UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-Q


[X]☒       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20182022
OR
[  ]  ☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to____________
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NORTHWEST NATURAL HOLDING COMPANYNORTHWEST NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter) 
Commission file number1-38681Commission file number1-15973
Oregon82-4710680Oregon93-0256722
(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)		(State or other jurisdiction of
incorporation or organization)		(I.R.S. Employer
Identification No.)
250 SW Taylor Street250 SW Taylor Street
 PortlandOregon97204 PortlandOregon97204
(Address of principal executive offices)  (Zip Code)(Address of principal executive offices)  (Zip Code)
Registrant’s telephone number, including area code:(503)226-4211Registrant’s telephone number, including area code:(503)226-4211
Securities registered pursuant to Section 12(b) of the Act:
RegistrantTitle of each classTrading Symbol
Name of each exchange
on which registered
NORTHWEST NATURAL HOLDING COMPANYCommon StockNWNNew York Stock Exchange
NORTHWEST NATURAL GAS COMPANYNone
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
NORTHWEST NATURAL HOLDING COMPANYYes☒No☐NORTHWEST NATURAL GAS COMPANYYes☒No☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   
NORTHWEST NATURAL HOLDING COMPANYYes☒No☐NORTHWEST NATURAL GAS COMPANYYes☒No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
NORTHWEST NATURAL HOLDING COMPANYNORTHWEST NATURAL GAS COMPANY
Large Accelerated Filer☒Large Accelerated Filer☐
Accelerated Filer☐Accelerated Filer☐
Non-accelerated Filer☐Non-accelerated Filer☒
Smaller Reporting Company☐Smaller Reporting Company☐
Emerging Growth Company☐Emerging Growth Company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
NORTHWEST NATURAL HOLDING COMPANYYes☐No☒NORTHWEST NATURAL GAS COMPANYYes☐No☒
Commission file number 1-15973Commission file number 1-38681
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NORTHWEST NATURAL GAS COMPANYNORTHWEST NATURAL HOLDING COMPANY
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter) 
Oregon93-0256722Oregon82-4710680
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
220 N.W. Second Avenue, Portland, Oregon 97209
(Address of principal executive offices)  (Zip Code)
Registrant’s telephone number:  (503) 226-4211

220 N.W. Second Avenue, Portland, Oregon 97209
(Address of principal executive offices)  (Zip Code)
Registrant’s telephone number:  (503) 226-4211

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
NORTHWEST NATURAL GAS COMPANY Yes[ X ]  No[   ]NORTHWEST NATURAL HOLDING COMPANY Yes[ X ]  No[   ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   
NORTHWEST NATURAL GAS COMPANY Yes[ X ]  No[   ]NORTHWEST NATURAL HOLDING COMPANY Yes[ X ]  No[   ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
NORTHWEST NATURAL GAS COMPANYNORTHWEST NATURAL HOLDING COMPANY
Large Accelerated Filer [    ]Large Accelerated Filer [ X ]
Accelerated Filer [    ]Accelerated Filer [    ]
Non-accelerated Filer [ X ]Non-accelerated Filer [    ]   
Smaller Reporting Company [    ]Smaller Reporting Company [    ]
Emerging Growth Company [    ]Emerging Growth Company [    ]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
NORTHWEST NATURAL GAS COMPANY Yes[   ]  No[ X ]NORTHWEST NATURAL HOLDING COMPANY Yes[   ]  No[ X ]
At October 26, 2018, 28,844,682July 28, 2022, 34,817,043 shares of Northwest Natural Holding Company's Common Stock (the only class of Common Stock) were outstanding, and 28,844,190outstanding. All shares of Northwest Natural Gas Company's Common Stock (the only class of Common Stock) were outstanding all of which were held by Northwest Natural Holding Company.
This combined Form 10-Q is separately filed by Northwest Natural Holding Company and Northwest Natural Gas Company. Information contained in this document relating to Northwest Natural Gas Company is filed by Northwest Natural Holding Company and separately by Northwest Natural Gas Company. Northwest Natural Gas Company makes no representation as to information relating to Northwest Natural Holding Company or its subsidiaries, except as it may relate to Northwest Natural Gas Company and its subsidiaries.



NORTHWEST NATURAL GAS COMPANY
NORTHWEST NATURAL HOLDING COMPANY
For the Quarterly Period Ended SeptemberJune 30, 20182022


TABLE OF CONTENTS
PART 1.FINANCIAL INFORMATIONPage
PART 1.FINANCIAL INFORMATIONPage
3
Unaudited Financial Statements:
Consolidated Statements of Comprehensive Income of Northwest Natural Holding Company for the three and sixmonths ended June 30, 2022 and 2021
5
Consolidated Balance Sheets of Northwest Natural Holding Company at June 30, 2022 and 2021 and December 31, 2021
6
Consolidated Statements of Shareholders' Equity of Northwest Natural Holding Company for the three and sixmonths ended June 30, 2022 and 2021
8
Consolidated Statements of Cash Flows of Northwest Natural Holding Company for the six monthsended June 30, 2022 and 2021
9
Consolidated Statements of Comprehensive Income of Northwest Natural Gas Company for the three and nine six months ended SeptemberJune 30 2018, 2022 and 20172021
510
Consolidated Balance Sheets of Northwest Natural Gas Company at SeptemberJune 30 2018, 2022 and 20172021 and December 31, 20172021
611
Consolidated Statements of Shareholder's Equity of Northwest Natural Gas Company for the three and six months ended June 30, 2022 and 2021
13
Consolidated Statements of Cash Flows of Northwest Natural Gas Company for the nine six months ended SeptemberJune 30 2018, 2022 and 20172021
814
Northwest Natural Holding Company Balance Sheet at September 30, 2018
8
Northwest Natural Holding Company Statement of Cash Flows from inception through September 30, 2018
8
Notes to Unaudited Consolidated Financial Statements
1115
3439
5464
5464
PART II.OTHER INFORMATION
5564
5564
5564
65
5565
5767




PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, which are subject to the safe harbors created by such Act. Forward-looking statements can be identified by words such as anticipates, assumes, may, intends, plans, projects, seeks, believes, estimates, expects, will, could, and similar references (including the negatives thereof) to future periods.periods, although not all forward-looking statements contain these words. Examples of forward-looking statements include, but are not limited to, statements regarding the following:
•plans, projections and predictions;
•objectives, goals, visions or strategies;
•assumptions, generalizations and estimates;
•ongoing continuation of past practices or patterns;
•future events or performance;
•trends;
•risks;
•uncertainties;
•timing and cyclicality;
•economic conditions, including impacts of inflation and interest rates, and general economic uncertainty;
•earnings and dividends;
•capital expenditures and allocation;
•capital markets or access to capital;
•capital or organizational structure, including restructuring as a holding company;structure;
•matters related to climate change and our role in decarbonization or a low-carbon future;
growth;•renewable natural gas, environmental attributes related thereto, and hydrogen;
•our strategy to reduce greenhouse gas emissions and the efficacy of communicating that strategy to shareholders, investors, stakeholders and communities;
•the policies and priorities of the current presidential administration and U.S. Congress;
•growth;
•customer rates;
•pandemic and related illness or quarantine, including COVID-19 and related variants, economic conditions related thereto, the resumption of normal business operations, availability and acceptance of vaccinations, and potential future shutdowns;
•labor relations and workforce succession;
•commodity costs;
•desirability and cost competitiveness of natural gas;
•gas reserves;
•operational and financial performance and costs;
•energy policy, infrastructure and preferences;
•public policy approach and involvement;
•efficacy of derivatives and hedges;
•liquidity, financial positions, and planned securities issuances;
•valuations;
•project and program development, expansion, or investment;
•business development efforts, including new business lines such as unregulated renewable natural gas, and acquisitions and integration thereof;
asset dispositions•implementation and outcomes thereof;execution of our water strategy;
•pipeline capacity, demand, location, and reliability;
•adequacy of property rights and headquarteroperations center development;
•technology implementation and cybersecurity practices;
•competition;
•procurement and development of gas (including renewable natural gas) and water supplies;
•estimated expenditures;expenditures, supply chain and third party availability and impairment;
•costs of compliance;compliance, and our ability to include those costs in rates;
•customers bypassing our infrastructure;
•credit exposures;
seasonality of gas utility earnings;•uncollectible account amounts;
•rate or regulatory outcomes, recovery or refunds;refunds, and the availability of public utility commissions to take action;
•impacts or changes of executive orders, laws, rules and regulations;regulations, or legal challenges related thereto;
•tax liabilities or refunds, including effects of tax reform and related timing variances;legislation;
•levels and pricing of gas storage contracts and gas storage markets;
•outcomes, timing and effects of potential claims, litigation, regulatory actions, and other administrative matters;
•projected obligations, expectations and treatment with respect to, and the impact of new legislation on, retirement plans;
•international, federal, state, and local efforts to regulate, in a variety of ways, greenhouse gas emissions, and the effects of those efforts;
•geopolitical factors, such as the Russia/Ukraine conflict;
3


•disruptions caused by social unrest, including related protests or disturbances;
•availability, adequacy, and shift in mix, of gas and water supplies;
•effects of new or anticipated changes in critical accounting policies or estimates;
•approval and adequacy of regulatory deferrals;
•effects and efficacy of regulatory mechanisms; and
•environmental, regulatory, litigation and insurance costs and recoveries, and timing thereof.


Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We therefore caution you against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future operational or financial performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in NW Holdings' and NW Natural's 20172021 Annual Report on Form 10-K, Part I, Item 1A “Risk Factors”“Risk Factors” and Part II, Item 7 and Item 7A, “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” and “Quantitative“Quantitative and Qualitative Disclosures about Market Risk”, respectively, and in Part I of this report, Items 2 and 3, “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” and “Quantitative“Quantitative and Qualitative Disclosures About Market Risk”Risk”, respectively of Part II of this report.respectively.


