Total operating lease liabilities	$	79,683	$	80,141	$	80,479

The weighted-average remaining lease terms and weighted-average discount rates for the operating leases at NW Natural were as follows:


In thousands	June 30,				December 31,
	2023		2022		2022
Weighted-average remaining lease term (years)	16.8		17.7		17.2
Weighted-average discount rate	7.3	%	7.2	%	7.3	%

Headquarters and Operations Center Lease

NW Natural commenced a 20-year operating lease agreement in March 2020 for a new headquarters and operations center in Portland, Oregon. There is an option to extend the term of the lease for two additional periods of seven years. There is a material timing difference between the minimum lease payments and expense recognition as calculated under operating lease accounting rules. OPUC issued an order allowing us to align our expense recognition with cash payments for ratemaking purposes. We recorded the difference between the minimum lease payments and the aggregate of the imputed interest on the finance lease obligation and amortization of the right-of-use asset as a deferred regulatory asset on our balance sheet. The balance of the regulatory asset was $7.5 million, $6.3 million and $6.9 million as of June 30, 2023 and 2022 and December 31, 2022, respectively.

Maturities of operating lease liabilities at June 30, 2023 were as follows:


In thousands	NW Natural		Other (NW Holdings)		NW Holdings
Remainder of 2023	$	3,610	$	83	$	3,693
2024	7,307		162		7,469
2025	7,193		155		7,348
2026	7,361		140		7,501
2027	7,538		107		7,645
Thereafter	108,991		12		109,003
Total lease payments	142,000		659		142,659
Less: imputed interest	62,912		64		62,976
Total lease obligations	79,088		595		79,683
Less: current obligations	1,598		134		1,732
Long-term lease obligations	$	77,490	$	461	$	77,951

Supplemental cash flow information related to leases was as follows:



































	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2023		2022		2023		2022
NW Natural:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,798	$	1,733	$	3,565	$	3,466
Finance cash flows from finance leases	—		307		173		382
Right of use assets obtained in exchange for lease obligations
Operating leases	$	81	$	(14)	$	81	$	—
Finance leases	—		120		173		220



Other (NW Holdings):
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	39	$	6	$	78	$	12

Right of use assets obtained in exchange for lease obligations

Finance leases	$	—	$	—	$	90	$	—



NW Holdings:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,837	$	1,739	$	3,643	$	3,478
Finance cash flows from finance leases	—		307		173		382
Right of use assets obtained in exchange for lease obligations
Operating leases	$	81	$	(14)	$	81	$	—
Finance leases	—		120		263		220

Finance Leases

NW Natural also leases building storage spaces for use as a gas meter room in order to provide natural gas to multifamily or mixed use developments. These contracts are accounted for as finance leases and typically involve a one-time upfront payment with no remaining liability. The right of use assets for finance leases were $2.4 million, $2.3 million and $2.3 million at June 30, 2023 and 2022 and at December 31, 2022, respectively. As of June 30, 2023 and December 31, 2022, there were no finance lease liabilities and as of June 30, 2022, finance lease liabilities were $0.1 million at NW Natural.

8. STOCK-BASED COMPENSATION

Stock-based compensation plans are designed to promote stock ownership in NW ~~Natural~~Holdings by employees, ~~and~~including officers. These compensation plans include a Long Term Incentive Plan (LTIP), and an Employee Stock Purchase Plan (ESPP)~~, and a Restated Stock Option Plan.~~. For additional information on ~~our~~ stock-based compensation plans, see Note 68 in the ~~2016~~2022 Form 10-K and the updates provided below.

~~Table of Contents~~

Long Term Incentive Plan

Performance Shares

LTIP performance shares incorporate a combination of market, performance, and service-based factors. During the ~~nine~~six months ended ~~September~~June 30, ~~2017, 34,340~~2023, the final performance factor under the 2021 LTIP was approved and 55,250 performance-based shares were granted under the 2021 LTIP ~~based on target-level awards with~~for accounting purposes. As such, NW Natural and other subsidiaries began recognizing compensation expense. In February 2022 and 2023, LTIP shares were awarded to participants; however, the agreements allow for one of the performance factors to remain variable until the first quarter of the third year of the award period. As the performance factor will not be approved until the first quarters of 2024 and 2025, respectively, there is not a ~~weighted-average~~mutual understanding of the awards' key terms and conditions between NW Holdings and the participants as of June 30, 2023, and therefore, no expense was recognized for the 2022 and 2023 awards. NW Holdings will calculate the grant date fair value ~~of $57.05 per share. Award~~and NW Natural will recognize expense over the remaining service period for each award once the final performance factor has been approved.

For the 2022 and 2023 LTIP awards, share payouts range from a threshold of 0% to a maximum of 200% based on achievement of ~~EPS~~pre-established goals. The performance criteria for the 2022 and 2023 performance shares consists of a three-year Return on Invested Capital (ROIC) ~~factors,~~threshold that must be satisfied and a cumulative EPS factor, which can be modified by a total shareholder return factor (TSR ~~factor)~~modifier) relative to the performance of ~~the Russell 2500 Utilities Index~~peer group companies over the ~~three-year~~ performance period ~~and a growth modifier based on a cumulative EBITDA measure. Fair value~~of three years for each respective award. If the targets were achieved for the 2022 and 2023 awards, NW Holdings would grant for accounting purposes 55,870 and 59,330 shares ~~granted during~~in the ~~nine months ended September 30, 2017 was estimated as~~first quarters of ~~the date of grant using a Monte-Carlo option pricing model based on the following assumptions:~~2024 and 2025, respectively.

Stock price on valuation date $ 59.90
Performance term (in years) 3.0
Quarterly dividends paid per share⁽¹⁾
$ 0.4700
Expected dividend yield 3.09 %
Dividend discount factor 0.9156


⁽¹⁾	In addition to common stock shares, a participant also receives a dividend equivalent cash payment equal to the number of shares of common stock received on the award payout multiplied by the aggregate cash dividends paid per share during the performance period.

As of ~~September~~June 30, ~~2017,~~2023, there ~~was $2.5~~was $0.3 million of unrecognized compensation cost ~~from~~associated with the 2021 LTIP ~~grants,~~grant, which is expected to be recognized through ~~2019.~~2023.

Restricted Stock Units

During the ~~nine~~six months ended ~~September~~June 30, ~~2017, 32,168~~2023, 45,532 RSUs were granted under the LTIP with a weighted-average grant date fair value of ~~$60.51~~$48.24 per share. Generally, the RSUs awarded are forfeitable and include a performance-based threshold as well as a vesting period of four years from the grant date. AThe majority of our RSU ~~obligates us,~~grants obligate NW Holdings, upon vesting, to issue the RSU holder one share of common ~~stock plus~~stock. The grant may also include a cash payment equal to the total amount of dividends paid per share between the grant date and vesting date of that portion of the ~~RSU.~~RSU depending on the structure of the award agreement. The fair value of an RSU is equal to the closing market price of ~~our~~NW Holdings' common stock on the grant date. As of ~~September~~June 30, ~~2017,~~2023, there was ~~$3.3~~$4.2 million of unrecognized compensation cost from grants of RSUs, which is expected to be recognized over a period extending through ~~2022.~~2027.

6.9. DEBT

Short-Term Debt

At ~~September~~June 30, ~~2017, we had no~~2023, June 30, 2022 and December 31, 2022, short-term debt consisted of the following:


	June 30, 2023				June 30, 2022				December 31, 2022
In millions	Balance Outstanding		Weighted Average Interest Rate(1)		Balance Outstanding		Weighted Average Interest Rate(1)		Balance Outstanding		Weighted Average Interest Rate(1)
NW Natural:
Commercial paper	$	—	—	%	$	78.7	2.0	%	$	170.2	4.6	%
Other (NW Holdings):
Credit agreement	41.0		6.2	%	144.0		2.7	%	88.0		5.3	%
NW Holdings	$	41.0			$	222.7			$	258.2

(1)Weighted average interest rate on outstanding short-term ~~debt.~~debt

Long-Term Debt

At ~~September~~June 30, ~~2017, we had~~2023, June 30, 2022 and December 31, 2022, NW Holdings' long-term debt consisted of ~~$779.4 million, which included $7.3 million of unamortized debt issuance costs. Utility long-term debt consists of~~the following:


	June 30, 2023				June 30, 2022				December 31, 2022
In millions	Balance Outstanding		Weighted Average Interest Rate(1)		Balance Outstanding		Weighted Average Interest Rate(1)		Balance Outstanding		Weighted Average Interest Rate(2)
NW Natural first mortgage bonds	$	1,334.7	4.7	%	$	994.7	4.4	%	$	1,134.7	4.5	%
NW Holdings credit agreement	100.0		5.5	%	—		—	%	100.0		4.2	%
NWN Water credit agreement	50.0		5.5	%	—		—	%	50.0		4.2	%
NWN Water term loan	55.0		4.8	%	55.0		2.3	%	55.0		2.5	%
Other long-term debt	5.9				4.2				6.2
Long-term debt, gross	$	1,545.6			$	1,053.9			$	1,345.9
Less: unamortized debt issuance costs	10.3				8.0				9.0
Less: current maturities	240.7				0.4				90.7
Total long-term debt	$	1,294.6			$	1,045.5			$	1,246.2

(1)Weighted average interest rate for the six months ended June 30, 2023 and June 30, 2022

(2)Weighted average interest rate for the year ended December 31, 2022

NW Natural's first mortgage bonds (FMBs) ~~with~~have maturity dates ranging from ~~2018~~2023 through ~~2047,~~2053 and interest rates ranging from ~~1.545%~~2.8% to ~~9.05%,~~7.9%. The credit agreements at NW Holdings and ~~a weighted-average coupon~~NWN Water have maturity dates in 2024 and the NWN Water term loan is due in 2026.

In March 2023, NW Natural issued and sold $100.0 million aggregate principal amount of 5.75% Secured Medium-Term Notes, Series B due 2033 (the Notes). The Notes bear interest at the rate of ~~4.780%.~~ 5.75% per annum, payable semi-annually on March 15 and September 15 of each year.

In ~~August 2017, we retired $40~~December 2022, NW Natural entered into a Bond Purchase Agreement between NW Natural and the institutional investors named as purchasers therein. The Bond Purchase Agreement provides for the issuance of (i) $100.0 million aggregate principal amount of NW Natural’s FMBs, ~~with a coupon~~5.43% Series due 2053 (5.43% Bonds), (ii) $80.0 million aggregate principal amount of NW Natural’s FMBs, 5.18% Series due 2034 (5.18% Bonds) and (iii) $50.0 million aggregate principal amount of NW Natural’s FMBs, 5.23% Series due 2038 (5.23% Bonds) in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.

In January 2023, NW Natural issued and sold $100.0 million aggregate principal amount of its FMBs, 5.43% Series due January 2053, to certain institutional investors pursuant to the Bond Purchase Agreement. The 5.43% Bonds bear interest at the rate of ~~7.00%,~~5.43% per annum, payable semi-annually on January 6 and July 6 of each year, commencing July 6, 2023, and will mature on January 6, 2053.

The 5.18% Bonds and the 5.23% Bonds are expected to be issued on or about August 4, 2023, pursuant to the Twenty-sixth Supplemental Indenture to the Mortgage. The 5.18% Bonds will bear interest at the rate of 5.18% per annum, payable semi-annually on February 4 and August 4 of each year, commencing February 4, 2024, and will mature on August 4, 2034. The 5.23% Bonds will bear interest at the rate of 5.23% per annum, payable semi-annually on February 4 and August 4 of each year, commencing February 4, 2024, and will mature on August 4, 2038.

In September 2022, NW Holdings entered into an 18-month credit agreement for $100.0 million and borrowed the full amount. The interest rate is based on the Secured Overnight Financing Rate (SOFR). The loan is due and payable on March 15, 2024. The credit agreement prohibits NW Holdings from permitting consolidated indebtedness to be greater than 70% of total capitalization, each as defined therein and calculated as of the end of each fiscal quarter. Failure to comply with this financial covenant would entitle the lenders to accelerate the maturity of the amounts outstanding under the credit agreement. NW Holdings was in compliance with this financial covenant as of June 30, 2023. In December 2022, NW Holdings entered into a swap to fix the interest rate on this debt beginning in January 2023 through the loan's maturity. See "Interest Rate Swap Agreements" below for more detail.

In September ~~2017, we issued $100~~2022, NWN Water entered into an 18-month credit agreement for $50.0 million and borrowed the full amount. The interest rate is based on the SOFR. The loan is due and payable on March 15, 2024. The credit agreement prohibits NWN Water and NW Holdings from permitting consolidated indebtedness to be greater than 70% of ~~FMBs.~~total capitalization, each as defined therein and calculated as of the end of each fiscal quarter. Failure to comply with this financial covenant would entitle the lenders to accelerate the maturity of the amounts outstanding under the credit agreement. NWN Water and NW Holdings were in compliance with this financial covenant as of June 30, 2023.

In July 2022, NW Natural entered into a Bond Purchase Agreement between NW Natural and the institutional investors named as purchasers therein. The ~~FMBs issued in September 2017, consisted~~Bond Purchase Agreement provides for the issuance of ~~$25~~$140.0 million ~~at 2.822%,~~aggregate principal amount of NW Natural's First Mortgage Bonds due in ~~2027~~2052 (the Bonds). The Bonds were issued on September 30, 2022. The Bonds bear interest at the rate of 4.8% per annum, payable semi-annually on March 30 and ~~$75 million at 3.685%, due~~September 30 of each year, commencing March 30, 2023, and will mature on September 30, 2052.

Interest Rate Swap Agreements

NW Holdings and NWN Water entered into interest rate swap agreements with major financial institutions that effectively converted variable-rate debt to a fixed rate. Interest payments made between the effective date and expiration date are hedged by the swap agreements. The notional amount, effective date, expiration date and rate of the swap agreements are shown in ~~2047.~~the table below:


In millions	Notional Amount		Effective Date	Expiration Date	Fixed Rate
NW Holdings	$	100.0	1/17/2023	3/15/2024	4.7	%
NWN Water	$	55.0	1/19/2023	6/10/2026	3.8	%

Fair Value of Long-Term Debt

~~Our~~NW Holdings' and NW Natural's outstanding debt does not trade in active markets. ~~We estimate the~~The fair value of ~~our~~ debt is estimated using ~~utility~~the value of outstanding debt at natural gas distribution companies with similar credit ratings, terms, and remaining maturities to ~~our~~NW Holdings' and NW Natural's debt that actively trade in public markets. These valuations are based on Level 2 inputs as defined in the fair value hierarchy. See Note 2 in the ~~2016~~2022 Form 10-K for a description of the fair value hierarchy.

~~Table of Contents~~

The following table provides an estimate of the fair value of ~~our~~ long-term debt, including current maturities of long-term debt, using market prices in effect on the valuation date:


	June 30,				December 31,
In thousands	2023		2022		2022
NW Natural:
Gross long-term debt	$	1,334,700	$	994,700	$	1,134,700
Unamortized debt issuance costs	(10,141)		(7,938)		(8,823)
Carrying amount	$	1,324,559	$	986,762	$	1,125,877
Estimated fair value(1)	$	1,176,519	$	891,064	$	944,383

NW Holdings:
Gross long-term debt	$	1,545,553	$	1,053,912	$	1,345,851
Unamortized debt issuance costs	(10,261)		(8,031)		(8,987)
Carrying amount	$	1,535,292	$	1,045,881	$	1,336,864
Estimated fair value(1)	$	1,385,612	$	950,597	$	1,148,395

September 30, December 31,
In thousands 2017 2016 2016
Gross long-term debt $ 786,700
$ 601,700
$ 726,700
Unamortized debt issuance costs (7,276 ) (6,487 ) (7,377 )
Carrying amount $ 779,424
$ 595,213
$ 719,323
Estimated fair value⁽¹⁾
$ 847,068
$ 701,183
$ 793,339

⁽¹⁾Estimated fair value does not include unamortized debt issuance costs.

10. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS

NW Natural maintains a qualified non-contributory defined benefit pension plan (Pension Plan), non-qualified supplemental pension plans for eligible executive officers and other key employees, and other postretirement employee benefit plans. NW Natural also has a qualified defined contribution plan (Retirement K Savings Plan) for all eligible employees. The Pension Plan and Retirement K Savings Plan have plan assets, which are held in qualified trusts to fund retirement benefits.

The service cost component of net periodic benefit cost for NW Natural pension and other postretirement benefit plans is recognized in operations and maintenance expense in the consolidated statements of comprehensive income. The other non-service cost components are recognized in other income (expense), net in the consolidated statements of comprehensive income.

The following table provides the components of net periodic benefit cost (credit) for ~~our~~the pension and other postretirement benefit plans:


	Three Months Ended June 30,								Six Months Ended June 30,
	Pension Benefits				Other Postretirement Benefits				Pension Benefits				Other Postretirement Benefits
In thousands	2023		2022		2023		2022		2023		2022		2023		2022
Service cost	$	1,049	$	1,529	$	28	$	47	$	2,098	$	3,059	$	56	$	94
Interest cost	5,218		3,659		248		179		10,436		7,318		496		359
Expected return on plan assets	(6,210)		(6,427)		—		—		(12,871)		(12,854)		—		—
Amortization of prior service credit	—		—		—		(84)		—		—		—		(167)
Amortization of net actuarial loss	140		3,199		—		99		279		6,397		—		198

Net periodic benefit cost (credit)	197		1,960		276		241		(58)		3,920		552		484
Amount allocated to construction	(439)		(616)		(9)		(17)		(913)		(1,280)		(20)		(35)

Net periodic benefit cost (credit) charged to expense	(242)		1,344		267		224		(971)		2,640		532		449

Amortization of regulatory balancing account	1,281		1,281		—		—		4,082		4,082		—		—
Net amount charged to expense	$	1,039	$	2,625	$	267	$	224	$	3,111	$	6,722	$	532	$	449

Three Months Ended September 30, Nine Months Ended September 30,
Pension Benefits
Other Postretirement
Benefits
Pension Benefits
Other Postretirement
Benefits
In thousands 2017 2016 2017 2016 2017 2016 2017 2016
Service cost $ 1,881
$ 1,978
$ 98
$ 119
$ 5,621
$ 5,866
$ 295
$ 361
Interest cost 4,484
4,607
274
301
13,428
13,755
822
901
Expected return on plan assets (5,112 ) (5,017 ) —
—
(15,337 ) (15,051 ) —
—
Amortization of prior service costs 32
57
(117 ) (117 ) 95
173
(351 ) (351 )
Amortization of net actuarial loss 3,656
3,555
138
192
10,899
10,559
415
575
Settlement expense —
193
—
—
—
193
—
—
Net periodic benefit cost 4,941
5,373
393
495
14,706
15,495
1,181
1,486
Amount allocated to construction (1,581 ) (1,556 ) (136 ) (163 ) (4,660 ) (4,678 ) (403 ) (491 )
Amount deferred to regulatory balancing account⁽¹⁾
(1,484 ) (1,542 ) —
—
(4,519 ) (4,762 ) —
—
Net amount charged to expense $ 1,876
$ 2,275
$ 257
$ 332
$ 5,527
$ 6,055
$ 778
$ 995

⁽¹⁾

The deferral of defined benefit pension plan expenses above or below the amount set in rates was approved by the OPUC, with recovery of these deferred amounts through the implementation of a balancing account. The balancing account includes the expectation of higher net periodic benefit costs than costs recovered in rates in the near-term with lower net periodic benefit costs than costs recovered in rates expected in future years. Deferred pension expense balances include accrued interest at the utility’s authorized rate of return, with the equity portion of the interest recognized when amounts are collected in rates. See Note 2 in the 2016 Form 10-K.

Net periodic benefit costs are reduced by amounts capitalized to NGD plant. In addition, net periodic benefit costs were recorded to a regulatory balancing account as approved by the OPUC and amortized accordingly.

The following table presents amounts recognized in accumulated other comprehensive loss (AOCL) and the changes in AOCL related to ~~our~~ non-qualified employee benefit plans:


	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2023		2022		2023		2022
Beginning balance	$	(6,312)	$	(11,207)	$	(6,414)	$	(11,404)

Amounts reclassified from AOCL:
Amortization of actuarial losses	140		268		279		536

Total reclassifications before tax	140		268		279		536
Tax benefit	(37)		(71)		(74)		(142)
Total reclassifications for the period	103		197		205		394
Ending balance	$	(6,209)	$	(11,010)	$	(6,209)	$	(11,010)

Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2017 2016 2017 2016
Beginning balance $ (6,678 ) $ (6,825 ) $ (6,951 ) $ (7,162 )
Amounts reclassified to AOCL —
(1,795 ) —
(1,795 )
Amounts reclassified from AOCL:
Amortization of actuarial losses 248
371
698
962
Loss from plan settlement —
193
—
193
Total reclassifications before tax 248
(1,231 ) 698
(640 )
Tax (benefit) expense (98 ) 486
(275 ) 232
Total reclassifications for the period 150
(745 ) 423
(408 )
Ending balance $ (6,528 ) $ (7,570 ) $ (6,528 ) $ (7,570 )

~~Table of Contents~~

Employer Contributions to Company-Sponsored Defined Benefit Pension Plans

~~For the nine months ended September 30, 2017, we~~NW Natural made no cash contributions ~~totaling $15.4 million~~ to ~~our~~its qualified defined benefit pension ~~plans. We~~plans during the six months ended June 30, 2023 or 2022. NW Natural does not expect ~~further~~to make any plan contributions ~~of $4.0 million~~ during the remainder of ~~2017.~~2023 as a result of adopting the American Rescue Plan Act.

Defined Contribution Plan

~~The~~NW Natural's Retirement K Savings Plan is a qualified defined contribution plan under Internal Revenue Code Sections 401(a) and 401(k). ~~Employer~~NW Natural contributions totaled ~~$4.1~~$5.9 million and ~~$3.6~~$5.2 million for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, respectively.

See Note 810 in the ~~2016~~2022 Form 10-K for more information concerning these retirement and other postretirement benefit plans.

11. INCOME TAX

An estimate of annual income tax expense is made each interim period using estimates for annual pre-tax income, regulatory flow-through adjustments, tax credits, and other items. The estimated annual effective tax rate is applied to year-to-date, pre-tax income to determine income tax expense for the interim period consistent with the annual estimate. Discrete events are recorded in the interim period in which they occur or become known.

The effective income tax rate varied from the ~~combined~~ federal ~~and state~~ statutory ~~tax rates~~rate due to the following:


	Three Months Ended June 30,
	NW Holdings						NW Natural
In thousands	2023			2022			2023			2022
Income tax at statutory rate (federal)	$	312		$	460		$	442		$	744
State income tax	211			161			217			219
Increase (decrease):
Differences required to be flowed-through by regulatory commissions	(161)			(62)			(160)			(62)
Other, net	(119)			(89)			(177)			(91)
Total benefit for income taxes	$	243		$	470		$	322		$	810

Effective income tax rate	16.3		%	21.5		%	15.3		%	22.9		%


	Three Months Ended September 30,						Nine Months Ended September 30,
Dollars in thousands	2017			2016			2017			2016
Income taxes at statutory rates (federal and state)	$	(5,838	)	$	(5,339	)	$	22,487		$	20,620

														Six Months Ended June 30,
														NW Holdings						NW Natural
In thousands													In thousands	2023			2022			2023			2022
Income tax at statutory rate (federal)													Income tax at statutory rate (federal)	$	20,644		$	16,243		$	21,854		$	16,859
State income tax													State income tax	8,360			6,674			8,623			6,803
Increase (decrease):													Increase (decrease):
Differences required to be flowed-through by regulatory commissions	(302		)	(381		)	1,282			1,202			Differences required to be flowed-through by regulatory commissions	(3,070)			(3,235)			(3,069)			(3,235)
Other, net	21			246			(1,296		)	(528		)	Other, net	(544)			(289)			(664)			(294)
Total provision for income taxes	$	(6,119	)	$	(5,474	)	$	22,473		$	21,294		Total provision for income taxes	$	25,390		$	19,393		$	26,744		$	20,133
Effective tax rate	41.9		%	40.5		%	39.4		%	41.0		%

Effective income tax rate													Effective income tax rate	25.8		%	25.1		%	25.7		%	25.1		%

The NW Holdings and NW Natural effective income tax ~~rate~~rates for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2023 compared to the same period in ~~2016 increased~~2022 changed primarily as a result of ~~increased stock-based compensation deductions~~changes in 2017. The effective income tax rate for the nine months ended September 30, 2017, compared to the same period in 2016, decreased primarily as a result of AFUDC equity income and increased stock-based compensation deductions in 2017.pre-tax income. See Note 911 in the ~~2016~~2022 Form 10-K for more detail on income taxes and effective tax rates.

The IRS Compliance Assurance Process (CAP) examination of the ~~2015~~2021 tax year was completed during the ~~first~~second quarter of ~~2017.~~2023. There were no material changes to the return as filed. The ~~2016~~2022 and 2023 tax ~~year is~~years are subject to examination under ~~CAP and the 2017 tax year CAP application has been accepted by the IRS.~~CAP.

~~Table of Contents~~

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s assessment of ~~Northwest Natural Gas Company’s (NW Natural or the Company)~~NW Holdings' and NW Natural's financial condition, including the principal factors that affect results of operations. The discussion refers to ~~our~~the consolidated results for the ~~quarters~~three and six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016.~~2022 of NW Holdings, the substantial majority of which consist of the operating results of NW Natural. When significant activity exists at NW Holdings that does not exist at NW Natural, additional disclosure has been provided. References in this discussion to "Notes" are to the Notes to Unaudited Consolidated Financial Statements in this report. A significant portion of ~~our~~the business results are seasonal in nature, and, as such, the results of operations for the three month ~~periods are~~period is not necessarily indicative of expected fiscal year results. Therefore, this discussion should be read in conjunction with ~~our 2016~~NW Holdings' and NW Natural's 2022 Annual Report on Form 10-K, ~~(2016~~as applicable (2022 Form 10-K).

~~The consolidated financial statements include NW Natural and its direct and indirect wholly-owned subsidiaries including:~~

NW ~~Natural Energy, LLC (NWN Energy);~~

~~NW Natural Gas Storage, LLC (NWN Gas Storage);~~

~~Gill Ranch Storage, LLC (Gill Ranch);~~

~~NNG Financial Corporation (NNG Financial);~~

~~Northwest Energy Corporation (Energy Corp); and~~

~~NWN Gas Reserves, LLC (NWN Gas Reserves).~~

~~We operate in two primary reportable business segments: local~~Natural's natural gas distribution ~~and gas storage. We also have other investments and business~~ activities ~~not specifically related to one of these two reporting segments, which we aggregate and report as other. We refer to our local~~are reported in the natural gas distribution ~~business as the utility, and our gas storage~~(NGD) segment. The NGD segment ~~and other as non-utility. Our utility segment~~also includes ~~our NW Natural local gas distribution business,~~ NWN Gas Reserves, which is a wholly-owned subsidiary of Energy Corp, ~~and~~ the ~~utility portion~~NGD-portion of ~~our~~NW Natural's Mist ~~underground~~ storage facility in Oregon, ~~(Mist). Our gas~~and NW Natural RNG Holding Company, LLC. NW Natural RNG Holding Company, LLC holds investments in Lexington Renewable Energy, LLC and Dakota City Renewable Energy LLC, which are accounted for under the equity method. Other activities aggregated and reported as other at NW Natural include the non-NGD storage ~~segment includes NWN Gas Storage, which is a wholly-owned subsidiary of NWN Energy, Gill Ranch, which is a wholly-owned subsidiary of NWN Gas Storage, the non-utility portion of~~activity at Mist ~~and~~as well as asset management ~~services.~~services and the appliance retail center operations. Other includes NWN Energy's equity investment in Trail West Holding, LLC (TWH), which is pursuing the development of a proposed natural gas pipeline through its wholly-owned subsidiary, Trail West Pipeline, LLC (TWP),activities aggregated and reported as other at NW Holdings include NNG Financial's ~~equity~~ investment in Kelso-Beaver Pipeline (KB Pipeline)~~. For a~~ and NWN Water's investment in Avion Water Company, Inc., which are accounted for under the equity method, NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities; and NWN Water, which through itself or its subsidiaries, owns and continues to pursue investments in the water, wastewater, and water services sectors. See Note 4 for further discussion of our business ~~segments~~segment and other, ~~see Note 4.~~as well as our direct and indirect wholly-owned subsidiaries.

NON-GAAP FINANCIAL MEASURES.In addition to presenting the results of operations and earnings amounts in total, certain financial measures are expressed in cents per share, ~~or exclude the after-tax regulatory disallowance related to the OPUC's 2016 environmental order,~~ which are non-GAAP financial measures. We present net income and earnings per share (EPS) excluding the regulatory disallowances along with the U.S. GAAP measures to illustrate the magnitude of this disallowance on ongoing business and operational results. Although the excluded amounts are properly included in the determination of net income and earnings per share under U.S. GAAP, we believe the amount and nature of such disallowances make period to period comparisons of operations difficult or potentially confusing. Financial measures are expressed in cents per share as these amounts reflect factors that directly impact earnings, including income taxes. All references in this section to ~~EPS~~earnings per share (EPS) are on the basis of diluted ~~shares (see Note 3).~~shares. We use such non-GAAP financial measures to analyze our financial performance because we believe they provide useful information to our investors, analysts and creditors in evaluating our financial condition and results of operations. Our non-GAAP financial measures should not be considered a substitute for, or superior to, measures calculated in accordance with U.S. GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than how such measures are calculated in this report, limiting the usefulness of those measures for comparative purposes. A reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is provided below.


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Diluted earnings per share - Total(1)	$	0.03	$	0.05	$	2.03	$	1.77
Diluted earnings (loss) per share - NGD segment(2)	(0.01)		—		2.00		1.70
Diluted earnings per share - NW Holdings - other(2)	0.04		0.05		0.03		0.07

(1) Total Diluted EPS is equal to the sum of Diluted EPS - NGD segment and Diluted EPS - NW Holdings – other.

(2) Non-GAAP financial measure

~~Table of Contents~~

EXECUTIVE SUMMARY

~~We manage our business~~

NW Holdings' financial results and strategic initiatives with a long-term view of providing natural gas service safely and reliably to customers, working with regulators on key policy initiatives, and remaining focused on growing our business. See ~~"2017 Outlook"~~ ~~in our 2016 Form 10-K for more information. Current operational~~ highlights include:

~~awarded~~•Reported net income of $1.2 million or $0.03 per share (diluted) for the ~~highest customer satisfaction score among large gas utilities~~second quarter of 2023, compared to net income of $1.7 million or $0.05 per share (diluted) in the ~~West~~prior year;

•Reported net income of $72.9 million or $2.03 per share (diluted) for the ~~fifth year in a row~~first six months of 2023, compared to net income of $58.0 million or $1.77 per share (diluted) in the ~~2017 J.D. Power and Associates study;~~prior year;

~~reduced residential customer rates for the third consecutive year resulting in a cumulative decrease of 15% in Oregon and 18% in Washington over that time;~~

~~added~~•Added nearly ~~12,700 customers~~6,400 meters during the past twelve months for a growth rate of ~~1.8%~~0.8% at ~~September~~June 30, ~~2017;~~2023;

~~invested~~•Completed construction on Dakota City renewable natural gas facility, which is designed to provide environmental attributes on behalf of NW Natural customers;

•NW Natural Water launched a water operations & maintenance service business by acquiring a service company in Washington and signed a purchase agreement for an additional service company in Oregon; and

•Invested nearly $145 million in our ~~distribution system~~utility systems in the first six months of 2023 in an effort to achieve greater reliability and ~~facilities for growth and reliability;~~resiliency.

~~continued construction on our North Mist Gas Storage Expansion Project, with $72 million of capital expenditures incurred as of September 30, 2017; and~~

~~delivered increasing dividends for the 62nd consecutive year. Our current annual indicated dividend rate is $1.89 per share.~~

Key quarter-to-date financial highlights for NW Holdings include:


	Three Months Ended June 30,
	2023				2022				QTD
In thousands, except per share data	Amount		Per Share		Amount		Per Share		Change
Consolidated net income	$	1,244	$	0.03	$	1,715	$	0.05	$	(471)

Three Months Ended September 30,
2017 2016 $
In thousands, except per share data Amount Per Share Amount Per Share Change
Consolidated net loss $ (8,495 ) $ (0.30 ) $ (8,040 ) $ (0.29 ) $ (455 )
Utility margin 52,532
50,923
1,609
Gas storage operating revenues 7,006
7,293
(287 )

Key quarter-to-date financial highlights for NW Natural include:


	Three Months Ended June 30,
	2023		2022		QTD
In thousands	Amount		Amount		Change
Consolidated net income	$	1,784	$	2,733	$	(949)
Natural gas distribution margin	$	109,925	$	94,378	$	15,547

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2023 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2016.~~ 2022.

Consolidated net ~~loss increased $0.5~~income decreased $0.9 million at NW Natural primarily due to the following factors:

~~a $2.0~~•$11.4 million increase in ~~operating~~operations and maintenance expenses due to higher compensation costs, higher contract labor, information technology costs, the amortization of deferred balances (which is mostly offset in revenues), and amortization expense ~~largely from utility payroll~~related to cloud computing arrangements;

•$4.4 million increase in interest expense, net due to higher long-term debt balances;

•$2.6 million increase in depreciation expense due to additional capital investments; and ~~benefits increases, as well as increased safety equipment upgrade costs;~~

•$1.7 million increase in general taxes primarily driven by higher property taxes; partially offset by

~~a $1.6~~•$15.5 millionincrease in ~~utility~~NGD segment margin driven by new rates in Oregon and Washington, actual gas prices that were lower than what was estimated in the 2022-23 PGA and amortization of deferred balances (which is mostly offset in operations and maintenance expenses and interest expense); and

•$3.8 million increase in other income, net primarily due to ~~customer growth.~~

lower pension costs and interest income.

Nine Months Ended September 30,
2017 2016 $
In thousands, except per share data Amount Per Share Amount Per Share Change
Consolidated net income $ 34,544
$ 1.20
$ 30,620
$ 1.11
$ 3,924
Adjustments:
Regulatory environmental disallowance, net of taxes ($1.3 million for 2016)⁽¹⁾
—
—
1,996
0.07
(1,996 )
Adjusted consolidated net income⁽¹⁾
$ 34,544
$ 1.20
$ 32,616
$ 1.18
$ 1,928
Utility margin $ 269,172
$ 256,958
$ 12,214
Gas storage operating revenues 17,635
19,654
(2,019 )

⁽¹⁾Regulatory environmental disallowance of $3.3 million in 2016 includes $2.8 million recorded in utility other income (expense), net and $0.5 million recorded in utility operations and maintenance expense. Adjusted consolidated net income and EPS are non-GAAP financial measures based on the after-tax disallowance using the combined federal and state statutory tax rate of 39.5%. EPS is calculated using 27.6 million diluted shares for the nine months ended September 30, 2016.

~~NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO SEPTEMBER 30, 2016.~~Consolidated net income ~~increased $3.9~~decreased $0.5 million including the environmental disallowance associated with a January 2016 OPUC Order in our SRRM docket described in the table above. Excluding the impact of this non-cash charge from the SRRM docket, adjusted consolidated net income increased $1.9 millionat NW Holdings primarily due to the following factors:

•$0.9 million decrease in consolidated net income at NW Natural as discussed above; partially offset by

~~a $12.2~~•$0.5 millionincrease in ~~utility margin~~other net income primarily reflecting a gain recognized from a settlement agreement with a third party to settle outstanding receivables, partially offset by higher interest expense at the holding company.

Key year-to-date financial highlights for NW Holdings include:


	Six Months Ended June 30,
	2023				2022				YTD
In thousands, except per share data	Amount		Per Share		Amount		Per Share		Change


Consolidated net income	$	72,915	$	2.03	$	57,954	$	1.77	$	14,961

Key year-to-date financial highlights for NW Natural include:


	Six Months Ended June 30,
	2023		2022		YTD
In thousands	Amount		Amount		Change
Consolidated net income	$	77,324	$	60,149	$	17,175
Natural gas distribution margin	$	327,540	$	272,110	$	55,430

SIX MONTHS ENDEDJUNE 30, 2023 COMPARED TO JUNE 30, 2022.

Consolidated net income increased $17.2 million at NW Natural primarily due to ~~customer growth and~~ the ~~effects of colder than average weather in 2017 compared to warmer than average weather in the prior period; partially offset by~~

following factors:

~~a $6.6~~•$55.4 million increase in ~~operating~~NGD segment margin driven by new rates in Oregon and Washington, amortization of deferred balances (which is mostly offset in operations and maintenance expenses and interest expense), actual gas prices that were lower than what was estimated in the 2022-23 PGA and customer growth; and

•$7.2 million increase in other income, net primarily due to lower pension costs and interest income; partially offset by

•$22.9 million increase in operations and maintenance expenses due to the amortization of deferred balances, higher compensation costs, higher contract labor, information technology costs, and amortization expense ~~largely from~~related to cloud computing arrangements;

•$8.2 million increase in interest expense, net due to higher ~~utility payroll~~long-term debt balances;

•$6.6 million increase in income tax expense due to higher pre-tax income;

•$5.1 million increase in depreciation expense due to additional capital investments; and ~~benefits increases,~~

•$3.7 million increase in general taxes primarily driven by higher property taxes.

Consolidated net income increased $15.0 million at NW Holdings primarily due to the following factors:

•$17.2 million increase in consolidated net income at NW Natural as ~~well as increased safety equipment upgrade costs; and~~discussed above; partially offset by

~~a $2.0~~•$2.2 million decrease in other net income primarily reflecting higher interest expense at the holding company.

CURRENT ECONOMIC CONDITIONS.We are evaluating and monitoring current economic conditions, which include but are not limited to: inflation, rising interest rates and commodity costs, recessionary pressures, banking environment and risk of further bank failure, heightened cybersecurity awareness, geopolitical uncertainty, and supply chain disruptions. We have enhanced cybersecurity monitoring in response to reports that cybersecurity attacks have increased and may continue to increase. We have experienced some longer lead times on materials, including valves and meter parts, however through advanced planning we are carrying additional levels of inventory to support our operations. Our suppliers may be subject to lack of personnel or disruption in their own supply chain for materials, which could disrupt supplier performance or deliveries, and negatively impact our business. Developers and HVAC suppliers have reported longer lead times for furnaces and other HVAC equipment, which may affect the timing of placing new meters into service particularly those converting to natural gas. However, because any supply chain issues are being experienced by vendors who supply directly to customers and not us, we do not have visibility of and are not able to quantify the number of new meters affected at this time. We are continuing to actively monitor supply chain disruptions, and have formulated and continue to evaluate contingency plans as necessary.

NW Holdings and NW Natural continue to monitor interest rates and financing options for all of its businesses. Interest rates increased in 2022 and 2023 resulting from actions taken by the U.S. Federal Reserve to increase short-term rates as inflation remains elevated. NW Natural generally recovers interest expense on its long-term debt through its authorized cost of capital. Certain working capital items, such as the cost of gas, ~~storage revenues largely due~~are deferred and accrue interest in Oregon and Washington. Additionally, short-term debt is incorporated in the capital structure in Washington. NW Natural Water's regulated water and wastewater utilities recover interest expense from long-term debt through their respective authorized cost of capital.

The mid-sized regional bank failures in March 2023 have created uncertainty in the banking markets, causing many investors to ~~lower revenues from~~look for alternative investment options. While this has had widespread impacts on the economy, neither NW Holdings nor NW Natural were directly impacted. We currently have a diverse group of eight banks that participate in our ~~asset management agreements~~revolving credit facilities. We additionally have two banks that provide deposit services. All of our current banking counterparties currently have solid investment grade credit ratings. We will continue to monitor this situation and its impact on our business.

See the discussion in "Results of Operations", "Regulatory Matters" and "Financial Condition" below for ~~our Mist storage and transportation capacity.~~additional detail regarding all significant activity that occurred during the second quarter of 2023.

~~Table of Contents~~

DIVIDENDS

Dividend highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
Per common share	2023		2022		2023		2022
Dividends paid	$	0.4850	$	0.4825	$	0.9700	$	0.9650	$	0.0025	$	0.0050

Three Months Ended September 30, Nine Months Ended September 30,
Per common share 2017 2016 2017 2016 QTR Change YTD Change
Dividends paid $ 0.4700
$ 0.4675
$ 1.4100
$ 1.4025
$ 0.0025
$ 0.0075

In ~~October 2017,~~July 2023, the Board of Directors of NW Holdings declared a quarterly dividend on ~~our~~NW Holdings common stock of ~~$0.4725 cents~~$0.4850 per ~~share,~~share. The dividend is payable on ~~November~~August 15, ~~2017,~~2023 to shareholders of record on ~~October~~July 31, ~~2017,~~2023, reflecting an annual indicated dividend rate of ~~$1.89~~$1.94 per share.

~~Table of Contents~~

RESULTS OF OPERATIONS

~~Regulatory Matters~~

~~Regulation and Rates~~

~~UTILITY.~~ Our utility business is subject to regulation by the OPUC, WUTC, and FERC with respect to, among other matters, rates and terms of service. The OPUC and WUTC also regulate the system of accounts and issuance of securities by our utility. In 2016, approximately 89% of our utility gas customers were located in Oregon, with the remaining 11% in Washington. Earnings and cash flows from utility operations are largely determined by rates set in general rate cases and other proceedings in Oregon and Washington. They are also affected by the local economies in Oregon and Washington, the pace of customer growth in the residential, commercial, and industrial markets, and our ability to remain price competitive, control expenses, and obtain reasonable and timely regulatory recovery of our utility-related costs, including operating expenses and investment costs in utility plant and other regulatory assets. See "~~Most Recent General Rate Cases"~~ ~~below.~~

~~GAS STORAGE.~~ Our gas storage business is subject to regulation by the OPUC, WUTC, CPUC, and FERC with respect to, among other matters, rates and terms of service. The OPUC and CPUC also regulate the issuance of securities, system of accounts, and regulate intrastate storage services. The FERC regulates interstate storage services. The FERC uses a maximum cost of service model which allows for gas storage prices to be set at or below the cost of service as approved by each agency in their last regulatory filing. The OPUC Schedule 80 rates are tied to the FERC rates, and are updated whenever we modify our FERC maximum rates. The CPUC regulates Gill Ranch under a market-based rate model which allows for the price of storage services to be set by the marketplace. In 2016, approximately 69% of our storage revenues were derived from FERC, Oregon, and Washington regulated operations and approximately 31% from California operations.

~~Most Recent General Rate Cases~~

~~OREGON.~~ ~~Effective November 1, 2012, the OPUC authorized rates to customers based on an ROE of 9.5%, an overall rate of return of 7.78%, and a capital structure of 50% common equity and 50% long-term debt.~~

~~WASHINGTON.~~ Effective January 1, 2009, the WUTC authorized rates to customers based on an ROE of 10.1% and an overall rate of return of 8.4% with a capital structure of 51% common equity, 5% short-term debt, and 44% long-term debt.

~~FERC.~~ We are required under our Mist interstate storage certificate authority and rate approval orders to file every five years either a petition for rate approval or a cost and revenue study to change or justify maintaining the existing rates for our interstate storage services. In December 2013, we filed a rate petition, which was approved in 2014, and allows for the maximum cost-based rates for our interstate gas storage services. These rates were effective January 1, 2014, with the rate changes having no significant impact on our revenues.

We continuously monitor the utility and evaluate the need for a rate case. Currently, we are contemplating filing an Oregon rate case in late 2017 or early 2018 and filing a Washington rate case thereafter.

~~Table of Contents~~

~~Regulatory Proceeding Updates~~

~~During 2017, we were involved in the regulatory activities discussed below.~~

~~SYSTEM INTEGRITY PROGRAM (SIP).~~ Upon completion of our bare-steel replacement program, we filed a request to extend the SIP program. The OPUC suspended our filing and ordered additional processes, including involvement of other local distribution companies' (LDCs) in the state, before making a final decision. In 2016, we withdrew our request to extend the SIP program and instead focused our efforts on establishing guidelines for future safety cost trackers with the OPUC. In 2016, an all-party agreement establishing guidelines was filed with the OPUC and, on March 6, 2017, the Commission issued an order adopting the agreement. The order allows LDCs to request safety cost recovery mechanisms under the guidelines established by the parties and requires LDCs to file annual safety project plans for OPUC and stakeholder review.

~~HEDGING.~~ In 2014 the OPUC opened a docket to discuss broader gas hedging practices across gas utilities in Oregon. This docket was divided into two phases. The first phase was focused on an analytical review of hedging and hedging practices. The second phase examined potential hedging guidelines for gas utilities. We continue to work with the parties in this proceeding to determine an appropriate resolution of this docket. We anticipate resolution of the docket in 2017 or early 2018.

The WUTC also conducted an investigation into the hedging practices of gas utilities operating in Washington, and considered whether it should require gas utilities to implement certain hedging practices. During 2016, the WUTC received and reviewed comments from all parties and issued a policy statement on March 13, 2017 outlining their expectations. The policy statement supports risk-responsive hedging strategies that are adaptable to variability in the market and requires gas utilities to submit with their 2017 PGA a preliminary hedging plan that outlines the utilities' intended path to incorporate risk-responsive hedging strategies. Beginning with the 2018 PGA, gas utilities must submit an annual comprehensive hedging plan that supports integration of risk responsive strategies into their hedging framework. Beginning with the 2019 PGA filing, utilities must provide a full strategy implementation plan for years 2020 and beyond. As directed by the WUTC, we submitted our preliminary hedging plan with our 2017 PGA in September 2017, and plan to submit our annual comprehensive hedging plan with our 2018 PGA.

~~INTERSTATE STORAGE AND OPTIMIZATION SHARING.~~ We received an Order from the OPUC in March 2015 on their review of the current revenue sharing arrangement that allocates a portion of the net revenues generated from non-utility Mist storage services and third-party asset management services to utility customers. The Order requires a third-party cost study to be performed and the results of the cost study may initiate a new docket or the re-opening of the original docket. In 2017, all parties agreed and hired a third-party consultant to perform the study and are continuing to facilitate completion of the work directed by the OPUC. We expect completion of this study in 2017.

~~GAS INCIDENT INVESTIGATION.~~ On October 19, 2016, there was a natural gas explosion in Portland, Oregon after a third-party contractor damaged a NW Natural service line. The contractor was not working for NW Natural at the time. NW Natural and local authorities responded to the event and evacuated the necessary building prior to the ignition. No fatalities or life-threatening injuries were sustained. On March 30, 2017, the OPUC released its investigation report regarding the incident, finding that NW Natural followed federal emergency response requirements. NW Natural did not receive any fines or penalties as a result of the report or the incident. We continue to focus on safety and enhancements to our incident response and reporting procedures, both of which are operational priorities. We will also continue to partner with other first responders in our community for on-site emergency response coordination.

~~DEPRECIATION STUDY.~~ Under OPUC regulations, the utility is required to file a depreciation study every five years to update or justify maintaining the existing depreciation rates. In December 2016, we filed the required depreciation study with the Commission. In September 2017, the parties to the docket filed a settlement with the Commission requesting approval of updated depreciation rates negotiated with the parties. The depreciation rates included in the stipulation do not materially change our current depreciation rates. We anticipate a resolution of the docket in 2017.

~~HOLDING COMPANY APPLICATION.~~ In February 2017, we filed applications with the OPUC, WUTC, and CPUC for approval to reorganize under a holding company structure. The filing of regulatory applications is the first of many steps required to form a holding company. We expect that the regulatory process will result in the OPUC, WUTC and CPUC authorizing a holding company structure subject to certain restrictions, or "ring-fencing"

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provisions applicable to NW Natural, the entity that currently, and would continue to, house our utility operations. In July 2017, the parties to the proceeding jointly agreed to suspend the OPUC procedural schedule, to continue the settlement process. We expect a resolution to the OPUC docket by settlement or otherwise by the end of 2017. We continue to work with the WUTC and CPUC, and expect resolutions by the end of the first quarter of 2018. We do not expect a material operational or financial impact to our business as a result of the contemplated reorganization. For further discussion of our holding company application, see Part II, Item 7 "Results of Operations—Regulatory Matters—~~Regulatory Proceeding Updates"~~ ~~in our 2016 Form 10-K~~.

~~MULTI-FAMILY TARIFF.~~ In June 2017, we filed a request to create a multi-family tariff to establish an optional program to serve the mixed-use, multi-family residential market. Under the tariff, NW Natural would provide up front incentives for builders to offset the initial cost of installing natural gas piping to individual units, and then recover the costs of the incentives through a fixed charge on the customer's monthly bills. In July 2017, the OPUC approved the tariff allowing us to further serve the multi-family customer sector.

~~Rate Mechanisms~~

~~PURCHASED GAS ADJUSTMENT.~~ Rate changes are established for the utility each year under PGA mechanisms in Oregon and Washington to reflect changes in the expected cost of natural gas commodity purchases. This includes gas costs under spot purchases as well as contract supplies, gas costs hedged with financial derivatives, gas costs from the withdrawal of storage inventories, the production of gas reserves, interstate pipeline demand costs, temporary rate adjustments, which amortize balances of deferred regulatory accounts, and the removal of temporary rate adjustments effective for the previous year.

As of September 30, 2017, in addition to the amount hedged for the 2016-17 gas year, we are also hedged in future gas years at approximately 70% for the 2017-18 gas year and between 4% and 23% for annual requirements over the subsequent five gas years. Our hedge levels are subject to change based on actual load volumes, which depend to a certain extent on weather, economic conditions, and estimated gas reserve production. Also, our gas storage inventory levels may increase or decrease with storage expansion, changes in storage contracts with third parties, variations in the heat content of the gas, and/or~~storage recall by the utility.~~

In September 2017, we filed our PGA and received OPUC and WUTC approval in October 2017. PGA rate changes are effective November 1, 2017. The rate changes will decrease the average monthly bills of residential customers by approximately 6.4% and 3.1% in Oregon and Washington, respectively. The decrease in Oregon reflected customers' portion of adjustments mainly for changes in wholesale natural gas costs and for a portion of WARM amounts that exceeded the maximum monthly allowable amount to be returned to customers during the 2016-17 gas year. Oregon rates were offset by adjustments related to our energy efficiency programs and additional annual adjustments based on ongoing orders with the OPUC. Washington rates reflected changes in wholesale natural gas costs.