3

Table of Contents





Any forward-looking statement made by us in this report speaks only as of the date on which it is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.


4



Table of Contents




ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS



NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
Three Months Ended September 30, Nine Months Ended September 30,
In thousands, except per share data 2018 2017 2018 2017
         
Operating revenues $91,239
 $86,213
 $479,441
 $516,413
         
Operating expenses:        
Cost of gas 25,538
 27,239
 175,697
 223,855
Operations and maintenance 37,569
 34,267
 115,120
 106,710
Environmental remediation 1,022
 1,355
 7,528
 10,920
General taxes 7,589
 7,540
 24,792
 23,423
Revenue taxes 3,522
 —
 20,731
 —
Depreciation and amortization 21,485
 20,352
 63,507
 60,529
Other operating expenses 625
 —
 2,157
 —
Total operating expenses 97,350
 90,753
 409,532
 425,437
Income (loss) from operations (6,111) (4,540) 69,909
 90,976
Other income (expense), net (312) 139
 (1,139) (624)
Interest expense, net 9,006
 9,208
 27,051
 28,311
Income (loss) before income taxes (15,429) (13,609) 41,719
 62,041
Income tax (benefit) expense (4,285) (5,722) 11,191
 24,456
Net income (loss) from continuing operations (11,144) (7,887) 30,528
 37,585
Loss from discontinued operations, net of tax (650) (608) (1,783) (3,041)
Net income (loss) (11,794) (8,495) 28,745
 34,544
Other comprehensive income:        
Amortization of non-qualified employee benefit plan liability, net of taxes of $55 and $98 for the three months ended and $166 and $275 for the nine months ended September 30, 2018 and 2017, respectively 154
 150
 461
 423
Comprehensive income (loss) $(11,640) $(8,345) $29,206
 $34,967
Average common shares outstanding:        
Basic 28,815
 28,678
 28,787
 28,653
Diluted 28,815
 28,678
 28,846
 28,734
Earnings (loss) from continuing operations per share of common stock:        
Basic $(0.39) $(0.28) $1.06
 $1.32
Diluted (0.39) (0.28) 1.06
 1.31
Loss from discontinued operations per share of common stock:        
Basic $(0.02) $(0.02) $(0.06) $(0.11)
Diluted (0.02) (0.02) (0.06) (0.11)
Earnings (loss) per share of common stock:        
Basic $(0.41) $(0.30) $1.00
 $1.21
Diluted (0.41) (0.30) 1.00
 1.20
NORTHWEST NATURAL HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended June 30,Six Months Ended June 30,
In thousands, except per share data2022202120222021
Operating revenues$194,960 $148,917 $545,261 $464,863 
Operating expenses:
Cost of gas79,720 41,193 225,308 153,403 
Operations and maintenance53,175 50,047 110,660 102,238 
Environmental remediation2,267 1,509 6,970 5,286 
General taxes8,989 8,914 21,093 20,283 
Revenue taxes8,240 5,671 21,600 18,335 
Depreciation28,110 28,144 56,539 56,241 
Other operating expenses920 815 1,914 1,747 
Total operating expenses181,421 136,293 444,084 357,533 
Income from operations13,539 12,624 101,177 107,330 
Other income (expense), net226 (2,597)(728)(6,139)
Interest expense, net11,580 11,028 23,102 22,154 
Income (loss) before income taxes2,185 (1,001)77,347 79,037 
Income tax expense (benefit)470 (277)19,393 20,244 
Net income (loss)1,715 (724)57,954 58,793 
Other comprehensive income:
Amortization of non-qualified employee benefit plan liability, net of taxes of $71 and $80 for the three months ended and $142 and $160 for the six months ended June 30, 2022 and 2021, respectively197 221 394 442 
Comprehensive income (loss)$1,912 $(503)$58,348 $59,235 
Average common shares outstanding:
Basic34,307 30,664 32,756 30,639 
Diluted34,352 30,664 32,805 30,671 
Earnings (loss) per share of common stock:
Basic$0.05 $(0.02)$1.77 $1.92 
Diluted0.05 (0.02)1.77 1.92 

See Notes to Unaudited Consolidated Financial Statements


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NORTHWEST NATURAL HOLDING COMPANY
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

  September 30, September 30, December 31,
In thousands 2018 2017 2017
       
Assets:      
Current assets:      
Cash and cash equivalents $29,965
 $15,780
 $3,472
Accounts receivable 25,125
 21,930
 66,236
Accrued unbilled revenue 16,351
 15,974
 62,381
Allowance for uncollectible accounts (394) (459) (956)
Regulatory assets 41,241
 49,504
 45,781
Derivative instruments 2,871
 2,073
 1,735
Inventories 53,064
 59,135
 47,577
Gas reserves 16,916
 16,218
 15,704
Other current assets 20,376
 17,285
 24,949
Discontinued operations current assets (Note 16) 12,644
 2,106
 3,057
Total current assets 218,159
 199,546
 269,936
Non-current assets:      
Property, plant, and equipment 3,370,388
 3,148,545
 3,204,635
Less: Accumulated depreciation 996,994
 954,782
 960,477
Total property, plant, and equipment, net 2,373,394
 2,193,763
 2,244,158
Gas reserves 70,556

87,876
 84,053
Regulatory assets 333,917
 345,352
 356,608
Derivative instruments 861
 1,555
 1,306
Other investments 65,113
 69,245
 66,363
Goodwill 6,563
 —
 —
Other non-current assets 12,844
 4,192
 6,505
Discontinued operations non-current assets (Note 16) —
 204,078
 10,817
Total non-current assets 2,863,248
 2,906,061
 2,769,810
Total assets $3,081,407
 $3,105,607
 $3,039,746
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

June 30,June 30,December 31,
In thousands202220212021
Assets:
Current assets:
Cash and cash equivalents$17,209 $20,084 $18,559 
Accounts receivable68,583 60,713 101,495 
Accrued unbilled revenue18,060 13,592 82,169 
Allowance for uncollectible accounts(1,356)(3,283)(2,018)
Regulatory assets92,803 60,672 72,391 
Derivative instruments60,652 46,168 48,130 
Inventories65,983 39,024 57,262 
Income taxes receivable— 6,000 — 
Other current assets36,060 30,871 59,288 
Total current assets357,994 273,841 437,276 
Non-current assets:
Property, plant, and equipment4,129,236 3,849,792 3,997,243 
Less: Accumulated depreciation1,150,555 1,093,863 1,125,873 
Total property, plant, and equipment, net2,978,681 2,755,929 2,871,370 
Regulatory assets301,855 330,710 314,579 
Derivative instruments9,121 7,912 10,730 
Other investments96,027 77,577 89,278 
Operating lease right of use asset, net73,754 76,294 75,049 
Assets under sales-type leases136,673 141,408 138,995 
Goodwill70,714 69,313 70,570 
Other non-current assets75,699 50,516 56,757 
Total non-current assets3,742,524 3,509,659 3,627,328 
Total assets$4,100,518 $3,783,500 $4,064,604 

See Notes to Unaudited Consolidated Financial Statements



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NORTHWEST NATURAL HOLDING COMPANY
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

  September 30, September 30, December 31,
In thousands 2018 2017 2017
       
Liabilities and equity:      
Current liabilities:      
Short-term debt $100,500
 $—
 $54,200
Current maturities of long-term debt 84,940
 21,995
 96,703
Accounts payable 80,143
 87,123
 111,021
Taxes accrued 13,074
 11,933
 18,883
Interest accrued 9,453
 9,854
 6,773
Regulatory liabilities 37,504
 34,659
 34,013
Derivative instruments 8,828
 8,968
 18,722
Other current liabilities 35,497
 27,218
 39,942
Discontinued operations current liabilities (Note 16) 13,003
 1,201
 1,593
Total current liabilities 382,942
 202,951
 381,850
Long-term debt 724,654
 757,429
 683,184
Deferred credits and other non-current liabilities:      
Deferred tax liabilities 274,315
 572,293
 270,526
Regulatory liabilities 606,175
 363,838
 586,093
Pension and other postretirement benefit liabilities 212,249
 212,259
 223,333
Derivative instruments 3,016
 3,926
 4,649
Other non-current liabilities 140,475
 134,123
 135,292
Discontinued operations - non-current liabilities (Note 16) —
 12,106
 12,043
Total deferred credits and other non-current liabilities 1,236,230
 1,298,545
 1,231,936
Commitments and contingencies (Note 15) 

 

 

Equity:      
Common stock - no par value; authorized 100,000 shares; issued and outstanding 28,844, 28,713, and 28,736 at September 30, 2018 and 2017, and December 31, 2017, respectively 455,499
 447,129
 448,865
Retained earnings 290,059
 406,081
 302,349
Accumulated other comprehensive loss (7,977) (6,528) (8,438)
Total equity 737,581
 846,682
 742,776
Total liabilities and equity $3,081,407
 $3,105,607
 $3,039,746
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

June 30,June 30,December 31,
In thousands, including share information202220212021
Liabilities and equity:
Current liabilities:
Short-term debt$222,700 $240,000 $389,500 
Current maturities of long-term debt351 60,274 345 
Accounts payable135,364 97,854 133,486 
Taxes accrued11,324 15,143 15,520 
Interest accrued7,425 7,425 7,503 
Regulatory liabilities97,277 103,210 112,281 
Derivative instruments15,918 3,393 10,402 
Operating lease liabilities1,315 1,228 1,296 
Other current liabilities47,624 43,946 54,432 
Total current liabilities539,298 572,473 724,765 
Long-term debt1,045,530 915,501 1,044,587 
Deferred credits and other non-current liabilities:
Deferred tax liabilities355,470 325,600 340,231 
Regulatory liabilities658,925 645,046 658,332 
Pension and other postretirement benefit liabilities162,511 203,854 166,684 
Derivative instruments9,475 453 412 
Operating lease liabilities78,826 80,088 79,468 
Other non-current liabilities111,704 117,659 114,979 
Total deferred credits and other non-current liabilities1,376,911 1,372,700 1,360,106 
Commitments and contingencies (Note 16)000
Equity: 
Common stock - no par value; authorized 100,000 shares; issued and outstanding 34,754, 30,672, and 31,129 at June 30, 2022 and 2021, and December 31, 2021, respectively767,826 569,785 590,771 
Retained earnings381,963 365,501 355,779 
Accumulated other comprehensive loss(11,010)(12,460)(11,404)
Total equity1,138,779 922,826 935,146 
Total liabilities and equity$4,100,518 $3,783,500 $4,064,604 

See Notes to Unaudited Consolidated Financial Statements





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NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
  Nine Months Ended September 30,
In thousands 2018 2017
     
Operating activities:    
Net income $28,745
 $34,544
Adjustments to reconcile net income to cash provided by operations:    
Depreciation and amortization 63,507
 60,529
Regulatory amortization of gas reserves 12,056
 12,036
Deferred income taxes 3,954
 17,287
Qualified defined benefit pension plan expense 4,450
 3,923
Contributions to qualified defined benefit pension plans (11,690) (15,400)
Deferred environmental expenditures, net (10,547) (10,468)
Amortization of environmental remediation 7,528
 10,920
Regulatory revenue deferral from the TCJA 6,983
 —
Other 1,541
 2,522
Changes in assets and liabilities:    
Receivables, net 83,194
 90,311
Inventories (5,134) (5,372)
Income taxes (5,809) (216)
Accounts payable (22,929) (29,282)
Interest accrued 2,680
 3,888
Deferred gas costs 2,372
 13,419
Other, net (3,588) 28
Discontinued operations 1,216
 4,187
Cash provided by operating activities 158,529
 192,856
Investing activities:    
Capital expenditures (158,795) (145,274)
Other (1,661) (1,131)
Discontinued operations (619) (167)
Cash used in investing activities (161,075) (146,572)
Financing activities:    
Repurchases related to stock-based compensation —
 (2,034)
Proceeds from stock options exercised 1,368
 3,711
Long-term debt issued 50,000
 100,000
Long-term debt retired (22,000) (40,000)
Change in short-term debt 46,300
 (53,300)
Cash dividend payments on common stock (38,387) (40,390)
Stock purchases related to acquisitions (7,951) —
Other (291) (2,012)
Cash provided by (used in) financing activities 29,039
 (34,025)
Increase in cash and cash equivalents 26,493
 12,259
Cash and cash equivalents, beginning of period 3,472
 3,521
Cash and cash equivalents, end of period $29,965
 $15,780
     
Supplemental disclosure of cash flow information:    
Interest paid, net of capitalization $22,821
 $22,859
Income taxes paid, net of refunds 22,047
 11,581
In thousands, except per share amountsThree Months Ended June 30,Six Months Ended June 30,
2022202120222021
Total shareholders' equity, beginning balances$987,944 $936,324 $935,146 $888,733 
Common stock:
Beginning balances602,382 568,066 590,771 565,112 
Stock-based compensation458 416 2,232 2,446 
Shares issued pursuant to equity based plans, net of shares withheld for taxes1,080 1,303 1,004 2,227 
Issuance of common stock, net of issuance costs163,906 — 173,819 — 
Ending balances767,826 569,785 767,826 569,785 
Retained earnings:
Beginning balances396,769 380,939 355,779 336,523 
Net income (loss)1,715 (724)57,954 58,793 
Dividends on common stock(16,521)(14,714)(31,770)(29,815)
Ending balances381,963 365,501 381,963 365,501 
Accumulated other comprehensive income (loss):
Beginning balances(11,207)(12,681)(11,404)(12,902)
Other comprehensive income197 221 394 442 
Ending balances(11,010)(12,460)(11,010)(12,460)
Total shareholders' equity, ending balances$1,138,779 $922,826 $1,138,779 $922,826 
Dividends per share of common stock$0.4825 $0.4800 $0.9650 $0.9600 

See Notes to Unaudited Consolidated Financial Statements


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NORTHWEST NATURAL HOLDING COMPANY
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEET (UNAUDITED)

  September 30,
In thousands, except share amounts 2018
   
Assets:  
Current assets:  
Cash and cash equivalents $20,000
Total current assets 20,000
Total assets $20,000
   
Equity:  
Common stock - no par value; authorized 100,000,000 shares; 100 issued and outstanding at September 30, 2018 $20,000
Total equity $20,000
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Six Months Ended June 30,
In thousands20222021
Operating activities:
Net income$57,954 $58,793 
Adjustments to reconcile net income to cash provided by operations:
Depreciation56,539 56,241 
Regulatory amortization of gas reserves2,984 7,597 
Deferred income taxes10,659 1,048 
Qualified defined benefit pension plan expense2,882 7,874 
Contributions to qualified defined benefit pension plans— (9,590)
Deferred environmental expenditures, net(9,608)(9,625)
Environmental remediation expense6,970 5,286 
Asset optimization revenue sharing bill credits(41,102)(9,053)
Other9,961 10,663 
Changes in assets and liabilities:
Receivables, net96,453 73,133 
Inventories(8,721)3,666 
Income and other taxes17,241 21,467 
Accounts payable(13,728)(17,239)
Deferred gas costs2,607 (26,962)
Asset optimization revenue sharing3,929 36,872 
Decoupling mechanism9,669 (6,860)
Other, net(8,125)(9,030)
Cash provided by operating activities196,564 194,281 
Investing activities:
Capital expenditures(167,696)(130,108)
Acquisitions, net of cash acquired— (55)
Proceeds from the sale of assets345 2,234 
Other(2,336)46 
Cash used in investing activities(169,687)(127,883)
Financing activities:
Proceeds from common stock issued, net174,053 — 
Long-term debt issued692 55,000 
Long-term debt retired— (35,000)
Proceeds from term loan due within one year— 100,000 
Repayment of commercial paper, maturities greater than three months— (195,025)
Changes in other short-term debt, net(166,800)30,500 
Cash dividend payments on common stock(30,311)(27,842)
Other(1,596)(1,175)
Cash used in financing activities(23,962)(73,542)
Increase (decrease) in cash, cash equivalents and restricted cash2,915 (7,144)
Cash, cash equivalents and restricted cash, beginning of period27,120 35,454 
Cash, cash equivalents and restricted cash, end of period$30,035 $28,310 
Supplemental disclosure of cash flow information:
Interest paid, net of capitalization$22,867 $21,971 
Income taxes paid, net of refunds1,086 7,405 

See Notes to Unaudited Consolidated Financial Statements


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NORTHWEST NATURAL GAS COMPANY
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
In thousands Inception through September 30, 2018
   
Financing activities:  
Capital contributions $20,000
Cash provided by financing activities 20,000
Increase in cash and cash equivalents 20,000
Cash and cash equivalents, at inception —
Cash and cash equivalents, end of period $20,000
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended June 30,Six Months Ended June 30,
In thousands2022202120222021
Operating revenues$190,251 $144,579 $536,875 $456,929 
Operating expenses:
Cost of gas79,776 41,249 225,420 153,515 
Operations and maintenance48,879 44,939 102,756 94,126 
Environmental remediation2,267 1,509 6,970 5,286 
General taxes8,872 8,783 20,861 20,042 
Revenue taxes8,208 5,650 21,532 18,305 
Depreciation27,328 27,530 54,965 54,699 
Other operating expenses796 780 1,695 1,699 
Total operating expenses176,126 130,440 434,199 347,672 
Income from operations14,125 14,139 102,676 109,257 
Other income (expense), net17 (2,566)(964)(6,231)
Interest expense, net10,599 10,696 21,430 21,486 
Income before income taxes3,543 877 80,282 81,540 
Income tax expense810 288 20,133 20,840 
Net income2,733 589 60,149 60,700 
Other comprehensive income:
Amortization of non-qualified employee benefit plan liability, net of taxes of $71 and $80 for the three months ended and $142 and $160 for the six months ended June 30, 2022 and 2021, respectively197 221 394 442 
Comprehensive income$2,930 $810 $60,543 $61,142 

See Notes to Unaudited Consolidated Financial Statements



10




NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30,June 30,December 31,
In thousands202220212021
Assets:
Current assets:
Cash and cash equivalents$10,267 $11,488 $12,271 
Accounts receivable66,186 51,849 99,780 
Accrued unbilled revenue17,840 13,474 82,028 
Receivables from affiliates300 301 261 
Allowance for uncollectible accounts(1,299)(3,239)(1,962)
Regulatory assets92,803 60,672 72,391 
Derivative instruments60,652 46,168 48,130 
Inventories64,726 38,549 56,752 
Other current assets31,784 30,630 47,378 
Total current assets343,259 249,892 417,029 
Non-current assets:
Property, plant, and equipment4,052,467 3,794,870 3,931,640 
Less: Accumulated depreciation1,142,611 1,088,743 1,119,361 
Total property, plant, and equipment, net2,909,856 2,706,127 2,812,279 
Regulatory assets301,790 330,670 314,539 
Derivative instruments9,121 7,912 10,730 
Other investments81,486 77,547 74,786 
Operating lease right of use asset, net73,706 76,211 74,987 
Assets under sales-type leases136,673 141,408 138,995 
Other non-current assets74,106 49,665 55,027 
Total non-current assets3,586,738 3,389,540 3,481,343 
Total assets$3,929,997 $3,639,432 $3,898,372 