Each year, we typically hedge gas prices on a portion of our utility's annual sales requirement based on normal weather, including both physical and financial hedges. We entered the 2017-18 gas year (November 1, 2017 - October 31, 2018) and the 2016-17 gas year (November 1, 2016 - October 31, 2017) hedged near 75% of our forecasted sales volumes, including 49% and 48% in financial swap and option contracts as well as 26% and 27% in physical gas supplies, respectively. As part of the guidance issued by the WUTC on hedging and our open hedge docket with the OPUC, we are evaluating our hedge strategies for Oregon and Washington.

Under the current PGA mechanism in Oregon, there is an incentive sharing provision whereby we are required to select each year an 80% deferral or a 90% deferral of higher or lower actual gas costs compared to estimated PGA prices, such that the impact on current earnings from the incentive sharing is either 20% or 10% of the difference between actual and estimated gas costs, respectively. For the 2017-18 and 2016-17 gas years, we selected the 90% deferral option. Under the Washington PGA mechanism, we defer 100% of the higher or lower actual gas costs, and those gas cost differences are passed on to customers through the annual PGA rate adjustment. See ~~"Regulatory Proceeding Updates~~—~~Hedging"~~ ~~above.~~

~~EARNINGS TEST REVIEW.~~ We are subject to an annual earnings review in Oregon to determine if the utility is earning above its authorized ROE threshold. If utility earnings exceed a specific ROE level, then 33% of the amount above that level is required to be deferred or refunded to customers. Under this provision, if we select the 80% deferral gas cost option, then we retain all of our earnings up to 150 basis points above the currently authorized ROE. If we select the 90% deferral option, then we retain all of our earnings up to 100 basis points above the

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currently authorized ROE. For the 2015-16 and 2016-17 periods, we selected the 80% and 90% deferral option, respectively. The ROE threshold is subject to adjustment annually based on movements in long-term interest rates. For calendar years 2015 and 2016, the ROE threshold was 10.60% and 11.06%, respectively. There were no refunds required for 2015. We filed the 2016 earnings test in May 2017 and it was approved by the Commission in July 2017. As a result, we were not subject to a customer refund adjustment for 2016.

~~GAS RESERVES.~~ In 2011, the OPUC approved the Encana gas reserves transaction to provide long-term gas price protection for our utility customers and determined our costs under the agreement would be recovered, on an ongoing basis, through our annual PGA mechanism. Gas produced from our interests is sold at then prevailing market prices, and revenues from such sales, net of associated operating and production costs and amortization, are included in our cost of gas. The cost of gas, including a carrying cost for the rate base investment made under the original agreement, is included in our annual Oregon PGA filing, which allows us to recover these costs through customer rates. Our net investment under the original agreement earns a rate of return.

In March 2014, we amended the original gas reserves agreement in response to Encana's sale of its interest in the Jonah field located in Wyoming to Jonah Energy. Under our amended agreement with Jonah Energy, we have the option to invest in additional wells on a well-by-well basis with drilling costs and resulting gas volumes shared at our amended proportionate working interest for each well in which we invest. Volumes produced from additional wells drilled after our amended agreement are included in our Oregon PGA at a fixed rate of $0.4725. We did not have the opportunity to participate in additional wells during 2015, 2016, or the nine months ended September 30, 2017, but we may have the opportunity in the future.

~~DECOUPLING.~~ In Oregon, we have a decoupling mechanism. Decoupling is intended to break the link between utility earnings and the quantity of gas consumed by customers, removing any financial incentive by the utility to discourage customers’ efforts to conserve energy.

The Oregon decoupling mechanism was reauthorized and the baseline expected usage per customer was set in the 2012 Oregon general rate case. This mechanism employs a use-per-customer decoupling calculation, which adjusts margin revenues to account for the difference between actual and expected customer volumes. The margin adjustment resulting from differences between actual and expected volumes under the decoupling component is recorded to a deferral account, which is included in the annual PGA filing. In Washington, customer use is not covered by such a tariff. See "Business Segments~~—Local Gas Distribution Utility Operations"~~ ~~below.~~

~~WARM.~~ In Oregon, we have an approved weather normalization mechanism, which is applied to residential and commercial customer bills. This mechanism is designed to help stabilize the collection of fixed costs by adjusting residential and commercial customer billings based on temperature variances from average weather, with rate decreases when the weather is colder than average and rate increases when the weather is warmer than average. The mechanism is applied to bills from December through May of each heating season. The mechanism adjusts the margin component of customers’ rates to reflect average weather, which uses the 25-year average temperature for each day of the billing period. Daily average temperatures and 25-year average temperatures are based on a set point temperature of 59 degrees Fahrenheit for residential customers and 58 degrees Fahrenheit for commercial customers. The collections of any unbilled WARM amounts due to tariff caps and floors are deferred and earn a carrying charge until collected in the PGA the following year. This weather normalization mechanism was reauthorized in the 2012 Oregon general rate case without an expiration date. Residential and commercial customers in Oregon are allowed to opt out of the weather normalization mechanism, and as of September 30, 2017, 9% of total customers had opted out. We do not have a weather normalization mechanism approved for residential and commercial Washington customers, which account for about 11% of total customers. See "Business Segments~~—Local Gas Distribution Utility Operations"~~ ~~below.~~

~~INDUSTRIAL TARIFFS.~~ The OPUC and WUTC have approved tariffs covering utility service to our major industrial customers, including terms, which are intended to give us certainty in the level of gas supplies we need to acquire to serve this customer group. The terms include, among other things, an annual election period, special pricing provisions for out-of-cycle changes, and a requirement that industrial customers complete the term of their service election under our annual PGA tariff.

~~ENVIRONMENTAL COST DEFERRAL AND SRRM.~~ ~~We have a SRRM through which we track and have the ability to recover past deferred and future prudently incurred environmental remediation costs allocable to Oregon, subject to an earnings test.~~

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~~Under the SRRM collection process there are three types of deferred environmental remediation expense:~~

Pre-review - This class of costs represents remediation spend that has not yet been deemed prudent by the OPUC. Carrying costs on these remediation expenses are recorded at our authorized cost of capital. We anticipate the prudence review for annual costs and approval of the earnings test prescribed by the OPUC to occur by the third quarter of the following year.

Post-review - This class of costs represents remediation spend that has been deemed prudent and allowed after applying the earnings test, but is not yet included in amortization. We earn a carrying cost on these amounts at a rate equal to the five-year treasury rate plus 100 basis points.

Amortization - This class of costs represents amounts included in current customer rates for collection and is generally calculated as one-fifth of the post-review deferred balance. We earn a carrying cost equal to the amortization rate determined annually by the OPUC, which approximates a short-term borrowing rate. We included $7.4 million and $10.0 million of deferred remediation expense approved by the OPUC for collection during the 2017-18 and 2016-17 PGA years, respectively.

In addition, the SRRM also provides for the annual collection of $5 million from Oregon customers through a tariff rider. As we collect amounts from customers, we recognize these collections as revenue and separately amortize an equal and offsetting amount of our deferred regulatory asset balance through the environmental remediation operating expense line shown separately in the operating expense section of the income statement. See Note 13 in our 2016 Form 10-K.

The SRRM earnings test is an annual review of our adjusted utility ROE compared to our authorized utility ROE, which is currently 9.5%. To apply the earnings test first we must determine what if any costs are subject to the test through the following~~calculation:~~



~~Annual spend~~
~~Less: $5 million base rate rider~~⁽¹⁾
~~Prior year carry-over~~⁽²⁾
~~$5 million insurance + interest on insurance~~
~~Total deferred annual spend subject to earnings test~~
~~Less: over-earnings adjustment, if any~~
~~Add: deferred interest on annual spend~~⁽³⁾
~~Total amount transferred to post-review~~


⁽¹⁾	~~Base rate rider went into Oregon customer rates beginning November 1, 2015.~~


⁽²⁾	~~Prior year carry-over results when the prior year amount transferred to post-review is negative. The negative amount is carried over to offset annual spend in the following year.~~


⁽³⁾	~~Deferred interest is added to annual spend to the extent the spend is recoverable.~~

To the extent the utility earns at or below its authorized Return on Equity (ROE), remediation expenses and interest in excess of the $5 million tariff rider and $5 million of insurance proceeds are recoverable through the SRRM. To the extent the utility earns more than its authorized ROE in a year, the utility is required to cover environmental expenses and interest on expenses greater than the $10 million with those earnings that exceed its authorized ROE.

~~For 2016, we have performed this test, which we submitted to the OPUC in May 2017. The submission was approved in July 2017, with no earnings test adjustment.~~

The WUTC has also previously authorized the deferral of environmental costs, if any, that are appropriately allocated to Washington customers. This Order was effective in January 2011 with cost recovery and carrying charges on amounts deferred for costs associated with services provided to Washington customers to be determined in a future proceeding. Annually, we review all regulatory assets for recoverability or more often if circumstances warrant. If we should determine all or a portion of these regulatory assets no longer meet the criteria for continued application of regulatory accounting, then we would be required to write-off the net unrecoverable balances against earnings in the period such a determination was made.

~~PENSION COST DEFERRAL AND PENSION BALANCING ACCOUNT.~~ Effective January 1, 2011, the OPUC approved our request to defer annual pension expenses above the amount set in rates, with recovery of these deferred amounts through the implementation of a balancing account, which includes the expectation of higher and lower pension expenses in future years. Our recovery of these deferred balances includes accrued interest on the

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account balance at the utility’s authorized rate of return, which is currently 7.78%. Future years’ deferrals will depend on changes in plan assets and projected benefit liabilities based on a number of key assumptions, and our pension contributions. Pension expense deferrals, excluding interest, were $4.5 million and $4.8 million during the nine months ended September 30, 2017 and 2016, respectively.

~~INTERSTATE STORAGE AND OPTIMIZATION SHARING.~~ In 2017, we received regulatory approval to refund an interstate storage credit of $11.7 million to our Oregon utility customers. Of this amount, $10.8 million was reflected in their June bills with the remainder credited in the third quarter. The interstate storage credit approved for refund in June 2016 was approximately $9.4 million. The 2017 and 2016 customer credits are part of our regulatory incentive sharing mechanism related to non-utility Mist storage and asset management services. The Washington share of interstate storage and optimization revenues is included in the Washington PGA.

~~For a discussion of other rate mechanisms, see Part II, Item 7, “Results of Operations—Regulatory Matters—Rate Mechanisms~~ ~~in our 2016 Form 10-K~~.

Business ~~Segments~~Segment - ~~Local~~Natural Gas Distribution ~~Utility Operations~~(NGD)

~~Utility~~NGD margin results are primarily affected by customer growth, revenues from rate-base additions, and, to a certain extent, by changes in delivered volumes due to weather and customers’ gas usage ~~patterns because a significant portion of our utility margin is derived from natural gas sales to residential and commercial customers.~~patterns. In Oregon, ~~we have~~NW Natural has a conservation tariff (also called the decoupling mechanism), which adjusts ~~utility~~ margin up or down each month through a deferred regulatory accounting adjustment designed to offset changes resulting from increases or decreases in average use by residential and commercial customers. WeNW Natural also ~~have~~has a weather normalization tariff in Oregon, WARM, which adjusts customer bills up or down to offset changes in ~~utility~~ margin resulting from above- or below-average temperatures during the winter heating season. Both mechanisms are designed to reduce, but not eliminate, the volatility of customer bills and ~~our utility’s~~natural gas distribution earnings. ~~See "Regulatory~~For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters—Rate Mechanisms" ~~above.~~in NW Natural's 2022 Form 10-K. In addition to NW Natural's local gas distribution business, the NGD segment also includes the portion of the Mist underground storage facility used to serve NGD customers, the North Mist gas storage expansion, NWN Gas Reserves, which is a wholly owned subsidiary of Energy Corp., and NW Natural RNG Holding Company, LLC.

~~Utility~~The NGD business is primarily seasonal in nature due to higher gas usage by residential and commercial customers during the cold winter heating months. Other categories of customers experience seasonality in their usage but to a lesser extent. Seasonality affects the comparability of the results of operations of the NGD business across quarters but not across years.

NGD segment highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands, except EPS data	2023		2022		2023		2022
NGD net income (loss)	$	(271)	$	157	$	71,680	$	55,547	$	(428)	$	16,133
Diluted EPS - NGD segment	$	(0.01)	$	—	$	2.00	$	1.70	$	(0.01)	$	0.30
Gas sold and delivered (in therms)	236,366		268,553		699,415		696,939		(32,187)		2,476
NGD margin(1)	$	109,925	$	94,378	$	327,540	$	272,110	$	15,547	$	55,430

Three Months Ended September 30, Nine Months Ended September 30,
Dollars and therms in thousands, except EPS data 2017 2016 2017 2016 QTR Change YTD Change
Utility net income (loss) $ (10,349 ) $ (9,511 ) $ 31,980
$ 26,848
$ (838 ) $ 5,132
EPS - utility segment $ (0.36 ) $ (0.35 ) $ 1.11

$ 0.97
$ (0.01 ) $ 0.14
Gas sold and delivered (in therms) 163,621
162,205
865,903
727,687
1,416
138,216
Utility margin⁽¹⁾
$ 52,532
$ 50,923
$ 269,172

$ 256,958
$ 1,609
$ 12,214

⁽¹⁾See ~~Utility~~Natural Gas Distribution Margin Table below for ~~a reconciliation and~~ additional detail.

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2023 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2016.~~ 2022. The primary factors contributing to the ~~$0.8~~$0.4 million, or $0.01 per share, ~~increase~~decrease in ~~utility~~NGD net ~~loss~~income were as follows:

~~a $2.8~~•$11.4 million increase in NGD operating and maintenance expenses due to higher compensation costs, higher contract labor, information technology costs, the amortization of deferred balances (which are mostly offset in revenues), and amortization expense related to cloud computing arrangements;

•$4.4 million increase in interest expense, net primarily due to higher long-term debt balances; and

•$2.6 million increase in depreciation expense due to additional capital investments in the distribution system, including several significant information technology projects that were placed into service in September 2022; partially offset by

•$15.5 millionincrease in NGD margin due to:

•$10.4 million increase due to new customer rates in Oregon and Washington that went into effect on November 1, 2022;

•$3.2 million increase due to actual gas prices that were lower than what was estimated in the 2022-23 PGA; and

•$1.7 million increase due to the amortization of deferred balances primarily related to COVID-19, cybersecurity, and enterprise resource planning (ERP) upgrades (which is mostly offset in operations and maintenance expenses and interest expense); and

•$3.7 million increase in other income, net driven by lower pension non-service costs and interest income from invested cash and the equity portion of Allowance for Funds Used During Construction (AFUDC);

For the three months ended June 30, 2023, total NGD volumes sold and delivered decreased 32.2 million therms or 12% over the same period in 2022 primarily due to 8% warmer than average weather in the second quarter of 2023 compared to 23% colder than average weather in the prior period.

SIX MONTHS ENDEDJUNE 30, 2023 COMPARED TO JUNE 30, 2022. The primary factors contributing to the $16.1 million, or $0.30 per share, increase in NGD net income were as follows:

•$55.4 millionincrease in NGD margin due to:

•$36.8 million increase due to new customer rates in Oregon and Washington that went into effect on November 1, 2022;

•$6.9 million increase due to the amortization of deferred balances primarily related to COVID-19, cybersecurity, and ERP upgrades (which is mostly offset in operations and maintenance expenses and interest expense);

•$5.5 million increase due to actual gas prices that were lower than what was estimated in the 2022-23 PGA;

•$3.4 million increase driven by customer growth; and

•$2.5 million increase due to colder than average weather for customers not covered under the weather normalization mechanism; and

•$7.1 million increase in other income, net driven by lower pension costs and interest income from invested cash and the equity portion of AFUDC; partially offset by

•$23.3 million increase in operations and maintenance ~~expense largely from payroll and benefits~~expenses due to ~~increased headcount, general salary increases,~~the amortization of deferred balances (which is mostly offset in revenues), higher compensation costs, higher contract labor, information technology costs, and ~~higher health care costs, as well as increased safety equipment upgrade costs; partially offset by~~amortization expense related to cloud computing arrangements;

~~a $1.6 millionincrease in utility margin primarily due to customer growth.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO SEPTEMBER 30, 2016.~~ ~~The primary factors contributing to the $5.1 million or $0.14 per share increase in utility net income were as follows:~~

~~a $12.2 millionincrease in utility margin primarily due to:~~


▪	~~a $5.0 million increase from customer growth; partially offset by~~


▪	~~a $3.2 million decrease in gains from gas cost incentive sharing due to actual gas prices being lower than those estimated in the 2016-17 PGA, but not by the same magnitude as in the prior period.~~


▪	~~a portion of the remaining increase was due to the effects of colder than average weather in 2017 compared to warmer than average weather in the prior period.~~

~~a $3.9~~•$8.2 million increase in ~~other income (expense),~~interest expense, net primarily due to ~~the environmental interest disallowance recognized in 2016 and increased earnings from the equity portion of AFUDC in 2017; partially offset by~~higher long-term debt balances;

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~~a $5.7~~•$6.0 million increase in ~~operations and maintenance~~income tax expense ~~largely from payroll and benefits~~ due to ~~increased headcount, general salary increases,~~higher pre-tax income; and ~~higher health care costs, and increased safety equipment upgrade costs; and~~

~~a $2.6~~•$5.0 million increase in depreciation expense ~~primarily~~ due to additional capital ~~expenditures.~~investments in the distribution system, including several significant information technology projects that were placed into service in September 2022.

~~Total utility~~For the six months ended June 30, 2023, total NGD volumes sold and delivered ~~in the three months ended September 30, 2017~~ increased 1%2.5 million therms over the same period in ~~2016. For the nine months ended September 30, 2017, total utility volumes sold and delivered increased 19%~~2022 primarily due to ~~the impact of weather that was 42% colder than the prior period and 11%~~2% colder than average ~~for~~weather in the ~~nine~~first six months ~~ended September 30, 2017.~~of 2023 compared to 2% warmer than average weather in the prior period.

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~~UTILITY~~NATURAL GAS DISTRIBUTION MARGIN TABLE. The following table summarizes the composition of ~~utility~~NGD gas volumes, revenues, and cost of sales:


	Three Months Ended June 30,						Six Months Ended June 30,						Favorable/ (Unfavorable)
In thousands, except degree day and customer data	2023			2022			2023			2022			QTD Change			YTD Change
NGD volumes (therms)
Residential and commercial sales	122,977			147,447			453,642			441,374			(24,470)			12,268
Industrial sales and transportation	113,389			121,106			245,773			255,565			(7,717)			(9,792)
Total NGD volumes sold and delivered	236,366			268,553			699,415			696,939			(32,187)			2,476
Operating Revenues
Residential and commercial sales	$	194,382		$	159,792		$	606,689		$	474,399		$	34,590		$	132,290
Industrial sales and transportation	23,238			19,526			52,382			40,799			3,712			11,583
Other distribution revenues	1,368			409			2,978			1,016			959			1,962
Other regulated services	4,726			4,907			9,435			9,818			(181)			(383)
Total operating revenues	223,714			184,634			671,484			526,032			39,080			145,452
Less: Cost of gas	102,490			79,776			308,295			225,420			(22,714)			(82,875)
Less: Environmental remediation expense	2,140			2,272			7,515			6,970			132			(545)
Less: Revenue taxes	9,159			8,208			28,134			21,532			(951)			(6,602)
NGD margin	$	109,925		$	94,378		$	327,540		$	272,110		$	15,547		$	55,430

Margin(1)
Residential and commercial sales	$	95,069		$	83,535		$	294,315		$	246,663		$	11,534		$	47,652
Industrial sales and transportation	7,990			8,065			17,736			16,991			(75)			745

Gain (loss) from gas cost incentive sharing	731			(2,518)			3,074			(2,448)			3,249			5,522
Other margin	1,412			390			2,983			1,088			1,022			1,895
Other regulated services	4,723			4,906			9,432			9,816			(183)			(384)
NGD Margin	$	109,925		$	94,378		$	327,540		$	272,110		$	15,547		$	55,430

Degree days(2)
Average(3)	296			305			1,619			1,631			(9)			(12)
Actual	273			374			1,658			1,591			(27)		%	4		%
Percent colder (warmer) than average weather	(8)		%	23		%	2		%	(2)		%


	As of June 30,
	2023	2022	Change	Growth
NGD Meters - end of period:
Residential meters	726,763	720,537	6,226	0.9%
Commercial meters	68,964	68,827	137	0.2%
Industrial meters	1,065	1,074	(9)	(0.8)%
Total number of meters	796,792	790,438	6,354	0.8%

(1) Amounts reported as NGD margin for each category of meters are operating revenues less cost of gas, environmental remediation expense and revenue taxes, subject to earnings test considerations, as applicable.

(2) Heating degree days are units of measure reflecting temperature-sensitive consumption of natural gas, calculated by subtracting the average of a day's high and low temperatures from 59 degrees Fahrenheit.

(3) Average weather represents the 25-year average of heating degree days. Beginning November 1, 2022, average weather is calculated over

the period June 1, 1996 through May 31, 2021, as determined in NW Natural's 2022 Oregon general rate case. From November 1, 2020

through October 31, 2022, average weather was calculated over the period June 1, 1994 through May 31, 2019, as determined in NW

Natural’s 2020 Oregon general rate case.

Three Months Ended September 30, Nine Months Ended September 30,
Favorable/
(Unfavorable)
In thousands, except degree day and customer data 2017 2016 2017 2016 QTD Change YTD Change
Utility volumes (therms):
Residential and commercial sales 54,557
55,610
495,949
381,109
(1,053 ) 114,840
Industrial sales and transportation 109,064
106,595
369,954
346,578
2,469
23,376
Total utility volumes sold and delivered 163,621
162,205
865,903
727,687
1,416
138,216
Utility operating revenues:
Residential and commercial sales $ 69,294
$ 68,508
$ 466,867
$ 388,689
$ 786
$ 78,178
Industrial sales and transportation 13,488
13,412
47,182
42,048
76
5,134
Other revenues 606
619
3,149
3,132
(13 ) 17
Less: Revenue taxes 2,262
2,161
13,251
11,252
(101 ) (1,999 )
Total utility operating revenues 81,126
80,378
503,947
422,617
748
81,330
Less: Cost of gas 27,239
28,264
223,855
157,546
1,025
(66,309 )
Less: Environmental remediation expense 1,355
1,191
10,920
8,113
(164 ) (2,807 )
Utility margin $ 52,532
$ 50,923
$ 269,172
$ 256,958
$ 1,609
$ 12,214
Utility margin:⁽¹⁾

Residential and commercial sales $ 44,612
$ 43,050
$ 241,617
$ 227,422
$ 1,562
$ 14,195
Industrial sales and transportation 7,272
7,173
23,529
22,458
99
1,071
Miscellaneous revenues 606
616
3,144
3,119
(10 ) 25
Gain from gas cost incentive sharing 102
85
940
4,151
17
(3,211 )
Other margin adjustments (60 ) (1 ) (58 ) (192 ) (59 ) 134
Utility margin $ 52,532
$ 50,923
$ 269,172
$ 256,958
$ 1,609
$ 12,214
Degree days
Average⁽²⁾
95
95
2,641
2,657
—
�� (16 )
Actual 78
78
2,931
2,066
— % 42 %
Percent colder (warmer) than average weather⁽²⁾
(18 )% (18 )% 11 % (22 )%

As of September 30,
Customers - end of period: 2017 2016 Change
Residential customers 662,555
650,950
11,605

Commercial customers 67,248
66,174
1,074

Industrial customers 1,021
1,015
6

Total number of customers 730,824
718,139
12,685

Customer growth (12 month rolling):

Residential customers 1.8 %

Commercial customers 1.6 %

Industrial customers 0.6 %

Total customer growth 1.8 %


⁽¹⁾	~~Amounts reported as margin for each category of customers are operating revenues, which are net of revenue taxes, less cost of gas and environmental remediation expense.~~


⁽²⁾	~~Average weather represents the 25-year average of heating degree days, as determined in our 2012 Oregon general rate case.~~

~~Table of Contents~~

Residential and Commercial Sales

Residential and commercial sales highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands	2023		2022		2023		2022
Volumes (therms)
Residential sales	72,622		90,016		282,440		276,345		(17,394)		6,095
Commercial sales	50,355		57,431		171,202		165,029		(7,076)		6,173
Total volumes	122,977		147,447		453,642		441,374		(24,470)		12,268
Operating revenues
Residential sales	$	132,692	$	107,292	$	406,165	$	324,475	$	25,400	$	81,690
Commercial sales	61,690		52,500		200,524		149,924		9,190		50,600
Total operating revenues	$	194,382	$	159,792	$	606,689	$	474,399	$	34,590	$	132,290
NGD margin






Residential NGD margin	$	68,457	$	60,046	$	212,779	$	179,878	$	8,411	$	32,901






Commercial NGD margin	26,612		23,489		81,536		66,785		3,123		14,751
Total NGD margin	$	95,069	$	83,535	$	294,315	$	246,663	$	11,534	$	47,652

Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2017 2016 2017 2016 QTR Change YTD Change
Volumes (therms):
Residential sales 29,308
29,820
307,655
232,121
(512 ) 75,534
Commercial sales 25,249
25,790
188,294
148,988
(541 ) 39,306
Total volumes 54,557
55,610
495,949
381,109
(1,053 ) 114,840
Operating revenues:
Residential sales $ 43,290
$ 43,102
$ 308,416
$ 257,401
$ 188
$ 51,015
Commercial sales 26,004
25,406
158,451
131,288
598
27,163
Total operating revenues $ 69,294
$ 68,508
$ 466,867
$ 388,689
$ 786
$ 78,178
Utility margin:
Residential:
Sales $ 28,628
$ 27,943
$ 178,998
$ 145,033
$ 685
$ 33,965
Weather normalization 1
—
(11,779 ) 13,966
1
(25,745 )
Decoupling 1,187
1,325
54
(834 ) (138 ) 888
Total residential utility margin 29,816
29,268
167,273
158,165
548
9,108
Commercial:
Sales 12,593
12,472
70,824
58,370
121
12,454
Weather normalization —
—
(4,511 ) 5,483
—
(9,994 )
Decoupling 2,203
1,310
8,031
5,404
893
2,627
Total commercial utility margin 14,796
13,782
74,344
69,257
1,014
5,087
Total utility margin $ 44,612
$ 43,050
$ 241,617

$ 227,422
$ 1,562
$ 14,195

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2023 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2016.~~ ~~The primary factors contributing to changes in the residential~~2022. Residential and commercial ~~markets were increases of $0.8~~margin increased $11.5 million compared to the prior period. The increase was primarily driven by new customer rates in ~~operating revenues~~Oregon and ~~$1.6~~Washington that took effect on November 1, 2022. Volumes decreased 24.5 million ~~in utility margin~~therms due to lower usage driven by comparatively warmer weather.