See Notes to Unaudited Consolidated Financial Statements
11


NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30,June 30,December 31,
In thousands202220212021
Liabilities and equity:
Current liabilities:
Short-term debt$78,700 $198,000 $245,500 
Current maturities of long-term debt— 59,987 — 
Accounts payable132,002 95,109 131,475 
Payables to affiliates7,259 22,869 1,248 
Taxes accrued11,289 10,072 15,476 
Interest accrued7,207 7,373 7,296 
Regulatory liabilities97,277 103,210 112,281 
Derivative instruments15,918 3,393 10,402 
Operating lease liabilities1,298 1,193 1,273 
Other current liabilities46,816 43,389 53,591 
Total current liabilities397,766 544,595 578,542 
Long-term debt986,762 857,422 986,495 
Deferred credits and other non-current liabilities:
Deferred tax liabilities352,606 323,522 337,717 
Regulatory liabilities657,943 644,177 657,350 
Pension and other postretirement benefit liabilities162,511 203,854 166,684 
Derivative instruments9,475 453 412 
Operating lease liabilities78,789 80,043 79,431 
Other non-current liabilities110,469 116,975 113,934 
Total deferred credits and other non-current liabilities1,371,793 1,369,024 1,355,528 
Commitments and contingencies (Note 16)000
Equity: 
Common stock601,032 319,506 435,515 
Retained earnings583,654 561,345 553,696 
Accumulated other comprehensive loss(11,010)(12,460)(11,404)
Total equity1,173,676 868,391 977,807 
Total liabilities and equity$3,929,997 $3,639,432 $3,898,372 

See Notes to Unaudited Consolidated Financial Statements

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12







NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED)
In thousandsThree Months Ended June 30,Six Months Ended June 30,
2022202120222021
Total shareholder's equity, beginning balances$1,021,609 $881,565 $977,807 $835,184 
Common stock:
Beginning balances436,042 319,506 435,515 319,506 
Capital contributions from parent164,990 — 165,517 — 
Ending balances601,032 319,506 601,032 319,506 
Retained earnings:
Beginning balances596,774 574,740 553,696 528,580 
Net income2,733 589 60,149 60,700 
Dividends on common stock(15,853)(13,984)(30,191)(27,935)
Ending balances583,654 561,345 583,654 561,345 
Accumulated other comprehensive income (loss):
Beginning balances(11,207)(12,681)(11,404)(12,902)
Other comprehensive income197 221 394 442 
Ending balances(11,010)(12,460)(11,010)(12,460)
Total shareholder's equity, ending balances$1,173,676 $868,391 $1,173,676 $868,391 

See Notes to Unaudited Consolidated Financial Statements

13



NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,
In thousands20222021
Operating activities:
Net income$60,149 $60,700 
Adjustments to reconcile net income to cash provided by operations:
Depreciation54,965 54,699 
Regulatory amortization of gas reserves2,984 7,597 
Deferred income taxes10,308 201 
Qualified defined benefit pension plan expense2,882 7,874 
Contributions to qualified defined benefit pension plans— (9,590)
Deferred environmental expenditures, net(9,608)(9,625)
Environmental remediation expense6,970 5,286 
Asset optimization revenue sharing bill credits(41,102)(9,053)
Other9,158 9,534 
Changes in assets and liabilities:
Receivables, net97,175 74,354 
Inventories(7,974)3,775 
Income and other taxes16,069 19,440 
Accounts payable(16,341)(19,936)
Deferred gas costs2,607 (26,962)
Asset optimization revenue sharing3,929 36,872 
Decoupling mechanism9,669 (6,860)
Other, net(8,404)(8,361)
Cash provided by operating activities193,436 189,945 
Investing activities:
Capital expenditures(156,189)(125,167)
Proceeds from the sale of assets345 2,234 
Other(2,336)46 
Cash used in investing activities(158,180)(122,887)
Financing activities:
Cash contributions received from parent165,517 — 
Proceeds from term loan due within one year— 100,000 
Repayment of commercial paper, maturities greater than three months— (195,025)
Changes in other short-term debt, net(166,800)61,500 
Cash dividend payments on common stock(30,191)(27,935)
Other(1,521)(1,623)
Cash used in financing activities(32,995)(63,083)
Increase in cash, cash equivalents and restricted cash2,261 3,975 
Cash, cash equivalents and restricted cash, beginning of period20,832 15,739 
Cash, cash equivalents and restricted cash, end of period$23,093 $19,714 
Supplemental disclosure of cash flow information:
Interest paid, net of capitalization$21,270 $21,285 
Income taxes paid, net of refunds3,490 10,910 

See Notes to Unaudited Consolidated Financial Statements
14


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
On October 1, 2018, Northwest Natural Gas Company (NW Natural) and Northwest Natural Holding Company (NW Holdings) completed the reorganization into a holding company structure. NW Holdings is now the parent holding company of NW Natural, NW Natural Water Company, LLC (NWN Water) and other subsidiaries previously held by NW Natural. For further discussion, see Note 17. These financial statements and accompanying notes are for the period ending September 30, 2018 and reflect the organizational structure prior to the reorganization.

The accompanying consolidated financial statements represent the respective, consolidated financial results of NWNorthwest Natural Holding Company (NW Holdings) and Northwest Natural Gas Company (NW Natural) and all respective companies NW Naturalthat each registrant directly or indirectly controlled,controls, either through majority ownership or otherwise asotherwise. This is a combined report of September 30, 2018. NW Holdings and NW Natural, which includes separate consolidated financial statements for each registrant.

NW Natural's regulated localnatural gas distribution business, referred to asactivities are reported in the utilitynatural gas distribution (NGD) segment. The NGD segment is NW Natural's core operating business and serves residential, commercial, and industrial customers in Oregon and southwest Washington. The NGD segment is the only reportable segment for NW Holdings and NW Natural. All other category primarily includes the non-utility portion of the Mist gas storage facility that provides storage services for utilities, gas marketers, electric generators,activities, water businesses, and large industrial users from facilities located in Oregon. In addition, prior to the reorganizationother investments are aggregated and reported as other at their respective registrant.

NW Holdings and NW Natural held regulated water services, other investments, and other non-utility activities reported as other.

NW Natural's direct and indirect wholly-owned subsidiaries as of September 30, 2018 include:

NW Natural Energy, LLC (NWN Energy);
◦NW Natural Gas Storage, LLC (NWN Gas Storage);
▪Gill Ranch Storage, LLC (Gill Ranch), which is presented as a discontinued operation;
Northwest Energy Corporation (Energy Corp);
◦NWN Gas Reserves LLC (NWN Gas Reserves);
NNG Financial Corporation (NNG Financial);
NW Natural Water Company, LLC (NWN Water);
◦Falls Water Co., Inc. (Falls Water);
◦Cascadia Water, LLC (Cascadia);
Northwest Natural Holding Company (NW Holdings); and
◦NWN Merger Sub, Inc. (NWN Holdco Sub).

NW Holdings' direct and indirect wholly-owned subsidiaries as of the filing date of this report include:

Northwest Natural Gas Company (NW Natural);
◦Northwest Energy Corporation (Energy Corp);
NWN Gas Reserves LLC (NWN Gas Reserves);
NW Natural Energy, LLC (NWN Energy);
◦NW Natural Gas Storage, LLC (NWN Gas Storage);
▪Gill Ranch Storage, LLC (Gill Ranch), which is presented as a discontinued operation;
NNG Financial Corporation (NNG Financial);
NW Natural Water Company, LLC (NWN Water);
◦Falls Water Co., Inc. (Falls Water);
◦Salmon Valley Water Company;
◦Cascadia Water, LLC (Cascadia);
◦NW Natural Water of Oregon, LLC (NWN Water of Oregon);
◦NW Natural Water of Washington, LLC; and
◦NW Natural Water of Idaho, LLC.

consolidate all entities in which they have a controlling financial interest. Investments in corporate joint ventures and partnerships that the registrantNW Holdings does not directly or indirectly control, and for which it is not the primary beneficiary, include NWN Energy'sNNG Financial's investment in Trail West Holdings, LLC (TWH)Kelso-Beaver Pipeline and NWN Water's investment in Avion Water Company, Inc., which isare accounted for under the equity method, and NNG Financial'smethod. NW Natural RNG Holding Company, LLC holds an investment in Kelso-Beaver Pipeline.Lexington Renewable Energy, LLC, which is also accounted for under the equity method. See Note 13 for activity related to equity method investments. NW Holdings and its direct and indirect subsidiaries are collectively referred to herein as NW Holdings, and NW Natural and its 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 NW Natural's regulated gas distribution business, and the term “non-utility” is used to describe the non-utility portion of the Mist gas storage facility 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 NW Holdings' and NW Natural's 2017combined 2021 Annual Report on Form 10-K (2017(2021 Form 10-K), taking into consideration the changes mentioned below in this Note 1 and in Notes 4 and 15, as reflected in Exhibit 99.1 to the Current Report on Form 8-K (Form 8-K) filed on September 24, 2018.. A significant part of 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.

During Seasonality affects the second quartercomparability of 2018, we moved forward with NW Natural's long-term strategic plans, which include a shift away from the California gas storage business. In June 2018, NWN Gas Storage, a wholly-owned subsidiary, entered into a Purchase and Sale Agreement that provides for the sale of all of the membership interests in its wholly-owned subsidiary, Gill Ranch, subject to various regulatory approvals and closing conditions. We have concluded that the pending sale of Gill Ranch qualifies as assets and liabilities held for sale and discontinued operations. As such, for all periods presented, the results of Gill Ranch have been presented as a discontinued operation on the consolidated statements of comprehensive income and cash flows, and the assets and liabilities associated with Gill Ranch have been classified as discontinuedother operations assets and liabilities on theacross quarters but not across years.

11

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consolidated balance sheets. See Note 16 for additional information. Additionally, we reevaluated reportable segments and concluded that the remaining gas storage activities no longer meet the requirements to be separately reported as a segment. The non-utility portion of the Mist gas storage facility is now reported as other, and all prior periods reflect this change. See Note 4, which provides segment information. These reclassifications had no effect on the prior year's consolidated results of operations, financial condition, or cash flows.

NW Holdings was formed on March 7, 2018. The accompanying financial statements for NW Holdings are provided in accordance with Exchange Act Rules 13a-13 and 15d-13. There was no income statement activity for NW Holdings during the period ended September 30, 2018 and thus no income statement is provided for NW Holdings. Prior to completing the reorganization, NW Holdings received a $20.0 million capital contribution.


Notes to the consolidated financial statements reflect the activity of continuing operationsfor both NW Holdings and NW Natural for all periods presented, unless otherwise noted. Note 16 providesCertain reclassifications have been made to conform prior period information regarding discontinued operations.to the current presentation. The reclassifications did not have a material effect on our consolidated financial statements.

2. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are described in Note 2 of the 20172021 Form 10-K. There were no material changes to those accounting policies during the ninesix months ended SeptemberJune 30, 20182022 other than those incorporatedset forth in this Note 5, Note 13, and Note 16 relating to revenue, business combinations and goodwill, and discontinued operations, respectively.2. The following are current updates to certain critical accounting policy estimates and new accounting standards.
  
Industry Regulation
In applying regulatory accounting principles, NW Holdings and NW Natural capitalizescapitalize or defersdefer certain costs and revenues as regulatory assets and liabilities pursuant to orders of the Oregon Public Utilities Commission (OPUC), Washington Utilities and Transportation Commission (WUTC) or, Idaho Public Utilities Commission (IPUC) or Public Utility Commission of Texas (PUCT), as applicable, 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.



12
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Amounts deferred as regulatory assets and liabilities for NW Holdings and NW Natural were as follows:
Regulatory Assets
June 30,December 31,
In thousands202220212021
NW Natural:
Current:
Unrealized loss on derivatives(1)
$15,918 $3,393 $10,402 
Gas costs48,218 29,486 35,641 
Environmental costs(2)
6,975 5,688 6,694 
Decoupling(3)
212 1,011 969 
Pension balancing(4)
7,131 7,131 7,131 
Income taxes2,276 2,345 2,568 
Other(5)
12,073 11,618 8,986 
Total current$92,803 $60,672 $72,391 
Non-current:
Unrealized loss on derivatives(1)
$9,475 $453 $412 
Pension balancing(4)
35,150 40,342 38,302 
Income taxes11,161 13,903 12,609 
Pension and other postretirement benefit liabilities110,548 160,385 116,440 
Environmental costs(2)
86,411 85,423 94,636 
Gas costs7,975 5,742 15,477 
Decoupling(3)
— 198 — 
Other(5)
41,070 24,224 36,663 
Total non-current$301,790 $330,670 $314,539 
Other (NW Holdings)65 40 40 
Total non-current - NW Holdings$301,855 $330,710 $314,579 
Regulatory Liabilities
June 30,December 31,
In thousands202220212021
NW Natural:
Current:
Gas costs$1,898 $1,519 $70 
Unrealized gain on derivatives(1)
60,652 46,168 48,130 
Decoupling(3)
14,242 5,821 4,475 
Income taxes7,318 8,217 8,192 
Asset optimization revenue sharing9,761 39,348 45,124 
Other(5)
3,406 2,137 6,290 
Total current$97,277 $103,210 $112,281 
Non-current:
Gas costs$353 $101 $250 
Unrealized gain on derivatives(1)
9,121 7,912 10,730 
Decoupling(3)
2,557 652 3,412 
Income taxes(6)
176,358 182,977 181,404 
Accrued asset removal costs(7)
455,794 439,685 445,952 
Asset optimization revenue sharing— — 1,810 
Other(5)
13,760 12,850 13,792 
Total non-current - NW Natural$657,943 $644,177 $657,350 
Other (NW Holdings)982 869 982 
Total non-current - NW Holdings$658,925 $645,046 $658,332 
(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 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 as approved by the OPUC.
16




Regulatory Assets
  September 30, December 31,
In thousands 2018 2017 2017
Current:      
Unrealized loss on derivatives(1)
 $8,828
 $8,887
 $18,712
Gas costs 461
 1,851
 154
Environmental costs(2)
 5,633
 6,362
 6,198
Decoupling(3)
 11,990
 15,663
 11,227
Income taxes 2,217
 4,378
 2,218
Other(4)
 12,112
 12,363
 7,272
Total current $41,241
 $49,504
 $45,781
Non-current:      
Unrealized loss on derivatives(1)
 $3,016
 $3,926
 $4,649
Pension balancing(5)
 72,291
 57,599
 60,383
Income taxes 19,267
 36,591
 19,991
Pension and other postretirement benefit liabilities 165,741
 172,687
 179,824
Environmental costs(2)
 63,464
 63,339
 72,128
Gas costs 14
 48
 84
Decoupling(3)
 829
 1,025
 3,970
Other(4)
 9,295
 10,137
 15,579
Total non-current $333,917
 $345,352
 $356,608
(5)Balances consist of deferrals and amortizations under approved regulatory mechanisms and typically earn a rate of return or carrying charge.
(6)Balance represents excess deferred income tax benefits subject to regulatory flow-through.
  Regulatory Liabilities
  September 30, December 31,
In thousands 2018 2017 2017
Current:      
Gas costs $20,716
 $16,459
 $14,886
Unrealized gain on derivatives(1)
 2,862
 2,020
 1,674
Decoupling(3)
 1,697
 314
 322
Other(4)
 12,229
 15,866
 17,131
Total current $37,504
 $34,659
 $34,013
Non-current:      
Gas costs $1,409
 $1,015
 $4,630
Unrealized gain on derivatives(1)
 861
 1,555
 1,306
Decoupling(3)
 119
 —
 957
Income taxes(6)
 223,841
 —
 213,306
Accrued asset removal costs(7)
 375,257
 356,106
 360,929
Other(4)
 4,688
 5,162
 4,965
Total non-current $606,175
 $363,838
 $586,093
(7)Estimated costs of removal on certain regulated properties are collected through rates.
(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)
Refer to footnote (3) per the Deferred Regulatory Asset table in Note 15 for a description of environmental costs.
(3)
This deferral represents the margin adjustment resulting from differences between actual and expected volumes. 
(4)
Balances consist of deferrals and amortizations under approved regulatory mechanisms and typically earn a rate of return or carrying charge.
(5)
Refer to footnote (1) of the Net Periodic Benefit Cost table in Note 8 for information regarding the deferral of pension expenses.
(6)
This balance represents estimated amounts associated with the Tax Cuts and Jobs Act. See Note 9.
(7)
Estimated costs of removal on certain regulated properties are collected through rates.


We believe all costs incurred and deferred at SeptemberJune 30, 20182022 are prudent. All regulatory assets and liabilities are reviewed annually for recoverability, 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 NW 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
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, 2022 and 2021 and December 31, 2021:
June 30,December 31,
In thousands202220212021
Cash and cash equivalents$17,209 $20,084 $18,559 
Restricted cash included in other current assets12,826 8,2268,561
Cash, cash equivalents and restricted cash$30,035 $28,310 $27,120 

The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Natural as of June 30, 2022 and 2021 and December 31, 2021:
June 30,December 31,
In thousands202220212021
Cash and cash equivalents$10,267 $11,488 $12,271 
Restricted cash included in other current assets12,826 8,2268,561
Cash, cash equivalents and restricted cash$23,093 $19,714 $20,832 

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.

During 2020 and 2021, we considered the significant exposure to COVID-19 related job losses in Oregon and Washington state, and expanded our standard review procedures for our allowance for uncollectible accounts at NW Holdings and NW Natural, including analyzing the unemployment rate and comparing it to historic economic data during the 2007-2009 time period when the country experienced an economic recession. We also considered other qualitative information including recent customer interactions related to payment plans and credit issues, statistics from our website related to credit inquiries, and bill assistance programs including the arrearage management program. For the residential allowance calculation, we continue to consider the funds applied or granted to customers through a variety of assistance programs including the COVID-19 arrearage management programs in Oregon and Washington. During the third quarter of 2021, the collection process for residential accounts resumed. For residential and commercial accounts, we've resumed collection processes and our provision is based on historical write-off trends and current information on delinquent accounts. For industrial accounts, we continue to analyze those accounts on an account-by-account basis with specific reserves taken as necessary. We’ll continue to closely monitor and evaluate our accounts receivable and provision for uncollectible accounts.


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Table
The following table presents the activity related to the NW Holdings provision for uncollectible accounts by pool, substantially all of Contentswhich is related to NW Natural's accounts receivable:



As ofAs of
December 31, 2021Six Months Ended June 30, 2022June 30, 2022
In thousandsBeginning BalanceProvision recorded, net of adjustmentsWrite-offs recognized, net of recoveriesEnding Balance
Allowance for uncollectible accounts:
Residential$1,460 $(142)$(468)$850 
Commercial178 52 (110)120 
Industrial67 110 (27)150 
Accrued unbilled and other313 18 (95)236 
Total$2,018 $38 $(700)$1,356 



Allowance for Net Investments in Sales-Type Leases
NW Natural currently holds 2 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.

COVID-19 Impact
During 2020, our regulated utilities received approval in their respective jurisdictions to defer certain financial impacts associated with COVID-19 such as bad debt expense, financing costs to secure liquidity, lost revenues related to late fees and reconnection fees, and other COVID-19 related costs, net of offsetting direct expense reductions associated with COVID-19. As of June 30, 2022 and 2021, we had a regulatory asset of approximately $13.4 million and $5.8 million, respectively, for incurred costs associated with COVID-19 that we believe are recoverable.