SIX MONTHS ENDEDJUNE 30, 2023 COMPARED TO JUNE 30, 2022. Residential and commercial margin increased $47.7 million compared to the prior period. The increase was primarily driven by new customer rates in Oregon and Washington that took effect on November 1, 2022 and 0.9% growth ~~slightly offset by a decrease~~ in ~~sales volumes of 1.1~~residential meters. Volumes increased 12.3 million therms ~~or 2%.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO SEPTEMBER 30, 2016.~~ The primary factors contributing to changes in the residential and commercial markets were increases of $78.2 million in operating revenue and $14.2 million in utility margin as a result of sales volume increases of 114.8 million therms, or 30%, due to ~~customer growth and the effects of~~higher usage driven by comparatively colder ~~than average weather in 2017 compared to warmer than average weather in the prior period.~~weather.

Industrial Sales and Transportation

Industrial customers have the option of purchasing sales or transportation services from the utility. Under the sales service, the customer buys the gas commodity from the utility. Under the transportation service, the customer buys the gas commodity directly from a third-party gas marketer or supplier. Our gas commodity cost is primarily a pass-through cost to customers; therefore, our profit margins are not materially affected by an industrial customer's decision to purchase gas from us or from third parties. Industrial and large commercial customers may also select between firm and interruptible service options, with firm services generally providing higher profit margins compared to interruptible services. To help manage gas supplies, our industrial tariffs are designed to provide some certainty regarding industrial customers' volumes by requiring an annual service election which becomes effective November 1, special charges for changes between elections, and in some cases, a minimum or maximum volume requirement before changing options.

~~Table of Contents~~

Industrial sales and transportation highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands	2023		2022		2023		2022
Volumes (therms)
Firm and interruptible sales	23,984		24,329		54,622		53,189		(345)		1,433
Firm and interruptible transportation	89,405		96,777		191,151		202,376		(7,372)		(11,225)


Total volumes - sales and transportation	113,389		121,106		245,773		255,565		(7,717)		(9,792)
NGD margin
Firm and interruptible sales	$	2,942	$	3,191	$	7,045	$	6,890	$	(249)	$	155
Firm and interruptible transportation	5,048		4,874		10,691		10,101		174		590
Total margin - sales and transportation	$	7,990	$	8,065	$	17,736	$	16,991	$	(75)	$	745

Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2017 2016 2017 2016 QTR Change YTD Change
Volumes (therms):
Industrial - firm sales 7,870
7,817
25,883
24,363
53
1,520
Industrial - firm transportation 33,826
32,737
121,452
112,456
1,089
8,996
Industrial - interruptible sales 10,207
9,902
40,388
36,274
305
4,114
Industrial - interruptible transportation 57,161
56,139
182,231
173,485
1,022
8,746
Total volumes 109,064
106,595
369,954
346,578
2,469
23,376
Utility margin:
Industrial - firm and interruptible sales $ 2,755
$ 2,703
$ 8,870
$ 8,479
$ 52
$ 391
Industrial - firm and interruptible transportation 4,517
4,470
14,659
13,979
47
680
Industrial - sales and transportation $ 7,272
$ 7,173
$ 23,529

$ 22,458
$ 99
$ 1,071

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2023 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2016.~~ ~~Sales~~2022.Industrial sales and transportation margin decreased $75 thousand compared to the prior period primarily driven by lower transportation volumes, ~~increased~~partially offset by ~~2.5~~new rates in Oregon and Washington that took effect on November 1, 2022. Volumes decreased 7.7 million therms primarily due to lower usage from multiple customers, most notably in the chemical manufacturing and ~~utility~~primary metals industries.

SIX MONTHS ENDEDJUNE 30, 2023 COMPARED TO JUNE 30, 2022.Industrial sales and transportation margin increased $0.7 million compared to the prior period primarily driven by ~~$0.1 million.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO SEPTEMBER 30, 2016.~~ ~~Sales~~new rates in Oregon and Washington that took effect on November 1, 2022, partially offset by lower transportation ~~volumes increased by 23.4~~volumes. Volumes decreased 9.8 million therms ~~and utility margin increased by $1.1 million~~primarily due to lower usage from multiple customers, most notably in the chemical manufacturing, primary metals, and food processing industries, partially offset by higher usage from ~~colder than average weather in 2017 compared to warmer than average weather~~customers in the ~~prior year~~pulp and ~~increased usage from higher production load.~~paper industry.

Cost of Gas

Cost of gas as reported by the utility includes gas purchases, gas withdrawn from storage inventory, gains and losses from commodity hedges, pipeline demand costs, seasonal demand cost balancing adjustments, regulatory gas cost deferrals, gas reserves costs, and company gas use. The OPUC and WUTC generally require natural gas commodity costs to be billed to customers at the actual cost incurred, or expected to be incurred, by the utility. Customer rates are set each year so that if cost estimates were met we would not earn a profit or incur a loss on gas commodity purchases; however, in Oregon we have an incentive sharing mechanism which has been described under "Regulatory Matters—Rate Mechanisms—~~Purchased Gas Adjustment"~~ above. In addition to the PGA incentive sharing mechanism, gains and losses from hedge contracts entered into after annual PGA rates are effective for Oregon customers are also required to be shared and therefore may impact net income. Further, we also have a regulatory agreement whereby we earn a rate of return on our investment in the gas reserves acquired under the original agreement with Encana and include gas from our amended gas reserves agreement at a fixed rate of $0.4725 per therm, which are also reflected in utility margin. See "Application of Critical Accounting Policies and Estimates—~~Accounting for Derivative Instruments and Hedging Activities"~~ ~~in our 2016 Form 10-K.~~

Cost of gas highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands	2023		2022		2023		2022
Cost of gas	$	102,490	$	79,776	$	308,295	$	225,420	$	22,714	$	82,875
Volumes sold (therms)(1)	146,961		171,776		508,264		494,563		(24,815)		13,701
Average cost of gas (cents per therm)	$	0.70	$	0.46	$	0.61	$	0.46	$	0.24	$	0.15
Gain (loss) from gas cost incentive sharing(2)	$	731	$	(2,518)	$	3,074	$	(2,448)	$	3,249	$	5,522

Three Months Ended September 30, Nine Months Ended September 30,
Dollars and therms in thousands 2017 2016 2017 2016 QTR Change YTD Change
Cost of gas $ 27,239
$ 28,264
$ 223,855
$ 157,546
$ (1,025 ) $ 66,309
Volumes sold (therms)⁽¹⁾
72,634
73,329
562,220
441,746
(695 ) 120,474
Average cost of gas (cents per therm) $ 0.38
$ 0.39
$ 0.40
$ 0.36
$ (0.01 ) $ 0.04
Gain from gas cost incentive sharing⁽²⁾
$ 102
$ 85
$ 940
$ 4,151
$ 17
$ (3,211 )


⁽¹⁾	~~This calculation excludes volumes delivered to transportation only customers.~~


⁽²⁾	~~For a discussion of our gas cost incentive sharing mechanism, see “Regulatory Matters—Rate Mechanisms—Purchased Gas Adjustment” above.~~

(1)This calculation excludes volumes delivered to industrial transportation customers.

(2) For additional information regarding NW Natural's gas cost incentive sharing mechanism, see Part II, Item 7 "Results of Operations—Regulatory Matters—Rate Mechanisms—Gas Reserves" in NW Natural's 2022 Form 10-K.

~~Table of Contents~~

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2023 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2016.~~ ~~Cost of gas decreased $1.0 million reflecting a 1% decrease in volumes and a 3% decrease in average cost of gas due to lower natural gas prices.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO SEPTEMBER 30, 2016.~~ 2022. Cost of gas increased ~~$66.3~~$22.7 million ~~or 42%,~~ primarily due to a ~~27% increase in volumes sold due to colder than average weather in 2017 compared to warmer than average weather in the prior period, customer growth, and an 11%~~52% increase in average cost of gas aswith the majority of these higher gas costs embedded in the 2022-23 PGA. Volumes sold decreased 24.8 million therms driven by lower usage from comparatively warmer weather.

SIX MONTHS ENDEDJUNE 30, 2023 COMPARED TO JUNE 30, 2022. Cost of gas increased $82.9 million primarily due to a 33% increase in average cost of gas and a 3% increase in ~~2016 includes an offset~~volumes sold. The majority of ~~$19.4 million from the~~these higher gas ~~cost savings credited to customers.~~

~~Business Segments - Gas Storage~~

~~Our gas storage segment primarily consists of the non-utility portion of our Mist underground storage facility in Oregon and our 75% undivided ownership interest~~costs were embedded in the ~~Gill Ranch underground~~2022-23 PGA. Volumes sold increased 13.7 million therms driven by comparatively colder weather and customer growth.

Other Regulated Services Margin

Other regulated services margin highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands	2023		2022		2023		2022
North Mist storage services	$	4,663	$	4,857	$	9,325	$	9,715	$	(194)	$	(390)
Other services	63		49		110		101		14		9
Total other regulated services	$	4,726	$	4,906	$	9,435	$	9,816	$	(180)	$	(381)

THREE MONTHS ENDEDJUNE 30, 2023 COMPARED TO JUNE 30, 2022. Other regulated services margin decreased $0.2 million compared to the prior period. The decrease is due to lower depreciation rates for the North Mist facility beginning November 1, 2022. See Note 7 for information regarding North Mist expansion lease accounting.

SIX MONTHS ENDEDJUNE 30, 2023 COMPARED TO JUNE 30, 2022. Other regulated services margin decreased $0.4 million compared to the prior period. The decrease is due to lower depreciation rates for the North Mist facility beginning November 1, 2022.

Other

Other activities aggregated and reported as other at NW Holdings include NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities; NWN Water, which owns and continues to pursue investments in the water, wastewater, and water services sectors; and NWN Water's investment in Avion Water Company, Inc. (Avion Water). Other activities aggregated and reported as other at NW Natural include the non-NGD storage ~~facility in California. We also contract with an independent energy marketing company to provide~~activity at Mist as well as asset management services ~~using our utility~~ and ~~non-utility storage and transportation capacity,~~ the ~~results of which are included in the gas storage businesses segment.~~

~~Gas storage segment highlights include:~~

Three Months Ended September 30, Nine Months Ended September 30,
In thousands, except EPS data 2017 2016 2017 2016 QTR Change YTD Change
Operating revenues $ 7,006
$ 7,293
$ 17,635
$ 19,654
$ (287 ) $ (2,019 )
Operating expenses 3,463
3,791
11,887
11,547
(328 ) 340
Gas storage net income 1,899
1,813
2,716
3,988
86
(1,272 )
EPS - gas storage segment 0.06
0.06
0.09
0.14
—
(0.05 )

~~THREE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO SEPTEMBER 30, 2016.~~ ~~Our gas storage segment net income increased $0.1 million.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO SEPTEMBER 30, 2016.~~ ~~Our gas storage segment net income decreased $1.3 million or $0.05 per share primarily due to the following factors:~~

~~a $2.0 milliondecrease in gas storage revenues largely due to lower revenues from our asset management agreements~~appliance retail center operations. See Note 4 for ~~our Mist storage and transportation capacity; and~~

~~a $0.3 million increase in operating expenses largely due to pipeline and compressor maintenance at our Gill Ranch facility.~~

Our Mist gas storage facility benefits from limited competition from other Pacific Northwest storage facilities primarily because of its geographic location. Over the past few years, market prices for natural gas storage, particularly in California, were negatively affected by the abundant supply of natural gas, low volatility of natural gas prices, and surplus gas storage capacity. We have contracted both our Mist and Gill Ranch facilities for the 2017-18 gas storage year. Our Mist facility remains under long-term contracts at similar prices to prior periods. Our Gill Ranch facility is contracted with approximately half of the capacity in firm contracts at slightly higher prices than the prior gas storage year. The remaining capacity at the Gill Ranch facility is under asset management agreements with a third-party and is subject to market pricing.

Though prices at our Gill Ranch facility have improved slightly over the last several years, prices continue to remain low relative to our original long-term contracts, which ended primarily in the 2013-14 gas storage year. In the future, we may see continued price improvement or an increase in the demand for natural gas driven by a number of factors, including changes in electric generation triggered by California's renewable portfolio standards, an increase in use of alternative fuels to meet carbon emission reduction targets, recovery of the California economy, growth of domestic industrial manufacturing, potential exports of liquefied natural gas from the west coast, and other favorable storage market conditions in and around California. These factors, if they occur, may contribute to higher summer/winter natural gas price spreads, gas price volatility, and gas storage values, but there can be no assurance that this will result.

~~Table of Contents~~

In October 2015, a significant natural gas leak occurred at an unaffiliated southern California gas storage facility that persisted into early 2016. At this time, we do not know the long-term effects of this incident on gas storage prices. In September 2016, legislation was passed and signed into law by the Governor of California in response to the incident, which directed the California Department of Oil Gas and Geothermal Resources (DOGGR) to develop new regulations for gas storage wells. On May 19, 2017, DOGGR sent a public notice related to Requirements for California Underground Gas Storage Projects, the proposed regulations issued in the formal rulemaking, with a public comment period, which ended in July 2017. We expect final rules to be issued in the second quarter of 2018. The draft DOGGR regulations focus on implementing a risk-based well integrity management program that utilizes well risk management plans and compliance plans to set well integrity testing plans and schedules, implements real-time well monitoring requirements, new leak detection procedures and requires the implementation of tubing on packer for all wells that make contact with the reservoir. While the regulations are still under development and their ultimate impact is unknown, we are working with DOGGR to understand the rules and how the Gill Ranch facility's risk profile may impact the timing and extentfurther discussion of our ~~compliance efforts~~business segment and other, as well as our ~~capital expenditures~~direct and ~~ongoing operations~~indirect wholly-owned subsidiaries. See Note 13 for information on our Avion Water investment.

The following table presents the results of activities aggregated and ~~maintenance costs.~~reported as other for both NW Holdings and NW Natural:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands, except EPS data	2023		2022		2023		2022
NW Natural other - net income	$	2,055	$	2,576	$	5,644	$	4,602	$	(521)	$	1,042
Other NW Holdings activity	(540)		(1,018)		(4,409)		(2,195)		478		(2,214)
NW Holdings other - net income	$	1,515	$	1,558	$	1,235	$	2,407	$	(43)	$	(1,172)
Diluted earnings per share - NW Holdings - other	$	0.04	$	0.05	$	0.03	$	0.07	$	(0.01)	$	(0.04)

THREE MONTHS ENDEDJUNE 30, 2023 COMPARED TO JUNE 30, 2022.Other net income decreased $0.5 million at NW Natural and $43 thousand at NW Holdings. The ~~timeline for implementation of the rules will not be set until the regulations are finalized next year. We expect the timeline~~decrease at NW Natural was primarily due to ~~focus on testing of all wells within 2 to 15 years of the issuance of the regulations.~~

In addition, the US Department of Transportation Pipeline and Hazardous Material Safety Administration (PHMSA) is developing new regulations that will apply to all underground natural gas storage facilities in the United States which includes our operations in California and Oregon.

If such new regulation and legislation require significant capital and on-going spending to upgrade or maintain the Gill Ranch facility, if we are unsuccessful in identifying new higher value customers, if future storage values do not improve, if an increased demand and otherlower asset management revenue from favorable market conditions ~~for natural gas storage do~~in the prior period that did not ~~materialize, and/or volatility does not return to~~recur. The decrease at NW Holdings was driven by higher interest expense at the ~~gas storage market, this could have~~holding company, partially offset by a ~~negative impact on our future cash flows and could result in impairment of our Gill Ranch gas storage facility, which had~~gain recognized from a settlement agreement.

SIX MONTHS ENDEDJUNE 30, 2023 COMPARED TO JUNE 30, 2022.Other net ~~book value of $193.0~~income increased $1.0 million at ~~September 30, 2017. We continue~~NW Natural and decreased $1.2 million at NW Holdings. The increase at NW Natural was primarily due to ~~assess these~~higher asset management revenue from favorable market conditions and their impact on net book value on an ongoing basis, as well as all current and future strategic alternatives with respect to the Gill Ranch gas storage facility. Refer to Note 2 in our 2016 Form 10-K for more information regarding our accounting policy for impairment of long-lived assets.

~~Other~~

~~Other primarily consists of NNG Financial's equity investment in KB Pipeline, an equity investment in TWH, which has invested~~ in the ~~Trail West pipeline project, and other miscellaneous non-utility investments and business development activities. There were no significant changes in our other activities during~~first quarter of 2023. The decrease at NW Holdings was driven by higher interest expense at the ~~nine months ended September 30, 2017. See Note 4 and Note 11 for further details on other activities and our investment in TWH.~~holding company, partially offset by a gain recognized from a settlement agreement.

Consolidated Operations

Operations and Maintenance

Operations and maintenance highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2023		2022		2023		2022		Change		Change
NW Natural	$	60,238	$	48,879	$	125,627	$	102,756	$	11,359	$	22,871
Other NW Holdings operations and maintenance	6,581		4,296		13,009		7,904		2,285		5,105
NW Holdings	$	66,819	$	53,175	$	138,636	$	110,660	$	13,644	$	27,976

Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2017 2016 2017 2016 QTR Change YTD Change
Operations and maintenance $ 36,867
$ 34,870
$ 115,833
$ 109,771
$ 1,997
$ 6,062

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2023 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2016.~~ 2022. Operations and maintenance expense increased$11.4 million at NW Natural. The increase at NW Natural was driven by the following:

•$3.3 million increase related to higher compensation costs;

•$3.3 million increase in contract labor for safety and reliability and support for information technology system upgrades;

•$2.1 million increase in information technology licensing costs and maintenance;

•$2.0 million increase due to the amortization of deferred balances (which is mostly offset in revenues) primarily related to COVID-19, cybersecurity and information technology system upgrades; and

•$1.2 million increase in amortization expense related to cloud computing arrangements.

Operations and maintenance expense increased ~~$2.0~~$13.6 million ~~reflecting higher utility payroll and benefits~~at NW Holdings primarily due to ~~increased headcount, general salary increases~~the following:

•$11.4 million increase in operations and maintenance expense at NW Natural as ~~well as increased safety equipment upgrade costs.~~discussed above; and

•$2.3 million increase in other NW Holdings operations and maintenance expense due to costs associated with recently acquired water and wastewater subsidiaries.

~~NINE~~

SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2023 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2016.~~ 2022.Operations and maintenance expense increased ~~$6.1~~$22.9 million ~~reflecting higher utility payroll and benefits~~at NW Natural primarily due to the following:

•$6.4 million increase due to the amortization of deferred balances (which is mostly offset in revenues) primarily related to COVID-19, cybersecurity and information technology system upgrades;

•$5.4 million increase related to higher compensation costs;

•$4.8 million increase in contract labor for safety and reliability and support for information technology system upgrades;

•$3.5 million increase in information technology licensing costs and maintenance; and

•$2.5 million increase in amortization expense related to cloud computing arrangements.

Operations and maintenance expense increased ~~headcount, general salary increases,~~$28.0 million at NW Holdings primarily due to the following:

•$22.9 million increase in operations and ~~higher health care~~maintenance expense at NW Natural as discussed above; and

•$5.1 million increase in other NW Holdings operations and maintenance expense primarily due to costs associated with recently acquired water and wastewater subsidiaries.

Depreciation

Depreciation highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2023		2022		2023		2022		Change		Change
NW Natural	$	29,880	$	27,328	$	60,024	$	54,965	$	2,552	$	5,059
Other NW Holdings depreciation	1,413		782		2,734		1,574		631		1,160
NW Holdings	$	31,293	$	28,110	$	62,758	$	56,539	$	3,183	$	6,219

THREE MONTHS ENDED JUNE 30, 2023 COMPARED TO JUNE 30, 2022. Depreciation expense increased $2.6 million at NW Natural primarily due to additional capital investments in the distribution system, such as installing new mains and services and replacing regulating equipment, as well as upgrading and improving structures. In addition, we placed two significant information technology projects into service in September 2022.

Depreciation expense increased ~~safety~~$3.2 million at NW Holdings, primarily due to a $0.6 million increase in other NW Holdings depreciation related to water and wastewater subsidiaries and a $2.6 million increase at NW Natural as discussed above.

SIX MONTHS ENDED JUNE 30, 2023 COMPARED TO JUNE 30, 2022. Depreciation expense increased $5.1 million at NW Natural primarily due to additional capital investments in the distribution system, such as installing new mains and services and replacing

regulating equipment, ~~upgrade costs~~as well as upgrading and improving structures. In addition, NW Natural placed several significant information technology projects into service in September 2022.

Depreciation expense increased ~~pipeline~~$6.2 million at NW Holdings, primarily due to a $1.2 million increase in other NW Holdings depreciation related to water and ~~compressor maintenance costs~~wastewater subsidiaries and a $5.1 million increase at ~~our Gill Ranch facility.~~NW Natural as discussed above.

Delinquent customer receivable balances continue to remain at historically low levels. The utility's annualized bad debt expense as a percent of revenues was 0.1% for both the nine months ended September 30, 2017 and 2016.

Other Income (Expense), Net

Other income (expense), net highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2023		2022		2023		2022		Change		Change
NW Natural other income (expense), net	$	3,832	$	17	$	6,277	$	(964)	$	3,815	$	7,241
Other NW Holdings activity	2,786		209		1,947		236		2,577		1,711
NW Holdings other income (expense), net	$	6,618	$	226	$	8,224	$	(728)	$	6,392	$	8,952

Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2017 2016 2017 2016 QTR Change YTD Change
Other income (expense), net $ 1,493
$ 652
$ 3,332
$ (1,144 ) $ 841
$ 4,476

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2023 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2016.~~ 2022.Other income, net increased $3.8 million at NW Natural primarily due to lower pension non-service costs, interest income from invested cash and the equity portion of AFUDC. Costs related to our defined benefit pension plan for the three months ended June 30, 2023 decreased compared to the prior year due to a decrease in amortization of actuarial losses. Our 2023 pension expense does not include any amortization of losses as the unrecognized losses are within a calculated corridor.

Other income, net increased $6.4 million at NW Holdings driven by the increase at NW Natural discussed above and a $2.7 million gain recognized from a settlement agreement with a third party to settle outstanding receivables.

Other income (expense), net primarily consists of regulatory interest, pension and other postretirement non-service costs, gains from company-owned life insurance, and donations.

SIX MONTHS ENDED JUNE 30, 2023 COMPARED TO JUNE 30, 2022.Other income, net increased ~~$0.8~~$7.2 million at NW Natural primarily due to ~~increased earnings of $0.7 million~~lower pension non-service costs, interest income from invested cash and the equity portion of AFUDC. Costs related to our defined benefit pension plan for the six months ended June 30, 2023 decreased compared to the prior year due to a decrease in amortization of actuarial losses.

~~NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO SEPTEMBER 30, 2016.~~ Other income, ~~(expense),~~ net increased ~~$4.5~~$9.0 million ~~primarily due~~at NW Holdings driven by the increase at NW Natural discussed above and a $2.7 million gain recognized from a settlement agreement with a third party to the January 2016 Order from the OPUC, which resulted in a $2.8 million interest disallowance in 2016. In addition, other income (expense), net benefited from increased earnings of $1.5 million from the equity portion of AFUDC.settle outstanding receivables, partially offset by contributions to fund community outreach initiatives at NW Holdings.