Cloud Computing Arrangements (CCA)
Implementation costs associated with its CCA are capitalized consistent with costs capitalized for internal-use software. Capitalized CCA implementation costs are included in other assets in the consolidated balance sheets. The CCA implementation costs are amortized over the term of the related hosting agreement, including renewal periods that are reasonably certain to be exercised. Amortization expense of CCA implementation costs are recorded as operations and maintenance expenses in the consolidated statements of comprehensive income. The CCA implementation costs are included within operating activities in the consolidated statements of cash flows.

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). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on NW Natural's consolidated financial position or results of operations.


Recently Adopted Accounting Pronouncements
STOCK COMPENSATION. On May 10, 2017,LEASES. In July 2021, the FASB issued ASU 2017-09, "Stock Compensation2021-05, "Leases (Topic 842), Lessors - Scope of Modification Accounting.Certain Leases with Variable Lease Payments." The purpose of the amendment is to provide clarity, reduce diversity in practice, and reduce the cost and complexity when applying the guidance in Topic 718, relatedrequire lessors to a change to the terms or conditions of a share-based payment award. 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.account for certain lease transactions that contain variable lease payments as operating leases. The amendments in this update wereASU are intended to eliminate the recognition of any day-one loss associated with certain sales-type and direct-financing lease transactions. The changes do not impact lessee accounting. The new guidance was effective for NW Natural beginningon January 1, 2018,2022 and will be applied prospectively to any award modified on or after the adoption date. The adoption did not have a material impact to financial statements or 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. Additionally, the other components of net periodic benefit costs are to be presented 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 were effective for us beginning January 1, 2018.

Upon adoption, the ASU required that changes to the income statement presentation of net periodic benefit cost be applied retrospectively, while changes to amounts capitalized must be applied prospectively. As such, the interest cost, expected return on assets, amortization of prior service costs, and other costs have been reclassified from operations and maintenance expense to other income (expense), net on the consolidated statement of comprehensive income for the three and nine months ended September 30, 2017. NW Natural did not elect the practical expedient which would have allowed us to reclassify amounts disclosed previously in the pension and other postretirement benefits footnote disclosure as the basis for applying retrospective presentation. As mentioned above, onadopted using a prospective basis, the other components of net periodic benefit cost will not be eligible for capitalization, however, they will continue to be included in the pension regulatory balancing mechanism.

The retrospective presentation requirement related to the other components of net periodic benefit cost affected the operations and maintenance expense and other income (expense), net lines on the consolidated statement of comprehensive income. For the three and nine months ended September 30, 2017, $1.4 million and $4.0 million of expense was reclassified from operations and maintenance expense and included in other income (expense), net, respectively.

GOODWILL. On January 26, 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." The ASU removes Step 2 from the goodwill impairment test and under the amended guidance an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount in which the carrying amounts exceeds the fair value of the reporting unit. The amendments in this standard are effective for us beginning January 1, 2020 and early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. NW Natural early adopted ASU 2017-04 in the third quarter ended September 30, 2018.approach. The adoption of this ASU did not materially affect the financial statements and disclosures.disclosures of NW Holdings or NW Natural. 

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. The amendments in this standard were effective for us beginning January 1, 2018, and the adoption did not have a material impact to financial statements or disclosures as NW Natural's historical practices and presentation were consistent with the directives of this ASU.

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 was effective for us beginning January 1, 2018, and the adoption did not materially impact financial statements or disclosures.

REVENUE RECOGNITION. On May 28, 2014, the FASB issued ASU 2014-09 "Revenue From Contracts with Customers." 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.



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The new accounting standard and all related amendments were effective for us beginning January 1, 2018. NW Natural applied the accounting standard to all contracts using the modified retrospective method. The new standard is primarily reflected in the consolidated statement of comprehensive income and Note 5. The implementation of the new revenue standard did not result in changes to how NW Natural currently recognizes revenue, and therefore, no cumulative effect or adjustment to the opening balance of retained earnings was required. The implementation did result in changes to the disclosures and presentation of revenue and expenses. The comparative information for prior years has not been restated. There is no material impact to financial results and no significant changes to NW Natural's control environment due to the adoption of the new revenue standard on an ongoing basis.

As previously discussed, the adoption of the new revenue standard did not impact the consolidated balance sheet or statement of cash flows but did result in changes to the presentation of the consolidated statements of comprehensive income. Had the adoption of the new revenue standard not occurred, operating revenues for the three and nine months ended September 30, 2018 would have been $87.7 million and $458.7 million, compared to the reported amounts of $91.2 million and $479.4 million under the new revenue standard, respectively. Similarly, absent the impact of the new revenue standard, operating expenses would have been $93.9 million and $388.8 million, compared to the reported amounts of $97.4 million and $409.5 million under the new revenue standard for the three and nine months ended September 30, 2018, respectively. The effect of the change was an increase in both operating revenues and operating expenses of $3.5 million and $20.7 million for the three and nine months ended September 30, 2018, respectively, due to the change in presentation of revenue taxes. As part of the adoption of the new revenue standard, we evaluated the presentation of revenue taxes under the new guidance and across NW Natural's peer group and concluded that the gross presentation of revenue taxes provides the greatest level of consistency and transparency. Prior to the adoption of the new revenue standard, a portion of revenue taxes was presented net in operating revenues and a portion was recorded directly on the balance sheet. During the three and nine months ended September 30, 2018, NW Natural recognized $3.5 million and $20.7 million in revenue taxes in operating revenues and operating expenses, respectively. In comparison, for the three and nine months ended September 30, 2017, NW Natural recognized $3.7 million and $23.0 million in revenue taxes, of which $2.3 million and $13.3 million were recorded in operating revenues and $1.4 million and $9.7 million were recorded on the balance sheet, respectively. The change in presentation of revenue taxes had no impact on utility margin, net income or earnings per share.

Recently Issued Accounting Pronouncements
CLOUD COMPUTING. On August 29, 2018, the FASB issued ASU 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The purpose of the amendment is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update are effective for us beginning January 1, 2020. Early adoption is permitted. The amended guidance can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently assessing the effect of this standard on financial statements and disclosures.

RETIREMENT BENEFITS. On August 28, 2018, the FASB issued ASU 2018-14, "Changes to the Disclosure Requirements for Defined Benefit Plans." The purpose of the amendment is to modify the disclosure requirements for defined benefit pension and other postretirement plans. The amendments in this update are effective for us beginning January 1, 2020. Early adoption is permitted. The amended presentation and disclosure guidance should be applied retrospectively. We are currently assessing the effect of this standard on disclosures.

FAIR VALUE MEASUREMENT. On August 28, 2018, the FASB issued ASU 2018-13, "Changes to the Disclosure Requirements for Fair Value Measurement." The purpose of the amendment is to modify the disclosure requirements for fair value measurements. The amendments in this update are effective for us beginning January 1, 2020. Early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. We are currently assessing the effect of this standard on disclosures.

ACCUMULATED OTHER COMPREHENSIVE INCOME. On February 14, 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This update was issued in response to concerns from certain stakeholders regarding the current requirements under U.S. GAAP that deferred tax assets and liabilities are adjusted for a change in tax laws or rates, and the effect is to be included in income from continuing operations in the period of the enactment date. This requirement is also applicable to items in accumulated other comprehensive income where the related tax effects were originally recognized in other comprehensive income. The adjustment of deferred taxes due to the new corporate income tax rate enacted through the Tax Cuts and Jobs Act (TCJA) on December 22, 2017 recognized in income from continuing operations causes the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects) to not reflect the appropriate tax rate. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA and require certain disclosures about stranded tax effects. The amendments in this update are effective for us beginning January 1, 2019, and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the federal corporate income tax rate in the TCJA is recognized. The

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reclassification allowed in this update is elective, and we are currently assessing whether NW Natural will make the reclassification. This update is not expected to have a material impact on financial condition.

DERIVATIVES AND HEDGING. On August 28, 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities." 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 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 NW Natural's leasing activities. On November 29, 2017, the FASB proposed an additional practical expedient that would allow entities to apply the transition requirements on the effective date of the standard. Additionally, on January 25, 2018, the FASB issued ASU 2018-01, "Land Easement Practical Expedient for Transition to Topic 842", to address the costs and complexity of applying the transition provisions of the new lease standard to land easements. This ASU provides an optional practical expedient to not evaluate existing or expired land easements that were not previously accounted for as leases under the current lease guidance. The standard and associated ASUs are effective for us beginning January 1, 2019. We are currently assessing NW Natural's lease population and material contracts to determine the effect of this standard on financial statements and disclosures. Refer to Note 14 of the 2017 Form 10-K for NW Natural's current lease commitments.

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 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. AntidilutiveAnti-dilutive stock awards are excluded from the calculation of diluted earnings or loss per common share.


DilutedNW Holdings' diluted earnings (loss) from continuing operationsor loss per share are calculated as follows:
Three Months Ended June 30,Six Months Ended June 30,
In thousands, except per share data2022202120222021
Net income (loss)1,715 (724)57,954 58,793 
Average common shares outstanding - basic34,307 30,664 32,756 30,639 
Additional shares for stock-based compensation plans (See Note 8)45 — 49 32 
Average common shares outstanding - diluted34,352 30,664 32,805 30,671 
Earnings (loss) per share of common stock:
Basic$0.05 $(0.02)$1.77 $1.92 
Diluted$0.05 $(0.02)$1.77 $1.92 
Additional information:
Anti-dilutive shares1 48 1 7 
  Three Months Ended September 30, Nine Months Ended September 30,
In thousands, except per share data 2018 2017 2018 2017
Net income (loss) from continuing operations $(11,144) $(7,887) $30,528
 $37,585
Average common shares outstanding - basic 28,815
 28,678
 28,787
 28,653
Additional shares for stock-based compensation plans (See Note 6) —
 —
 59
 81
Average common shares outstanding - diluted 28,815
 28,678
 28,846
 28,734
Earnings (loss) from continuing operations per share of common stock - basic $(0.39) $(0.28) $1.06
 $1.32
Earnings (loss) from continuing operations per share of common stock - diluted $(0.39) $(0.28) $1.06
 $1.31
Additional information:        
Antidilutive shares 73
 96
 4
 15

4. SEGMENT INFORMATION
We primarily operate in one1 reportable business segment, which is NW Natural's local gas distribution business and is referred to as the utilityNGD segment. During the second quarter of 2018, we moved forward with long-term strategic plans, which include a shift away from the California gas storage business, by entering into a Purchase and Sale Agreement that provides for the sale of all of the membership interests in Gill Ranch, subject to various regulatory approvals and closing conditions. As such, we reevaluated reportable segments and concluded that the gas storage activities no longer meet the requirements of a reportable segment. Ongoing, non-utility gas storage activities, which include interstate storage and asset management activities at the Mist gas storage facility, are now reported as other. NW Natural and NW Holdings also has regulated water operations, otherhave investments and

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business activities not specifically related to the utilityNGD segment, which are aggregated and reported as other. We refer to NW Natural's local gas distribution business as the utilityother and all other activities as non-utility.described below for each entity.


LocalNatural 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 customers in Oregon and southwest Washington. As a regulated utility, NW Natural is responsible for building and maintaining a safe and reliable pipeline distribution system, purchasing sufficient gas supplies from producers and marketers, contracting for firm and interruptible transportation of gas over interstate pipelines to bring gas from the supply basins into its service territory, and re-selling the gas to customers subject to rates, terms, and conditions approved by the OPUC or WUTC. Gas distribution also includes taking customer-owned gas and transporting it from interstate pipeline connections, or city gates, to the customers’ end-use facilities for a fee, which is approved by the OPUC or WUTC. As of December 31, 2017, approximately 89% of NW Natural's customers are located in Oregon and 11% in Washington. On an annual basis, residential and commercial customers typically account for around 60% of utility total volumes delivered and 90% of utility margin. Industrial customers largely account for the remaining volumes and utility margin. A small amount of utility margin is also derived from miscellaneous services, gains or losses from an incentive gas cost sharing mechanism, and other service fees.
Industrial sectors served by NW Natural include: pulp, paper, and other forest products; the manufacture of electronic, electrochemical and electrometallurgical products; the processing of farm and food products; the production of various mineral products; metal fabrication and casting; the production of machine tools, machinery, and textiles; the manufacture of asphalt, concrete, and rubber; printing and publishing; nurseries; government and educational institutions; and electric generation.
In addition to NW Natural's local gas distribution business, the utilityNGD segment also includes the utility portion of the Mist underground storage facility 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.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.


OtherNW Natural
Regulated water operations, non-utility investments,NW Natural's activities in Other include Interstate Storage Services and other business activities are aggregated and reported as other. Other includes NWN Gas Storage, a wholly-owned subsidiary of NWN Energy, and the non-utility portion ofthird-party asset management services for the Mist facility in Oregon, appliance retail center operations, and third-party asset management services. corporate operating and non-operating revenues and expenses that cannot be allocated to NGD operations.

Earnings from non-utilityInterstate Storage Services assets at the Mist facility are primarily related to firm storage capacity revenues. Earnings from the Mist facility also include revenue, net of amounts shared with utilityNGD customers, from management of utilityNGD assets at Mist and upstream pipeline capacity when not needed to serve utilityNGD customers. Under the Oregon sharing mechanism, NW Natural retains 80% of the pre-tax income from these services when the costs of the capacity havewere not been included in utilityNGD rates, or 33%10% of the pre-tax income when the costs have been included in utilitythese rates. The remaining 20% and 67%90%, respectively, are recorded to a deferred regulatory account for crediting back to utilityNGD customers.


NW Holdings
NW Holdings' activities in Other also includes NNG Financial, non-utility appliance retail center operations,include all remaining activities not associated with NW Natural, specifically: NWN Water, which consolidates the regulated water and wastewater utility operations and is pursuing other investments in the water sector through itself and through its wholly-owned subsidiaries Falls Water and Cascadia,subsidiaries; NWN Energy'sWater's equity investment in TWH, which is pursuing developmentAvion Water Company, Inc.; NWN Gas Storage, a wholly-owned subsidiary of a cross-Cascades transmissionNWN Energy; other pipeline projectassets in NNG Financial; and NW Holdings, which was used in effecting the holding company reorganization of NW Natural throughRenewables Holdings, LLC and its wholly-owned subsidiary NWN Holdco Sub. See Note 1 for information regarding changesnon-regulated renewable natural gas activities. Other also includes corporate revenues and expenses that cannot be allocated to NW Natural's organizational structure subsequent to September 30, 2018.other operations, including certain business development activities.


All prior period amounts have been retrospectively adjusted to reflect the change in reportable segments and the designation of Gill Ranch as a discontinued operation.



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Segment Information Summary
Inter-segment transactions were immaterial for the periods presented. The following table presents summary financial information concerning the reportable segments of continuing operations. See Note 16 for information regarding the discontinued operation, Gill Ranch.segment and other.
Three Months Ended June 30,
In thousandsNGDOther
(NW Natural)		NW NaturalOther
(NW Holdings)		NW Holdings
2022
Operating revenues$184,634 $5,617 $190,251 $4,709 $194,960 
Depreciation27,062 266 27,328 782 28,110 
Income (loss) from operations10,575 3,550 14,125 (586)13,539 
Net income (loss)157 2,576 2,733 (1,018)1,715 
Capital expenditures91,122 750 91,872 7,310 99,182 
2021
Operating revenues$139,614 $4,965 $144,579 $4,338 $148,917 
Depreciation27,273 257 27,530 614 28,144 
Income (loss) from operations11,331 2,808 14,139 (1,515)12,624 
Net income (loss)(1,381)1,970 589 (1,313)(724)
Capital expenditures60,376 693 61,069 3,337 64,406 
  Three Months Ended September 30,
In thousands Utility Other Total
2018      
Operating revenues $85,077
 $6,162
 $91,239
Depreciation and amortization 21,127
 358
 21,485
Income (loss) from operations (9,780) 3,669
 (6,111)
Net income (loss) from continuing operations (11,983) 839
 (11,144)
Capital expenditures 55,914
 511
 56,425
2017      
Operating revenues $81,126
 $5,087
 $86,213
Depreciation and amortization 20,023
 329
 20,352
Income (loss) from operations (8,624) 4,084
 (4,540)
Net income (loss) from continuing operations (10,349) 2,462
 (7,887)
Capital expenditures 50,009
 932
 50,941


Six Months Ended June 30,
In thousandsNGDOther
(NW Natural)		NW NaturalOther
(NW Holdings)		NW Holdings
2022
Operating revenues$526,032 $10,843 $536,875 $8,386 $545,261 
Depreciation54,435 530 54,965 1,574 56,539 
Income (loss) from operations96,238 6,438 102,676 (1,499)101,177 
Net income (loss)55,547 4,602 60,149 (2,195)57,954 
Capital expenditures155,402 787 156,189 11,507 167,696 
Total assets at June 30, 20223,875,237 54,760 3,929,997 170,521 4,100,518 
2021
Operating revenues$440,952 $15,977 $456,929 $7,934 $464,863 
Depreciation54,186 513 54,699 1,542 56,241 
Income (loss) from operations97,818 11,439 109,257 (1,927)107,330 
Net income (loss)52,544 8,156 60,700 (1,907)58,793 
Capital expenditures124,368 799 125,167 4,941 130,108 
Total assets at June 30, 20213,587,966 51,466 3,639,432 144,068 3,783,500 
Total assets at December 31, 20213,846,112 52,260 3,898,372 166,232 4,064,604 

  Nine Months Ended September 30,
In thousands Utility Other Total
2018      
Operating revenues $461,525
 $17,916
 $479,441
Depreciation and amortization 62,436
 1,071
 63,507
Income from operations 59,521
 10,388
 69,909
Net income from continuing operations 24,930
 5,598
 30,528
Capital expenditures
156,609

2,186

158,795
Total assets at September 30, 2018(1)
 2,972,066
 96,697
 3,068,763
2017     

Operating revenues $503,947
 $12,466
 $516,413
Depreciation and amortization 59,541
 988
 60,529
Income from operations 81,661
 9,315
 90,976
Net income from continuing operations 31,980
 5,605
 37,585
Capital expenditures 143,128
 2,146
 145,274
Total assets at September 30, 2017(1)
 2,835,860
 63,563
 2,899,423
Total assets at December 31, 2017(1)
 2,961,326
 64,546
 3,025,872
(1)
Total assets exclude assets related to discontinued operations of $12.6 million, $206.2 million, and $13.9 million as of September 30, 2018, September 30, 2017, and December 31, 2017, respectively.

UtilityNatural Gas Distribution Margin
UtilityNGD margin is athe primary financial measure used by the chief operating decision makerChief Operating Decision Maker (CODM), consisting of utilityNGD operating revenues, reduced by the associated cost of gas, environmental recovery revenues,remediation expense, and revenue taxes. The cost of gas purchased for utilityNGD customers is generally a pass-through cost in the amount of revenues billed to regulated utilityNGD customers. Environmental recovery revenues representremediation expense represents collections received from customers through the environmental recovery mechanismmechanisms in Oregon. These collections areOregon and Washington as well as adjustments for the Oregon environmental earnings test when applicable. This is offset by the amortization of environmental liabilities, which is presented as environmental remediation expense presented in operating expenses. Revenue taxes are collected from utilityNGD customers and remitted to taxing authorities. The collections from customers are offset by the expense recognition of the obligation to the taxing authority. By subtracting cost of gas, environmental remediation expense, and revenue taxes from utilityNGD operating revenues, utilityNGD margin provides a key metric used by the CODM in assessing the performance of the utilityNGD segment.