Interest Expense, Net

Interest expense, net highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2023		2022		2023		2022		Change		Change
NW Natural	$	15,028	$	10,599	$	29,639	$	21,430	$	4,429	$	8,209
Other NW Holdings interest expense, net	3,946		981		7,631		1,672		2,965		5,959
NW Holdings	$	18,974	$	11,580	$	37,270	$	23,102	$	7,394	$	14,168

Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2017 2016 2017 2016 QTR Change YTD Change
Interest expense, net $ 9,451
$ 9,729
$ 29,044
$ 29,183
$ (278 ) $ (139 )

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2023 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2016.~~ 2022. Interest expense, net increased $4.4 million at NW Natural primarily due to higher interest expense on a higher level of long-term debt.

Interest expense, net increased $7.4 million NW Holdings due to the increase at NW Natural discussed above and higher interest expense on a higher level of long-term debt at NW Holdings and NWN Water.

SIX MONTHS ENDED JUNE 30, 2023 COMPARED TO JUNE 30, 2022. Interest expense, net increased $8.2 million at NW Natural primarily due to higher interest expense on a higher level of long-term debt.

Interest expense, net increased $14.2 million at NW Holdings due to the increase at NW Natural discussed above and higher interest expense on a higher level of long-term debt at NW Holdings and NWN Water.

Income Tax Expense

Income tax expense highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2023		2022		2023		2022		Change		Change
NW Natural income tax expense	$	322	$	810	$	26,744	$	20,133	$	(488)	$	6,611
NW Holdings income tax expense	$	243	$	470	$	25,390	$	19,393	$	(227)	$	5,997

THREE MONTHS ENDED JUNE 30, 2023 COMPARED TO JUNE 30, 2022. Income tax expense decreased ~~$0.3~~$0.5 million at NW Natural and $0.2 million at NW Holdings. The decrease in income tax expense is primarily due to a ~~$0.6~~lower pre-tax income in the current period compared to the prior year.

SIX MONTHS ENDED JUNE 30, 2023 COMPARED TO JUNE 30, 2022. Income tax expense increased $6.6 million at NW Natural and $6.0 million at NW Holdings. The increase in income tax expense is primarily due to higher pre-tax income in the current period compared to the prior year.

Regulatory Matters

For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the 2022 Form 10-K.

Regulation and Rates

NATURAL GAS DISTRIBUTION.NW Natural's natural gas distribution business is subject to regulation by the OPUC and WUTC with respect to, among other matters, rates and terms of service, systems of accounts, and issuances of securities by NW Natural. At June 30, 2023, approximately 88% of NGD customers were located in Oregon, with the remaining 12% in Washington. Earnings and cash flows from natural gas distribution operations are largely determined by rates set in general rate cases and other proceedings in Oregon and Washington. They are also affected by weather, the local economies in Oregon and Washington, the pace of customer growth in the residential, commercial, and industrial markets, legislation and policy, customer preferences and NW Natural's ability to remain price competitive, control expenses, and obtain reasonable and timely regulatory recovery of its natural gas distribution-related costs, including operating expenses and investment costs in plant and other regulatory assets. See "Most Recent Completed Rate Cases" below.

MIST INTERSTATE GAS STORAGE. NW Natural's interstate storage activity at Mist is subject to regulation by the OPUC, WUTC, and the Federal Energy Regulatory Commission (FERC) with respect to, among other matters, rates and terms of service. The OPUC also regulates the intrastate storage services at Mist, while FERC regulates the interstate storage services at Mist. The FERC uses a maximum cost of service model which allows for gas storage prices to be set at or below the cost of service as approved by each agency in their last regulatory filing. The OPUC Schedule 80 rates are tied to the FERC rates, and are updated whenever NW Natural modifies FERC maximum rates.

OTHER. The wholly-owned regulated water businesses of NWN Water, a wholly-owned subsidiary of NW Holdings, are subject to regulation by the utility commissions in the states in which they are located, which currently includes Oregon, Washington, Arizona, Idaho, and Texas. The wholly-owned regulated wastewater businesses of NWN Water are subject to regulation by the utility commissions in the states in which they are located, which currently includes Texas and Arizona.

Most Recent Completed Rate Cases

OREGON.On October 24, 2022, the OPUC issued an order for rates effective November 1, 2022, which authorized a return on equity of 9.4%, a cost of capital of 6.836%, and a capital structure of 50% common equity and 50% long-term debt. After adjustments provided in the order, the order increased the revenue requirement by $59.4 million, and included a rate base of $1.76 billion, or an increase of $320 million since the last rate case. The OPUC also ordered an adjustment to NW Natural’s current line extension allowance methodology to a five times margin approach (which for an average residential customer is currently approximately $2,300), declining to four times margin on November 1, 2023, and three times margin on November 1, 2024. The OPUC further ordered that the costs NW Natural sought to recover related to its Lexington RNG project were reasonable and prudently incurred under Senate Bill 98 and adopted an automatic adjustment clause that allows for NW Natural’s RNG project costs to be added to rates annually on November 1st.

From November 1, 2020 through October 31, 2022, the OPUC authorized rates to customers based on an ROE of 9.4% and a cost of capital of 6.965% with a capital structure of 50% common equity and 50% long-term debt. The OPUC also authorized NW Natural to recover the expense associated with the Oregon Corporate Activity Tax (CAT) as a component of base rates. See "Corporate Activity Tax" in the 2021 Form 10-K.

WASHINGTON.On October 21, 2021, the WUTC issued an order concluding NW Natural's general rate case filed in December 2020 (WUTC Order). The WUTC Order provides for an annual revenue requirement increase over two years, consisting of a 6.4% or $5.0 million increase in ~~benefits recognized from~~ the ~~interest-related portion of AFUDC, partially offset by increased interest expense of $0.3 million due to the issuance of long-term debt in December 2016.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2017 COMPARED TO SEPTEMBER 30, 2016.~~ ~~Interest expense, net decreased $0.1 million primarily due to~~first year beginning November 1, 2021 (Year One), and a ~~$1.3~~3.5% or $3.0 million increase in the second year beginning November 1, 2022 (Year Two). The increase is based on the following assumptions:

•Cost of capital of 6.814%; and

•Average rate base of $194.7 million, an increase of $20.9 million since the last rate case for capital expenditures already expended at the time of filing, with an additional expected $31.2 million increase in Year One, and an additional expected $21.4 million increase in Year Two, with the increases in Year One and Year Two relating to expected capital expenditures in those years.

The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity. New rates authorized by the WUTC Order were effective November 1, 2021. The WUTC also authorized the recovery of environmental remediation expenses allocable to Washington customers through an Environmental Cost Recovery Mechanism (ECRM) and directed NW Natural to provide federal tax reform benefits ~~recognized~~to customers. See "Rate Mechanisms - Environmental Cost Deferral and Recovery - Washington ECRM" below.

FERC.NW Natural is required under its Mist interstate storage certificate authority and rate approval orders to file every five years either a petition for rate approval or a cost and revenue study to change or justify maintaining the existing rates for its interstate storage services. On October 12, 2018, NW Natural filed a rate petition with FERC for revised cost-based maximum rates, which incorporated the federal corporate income tax rate. The revised rates were effective beginning November 1, 2018. NW Natural expects to file a rate petition with the FERC in the second half of 2023.

NW Natural continuously evaluates the need for rate cases in its jurisdictions.

Rate Mechanisms

During 2023 and 2022, NW Natural's key approved rates and recovery mechanisms for each service area included:

Oregon

Washington

2022 Rate Case (effective 11/1/2022)

2020 Rate Case (effective 11/1/2020)

2021 Rate Case

(effective 11/1/2021)

Authorized Rate Structure:

Return on Equity

9.4%

Rate of Return

6.8%

7.0%

6.8%

Debt/Equity Ratio

50%/50%

Key Regulatory Mechanisms:

Purchased Gas Adjustment (PGA)

Gas Cost Incentive Sharing

Decoupling

Weather Normalization (WARM)

RNG Automatic Adjustment Clause

Environmental Cost Recovery

Interstate Storage and Asset Management Sharing

** The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity.

PURCHASED GAS ADJUSTMENT. Rate changes are established for NW Natural each year under PGA mechanisms in Oregon and Washington to reflect changes in the expected cost of natural gas commodity purchases. The PGA filings include gas costs under spot purchases as well as contract supplies, gas cost hedges, gas costs from the ~~interest-related~~withdrawal of storage inventories, the production of gas reserves, interstate pipeline demand costs, renewable natural gas and its attributes, including renewable thermal certificates, temporary rate adjustments, which amortize balances of deferred regulatory accounts.

Each year, NW Natural hedges gas prices on a portion of ~~AFUDC, partially offset~~NW Natural's annual sales requirement based on normal weather, including both physical and financial hedges. During 2022, there was increased price volatility in the spot and forward gas markets. In response to higher than normal volatility in forward gas markets in 2022, we hedged at higher levels for the 2022-23 gas year. NW Natural entered the 2022-23 gas year with forecasted sales volumes hedged at approximately 84% in total. The total hedged for Oregon was approximately 85%, including 67% in financial hedges and 18% in physical gas supplies. The total hedged for Washington was approximately 79%, including 66% in financial hedges and 13% in physical gas supplies.

As of June 30, 2023, NW Natural is hedged in total between 30% and 58% for annual requirements over the subsequent two gas years, which consists of between 34% and 59% in Oregon and between 0% and 54% in Washington. Hedge levels are subject to change based on actual load volumes, which depend to a certain extent on weather, economic conditions, and estimated gas reserve production. Also, gas storage inventory levels may increase or decrease with storage expansion, changes in storage contracts with third parties, variations in the heat content of the gas, and/or storage recall by ~~increased interest expense~~NW Natural. As the Company planned for the 2022-23 gas year, gas price volatility remained high with current and forward gas prices increasing substantially in 2022. We will continue to monitor gas prices as we fill storage and look at hedging plans for future gas years. Gas purchases and hedges entered into for the upcoming PGA year will be included in the Company’s PGA filings in Oregon and Washington.

In September 2022, NW Natural filed its annual PGAs and received OPUC and WUTC approval in October 2022. Included in the 2022-23 PGA, the OPUC and WUTC approved a new customer rate mitigation program to address higher gas costs, which includes a temporary bill credit for NW Natural’s residential customers from November 2022 to March 2023, with deferral of ~~$1.2 million~~the temporary bill credit to be recovered in warmer months when customers typically see lower bills. As of June 30, 2023, the amount deferred to a regulatory asset related to the bill credit that remains to be collected from customers was approximately $12.4 million. PGA rate changes were effective November 1, 2022. Rates may vary between states due to different rate structures, rate mechanisms and hedging policies.

Under the ~~issuance~~current PGA mechanism in Oregon, there is an incentive sharing provision whereby NW Natural is required to select each year an 80% deferral or a 90% deferral of higher or lower actual gas costs compared to estimated PGA prices, such that the impact on NW Natural's current earnings from the incentive sharing is either 20% or 10% of the difference between actual and estimated gas costs, respectively. For the 2022-23 and 2021-22 gas years, NW Natural selected the 90% deferral option. Under the Washington PGA mechanism, NW Natural defers 100% of the higher or lower actual gas costs, and those gas cost differences are passed on to customers through the annual PGA rate adjustment.

EARNINGS TEST REVIEW. NW Natural is subject to an annual earnings review in Oregon to determine if the NGD business is earning above its authorized ROE threshold. If NGD business earnings exceed a specific ROE level, then 33% of the amount above that level is required to be deferred or refunded to customers. Under this provision, if NW Natural selects the 80% deferral gas cost option, then NW Natural retains all earnings up to 150 basis points above the currently authorized ROE. If NW Natural selects the 90% deferral option, then it retains all earnings up to 100 basis points above the currently authorized ROE. For the 2021-22 and 2022-23 gas years, NW Natural selected the 90% deferral option. The ROE threshold is subject to adjustment annually based on movements in long-term interest rates. For calendar year 2022, the ROE threshold was 10.40%. NW Natural filed the 2022 earnings test in April 2023, indicating no customer refund adjustment based on results. NW Natural does not expect a customer refund adjustment for 2023 based on results of the earnings test.

GAS RESERVES. In 2011, the OPUC approved the Encana gas reserves transaction to provide long-term gas price protection for NGD business customers and determined costs under the agreement would be recovered on an ongoing basis through the annual PGA mechanism. Gas produced from NW Natural's interests is sold at then prevailing market prices, and revenues from such sales, net of associated operating and production costs and amortization, are included in cost of gas. The cost of gas, including a carrying cost for the rate base investment made under the original agreement, is included in NW Natural's annual Oregon PGA filing, which allows NW Natural to recover these costs through customer rates. The net investment under the original agreement earns a rate of return.

In 2014, NW Natural amended the original gas reserves agreement in response to Encana's sale of its interest in the Jonah field located in Wyoming to Jonah Energy. Under the amended agreement with Jonah Energy, NW Natural has the option to invest in additional wells on a well-by-well basis with drilling costs and resulting gas volumes shared at the amended proportionate working interest for each well in which NW Natural invests. Volumes produced from the additional wells drilled after the amended agreement are included in NW Natural's Oregon PGA at a fixed rate of $0.4725 per therm. NW Natural has not participated in additional wells since 2014.

DECOUPLING. In Oregon, NW Natural has a decoupling mechanism. Decoupling is intended to break the link between earnings and the quantity of gas consumed by customers, removing any financial incentive to discourage customers’ efforts to conserve energy. This mechanism employs a use-per-customer decoupling calculation, which adjusts margin revenues to account for the difference between actual and expected customer volumes. The margin adjustment resulting from differences between actual and expected volumes under the decoupling component is recorded to a deferral account, which is included in the annual PGA filing. The Oregon decoupling baseline usage per customer was reset in the 2020 Oregon general rate case.

WARM.In Oregon, NW Natural has an approved weather normalization mechanism (WARM), which is applied to residential and small commercial customer bills. This mechanism is designed to help stabilize the collection of fixed costs by adjusting residential and small commercial customer billings based on temperature variances from average weather, with rate decreases when the weather is colder than average and rate increases when the weather is warmer than average. The mechanism is applied to bills from December through mid-May of each heating season. The mechanism adjusts the margin component of customers’ rates to reflect average weather, which uses the 25-year average temperature for each day of the billing period. Daily average temperatures and 25-year average temperatures are based on a set point temperature of 59 degrees Fahrenheit for residential customers and 58 degrees Fahrenheit for commercial customers. The collections of any unbilled WARM amounts due to tariff caps and floors are deferred and earn a carrying charge until collected, or returned, in the PGA the following year. Residential and small commercial customers in Oregon are allowed to opt out of the weather normalization mechanism, and as of June 30, 2023, 7% of total eligible customers had opted out. NW Natural does not have a weather normalization mechanism approved for Washington customers, which account for about 12% of total customers. See "Business Segment—Natural Gas Distribution" below.

INDUSTRIAL TARIFFS. The OPUC and WUTC have approved tariffs covering NGD service to major industrial customers, which are intended to give NW Natural certainty in the level of gas supplies needed to serve this customer group. The approved terms include, among other things, an annual election period, special pricing provisions for out-of-cycle changes, and a requirement that industrial customers complete the term of their service election under NW Natural's annual PGA tariff.

ENVIRONMENTAL COST DEFERRAL AND RECOVERY. NW Natural has authorizations in Oregon and Washington to defer costs related to remediation of properties that are owned or were previously owned by NW Natural. In Oregon, a Site Remediation and Recovery Mechanism (SRRM) is currently in place to recover prudently incurred costs allocable to Oregon customers, subject to an earnings test. Effective beginning November 1, 2019, the WUTC authorized an Environmental Cost Recovery Mechanism (ECRM) for recovery of prudently incurred costs allocable to Washington customers.

Oregon SRRM

Under the Oregon SRRM collection process there are three types of deferred environmental remediation expense:

•Pre-review - This class of costs represents remediation spend that has not yet been deemed prudent by the OPUC. Carrying costs on these remediation expenses are recorded at NW Natural's authorized cost of capital. NW Natural anticipates the prudence review for annual costs and approval of the earnings test prescribed by the OPUC to occur by the third quarter of the following year.

•Post-review - This class of costs represents remediation spend that has been deemed prudent and allowed after applying the earnings test, but is not yet included in amortization. NW Natural earns a carrying cost on these amounts at a rate equal to the five-year treasury rate plus 100 basis points.

•Amortization - This class of costs represents amounts included in current customer rates for collection and is calculated as one-fifth of the post-review deferred balance. NW Natural earns a carrying cost equal to the amortization rate determined annually by the OPUC, which approximates a short-term borrowing rate. NW Natural included $6.8 million and $6.3 million of deferred remediation expense approved by the OPUC for collection during the 2022-23 and 2021-22 PGA years, respectively.

In addition, the SRRM also provides for the annual collection of $5.0 million from Oregon customers through a tariff rider. As it collects amounts from customers, NW Natural recognizes these collections as revenue net of any earnings test adjustments and separately amortizes an equal and offsetting amount of the deferred regulatory asset balance through the environmental remediation operating expense line shown separately in the operating expenses section of the Consolidated Statements of Comprehensive Income (Loss). For additional information, see Note 17 in the 2022 Form 10-K.

The SRRM earnings test is an annual review of adjusted NGD ROE compared to authorized NGD ROE. To apply the earnings test NW Natural must first determine what if any costs are subject to the test through the following calculation:


Annual spend
Less: $5.0 million base rate rider
Prior year carry-over(1)
$5.0 million insurance + interest on insurance
Total deferred annual spend subject to earnings test
Less: over-earnings adjustment, if any
Add: deferred interest on annual spend(2)
Total amount transferred to post-review

(1) Prior year carry-over results when the prior year amount transferred to post-review is negative. The negative amount is carried over to offset annual spend in the following year.

(2) Deferred interest is added to annual spend to the extent the spend is recoverable.

To the extent the NGD business earns at or below its authorized ROE as defined in the SRRM, the total amount transferred to post-review is recoverable through the SRRM. To the extent more than authorized ROE is earned in a year, the amount transferred to post-review would be reduced by those earnings that exceed its authorized ROE.

NW Natural concluded there was no earnings test adjustment for 2022 based on the environmental earnings test that was submitted in April 2023.

Washington ECRM

The ECRM established by the WUTC order effective November 1, 2019 permits NW Natural’s recovery of environmental remediation expenses allocable to Washington customers. These expenses represent 3.32% of costs associated with remediation of sites that historically served both Oregon and Washington customers. The order allows for recovery of past deferred and future prudently incurred remediation costs allocable to Washington through application of insurance proceeds and collections from customers. Prudently incurred costs that were deferred from the initial deferral authorization in February 2011 through June 2019 were fully offset with insurance proceeds, with any remaining insurance proceeds to be amortized over a 10.5 year period. On an annual basis NW Natural will file for a prudence determination and a request to recover remediation expenditures in excess of insurance amortizations in the following year's customer rates. After insurance proceeds are fully amortized, if in a particular year the request to collect deferred amounts exceeds one percent of Washington normalized revenues, then the excess will be collected over three years with interest.

INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING.On an annual basis, NW Natural credits amounts to Oregon and Washington customers as part of a regulatory incentive sharing mechanism related to net revenues earned from Mist gas storage for assets developed in advance of utility customer needs, and asset management revenues. In January 2023, the

OPUC approved the annual 2023 bill credit for Oregon customer’s share of interstate storage and asset management activities totaling approximately $23.5 million. This includes revenue generated for the November 2021 through October 2022 PGA year. Commercial and industrial customers in Oregon received this credit in February 2023, which totaled approximately $10.5 million. Residential customers in Oregon are receiving this credit as a reduction to the temporary rate mitigation adjustment, which began March 2023, and totaled approximately $13.0 million. Credits are given to customers in Washington as reductions in rates through the annual PGA filing in November. Credits to Oregon and Washington customers in 2022 were approximately $41.1 million and $1.5 million, respectively.

Regulatory Proceeding Updates

During 2023, NW Natural was involved in the regulatory activities discussed below. For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the 2022 Form 10-K.

COVID-19 DEFERRAL DOCKETS.During 2020, Oregon and Washington approved our applications to defer certain COVID-19 related costs. Costs that may be recoverable include, but are not limited to, the following: personal protective equipment, cleaning supplies and services, bad debt expense, financing costs to secure liquidity, and certain lost revenue, net of offsetting direct expense reductions associated with COVID-19. As part of the 2022 Oregon general rate case, NW Natural received approval from the OPUC to recover the 2020 and 2021 COVID-19 deferral totaling $10.9 million beginning November 1, 2022 over a two-year period. As of June 30, 2023, approximately $5.8 million will be amortized through October 31, 2024 and NW Natural expects to request recovery of the remaining $6.9 million in the third year. In addition, there are approximately $2.5 million of forgone late fee revenue that will be recognized in future periods as billed. Beginning January 2023, NW Natural is no longer deferring any COVID-19 related costs in Oregon. NW Natural expects to recover its COVID-19 deferrals in Washington in a future proceeding.

LOW INCOME DISCOUNT TARIFF.In July 2022, NW Natural received approval from the OPUC for an income-qualifying residential bill discount program. The income threshold for program participation is at or below 60 percent of Oregon state median income (SMI). The program provides a bill discount for income-qualifying residential customers at four discount tier levels based on household income compared to SMI, with higher discounts given for lower income levels. Participating customers can self-certify their income and household size to qualify for the program directly with NW Natural or their local Community Action Agency. The program was available for qualifying customers starting November 1, 2022. Costs for the bill discount program include simultaneous recovery from all customers. Costs for the bill discount program, inclusive of start-up and administrative costs of the program, are recoverable in rates. The amount deferred to a regulatory asset as of June 30, 2023 was approximately $2.2 million.


	Total Household Income	Bill Discount Percentage
Tier 0	At or below 15% SMI	40%
Tier 1	16% - 30% of SMI	25%
Tier 2	31% - 45% of SMI	20%
Tier 3	46% - 60% of SMI	15%

RENEWABLE NATURAL GAS AND AUTOMATIC ADJUSTMENT CLAUSE. On June 19, 2019, the Oregon legislature passed Senate Bill 98 (SB 98), which enables natural gas utilities to procure or develop RNG on behalf of their Oregon customers. The bill was signed into law by the governor in July 2019, and subsequently, the OPUC adopted final rules in July 2020.

SB 98 and the rules outline the following parameters for the RNG program including: setting voluntary goals for adding as much as 30% renewable natural gas into the state’s pipeline system by 2050; enabling gas utilities to invest in and own the cleaning and conditioning equipment required to bring raw biogas and landfill gas up to pipeline quality, as well as the facilities to connect to the local gas distribution system; and allowing up to 5% of a utility’s revenue requirement to be used to cover the incremental cost or investment in renewable natural gas infrastructure.

Further, the law supports all forms of renewable natural gas including renewable hydrogen, which is made from excess wind, solar and hydro power. Renewable hydrogen can be used for the transportation system, industrial use, or blended into the natural gas pipeline system.

Pursuant to the 2022 Oregon general rate case, the OPUC ordered that the costs NW Natural sought to recover related to its investment in Lexington Renewables Energy LLC were reasonable and prudently incurred under SB 98. Furthermore, the OPUC approved an automatic adjustment clause that allows for NW Natural's investments in RNG projects, including operating costs, to be added to rates annually on November 1st, following a prudence review. The mechanism allows NW Natural to defer for recovery or credit the differences between the forecasted and actual costs of the RNG projects, subject to an earnings test that includes deadbands at 50 basis points below and above NW Natural's authorized ROE. For RNG procurement contracts, NW Natural seeks recovery of the costs in the PGA, subject to a prudence review.

In February 2023, NW Natural filed a request to include its investment in Dakota City Renewable Energy LLC in the approved RNG mechanism effective November 1, 2023. The parties are currently performing a prudence review and an OPUC order is expected in the fourth quarter of 2023. The RNG facility began production in April 2023. Under the RNG mechanism, expenses incurred prior to the rate effective date are not recoverable under this rate mechanism.

INTEGRATED RESOURCE PLAN (IRP). NW Natural generally files a full IRP biennially for Oregon and Washington with the OPUC and WUTC, respectively. NW Natural jointly filed its 2022 IRP for both Oregon and Washington on September 23, 2022. The 2022 IRP outlines scenarios of future requirements based on a range of inputs that would provide the least-cost and least-risk resources to meet future demand and environmental compliance obligations. In our most recent filing, we included certain demand and supply side projects that resulted in an action plan which is being evaluated by the WUTC. With respect to IRPs generally, the WUTC issues letters of compliance and Oregon acknowledges the IRP. NW Natural anticipates the WUTC to take action on our IRP by September 30, 2023.

The OPUC issued their order on NW Natural's 2022 IRP in August 2023. The OPUC acknowledged key system investments including the Portland LNG cold box project and the Forest Grove reinforcement project. The OPUC declined at this time to acknowledge certain elements related to long-term analysis and selection of resources and suggested that NW Natural work with interested parties to develop and refine modeling related to these open items. We anticipate additional process, planning and engagement with the OPUC related to these matters.

PIPELINE SECURITY. In May and July 2021, the Department of Homeland Security’s (DHS) Transportation Security Administration (TSA) released two security directives applicable to certain owners and operators of natural gas pipeline facilities (including local distribution companies). The first directive requires owners and operators to implement cybersecurity incident reporting to the DHS, designate a cybersecurity coordinator, and perform a gap assessment of current entity cybersecurity practices against certain voluntary TSA security guidelines and report relevant results and proposed mitigation to applicable DHS agencies. The second directive requires entities to implement a significant number of specified cybersecurity controls and processes. The TSA recently released a third directive renewing the second directive as well as clarifying Operational Technology (OT) scope and providing a risk- and outcome-based framework. The third directive was effective until July 2023. NW Natural is currently evaluating and implementing the security directives and related deliverables. NW Natural frequently updates the TSA on its progress on achieving the security directives.

NW Natural filed requests with the OPUC and WUTC to defer the costs associated with complying with the TSA's security directives. As of June 30, 2023, NW Natural has invested approximately $35.6 million in information and operational technology. A majority of the capital investment was included in rate base starting November 1, 2022 in Oregon.

NW Natural continues to evaluate the potential effect of these directives on our operations and facilities, as well as the potential total cost of implementation, and will continue to monitor for any clarifications or amendments to these directives. We may seek to request recovery from customers of any additional costs incurred to the extent that incremental expenses and capital expenditures are incurred in the future.

ERP UPGRADE. In the fourth quarter of 2020, NW Natural filed requests to defer expenses pertaining to a project to upgrade the existing ERP system with the OPUC and WUTC. A stipulation supported by all parties in the Oregon docket was filed and approved by the OPUC in the third quarter of 2021. Approval of the Washington deferral was resolved as part of the most recent general rate case. NW Natural placed its new ERP system into service in September 2022. On November 1, 2022, NW Natural began recovering all expenses deferred and accruing interest over a 10-year period.

WATER UTILITIES. NW Natural Water serves more than 158,000 people through nearly 64,000 connections across five states. In the first quarter of 2023, NWN Water signed a purchase agreement for a water utility with approximately 1,350 connections in Arizona. Application for approval of the purchase agreement was filed with the ACC and a decision is expected in the third quarter of 2023. In the second quarter of 2023, NWN Water signed a purchase agreement for a water and wastewater business with approximately 2,300 connections in Oregon. Application for approval of the purchase agreement was filed with the OPUC and a decision is expected in the fourth quarter of 2023.

For our regulated water utilities, we have been executing general rate cases.

•In July 2022, Gem State Water Company filed a general rate case with the IPUC and the IPUC allowed rates to go into effect March 1, 2023.

•In February 2023, Salmon Valley Water Company filed a general rate case with the OPUC and requested rates to go into effect prior to the end of 2023.

•In May 2023, Falls Water Company filed a general rate case with the IPUC and requested rates to go into effect prior to the end of 2023.

Environmental Regulation and Legislation Matters

There is a growing international and domestic focus on climate change and the contribution of GHG emissions, most notably methane and carbon dioxide, to climate change. In response, there are increasing efforts at the international, federal, state, and local level to regulate GHG emissions. Legislation or other forms of regulation could take a variety of forms including, but not limited to, GHG emissions limits, reporting requirements, carbon taxes, requirements to purchase carbon credits, building codes, increased efficiency standards, additional charges to fund energy efficiency activities or other regulatory actions, incentives or mandates to conserve energy or use renewable energy sources, tax advantages and other subsidies to support alternative energy sources, a reduction in rate recovery for construction costs related to the installation of new customer services or other new infrastructure investments, mandates for the use of specific fuels or technologies, bans on specific fuels or technologies, or promotion of research into new technologies to reduce the cost and increase the scalability of alternative energy sources. These efforts could include legislation, legislative proposals, or new regulations at the federal, state, and local level, as well as private party litigation related to GHG emissions or regulation thereof. We recognize certain of our businesses, including our natural gas business, are likely to be affected by current or future regulation seeking to limit GHG emissions.

International

In early 2021, the U.S. rejoined the Paris Agreement on Climate, which establishes non-binding targets to reduce GHG emissions from both developed and developing nations. Under the Paris Agreement, signatory countries are expected to submit their nationally determined contributions to curb GHG emissions and meet the agreed temperature objectives every five years. On April 22, 2021, the United States federal administration announced the U.S. nationally determined contribution to achieve a fifty to fifty-two percent reduction from 2005 levels in economy-wide net GHG emissions by 2030.

Federal

President Biden’s administration has issued executive orders directing agencies to conduct a general review of regulations and executive actions related to the environment and reestablished a framework for considering the social cost of carbon as part of certain agency cost-benefit analyses for new regulations. President Biden’s administration continues to consider a wide range of additional policies, executive orders, rules, legislation, and other initiatives to address climate change.

The Inflation Reduction Act of 2022 (IRA) was signed into law in August 2022 and includes several climate and energy provisions. We expect that over a ten-year period, the IRA will provide approximately $415 billion of funding through grants, tax credits, and investments to support various initiatives including manufacturing, renewable energy production and consumption, transportation electrification and climate-smart agriculture. The IRA includes tax credits for RNG, hydrogen and carbon capture projects, among other investments. The IRA also includes funding for the EPA to improve GHG reporting and enforcement, as well as a methane fee applicable to activities associated with gas production and processing facilities, transmission pipelines and certain storage facilities, creates a new corporate alternative minimum tax of 15 percent that applies to corporations with average annual financial statement income in excess of one billion dollars, and creates a new 1 percent excise tax on the net stock repurchases by public companies. We are assessing effects of the IRA that are relevant to our businesses, and will continue to do so as it is implemented. The U.S. Congress may also pass federal climate change legislation in the future. We cannot predict when or if Congress will pass such legislation and in what form.

In addition, the EPA regulates GHG emissions pursuant to the Clean Air Act. For example, the EPA requires the annual reporting of GHG emissions from certain industries, specified emission sources, and facilities. Under this reporting rule, local natural gas distribution companies like NW Natural are required to report system throughput to the EPA on an annual basis. The EPA also has required additional GHG reporting regulations to which NW Natural is subject, requiring the annual reporting of fugitive emissions from operations. Other federal regulatory agencies, including the U.S. Department of Energy and Federal Energy Regulatory Commission, are beginning to address GHG emissions that may include changes in their regulatory oversight approach, policies and rules.

Other federal agencies have taken or are expected to take actions related to climate change. For example, in March 2022, the Securities and Exchange Commission (SEC) proposed new rules relating to the disclosure of a range of climate-related matters, PHMSA is expected to prepare regulations and other actions to limit methane emissions, the Commodities Futures Trading Commission (CFTC) has indicated it intends to take actions related to oversight of climate-related financial risks as pertinent to the derivatives and underlying commodities markets. Similarly, other federal agencies and regulations, including but not limited to the Consumer Products Safety Commission, the U.S. Department of Treasury, Federal Acquisitions Regulations, and others have indicated impending regulatory actions related to climate change. To the extent these agencies adopt final rules as proposed or in modified form, we or our customers could incur increased costs. These could include internal costs as well as external costs such as the cost of independent experts to provide attestation reports on our GHG emissions data and increased audit costs.

Washington State

In 2022, Washington comprised approximately 12% of NW Natural’s revenues, as well as 1% and 18% of new meters from commercial and residential customers, respectively. Effective February 1, 2021, building codes in Washington state require new residential homes to achieve higher levels of energy efficiency based on specified carbon emissions assumptions, which calculate electric appliances to have lower on-site GHG emissions than comparable gas appliances. This increases the cost of new home construction incorporating natural gas depending on a number of factors including home size, equipment configurations, and building envelope measures. Additionally, the Washington State Building Code Council (SBCC) voted in April

2022 to include updates in the state commercial building energy code that would restrict or eliminate the use of gas space and water heating in new commercial construction. In November 2022, the SBCC voted to include updates to the state residential building energy code that are expected to restrict the use of gas space and water heating in residential construction, with certain exceptions including for natural gas-fired heat pumps and hybrid fuel systems. The SBCC commercial and residential rules were expected to become effective July 1, 2023, but the SBCC delayed implementation and has taken steps to modify those rules. The timeline for implementation of the modified rules, if any, is currently uncertain. The rules are currently subject to legal challenge by a number of utilities, companies and organizations, including NW Natural.

Washington has also enacted the Climate Commitment Act (CCA), which establishes a comprehensive program that includes an overall limit for GHG emissions from major sources in the state that declines yearly beginning January 1, 2023, resulting in an overall reduction of GHG emissions to 95% below 1990 levels by 2050. The Washington Department of Ecology has adopted rules to create a cap-and-invest program, under which entities, including natural gas and electric utilities, large manufacturing facilities, and transportation and other fuel providers, which are subject to the CCA must either reduce their emissions, purchase qualifying offsets (including RNG) or obtain allowances to cover any remaining emissions. NW Natural is subject to the CCA, has received an order authorizing deferral of CCA costs from the WUTC, and intends to pursue inclusion of CCA compliance costs in rates.

Oregon

On March 10, 2020, the governor of Oregon issued an executive order (EO) establishing GHG emissions reduction goals of at least 45% below 1990 emission levels by 2035 and at least 80% below 1990 emission levels by 2050 and directed state agencies and commissions to facilitate such GHG emission goals targeting a variety of sources and industries. Although the EO does not specifically direct actions of natural gas distribution businesses, the OPUC is directed to prioritize proceedings and activities that advance decarbonization in the utility sector, mitigate the energy burden experienced by utility customers and ensure system reliability and resource adequacy. The EO also directs other state agencies, including the Oregon Department of Environmental Quality (ODEQ), to cap and reduce GHG emissions from transportation fuels and all other liquid and gaseous fuels, including natural gas, adopt building energy efficiency goals for new building construction, reduce methane gas emissions from landfills and food waste, and submit a proposal for adoption of state goals for carbon sequestration and storage by Oregon’s forest, wetlands and agricultural lands. The OPUC is charged with carrying out the EO to the extent it is consistent with its statutory authority and duties, and in doing so to focus on equitable impacts to low-income customers.

In December ~~2016.~~2021, the ODEQ concluded its rulemaking process and issued final cap and reduce rules for its Climate Protection Program (CPP), which became effective in January of 2022. The CPP outlines GHG emissions reduction goals of 50% by 2035 and 90% by 2050 from a 1990 baseline. The first three-year compliance period is 2022 through 2024. NW Natural is subject to the CPP, and pursuant to this rule, is required to make its first compliance filing in 2025. We have received an order from the OPUC authorizing deferral of CPP compliance costs and intend to pursue inclusion of those compliance costs in rates. The CPP has been subject to legal challenge by a number of utilities, companies and organizations, including NW Natural.

Local Jurisdictions and Other Advocacy

In addition to legislative activities at the state level, advocacy groups have indicated a willingness to pursue ballot measures and other local activities. Some local and county governments in the United States also have been proposing or passing renewable energy resolutions, restrictions, taxes, or fees seeking to accelerate climate action goals. A number of cities across the country, and several in our service territory are taking action or currently considering actions such as limitations or bans on the use of natural gas in new construction or otherwise. For example, in February 2023, the Eugene City Council passed an ordinance that prohibits the use of natural gas in low rise residential buildings beginning with permits submitted after June of 2023. That ordinance was initially referred to the voters on the November 2023 ballot and was subsequently rescinded by the Eugene City Council. In connection with its recision of the ordinance, the City Council directed the Eugene City Manager to develop a plan to address GHG emissions and align incentives around GHG emissions. Similarly, some jurisdictions and advocates are seeking to ban the use of natural gas and certain natural gas appliances inside homes and contend that there are detrimental indoor public health effects associated with the use of natural gas.

NW Natural is actively engaged with federal, state and local policymakers, consumers, customers, small businesses and other business coalitions, economic development practitioners, and other advocates in our service territory and is working with these communities to communicate the role that direct use natural gas, and in the coming years, RNG and hydrogen, can play in pursuing more effective policies to reduce GHGs while supporting reliability, resiliency, energy choice, equity, and energy affordability.

NW Natural Decarbonization Initiatives & Compliance Actions

Our customers are currently paying less for their natural gas today than they did 15 years ago. We expect that compliance with any form of regulation of GHG emissions, including the CPP in Oregon and CCA in Washington as well as voluntary actions under SB 98 or otherwise, will require additional resources and compliance tools, and will increase costs. The developing and changing implementation guidance for the CCA and CPP, evolving carbon credit markets and other compliance tool options, decades-long timeframes for compliance, likely changing and evolving laws and energy policy, and evolving technological advancements, all make it difficult to accurately predict long-term tools for and costs of compliance. In September 2022, NW Natural filed its integrated resource plans (IRPs) with the OPUC and WUTC. Those IRPs comprehensively evaluate resource options available to serve NW Natural's customers' energy, capacity and environmental compliance needs. The resolution of the

IRP docket will inform the resources selected for compliance with the CPP and CCA. While we have modeled compliance with the CCA and CPP in our IRPs, given the recency of the adoption of the final CPP and CCA rules and changing guidance with respect to those rules, the nature of our compliance obligations, the manner in which we intend to comply, and the expected costs of compliance are uncertain and subject to significant change, particularly after the first compliance period, and especially with respect to the CPP, under which programs are still being developed. For the first compliance period under the CCA, we currently anticipate that we will comply by purchasing RNG or attributes to reduce emissions, making full use of offsets available under the CCA, meeting remaining compliance requirements by purchasing allowances through the processes outlined under the CCA, and returning all money received from the sale of free carbon allowances to customers. We intend to pursue inclusion of costs of compliance with the CCA in rates, and currently believe that the costs to comply could increase non-low income residential bills by an estimated 1.5% to 6% in the first year of compliance.

The CPP in Oregon is largely tied to the volume of natural gas consumed and as such, we currently expect that CPP cost impacts will be the lowest among residential customers because they generally consume less, and highest among industrial customers that use significantly higher volumes of natural gas, with cost increases for commercial customers falling between residential and industrial customers. We proposed in our IRP that the majority of our needed emissions reduction in Oregon for the first CPP compliance period of 2022-2025 can be met with purchases of RNG or its attributes under Senate Bill 98, with modest supplemental purchases of Community Climate Investments (CCIs) when that program becomes available, however the mix of tools selected to comply with the CPP could vary. We intend to pursue costs of compliance with the CPP in rates and currently believe those costs could increase non-low income residential bills by an estimated 1% to 9% in the first compliance period.

These projected customer bill impacts of the CCA and CPP are estimates, are likely to increase beyond the first compliance period, and are subject to change as these laws are implemented and compliance begins. The costs are also likely to vary significantly based on forecasting assumptions related to permitted levels of rate recovery, available technologies and equipment, weather patterns and gas usage, customer growth or attrition, allocation of fixed costs among classes of customers, energy efficiency levels, availability, use and cost of renewables, feasibility of broad-scale hydrogen in the natural gas system, and a number of other assumptions used in the complex analysis of integrated resource planning.

We are not currently able to quantify the extent to which limitations on natural gas use, or declining line extension allowances provided in rates to cover construction costs for new services, will affect new meter additions, or to what extent carbon compliance costs included in rates will affect the competitiveness of our business and the demand for natural gas service. All of these developments could negatively affect our gas utility customer growth. However, at the same time natural gas utilities will be subject to GHG emissions regulation, we expect that other energy source providers will be subject to similar, or in some cases stricter or more rapid, compliance requirements that are likely to affect their cost and competitiveness relative to natural gas as well. For example, President Biden has announced his intention to have a carbon-free electricity sector by 2035, 15 years before the target date of the CCA or CCP. In June 2021, the State of Oregon enacted HB 2021, a clean electricity bill that requires the state’s two largest investor-owned electric utilities and retail electricity service suppliers to reduce GHG emissions associated with electricity sold to Oregon customers to 100 percent below baseline levels by 2040 with interim steps, including an 80 percent reduction by 2030 and 90 percent reduction by 2035. This bill does not replace the separate renewable portfolio standards previously established in Oregon, which sets requirements for how much of the electricity used in Oregon must come from renewable resources. In Washington, SB 5116, the Clean Energy Transformation Act, requires all electric utilities in Washington to transition to carbon-neutral electricity by 2030 and to 100 percent carbon-free electricity by 2045. We expect compliance with these and other laws will increase the cost of energy for electric customers in our service territory. We are not able to determine at this time whether increased electricity costs will make natural gas use more or less competitive on a relative basis.

We expect these and other trends to drive innovation of, and demand for, technological developments and innovative new products that reduce GHG emissions. Research and development are occurring across the energy sector, including in the gas sector with work being conducted on gas heat pumps, higher efficiency water and space heating appliances including hybrid systems, carbon capture utilization and storage developments, continued development of technologies related to RNG, and various forms of hydrogen for different applications, among others.

NW Natural continues to take proactive steps in seeking to reduce GHG emissions in our region and is proactively communicating with local, state, and federal governments and communities about those steps. NW Natural has been a leader among gas utilities in innovative programs. Notable programs have included a decoupling rate structure designed to weaken the link between revenue and gas consumption by customers adopted in 2007, and establishment of a voluntary Smart Energy carbon offset program for customers established in 2007, and removal of all known cast iron and bare steel to create one of the tightest and most modern distribution systems in the country. We continue to believe that NW Natural has an important role in providing affordable and equitable energy to the communities we serve. NW Natural is an important provider of energy to families and businesses in Oregon and southwest Washington. Natural gas sales to our residential and commercial customers account for approximately 6% of Oregon’s GHG emissions according to the 2019 data from the State of Oregon Department of Environmental Quality In-Boundary GHG Inventory. We intend to continue to provide this necessary energy to our communities with the goal of using our modern pipeline system to help the Pacific Northwest transition to a cleaner energy future.

In 2016, NW Natural initiated a multi-pronged, multi-year strategy to accelerate and deliver greater GHG emission reductions in the communities we serve. Key components of this strategy include customer energy efficiency, continued adoption of NW Natural's voluntary Smart Energy carbon offset program, and seeking to incorporate RNG and hydrogen into our gas supply. RNG is produced from organic materials including food, agricultural and forestry waste, wastewater, or landfills. We believe RNG has the potential to significantly reduce net GHG emissions because methane that would otherwise be released to the atmosphere can be captured from these organic materials as they decompose and then conditioned to pipeline quality and distributed into our existing system. In 2019, Oregon Senate Bill 98 (SB 98) was signed into law enabling NW Natural to procure RNG on behalf of customers and provided voluntary targets that would allow us to make qualified investments and purchase RNG from third parties.

Under SB 98, NW Natural is actively working to procure RNG supply for customers and increase the amount of RNG on our system and is also exploring the development of renewable hydrogen through power to gas. To that end, in 2020 and 2021, NW Natural announced several agreements and investments to procure RNG for its customers. For example, NW Natural began a partnership with BioCarbN to invest up to an estimated $38 million in four separate RNG development projects that will access biogas derived from water treatment at Tyson Foods’ processing plants, subject to approval by all parties. The first project was commissioned in early 2022 and the second was commissioned in April 2023. To date, NW Natural has signed agreements with options to purchase or develop RNG for utility customers totaling about 3% of NW Natural’s annual sales volume in Oregon.

FINANCIAL CONDITION

Capital Structure

~~One of our~~NW Holdings' long-term ~~goals~~goal is to maintain a strong and balanced consolidated capital ~~structure, generally consisting of 45% to 50% common stock equity and 50% to 55% long-term and short-term debt, and with~~structure. NW Natural targets a ~~target utility~~regulatory capital structure of 50% common ~~stock~~equity and 50% long-term ~~debt.~~ debt, which is consistent with approved regulatory allocations in Oregon, which has an allocation of 50% common equity and 50% long-term debt without recognition of short-term debt, and Washington, which has an allocation of 50% long-term debt, 1% short-term debt, and 49% common equity.

When additional capital is required, debt or equity securities are issued depending on both the target capital structure and market conditions. These sources of capital are also used to fund long-term debt retirements and short-term commercial paper maturities. See "~~Liquidity~~"Liquidity and Capital Resources" below and Note 6.

~~Table of Contents~~

9. Achieving ~~the~~our target capital structure and maintaining sufficient liquidity to meet operating requirements ~~are~~is necessary to maintain attractive credit ratings and provide access to the capital markets at reasonable costs. ~~Our~~

NW Holdings' consolidated capital structure, excluding short-term debt, was as follows:


	June 30,				December 31,
	2023		2022		2022
Common equity	44.7	%	52.1	%	46.8	%
Long-term debt (including current maturities)	55.3		47.9		53.2
Total	100.0	%	100.0	%	100.0	%

NW Natural's consolidated capital structure, excluding short-term debt, was as follows:


	June 30,				December 31,
	2023		2022		2022
Common equity	47.7	%	54.3	%	51.4	%
Long-term debt (including current maturities)	52.3		45.7		48.6
Total	100.0	%	100.0	%	100.0	%

As of June 30, 2023 and 2022, and December 31, 2022, NW Holdings' consolidated capital structure included common equity of 44.0%, 47.3% and 42.4%; long-term debt of 46.0%, 43.4% and 45.0%; and short-term debt including current maturities of long-term debt of 10.0%, 9.3% and 12.6%, respectively. As of June 30, 2023 and 2022, and December 31, 2022, NW Natural's consolidated capital structure included common equity of 47.7%, 52.4%, and 47.9%; long-term debt of 48.8%, 44.1% and 41.6%; and short-term debt including current maturities of long-term debt of 3.5%, 3.5%, and 10.5%, respectively.

September 30, December 31,
2017 2016 2016
Common stock equity 52.1 % 49.6 % 52.4 %
Long-term debt 46.6
33.8
41.9
Short-term debt, including current maturities of long-term debt 1.3
16.6
5.7
Total⁽¹⁾
100.0 % 100.0 % 100.0 %


⁽¹⁾	~~Ratios reflect debt balances net of any unamortized debt issuance costs.~~

Liquidity and Capital Resources

At ~~September~~June 30, ~~2017 we~~2023 and 2022, NW Holdings had ~~$15.8~~approximately $137.8 million and $17.2 million, and NW Natural had approximately $131.8 million and $10.3 million of cash and cash equivalents, compared to $6.2 million at September 30, 2016 due to higher cash collections from customers as a result of colder than average weather, especially in the first quarter of 2017, and lower working capital requirements.respectively. In order to maintain sufficient liquidity during periods when capital markets are volatile, weNW Holdings and NW Natural may elect to maintain higher cash balances and add short-term borrowing capacity. ~~In addition, we~~NW Holdings and NW Natural may also pre-fund ~~utility~~their respective capital expenditures when long-term fixed rate environments are attractive. NW Holdings and NW Natural expect to have ample liquidity in the form of cash on hand and from operations and available credit capacity under credit facilities to support funding needs.

ATM Equity Program

NW Holdings

For NW Holdings, short-term liquidity is primarily provided by cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a ~~regulated entity, our~~multi-year credit facility, and short-term credit facilities. NW Holdings also has a universal shelf registration statement filed with the SEC for the issuance of debt and equity ~~securities~~securities. NW Holdings long-term debt, if any, and ~~most forms~~equity issuances are primarily used to provide equity contributions to NW Holdings’ operating subsidiaries for operating and capital expenditures and other corporate purposes. From 2023 through 2025, we estimate NW Holdings’ and NW Natural's combined incremental capital needs to be in the range of ~~debt~~$450 million to $550 million. NW Holdings intends to use raised capital to support NW Natural, NW Natural Water, and NW Natural Renewables operating and capital expenditure programs. NW Holdings' issuance of securities ~~are subject to approval by the OPUC and WUTC. Our use of retained earnings~~ is not subject to ~~those same restrictions.~~regulation by state public utility commissions, but the dividends from NW Natural to NW Holdings are subject to regulatory ring-fencing provisions. NW Holdings guarantees the debt of its wholly-owned subsidiary, NWN Water. See "Long-Term Debt" below for more information regarding NWN Water debt.

~~Utility Segment~~As part of the ring-fencing conditions agreed upon with the OPUC and WUTC in connection with the holding company reorganization, NW Natural may not pay dividends or make distributions to NW Holdings if NW Natural’s credit ratings and common equity ratio, defined as the ratio of equity to long-term debt, fall below specified levels. If NW Natural’s long-term secured credit ratings are below A- for S&P and A3 for Moody’s, dividends may be issued so long as NW Natural’s common equity ratio is 45% or more. If NW Natural’s long-term secured credit ratings are below BBB for S&P and Baa2 for Moody’s, dividends may be issued so long as NW Natural’s common equity ratio is 46% or more. Dividends may not be issued if NW Natural’s long-term secured credit ratings are BB+ or below for S&P or Ba1 or below for Moody’s, or if NW Natural’s common equity ratio is below 44%, where the ratio is measured using common equity and long-term debt excluding imputed debt or debt-like lease obligations. In each case, common equity ratios are determined based on a preceding or projected 13-month average. In addition, there are certain OPUC notice requirements for dividends in excess of 5% of NW Natural’s retained earnings.

Additionally, if NW Natural’s common equity (excluding goodwill and equity associated with non-regulated assets), on a preceding or projected 13-month average basis, is less than 46% of NW Natural’s capital structure, NW Natural is required to notify the OPUC, and if the common equity ratio falls below 44%, file a plan with the OPUC to restore its equity ratio to 44%. This condition is designed to ensure NW Natural continues to be adequately capitalized under the holding company structure. Under the WUTC order, the average common equity ratio must not exceed 56%.

At June 30, 2023, NW Natural satisfied the ring-fencing provisions described above.

Based on several factors, including current cash reserves, committed credit facilities, its ability to receive dividends from its operating subsidiaries, in particular NW Natural, and an expected ability to issue long-term debt and equity securities in the capital markets, NW Holdings believes its liquidity is sufficient to meet anticipated near-term cash requirements, including all contractual obligations, investing, and financing activities as discussed in "Cash Flows" below.

NW HOLDINGS DIVIDENDS. Quarterly dividends have been paid on common stock each year since NW Holdings’ predecessor’s stock was first issued to the public in 1951. Annual common stock dividend payments per share, adjusted for stock splits, have increased each year since 1956. The declarations and amount of future dividends to shareholders will depend upon earnings, cash flows, financial condition, NW Natural’s ability to pay dividends to NW Holdings and other factors. The amount and timing of dividends payable on common stock is at the sole discretion of the NW Holdings Board of Directors.

NW Natural

For the ~~utility~~NGD business segment, ~~the~~ short-term borrowing requirements typically peak during colder winter months when the ~~utility~~NGD business borrows money to cover the lag between natural gas purchases and bill collections from customers. ~~Our short-term~~Short-term liquidity for the ~~utility~~NGD business is primarily provided by cash balances, internal cash flow from operations, proceeds from the sale of commercial paper notes, as well as available cash from multi-year credit facilities, short-term credit facilities, company-owned life insurance policies, the sale of long-term debt, and ~~issuances of equity. Utility~~equity contributions from NW Holdings. NW Natural's long-term debt and ~~equity issuance proceeds~~contributions from NW Holdings are primarily used to finance ~~utility~~NGD capital expenditures, refinance maturing debt, ~~of the utility,~~ and provide temporary funding for other general corporate purposes of the ~~utility.~~ NGD business.

Based on ~~our~~its current debt ratings (see "~~Credit~~"Credit Ratings" below), ~~we have~~NW Natural has been able to issue commercial paper and long-term debt at attractive ~~rates and have not needed to borrow or issue letters of credit from our back-up credit facility.~~rates. In the event ~~we are~~NW Natural is not able to issue new long-term debt due to adverse market conditions or

other reasons, ~~we expect our~~NW Natural expects that near-term liquidity needs can be met using internal cash flows, issuing commercial paper, receiving equity contributions from NW Holdings, or ~~for the utility segment,~~ drawing upon ~~our~~a committed credit facility. WeNW Natural also ~~have~~has a universal shelf registration statement filed with the SEC for the issuance of secured and unsecured debt or equity securities, subject to market conditions and certain regulatory approvals. As of September 30, 2017, we have Board authorization to issue up to $75 million of additional FMBs. We also have OPUC approval to issue up to $75 million of additional long-term debt for approved purposes.securities.

In the event ~~our~~NW Natural senior unsecured long-term debt ratings are downgraded, or ~~our~~ outstanding derivative ~~position exceeds~~positions exceed a certain credit threshold, ~~our~~ counterparties under derivative contracts could require usNW Natural to post cash, a letter of credit, or other forms of collateral, which could expose usNW Natural to additional cash requirements and may trigger increases in short-term borrowings while ~~we were~~ in a net loss position. ~~We were~~NW Natural was not required to post collateral at ~~September~~June 30, 2017. However, if the credit risk-related contingent features underlying these contracts were triggered on September 30, 2017, assuming our long-term debt ratings dropped to non-investment grade levels, we could have been required to post $9.1 million in collateral with our counterparties.2023. See "Credit Ratings" below and Note ~~12.~~15.

Other items that may have a significant impact on ~~our~~NW Natural's liquidity and capital resources include NW Natural's pension contribution requirements ~~discontinuation of bonus tax depreciation~~ and environmental expenditures. For additional information, see Part II, Item 7 "Financial Condition"in the 2022 Form 10-K.

~~With respect~~

Gas and Pipeline Capacity Purchase Agreements

NW Natural Renewables is an unregulated subsidiary of NW Natural Holdings established to ~~pensions, we expect~~pursue unregulated renewable natural gas activities. In September 2021, a subsidiary of NW Natural Renewables and a subsidiary of EDL, a global producer of sustainable distributed energy, executed agreements to partially fund two production facilities that are designed to convert landfill waste gases to RNG. In August 2023, EDL announced that the first RNG facility began operations. Testing and commissioning of the second facility is expected to occur in the second half of 2023. When those facilities achieve full commercial operations, the subsidiary of NW Natural Renewables is committed to make ~~significant contributions~~cash payments totaling approximately $50 million to ~~our company-sponsored defined benefit plan, which is closed~~partially fund the infrastructure required to ~~new employees, over~~condition biogas. Alongside these development agreements, a subsidiary of NW Natural Renewables and a subsidiary of EDL executed agreements designed to obtain a 20-year supply of RNG produced by the ~~next several years until~~facilities for NW Natural Renewables. Upon commencement of commercial operations, we ~~are fully funded under~~estimate the ~~Pension Protection Act rules, including the new rules issued under the Moving Ahead for Progress~~amount of RNG purchases based on prices and quantities specified in the ~~21st Century Act (MAP-21)~~agreements are as follows: approximately $3.2 million in 2023, $10.5 million in 2024, $21.0 million in 2025, $21.0 million in 2026, $27.3 million in 2027 and ~~the Highway and Transportation Funding Act~~$582.0 million thereafter. NW Natural Renewables has separately contracted to sell an equivalent amount of ~~2014 (HATFA). See "Application of Critical Accounting Policies—Accounting for Pensions and Postretirement Benefits" in the 2016 Form 10-K.~~fixed-volume RNG supply to investment grade counterparties under long-term contracts.

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~~Gas Storage~~

Short-term liquidity for the gas storage segment is supported by cash balances, internal cash flow from operations, equity contributions from its parent company, and, if necessary, additional external financing.

The amount and timing of our Gill Ranch facility's cash flows from year to year are uncertain, as the majority of these storage contracts are currently short-term. We have seen slightly higher firm contract prices over the last several years, but overall prices are still lower than the long-term contracts that expired at the end of the 2013-14 storage year. While we expect continuing challenges for Gill Ranch in 2017, we do not anticipate material changes in our ability to access sources of cash for short-term liquidity.

~~Consolidated~~

On October 9, 2017, the Company entered into a 20-year operating lease agreement for our new headquarters location in Portland, Oregon. The Company's existing headquarters lease expires in 2020 and after an extensive search and evaluation process with a focus on seismic preparedness, safety, reliability, least cost to our rate payers and a continued commitment to our employees and the communities we serve, we executed a new lease for suitable commercial office space in Portland, Oregon. Payments under the lease are expected to commence in 2020 and total estimated base rent payments over the life of the lease are approximately $160 million. The Company has the option to extend the term of the lease for two additional seven-year periods.

Based on several factors, including our current credit ratings, our commercial paper program, current cash reserves, committed credit facilities, and our expected ability to issue long-term debt in the capital markets, we believe our liquidity is sufficient to meet anticipated near-term cash requirements, including all contractual obligations, investing, and financing activities discussed below.

Short-Term Debt

~~Our~~The primary source of ~~utility~~ short-term liquidity for NW Holdings is cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a multi-year credit facility, and short-term credit facilities it may enter into from time to time.

The primary source of short-term liquidity for NW Natural is from the sale of commercial paper, available cash from a multi-year credit facility, and ~~bank loans.~~short-term credit facilities it may enter into from time to time. In addition to issuing commercial paper or entering into bank loans to meet working capital requirements, including seasonal requirements to finance gas purchases and accounts receivable, short-term debt may also be used to temporarily fund ~~utility~~ capital requirements. ~~Commercial~~For NW Natural, commercial paper and bank loans are periodically refinanced through the sale of long-term debt or equity ~~securities. When we have~~contributions from NW Holdings. Commercial paper, when outstanding, ~~commercial paper, which~~ is sold through two commercial banks under an issuing and paying agency agreement itand is supported by one or more unsecured revolving credit facilities. See “Credit Agreements” below.

At ~~September~~June 30, ~~2017, our utility had no~~2023, June 30, 2022 and December 31, 2022, short-term debt ~~outstanding compared to $194.9 million at September 30, 2016 due to lower working capital needs and net proceeds from our equity issuance in November 2016 and issuances~~consisted of ~~long-term debt instruments in December 2016 and September 2017. The effective~~the following:


	June 30, 2023				June 30, 2022				December 31, 2022
In millions	Balance Outstanding		Weighted Average Interest Rate(1)		Balance Outstanding		Weighted Average Interest Rate(1)		Balance Outstanding		Weighted Average Interest Rate(1)
NW Natural:
Commercial paper	$	—	—	%	$	78.7	2.0	%	$	170.2	4.6	%
Other (NW Holdings):
Credit agreement	41.0		6.2	%	144.0		2.7	%	88.0		5.3	%
NW Holdings	$	41.0			$	222.7			$	258.2

(1)Weighted average interest rate on outstanding short-term debt ~~outstanding at September 30, 2016 was 0.7%.~~

Credit Agreements

~~We have~~NW Holdings

At June 30, 2023, NW Holdings had a ~~$300~~$200 million sustainability-linked credit agreement, with a feature that allows ~~the Company~~it to request increases in the total commitment amount, up to a maximum of ~~$450~~$300 million. The maturity date of the agreement is ~~December 20, 2019.~~November 3, 2026, with available extensions of commitments for two additional one-year periods, subject to lender approval.

All lenders under the NW Holdings credit agreement are major financial institutions with committed balances and investment grade credit ratings as of ~~September~~June 30, ~~2017~~2023 as follows:


In millions
Lender rating, by category	Loan Commitment
AA/Aa	$	200

Total	$	200

In millions
Lender rating, by category Loan Commitment
AA/Aa $ 201
A/A 99
Total $ 300

Based on credit market conditions, it is possible one or more lending commitments could be unavailable to usNW Holdings if the lender defaulted due to lack of funds or insolvency; however, ~~we do~~NW Holdings does not believe this risk to be imminent due to the lenders' strong investment-grade credit ratings. At June 30, 2023, June 30, 2022 and December 31, 2022, $41.0 million, $144.0 million and $88.0 million were drawn under the NW Holdings Credit Agreement, respectively.

~~Our~~The NW Holdings credit agreement permits the issuance of letters of credit in an aggregate amount of up to ~~$100~~$40 million. The principal amount of borrowings under the credit agreement is due and payable on the maturity date. ~~There were no outstanding balances under this credit agreement at September 30, 2017 or 2016.~~ The credit agreement requires

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us NW Holdings to maintain a consolidated indebtedness to total capitalization ratio of 70% or less. Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and accelerate the maturity of all amounts outstanding. ~~We were~~NW Holdings was in compliance with this covenant at ~~September~~June 30, ~~2017~~2023 and ~~2016,~~2022, with consolidated indebtedness to total capitalization ratios of ~~47.9%~~56.0% and ~~50.3%~~52.7%, respectively.

The NW Holdings credit agreement also requires usNW Holdings to maintain debt ratings (which are defined by a formula using NW Natural's credit ratings in the event NW Holdings does not have a credit rating) with Standard & Poor's (S&P) and Moody's Investors Service, Inc. (Moody’s) and notify the lenders of any change in ~~our~~its senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies. A change in ~~our~~NW Holdings' debt ratings by S&P or Moody’s is not an event of default, nor is the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement. Rather, interest rates on any loans outstanding under the credit agreements are tied to debt ratings and therefore, a change in the debt rating would increase or decrease the cost of any loans under the credit agreements when ratings are changed. NW Holdings does not currently maintain ratings with S&P or Moody's.

Interest charges on the NW Holdings credit agreement were indexed to the London Interbank Offered Rate (LIBOR) through January 31, 2023. The agreement was amended to replace LIBOR with the secured overnight financing rate (SOFR) beginning February 2023. The SOFR is subject to a 10 basis point spread adjustment. The NW Holdings credit agreement also includes a mechanism that can increase or decrease the undrawn interest rate by up to 1 basis point and undrawn interest rate by up to 5 basis points in accordance with NW Holdings’ independently verified achievement of quantifiable metrics related to two goals—one related to carbon savings and one related to in-line inspections of NW Natural’s transmission pipeline. Performance against these metrics is designed to be assessed annually with pricing adjustments, if any, resetting off of primary pricing annually and not cumulatively.

NW Holdings had no letters of credit issued and outstanding at June 30, 2023 and 2022.

NW Natural

At June 30, 2023, NW Natural had a sustainability-linked multi-year credit agreement for unsecured revolving loans totaling $400 million, with a feature that allows NW Natural to request increases in the total commitment amount, up to a maximum of $600 million. The maturity date of the agreement is November 3, 2026 with an available extension of commitments for two additional one-year periods, subject to lender approval.

All lenders under the NW Natural credit agreement are major financial institutions with committed balances and investment grade credit ratings as of June 30, 2023 as follows:


In millions
Lender rating, by category	Loan Commitment
AA/Aa	$	400

Total	$	400

Based on credit market conditions, it is possible one or more lending commitments could be unavailable to NW Natural if the lender defaulted due to lack of funds or insolvency; however, NW Natural does not believe this risk to be imminent due to the lenders' strong investment-grade credit ratings. NW Natural did not have any outstanding balances drawn under this credit facility at June 30, 2023, June 30, 2022 and December 31, 2022.

The NW Natural credit agreement permits the issuance of letters of credit in an aggregate amount of up to $60 million. The principal amount of borrowings under the credit agreement is due and payable on the maturity date. There were no outstanding balances under this credit agreement at June 30, 2023 or 2022. The credit agreement requires NW Natural to maintain a consolidated indebtedness to total capitalization ratio of 70% or less. Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and accelerate the maturity of all amounts outstanding. NW Natural was in

compliance with this covenant at June 30, 2023 and 2022, with consolidated indebtedness to total capitalization ratios of 52.3% and 47.6%, respectively.

The NW Natural credit agreement also requires NW Natural to maintain credit ratings with S&P and Moody’s and notify the lenders of any change in NW Natural's senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies. A change in NW Natural's debt ratings by S&P or Moody’s is not an event of default, nor is the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement. Rather, interest rates on any loans outstanding under the credit agreement are tied to debt ratings and therefore, a change in the debt rating would increase or decrease the cost of any loans under the credit agreement when ratings are changed. See "Credit Ratings" below.

Interest charges on the NW Natural credit agreement were indexed to the LIBOR through January 31, 2023. The agreement was amended to replace LIBOR with the SOFR beginning February 2023. The SOFR is subject to a 10 basis point spread adjustment. The NW Natural credit agreement also includes a mechanism that can increase or decrease the undrawn interest rate by up to 1 basis point and undrawn interest rate by up to 5 basis points in accordance with NW Natural’s independently verified achievement of quantifiable metrics related to two goals—one related to carbon savings and one related to in-line inspections of NW Natural’s transmission pipeline. Performance against these metrics is designed to be assessed annually with pricing adjustments, if any, resetting off of primary pricing annually and not cumulatively.

NW Natural had no letters of credit issued and outstanding at June 30, 2023 and 2022. In July 2023, NW Natural issued a $15.0 million letter of credit, which expires in September 2023.

Credit Ratings

~~Our~~NW Holdings does not currently maintain ratings with S&P or Moody's. NW Natural's credit ratings are a factor of ~~our~~ liquidity, potentially affecting ~~our~~ access to the capital markets including the commercial paper market. ~~Our~~NW Natural's credit ratings also have an impact on the cost of funds and the need to post collateral under derivative contracts. The following table summarizes ~~our~~NW Natural's current ~~debt~~credit ratings:

S&P

Moody's

Commercial paper (short-term debt)

A-1

P-2

Senior secured (long-term debt)

AA-

A1A2

Senior unsecured (long-term debt)

n/a

A3Baa1

Corporate credit rating

A+

n/a

Ratings outlook

Stable

The above credit ratings and ratings outlook are dependent upon a number of factors, both qualitative and quantitative, and are subject to change at any time. The disclosure of or reference to these credit ratings is not a recommendation to buy, sell or hold NW Holdings or NW Natural securities. Each rating should be evaluated independently of any other rating.

As part of the ring-fencing conditions agreed upon with the OPUC and WUTC in connection with the holding company reorganization, NW Holdings and NW Natural are required to maintain separate credit ratings, long-term debt ratings, and preferred stock ratings, if any.

Long-Term Debt

~~We retired $40~~Issuance of Long-Term Debt

In March 2023, NW Natural issued and sold $100.0 million aggregate principal amount of 5.75% Secured Medium-Term Notes, Series B due 2033 (the Notes). The Notes bear interest at the rate of 5.75% per annum, payable semi-annually on March 15 and September 15 of each year.

In December 2022, NW Natural entered into a Bond Purchase Agreement between NW Natural and the institutional investors named as purchasers therein. The Bond Purchase Agreement provides for the issuance of (i) $100.0 million aggregate principal amount of NW Natural’s First Mortgage Bonds (FMBs), 5.43% Series due 2053 (5.43% Bonds), (ii) $80.0 million aggregate principal amount of NW Natural’s FMBs, 5.18% Series due 2034 (5.18% Bonds) and (iii) $50.0 million aggregate principal amount of NW Natural’s FMBs, 5.23% Series due 2038 (5.23% Bonds) in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended.

In January 2023, NW Natural issued and sold $100.0 million aggregate principal amount of its FMBs, 5.43% Series due

January 6, 2053, to certain institutional investors pursuant to the Bond Purchase Agreement. The 5.43% Bonds bear interest at the rate of 5.43% per annum, payable semi-annually on January 6 and July 6 of each year, commencing July 6, 2023, and will mature on January 6, 2053.

5.23% Bonds will bear interest at the rate of 5.23% per annum, payable semi-annually on February 4 and August 4 of each year, commencing February 4, 2024, and will mature on August 4, 2038.

At June 30, 2023, NW Holdings and NW Natural had long-term debt outstanding of $1,535.3 million and $1,324.6 million, respectively, which included $10.3 million and $10.1 million of ~~FMBs~~unamortized debt issuance costs at NW Holdings and NW Natural, respectively. NW Natural's long-term debt consists of first mortgage bonds (FMBs) with maturity dates ranging from 2023 through 2053, interest rates ranging from 2.8% to 7.9%, and a ~~coupon~~weighted average interest rate of ~~7.00%~~4.7%. NW Holdings' long-term debt primarily consists of credit agreements at NW Holdings and NWN Water with maturity dates in ~~August 2017~~2024 and ~~issued $25 million and $75~~a term loan at NWN Water due in 2026.

$90.0 million of ~~FMBs with coupon rates of 2.822% and 3.685%, respectively, in September 2017. No other~~long-term debt ~~was retired or issued in the nine months ended September 30, 2017. Over~~is scheduled to mature over the next twelve months ~~$22~~as of June 30, 2023 at NW Natural and $150.7 million ~~of FMBs with a coupon rate of 6.60% will mature in March 2018.~~

at other NW Holdings. See Part II, Item 7, "Financial Condition—~~Contractual Obligations~~Long-Term Debt" in ~~our 2016~~the 2022 Form 10-K for long-term debt maturing over the next five years.

Interest Rate Swap Agreements

NW Holdings and NWN Water entered into interest rate swap agreements with major financial institutions that effectively convert variable-rate debt to a fixed rate. Interest payments made between the effective date and expiration date are hedged by the swap agreements. The notional amount, effective date, expiration date and rate of the swap agreements are shown in the table below:


In millions	Notional Amount		Effective Date	Expiration Date	Fixed Rate
NW Holdings	$	100.0	1/17/2023	3/15/2024	4.7	%
NWN Water	$	55.0	1/19/2023	6/10/2026	3.8	%

Bankruptcy Ring-fencing Restrictions

As part of the ring-fencing conditions agreed upon with the OPUC and WUTC, NW Natural is required to have one director who is independent from NW Natural management and from NW Holdings and to issue one share of NW Natural preferred stock to an independent third party. NW Natural was in compliance with both of these ring-fencing provisions as of June 30, 2023. NW Natural may file a voluntary petition for bankruptcy only if approved unanimously by the Board of Directors of NW Natural, including the independent director, and by the holder of the preferred share.

Cash Flows

Operating Activities

Changes in ~~our~~ operating cash flows are primarily affected by net income ~~changes~~or loss, changes in working capital requirements, and other cash and non-cash adjustments to operating results.


	Six Months Ended June 30,
In thousands	2023		2022		YTD Change
NW Natural cash provided by operating activities	$	288,005	$	193,436	$	94,569
NW Holdings cash provided by operating activities	$	297,854	$	196,564	$	101,290

~~Operating activity highlights include:~~

Nine Months Ended September 30,
In thousands 2017 2016 YTD Change
Cash provided by operating activities $ 192,856
$ 206,399
$ (13,543 )

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~ 2023 COMPARED ~~to SEPTEMBER~~TO JUNE 30, ~~2016.~~ 2022.Cash provided by operating activities increased $101.3 million at NW Holdings and increased $94.6 million at NW Natural. The significant factors contributing to the ~~$13.5~~increase at NW Holdings were as follows:

•$67.5 million decrease in accounts receivable due to colder weather in December 2022 and a rate increase effective November 1, 2022;

•$30.6 million decrease in asset optimization revenue sharing bill credits to customers;

•$28.8 million decrease in inventories due to a larger volume of gas withdrawn from storage; and

•$15.0 million increase in net income; partially offset by

•$35.2 million decrease in accounts payable resulting from payments of higher priced gas purchased in December 2022; and

•$19.0 million decrease in net deferred gas costs as gas costs for the six months ended June 30, 2022 were 12% below PGA estimates.

The increase in cash ~~flows~~ provided by operating activities ~~were as follows:~~at NW Natural was primarily driven by the factors discussed above.

a decrease of $16.0 million from changes in tax-related accounts primarily due to a refund of federal income tax overpayments received in 2016 and additional cash flow benefits reflected in the prior period related to the enactment of bonus depreciation in December 2015; and

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a net decrease of $13.4 million from changes in working capital related to receivables, inventories, and accounts payable reflecting colder than average weather in 2017 compared to weather in the prior period; partially offset by

~~an increase of $23.9 million in cash flow benefits from changes in deferred gas cost balances primarily due to the $19.4 million gas cost savings credited to customers in 2016 that~~NW Natural did not ~~occur in 2017.~~

~~The non-cash~~make any cash contributions to its qualified defined benefit pension ~~expense recognized on~~plans during the ~~income statement for the nine~~six months ended ~~September~~June 30, ~~2017 and 2016 was $3.9 million and $4.0 million, respectively. Changes in pension expense are mitigated by our balancing account in Oregon; and therefore, net non-cash pension expenses are expected~~2023 or 2022. NW Natural does not expect to ~~remain relatively flat in the coming years.~~

~~During the nine months ended September 30, 2017, we contributed $15.4 million to our utility's qualified defined benefit pension~~make any plan ~~compared to $11.3 million for the same period in 2016.~~contributions during 2023. The amount and timing of future contributions will depend on market interest rates and investment returns on the plans' assets. ~~See~~For additional information, see Note 7.10.

Bonus income tax depreciation for 2015 was not enacted until December 18, 2015, which was extended retroactively back to January 1, 2015. As a result, estimated income tax payments were made throughout 2015 without the benefit of bonus depreciation for the year. This delayed the cash flow benefit of bonus depreciation until a refund could be requestedNW Holdings and received. We received a refund of federal income tax overpayments of $7.9 million in the first quarter of 2016. As a result of the Federal Protecting Americans From Tax Hikes Act of 2015, bonus depreciation is now enacted through 2019. Accordingly, we do not anticipate similar refunds from income tax overpayments related to bonus depreciation, in the near future.

WeNW Natural have lease and purchase commitments relating to ~~our~~their operating activities that are financed with cash flows from ~~operations.~~operations. For information on cash flow requirements related to leases and other purchase commitments, see Note ~~14 herein as well as “Financial Condition—Contractual Obligations~~”7 and Note 1416 in the ~~2016~~2022 Form ~~10-K.~~10-K.

Investing Activities

~~Investing activity highlights include:~~


	Six Months Ended June 30,
In thousands	2023		2022		YTD Change
NW Natural cash used in investing activities	$	(131,726)	$	(158,180)	$	26,454
NW Holdings cash used in investing activities	$	(151,540)	$	(169,687)	$	18,147

Nine Months Ended September 30,
In thousands 2017 2016 YTD Change
Total cash used in investing activities $ (146,572 ) $ (95,243 ) $ (51,329 )
Capital expenditures (145,441 ) (98,111 ) (47,330 )

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2023 COMPARED ~~to SEPTEMBER~~TO JUNE 30, ~~2016.~~ 2022. Cash used in investing activities decreased $18.1 million at NW Holdings and decreased $26.5 million at NW Natural. The ~~$51.3 million increase~~decrease in cash used in investing activities at NW Holdings and NW Natural was primarily due to ~~higher~~a decrease in capital expenditures ~~primarily~~ related to ~~our North Mist Gas Storage Expansion Project as well as customer growth, system reinforcement,~~two significant information technology projects that were placed into service in the prior year.

NW Natural capital expenditures for 2023 are expected to be in the range of $310 million to $350 million and ~~facilities.~~

~~Over~~for the five-year period ~~2017 through 2021, total utility~~from 2023 to 2027 are expected to range from $1.3 billion to $1.5 billion. NW Natural Water is expected to invest approximately $25 million in 2023 related to maintenance capital expenditures for water and wastewater utilities owned as of December 31, 2022, and for the five-year period from 2023 to 2027 capital expenditures are ~~estimated~~expected to ~~be between $850~~invest approximately $90 million to $110 million.

The timing and ~~$950 million. This range includes the total estimated cost of our North Mist gas storage facility expansion, which is approximately $128 million. The majority~~amount of the ~~North Mist~~core capital expenditures ~~$80 million to $90 million,~~and projects for 2023 and the next five years could change based on regulation, growth, and cost estimates. Additional investments in our infrastructure during and after 2023 that are ~~expected~~not incorporated in ~~2017, with~~ the ~~remaining investment in 2018. We anticipate placing the~~estimates provided above will depend largely on additional regulations, growth, and expansion ~~into service~~opportunities. Required funds for the winter of 2018-19. When the expansion is placed into service, the investment will immediately be included in rate base under an established tariff schedule already approved by the OPUC, with revenues recognized consistent with the schedule. Our five-year capital expenditure range also includes estimated capital expenditures between $75 million to $85 million related to planned upgrades and refurbishments to storage facilities, including our existing liquefied natural gas facilities in Oregon and our Mist storage facility. In addition, we plan to spend approximately $20 million to upgrade distribution infrastructure in Clark County, Washington through 2019. The estimated level of utility capital expenditures through 2021 reflects assumptions for continued customer growth, technology investments ~~distribution system maintenance and improvements, and gas storage facilities maintenance. Most of the required funds~~ are expected to be internally generated ~~over the five-year period,~~or financed with ~~short-term and~~ long-term debt ~~and bridge financing providing liquidity.~~or equity, as appropriate.

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In 2017 utility capital expenditures are estimated to be between $225 and $250 million, and non-utility capital investments of less than $5 million. Additional spend for gas storage and other investments during and after 2017 are expected to be paid from working capital and additional equity contributions from NW Natural as needed.

Financing Activities

~~Financing activity highlights include:~~


	Six Months Ended June 30,
In thousands	2023		2022		YTD Change
NW Natural cash used in financing activities	$	(31,873)	$	(32,995)	$	1,122



NW Holdings cash used in financing activities	$	(32,195)	$	(23,962)	$	(8,233)

Nine Months Ended September 30,
In thousands 2017 2016 YTD Change
Total cash used in financing activities $ (34,025 ) $ (109,137 ) $ 75,112
Change in short-term debt (53,300 ) (75,135 ) 21,835
Change in long-term debt 60,000
—
60,000

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~ 2023 COMPARED ~~to SEPTEMBER~~TO JUNE 30, ~~2016.~~ ~~The $75.1 million decrease in cash~~2022. Cash used in financing activities increased $8.2 million at NW Holdings and decreased $1.1 million at NW Natural. The increase at NW Holdings was ~~primarily due~~attributable to ~~$100 million of~~ proceeds from the issuance of long-term debt, ~~issued in September 2017, as well as lower repayments of $21.8 million of short-term debt compared to the prior period,~~ partially offset by ~~a $40.0 million repayment of long-term~~changes in short-term debt ~~in August 2017.~~and lower proceeds from common stock issuances.

~~Ratios of Earnings to Fixed Charges~~

For the nine and twelve months ended September 30, 2017, and the twelve months ended December 31, 2016, our ratios of earnings to fixed charges, computed using the method outlined by the SEC, were 2.67, 3.34 and 3.39, respectively. For this purpose, earnings consist of net income before income taxes plus fixed charges, and fixed charges consist of interest on all indebtedness, the amortization of debt expense and discount or premium and the estimated interest portion of rentals charged to income. See Exhibit 12 for the detailed ratio calculation.

Contingent Liabilities

Loss contingencies are recorded as liabilities when it is probable ~~that~~ a liability has been incurred and the amount of the loss is reasonably estimable in accordance with accounting standards for contingencies. See “Application of Critical Accounting Policies and Estimates” in ~~our 2016~~the 2022 Form 10-K. At ~~September~~June 30, ~~2017, our~~2023, NW Natural's total estimated liability related to environmental sites is ~~$117.8~~$109.8 million. See ~~Note 13 and~~ "Results of Operations—Regulatory Matters—Rate Mechanisms—Environmental Costs". in the 2022 Form 10-K and Note 16.

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APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing ~~our~~ financial statements in accordance with U.S. GAAP, management exercises judgment to assess the potential outcomes and related accounting impacts in the selection and application of accounting principles, including making estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses, and related disclosures in the financial statements. Management considers ~~our~~ critical accounting policies to be those which are most important to the representation of ~~our~~ financial condition and results of operations and which require management’s most difficult and subjective or complex judgments, including accounting estimates that could result in materially different amounts if we reported under different conditions or if they used different assumptions. Our most critical estimates and judgments for both NW Holdings and NW Natural include accounting for:

•regulatory accounting;

•revenue recognition;

•derivative instruments and hedging activities;

•pensions and postretirement benefits;

•income taxes;

•environmental contingencies; and

•impairment of long-lived ~~assets.~~assets and goodwill.

There have been no material changes to the information provided in the ~~2016~~2022 Form 10-K with respect to the application of critical accounting policies and estimates. See Part II, Item 7, "Application of Critical Accounting Policies and Estimates," in the ~~2016~~2022 Form 10-K.

Management has discussed its current estimates and judgments used in the application of critical accounting policies with the Audit ~~Committee~~Committees of the ~~Board.~~Boards of NW Holdings and NW Natural. Within the context of ~~our~~ critical accounting policies and estimates, management is not aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. For a description of recent accounting pronouncements that could have an impact on ~~our~~ financial condition, results of operations or cash flows, see Note 2.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

WeNW Holdings and NW Natural are exposed to various forms of market risk including commodity supply risk, commodity price ~~and storage value~~ risk, interest rate risk, foreign currency risk, credit risk and weather risk. ~~We monitor~~Management monitors and ~~manage~~manages these financial exposures as an integral part of ~~our~~NW Holdings' and NW Natural's overall risk management program. No material changes have occurred related to ~~our~~ disclosures about market risk for the ~~nine~~six months ended ~~September~~June 30, ~~2017. See~~2023. For additional information, see Part II, Item 1A, “Risk Factors” in this report and Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in the ~~2016~~2022 Form ~~10-K for details regarding these risks.~~10-K.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

~~Our~~NW Holdings and NW Natural management, under the supervision and with the participation of ~~our~~the Chief Executive Officer and Chief Financial Officer, ~~has~~ completed an evaluation of the effectiveness of the design and operation of ~~our~~ disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon this evaluation, ~~our~~the Chief Executive Officer and Chief Financial Officer of each registrant have concluded that, as of the end of the period covered by this report, ~~our~~ disclosure controls and procedures were effective to ensure that information required to be disclosed by useach such registrant and included in ~~our~~ reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the ~~Securities and Exchange Commission (SEC)~~SEC rules and forms and that such information is accumulated and communicated to management of each registrant, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

~~Our~~NW Holdings and NW Natural management isare responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).

There ~~have been~~were no changes in ~~our~~NW Holdings' or NW Natural's internal control over financial reporting ~~that occurred~~ during the quarter ended ~~September~~June 30, ~~2017~~2023, that have materially affected, or are reasonably likely to materially affect, ~~our~~ internal control over financial ~~reporting.~~reporting for NW Holdings and NW Natural. The statements contained in Exhibit 31.1, Exhibit 31.2, Exhibit 31.3, and Exhibit ~~31.2~~31.4 should be considered in light of, and read together with, the information set forth in this Item 4(b).

~~Table of Contents~~

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Other than the proceedings disclosed in Note 1316 and those proceedings disclosed and incorporated by reference in Part I, Item 3, “Legal Proceedings” in ~~our 2016~~the 2022 Form 10-K, we have only ~~routine~~ nonmaterial litigation, or litigation that occurs in the ordinary course of our business.

ITEM 1A. RISK FACTORS

There were no material changes from the risk factors discussed in Part I, Item 1A, "~~Risk Factors~~”"Risk Factors” in ~~our 2016~~the 2022 Form 10-K. In addition to the other information set forth in this report, you should carefully consider those risk factors, which could materially affect our business, financial condition, or results of operations.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information about purchases of ~~our~~NW Holdings' equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the quarter ended ~~September~~June 30, ~~2017:~~2023:


Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased(1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2)	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2)
Balance forward				2,124,528	$	16,732,648
04/01/23-04/30/23	—	—		—	—
05/01/23-05/31/23	—	—		—	—
06/01/23-06/30/23	—	—		—	—
Total	—	$	—	2,124,528	$	16,732,648

(1)During the quarter ended June 30, 2023, no shares of common stock were purchased on the open market to meet the requirements of NW Holdings' Dividend Reinvestment and Direct Stock Purchase Plan. During the quarter ended June 30, 2023, no shares of NW Holdings common stock were purchased on the open market to meet the requirements of share-based compensation programs.

(2)During the quarter ended June 30, 2023, no shares of NW Holdings common stock were repurchased pursuant to the Board-approved share repurchase program. Effective August 3, 2022, we received NW Holdings Board approval to extend the repurchase program. Such authorization will continue until the program is used, terminated or replaced. For more information on this program, refer to Note 5 in the 2022 Form 10-K.

Issuer Purchases of Equity Securities
Period
Total Number
of Shares Purchased⁽¹⁾
Average
Price Paid per Share
Total Number of Shares
Purchased as Part of
Publicly Announced Plans or Programs⁽²⁾

Maximum Dollar Value of
Shares that May Yet Be
Purchased Under the Plans or Programs⁽²⁾
Balance forward 2,124,528
$ 16,732,648
07/01/17-07/31/17 738
$ 59.98
—
—
08/01/17-08/31/17 15,023
64.82
—
—
09/01/17-09/30/17 562
66.32
—
—
Total 16,323
64.65
2,124,528
$ 16,732,648
ITEM 5. OTHER INFORMATION

⁽¹⁾

During the quarter ended September 30, 2017, 14,557 shares of our common stock were purchased on the open market to meet the requirements of our Dividend Reinvestment and Direct Stock Purchase Plan. In addition, 1,766 shares of our common stock were purchased on the open market to meet the requirements of our share-based programs. During the quarter ended September 30, 2017, no shares of our common stock were accepted as payment for stock option exercises pursuant to our Restated Stock Option Plan.

⁽²⁾

We have a common stock share repurchase program under which we purchase shares on the open market or through privately negotiated transactions. We currently have Board authorization through May 31, 2018 to repurchase up to an aggregate of 2.8 million shares or up to an aggregate of $100 million. During the quarter ended September 30, 2017, no shares of our common stock were repurchased pursuant to this program. Since the program’s inception in 2000, we have repurchased approximately 2.1 million shares of common stock at a total cost of approximately $83.3 million.

The following disclosure is intended to satisfy any obligation to provide disclosures pursuant to Item 5.02 of Form 8-K.

As previously reported, effective May 25, 2023, the Boards of Directors of NW Holdings and NW Natural appointed Justin B. Palfreyman as President of NW Holdings and NW Natural and Kim Rush as Senior Vice President and Chief Operating Officer of NW Natural.

As also previously reported, effective July 28, 2023, the Boards of Directors of NW Holdings and NW Natural appointed Brody J. Wilson as interim Chief Financial Officer of NW Holdings and NW Natural in addition to his current role as NW Holdings’ and NW Natural’s Vice President, Treasurer, Chief Accounting Officer and Controller.

Effective August 3, 2023, the Organization and Executive Compensation Committee (Committee) of the Boards of NW Natural and NW Holdings: increased Mr. Palfreyman’s annual salary to $600,000 and target award percentage under NW Natural’s Executive Annual Incentive Plan (EAIP) to 70 percent for 2023; increased Mr. Wilson’s annual salary to $418,500 and target award percentage under NW Natural’s EAIP to 40 percent for 2023; and increased Ms. Rush’s salary to $456,000.

The Committee did not alter any other compensation previously awarded to Mr. Palfreyman, Mr. Wilson or Ms. Rush as part of the Committee’s annual compensation review in February 2023 or otherwise, including targets for performance shares under NW Holding’s Long Term Incentive Plan or performance-based restricted stock units.

ITEM 6. EXHIBITS

See the Exhibit Index ~~below.~~

below, which is incorporated by reference herein.

~~Table of Contents~~

NORTHWEST NATURAL GAS COMPANY

NORTHWEST NATURAL HOLDING COMPANY

Exhibit Index to Quarterly Report on Form 10-Q

For the Quarter Ended ~~September~~June 30, ~~2017~~2023



Exhibit ~~Number~~			~~Document~~
	Index
12Exhibit Number		~~Statement re computation of ratios of earnings to fixed charges.~~ Document

31.1	Certification of Principal Executive Officer of Northwest Natural Gas Company Pursuant to Rule 13a-14(a)/15-d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer of Northwest Natural Gas Company Pursuant to Rule 13a-14(a)/15-d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002.

~~32.1~~ 31.3		Certification of Principal Executive Officer of Northwest Natural Holding Company Pursuant to Rule 13a-14(a)/15-d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002.

31.4		Certification of Principal Financial Officer of Northwest Natural Holding Company Pursuant to Rule 13a-14(a)/15-d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002.

*32.1		Certification of Principal Executive Officer and Principal Financial Officer of Northwest Natural Gas Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~101.~~*32.2		Certification of Principal Executive Officer and Principal Financial Officer of Northwest Natural Holding Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials formatted in Inline Extensible Business Reporting Language (Inline XBRL): (i) Consolidated Statements of Income; (ii) Consolidated Balance Sheets; (iii) Consolidated Statements of Cash Flows; and (iv) Related notes. The instance document does not appear in the interactive data file because XBRL tags are embedded within the Inline XBRL document.

104		The cover page from ~~Northwest Natural Gas~~the Company's Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2017,~~2023, formatted in ~~Extensible Business Reporting Language (XBRL):~~ ~~(i) Consolidated Statements of Income;~~ ~~(ii) Consolidated Balance Sheets;~~ ~~(iii) Consolidated Statements of Cash Flows; and~~ ~~(iv) Related notes.~~ Inline XBRL.

* Pursuant to Item 601(b)(32)(ii) of Regulation S-K, this certification is furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

~~SIGNATURE~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, ~~the~~each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company and its subsidiaries.

NORTHWEST NATURAL GAS COMPANY

(Registrant)


Dated:		August 3, 2023

~~Dated:~~	~~November 3, 2017~~
		/s/ Brody J. Wilson
			Brody J. Wilson
			Principal Accounting Officer
			Chief Financial Officer, Vice President, Treasurer, Chief Accounting Officer and Controller

NORTHWEST NATURAL HOLDING COMPANY

(Registrant)


Dated:	August 3, 2023
		/s/ Brody J. Wilson
		Brody J. Wilson
		Principal Accounting Officer
		Chief Financial Officer, Vice President, Treasurer, Chief Accounting Officer and Controller



~~Oregon~~	~~93-0256722~~
~~(State or other jurisdiction of~~ ~~incorporation or organization)~~	~~(I.R.S. Employer~~ ~~Identification No.)~~


PART 1.		FINANCIAL INFORMATION		Page

			~~Page~~

~~PART 1.~~	~~FINANCIAL INFORMATION~~

	Forward-Looking Statements		3

Item 1.		Unaudited ~~Consolidated~~ Financial Statements:

	Consolidated Statements of Comprehensive Income of Northwest Natural Holding Company for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022		5

	Consolidated Balance Sheets of Northwest Natural Holding Company at ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022 and December 31, ~~2016~~2022		6
		Consolidated Statements of Shareholders' Equity of Northwest Natural Holding Company for the three and six months ended June 30, 2023 and 2022		8
		Consolidated Statements of Cash Flows of Northwest Natural Holding Company for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2023 and ~~2016~~2022		89
		Consolidated Statements of Comprehensive Income of Northwest Natural Gas Company for the three and six months ended June 30, 2023 and 2022		10
		Consolidated Balance Sheets of Northwest Natural Gas Company at June 30 , 2023 and 2022 and December 31, 2022		11
		Consolidated Statements of Shareholder's Equity of Northwest Natural Gas Company for the three and six months ended June 30, 2023 and 2022		13
		Consolidated Statements of Cash Flows of Northwest Natural Gas Company for the six months ended June 30, 2023 and 2022		14
		Notes to Unaudited Consolidated Financial Statements		915

Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations		2741

Item 3.		Quantitative and Qualitative Disclosures About Market Risk		4867

Item 4.		Controls and Procedures		4867

PART II.		OTHER INFORMATION

Item 1.		Legal Proceedings		4967

Item 1A.		Risk Factors		4967

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		4967

Item 5.		Other Information		68

Item 6.		Exhibits		4968

		~~Signature~~Signatures		5070

NORTHWEST NATURAL GAS COMPANY CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	September 30,			September 30,			December 31,
In thousands	2017			2016			2016

Assets:
Current assets:
Cash and cash equivalents	$	15,780		$	6,230		$	3,521
Accounts receivable	23,450			25,506			66,700
Accrued unbilled revenue	15,974			15,537			64,946
Allowance for uncollectible accounts	(459		)	(289		)	(1,290		)
Regulatory assets	49,504			55,280			42,362
Derivative instruments	2,073			4,857			17,031
Inventories	59,549			67,470			54,129
Gas reserves	16,218			16,257			15,926
Income taxes receivable	—			2,257			—
Other current assets	17,457			17,480			24,728
Total current assets	199,546			210,585			288,053
Non-current assets:
Property, plant, and equipment	3,384,122			3,177,196			3,208,816
Less: Accumulated depreciation	986,332			943,334			947,916
Total property, plant, and equipment, net	2,397,790			2,233,862			2,260,900
Gas reserves	87,876			103,976			100,184
Regulatory assets	345,352			341,188			357,530
Derivative instruments	1,555			1,151			3,265
Other investments	69,245			67,853			68,376
Other non-current assets	4,243			1,269			1,493
Total non-current assets	2,906,061			2,749,299			2,791,748
Total assets	$	3,105,607		$	2,959,884		$	3,079,801

NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended September 30,
In thousands	2017			2016

Operating activities:
Net income	$	34,544		$	30,620
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization	63,924			61,435
Regulatory amortization of gas reserves	12,036			11,403
Deferred income taxes	17,287			17,810
Qualified defined benefit pension plan expense	3,923			3,989
Contributions to qualified defined benefit pension plans	(15,400		)	(11,250		)
Deferred environmental expenditures, net	(10,468		)	(8,302		)
Regulatory disallowance of prior environmental cost deferrals	—			3,287
Amortization of environmental remediation	10,920			8,113
Other	2,605			4,817
Changes in assets and liabilities:
Receivables, net	90,735			83,377
Inventories	(5,420		)	3,226
Income taxes	146			7,170
Accounts payable	(29,726		)	(17,612		)
Interest accrued	3,888			3,798
Deferred gas costs	13,419			(10,470		)
Other, net	443			14,988
Cash provided by operating activities	192,856			206,399
Investing activities:
Capital expenditures	(145,441		)	(98,111		)
Other	(1,131		)	2,868
Cash used in investing activities	(146,572		)	(95,243		)
Financing activities:
Repurchases related to stock-based compensation	(2,034		)	(1,042		)
Proceeds from stock options exercised	3,711			5,874
Long-term debt issued	100,000			—
Long-term debt retired	(40,000		)	—
Change in short-term debt	(53,300		)	(75,135		)
Cash dividend payments on common stock	(40,390		)	(38,556		)
Other	(2,012		)	(278		)
Cash used in financing activities	(34,025		)	(109,137		)
Increase in cash and cash equivalents	12,259			2,019
Cash and cash equivalents, beginning of period	3,521			4,211
Cash and cash equivalents, end of period	$	15,780		$	6,230

Supplemental disclosure of cash flow information:
Interest paid, net of capitalization	$	22,859		$	23,271
Income taxes paid (refunded)	11,581			(6,900		)


In thousands, except per share amounts	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
Total shareholders' equity, beginning balances	$	1,248,307	$	987,944	$	1,175,441	$	935,146

Common stock:
Beginning balances	824,304		602,382		805,253		590,771
Stock-based compensation	426		458		3,006		2,232
Shares issued pursuant to equity based plans, net of shares withheld for taxes	1,011		1,080		837		1,004
Issuance of common stock, net of issuance costs	5,394		163,906		22,039		173,819


Ending balances	831,135		767,826		831,135		767,826

Retained earnings:
Beginning balances	430,597		396,769		376,473		355,779
Net income	1,244		1,715		72,915		57,954
Dividends on common stock	(17,443)		(16,521)		(34,990)		(31,770)

Ending balances	414,398		381,963		414,398		381,963

Accumulated other comprehensive income (loss):
Beginning balances	(6,594)		(11,207)		(6,285)		(11,404)
Other comprehensive income	1,339		197		1,030		394

Ending balances	(5,255)		(11,010)		(5,255)		(11,010)

Total shareholders' equity, ending balances	$	1,240,278	$	1,138,779	$	1,240,278	$	1,138,779

Dividends per share of common stock	$	0.4850	$	0.4825	$	0.9700	$	0.9650



	Three Months Ended September 30,
In thousands	Utility			Gas Storage		Other			Total
2017
Operating revenues	$	81,126		$	7,006	$	58		$	88,190
Depreciation and amortization	20,023			1,461		—			21,484
Income (loss) from operations	(9,977		)	3,543		(222		)	(6,656		)
Net income (loss)	(10,349		)	1,899		(45		)	(8,495		)
Capital expenditures	50,009			164		950			51,123
2016
Operating revenues	$	80,378		$	7,293	$	56		$	87,727
Depreciation and amortization	19,173			1,455		—			20,628
Income (loss) from operations	(7,264		)	3,502		(675		)	(4,437		)
Net income (loss)	(9,511		)	1,813		(342		)	(8,040		)
Capital expenditures	36,238			437		—			36,675



Stock price on valuation date	$	59.90
Performance term (in years)	3.0
Quarterly dividends paid per share⁽¹⁾	$	0.4700
Expected dividend yield	3.09		%
Dividend discount factor	0.9156


⁽¹⁾			~~Our net investment in additional wells included in total gas reserves was $6.0 million, $7.0 million and $6.7 million at September 30, 2017 and 2016 and December 31, 2016, respectively.~~



			Credit Rating Downgrade Scenarios
In thousands	(Current Ratings) A+/A3		BBB+/Baa1		BBB/Baa2		BBB-/Baa3			Speculative
With Adequate Assurance Calls	$	—	$	—	$	—	$	(3,138	)	$	(9,146	)
Without Adequate Assurance Calls	—		—		—		(3,138		)	(7,113		)


	Current Liabilities						Non-Current Liabilities
	June 30,				December 31,		June 30,				December 31,
In thousands	2023		2022		2022		2023		2022		2022
Portland Harbor site:
Gasco/Siltronic Sediments	$	8,103	$	6,144	$	9,744	$	42,120	$	40,740	$	42,120
Other Portland Harbor	2,838		2,313		2,634		10,143		8,613		11,270
Gasco/Siltronic Upland site	11,424		11,050		16,067		33,516		34,352		35,457

Front Street site	513		585		457		939		868		879
Oregon Steel Mills	—		—		—		179		179		179
Total	$	22,878	$	20,092	$	28,902	$	86,897	$	84,752	$	89,905


⁽¹⁾	~~Includes pre-review and post-review deferred costs, amounts currently in amortization, and interest, net of amounts collected from customers.~~


⁽²⁾	Excludes $0.3 million, or 3.32% of the Front Street site liability as the OPUC allows recovery of 96.68% of costs for those sites allocable to Oregon, including those that historically served only Oregon customers.



	Three Months Ended September 30,						Nine Months Ended September 30,
Dollars and therms in thousands, except EPS data	2017			2016			2017		2016		QTR Change			YTD Change
Utility net income (loss)	$	(10,349	)	$	(9,511	)	$	31,980	$	26,848	$	(838	)	$	5,132
EPS - utility segment	$	(0.36	)	$	(0.35	)	$	1.11	$	0.97	$	(0.01	)	$	0.14
Gas sold and delivered (in therms)	163,621			162,205			865,903		727,687		1,416			138,216
Utility margin⁽¹⁾	$	52,532		$	50,923		$	269,172	$	256,958	$	1,609		$	12,214



	Three Months Ended September 30,				Nine Months Ended September 30,
Dollars and therms in thousands	2017		2016		2017		2016		QTR Change			YTD Change
Cost of gas	$	27,239	$	28,264	$	223,855	$	157,546	$	(1,025	)	$	66,309
Volumes sold (therms)⁽¹⁾	72,634		73,329		562,220		441,746		(695		)	120,474
Average cost of gas (cents per therm)	$	0.38	$	0.39	$	0.40	$	0.36	$	(0.01	)	$	0.04
Gain from gas cost incentive sharing⁽²⁾	$	102	$	85	$	940	$	4,151	$	17		$	(3,211	)



Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽²⁾	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs⁽²⁾
Balance forward				2,124,528	$	16,732,648
07/01/17-07/31/17	738	$	59.98	—	—
08/01/17-08/31/17	15,023	64.82		—	—
09/01/17-09/30/17	562	66.32		—	—
Total	16,323	64.65		2,124,528	$	16,732,648