18
20


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The following table presents additional segment information concerning utilityNGD margin:
Three Months Ended June 30,Six Months Ended June 30,
In thousands2022202120222021
NGD margin calculation:
NGD distribution revenues$179,727 $134,849 $516,214 $431,402 
Other regulated services4,907 4,765 9,818 9,550 
Total NGD operating revenues184,634 139,614 526,032 440,952 
Less: NGD cost of gas79,776 41,249 225,420 153,515 
          Environmental remediation2,272 1,509 6,970 5,286 
 Revenue taxes8,208 5,650 21,532 18,305 
NGD margin$94,378 $91,206 $272,110 $263,846 
5. COMMON STOCK
  Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2018 2017 2018 2017
Utility margin calculation:        
Utility operating revenues $85,077
 $81,126
 $461,525
 $503,947
Less: Utility cost of gas 25,593
 27,239
 175,864
 223,855
          Environmental remediation expense 1,022
 1,355
 7,528
 10,920
Revenue taxes(1)
 3,522
 —
 20,731
 —
Utility margin $54,940
 $52,532
 $257,402
 $269,172
(1)
The change in presentation of revenue taxes was a result of the adoption of ASU 2014-09 "Revenue From Contracts with Customers" and all related amendments on January 1, 2018. This change had no impact on utility margin results as revenue taxes were previously presented net in utility operating revenue. For additional information, see Note 2.

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, 2022, NW Holdings issued and sold 482,200 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $25.1 million, net of fees and commissions paid to agents of $0.4 million. During the six months ended June 30, 2022, NW Holdings issued and sold 678,101 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $35.2 million, net of fees and commissions paid to agents of $0.7 million. As of June 30, 2022, NW Holdings had $146.2 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. Contributions to NW Natural and NW Natural Water will be used for general corporate purposes.
5.
On April 1, 2022, NW Holdings issued and sold 2,875,000 shares of its common stock pursuant to a registration statement on Form S-3 and related prospectus settlement. NW Holdings received net offering proceeds, after deducting the underwriter's discounts and commissions and expenses payable by NW Holdings, of approximately $138.6 million. The proceeds are to be used for general corporate purposes, including repayment of its short-term indebtedness and/or making equity contributions to NW Holdings' subsidiaries, NW Natural, NW Natural Water and NW Natural Renewables. Contributions to NW Natural, NW Natural Water and NW Natural Renewables are to be used for general corporate purposes. Of the contributions received by NW Natural, $130.0 million was used to repay its short-term indebtedness.

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6. REVENUE
The following table presentstables present disaggregated revenue from continuing operations:revenue:

Three Months Ended June 30,
In thousandsNGDOther
(NW Natural)		NW NaturalOther
(NW Holdings)		NW Holdings
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 revenue628 — 628 4,709 5,337 
    Revenue from contracts with customers190,669 5,617 196,286 4,709 200,995 
Alternative revenue(10,333)— (10,333)— (10,333)
Leasing revenue4,298 — 4,298 — 4,298 
    Total operating revenues$184,634 $5,617 $190,251 $4,709 $194,960 
2021
Natural gas sales$123,739 $— $123,739 $— $123,739 
Gas storage revenue, net— 2,805 2,805 — 2,805 
Asset management revenue, net— 817 817 — 817 
Appliance retail center revenue— 1,343 1,343 — 1,343 
Other revenue399 — 399 4,338 4,737 
    Revenue from contracts with customers124,138 4,965 129,103 4,338 133,441 
Alternative revenue11,083 — 11,083 — 11,083 
Leasing revenue4,393 — 4,393 — 4,393 
    Total operating revenues$139,614 $4,965 $144,579 $4,338 $148,917 

Six Months Ended June 30,
In thousandsNGDOther
(NW Natural)		NW NaturalOther
(NW Holdings)		NW Holdings
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 revenue1,258 — 1,258 8,386 9,644 
    Revenue from contracts with customers528,595 10,843 539,438 8,386 547,824 
Alternative revenue(11,160)— (11,160)— (11,160)
Leasing revenue8,597 — 8,597 — 8,597 
    Total operating revenues$526,032 $10,843 $536,875 $8,386 $545,261 
2021
Natural gas sales$419,822 $— $419,822 $— $419,822 
Gas storage revenue, net— 5,300 5,300 — 5,300 
Asset management revenue, net— 7,745 7,745 — 7,745 
Appliance retail center revenue— 2,932 2,932 — 2,932 
Other revenue814 — 814 7,934 8,748 
    Revenue from contracts with customers420,636 15,977 436,613 7,934 444,547 
Alternative revenue11,536 — 11,536 — 11,536 
Leasing revenue8,780 — 8,780 — 8,780 
    Total operating revenues$440,952 $15,977 $456,929 $7,934 $464,863 


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  Three months ended September 30, 2018
In thousands Utility Other Total
Local gas distribution revenue $82,358
 $—
 $82,358
Gas storage revenue, net —
 2,415
 2,415
Asset management revenue, net —
 2,714
 2,714
Appliance retail center revenue —
 1,033
 1,033
    Revenue from contracts with customers 82,358
 6,162
 88,520
       
Alternative revenue 1,994
 —
 1,994
Leasing revenue 725
 —
 725
    Total operating revenues $85,077
 $6,162
 $91,239
  Nine months ended September 30, 2018
In thousands Utility Other Total
Local gas distribution revenue $455,312
 $—
 $455,312
Gas storage revenue, net —
 7,189
 7,189
Asset management revenue, net —
 6,974
 6,974
Appliance retail center revenue —
 3,753
 3,753
    Revenue from contracts with customers 455,312
 17,916
 473,228
       
Alternative revenue 5,285
 —
 5,285
Leasing revenue 928
 —
 928
    Total operating revenues $461,525
 $17,916
 $479,441

RevenueNW 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 we expectexpected to receivebe received in exchange for transferring goods or providing services. Revenue from contracts with customers containcontains 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 perby 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 NW Naturalwe will collect substantially all of the consideration to which it is entitled to receive.we are entitled. We evaluated the probability of collection in accordance with the current expected credit losses standard.


NW Holdings and NW Natural doesdo 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 doesdo not have any material contract liabilities.


Revenue-based taxes are primarily franchise taxes, which are collected from utility customers and remitted to taxing authorities. Beginning January 1, 2018, revenueRevenue taxes are included in operating revenues with an equal and offsetting expense recognized in operating expenses in the consolidated statementstatements of comprehensive income. Revenue-based taxes are primarily franchise taxes, which are collected from NGD customers and remitted to taxing authorities.



Natural Gas Distribution
19Natural Gas Sales

Table of Contents




Utility Segment
Local gas distribution revenue. NW Natural's primary source of revenue is providing natural gas to customers in itsthe NGD service territory, which includeincludes residential, commercial, industrial and transportation customers. Gas distributionNGD 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.


NW NaturalWe applied the significant financing practical expedient and hashave not adjusted the consideration itNW Natural expects to receive from utilityNGD 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, NW Natural doeswe do not disclose the value of unsatisfied performance obligations as of September 30, 2018.obligations.


Alternative revenue. 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. Revenue
Leasing revenue primarily consists of revenues from NW Natural's North Mist Storage contract with Portland General Electric (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 forfrom small leases of utility-owned property owned by NW Natural to third parties. The majority of these transactions are accounted for as operating leases and the revenue is recognized on a straight-line basis 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. Storage Revenue
NW Natural's other revenue includes gas storage activity, which includes the non-utility portion of the Mist facility, which isInterstate 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 utilityNGD customers.


Asset Management Revenue
Revenues include the optimization of third-party storage assets and pipeline capacity and are provided net of the profit sharing amount refunded to NGD customers. Certain asset management revenue. Asset management revenue is generallyrevenues 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
23


each period using the most likely amount approach. Revenues include the optimization of the storage assets and pipeline capacity provided, net of the profit sharing amount refunded to utility customers. AssetAdditionally, other asset management revenues may be based on a fixed rate. Generally, asset management accounts are settled on a monthly basis.


As of SeptemberJune 30, 2018, unrecognized2022, unrecognized revenue for the fixed component of the transaction price related to gas storage and asset management revenue was approximately $43.8approximately $89.6 million. Of this amount, approximately $5.1$10.5 million will be recognized during the remainder of 2018, $11.92022, $18.6 million in 2019, $9.22023, $15.6 million in 2020, $8.32024, $13.5 million in 2021, $4.62025, $9.4 million in 20222026 and $4.7$22.0 million thereafter. The amounts presented here are calculated using current contracted rates. On October 12, 2018, NW Natural filed a rate petition with FERC for revised maximum cost-based rates, which incorporated the new federal corporate income tax rate as well as an updated depreciation study. NW Natural does not expect the new FERC rates to have a significant financial impact.


Appliance retail center revenue. 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
6. 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 or bi-monthly, 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 Portland General Electric (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 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 thousands2022202120222021
Lease revenue
Operating leases$19 $25 $37 $43 
Sales-type leases4,279 4,368 8,560 8,737 
Total lease revenue$4,298 $4,393 $8,597 $8,780 

Additionally, lease revenue of $0.1 million was recognized for the three months ended June 30, 2022 and 2021 and lease revenue of $0.3 million was recognized for the six months ended June 30, 2022 and 2021 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.


24


Total future minimum lease payments to be received under non-cancelable leases at June 30, 2022 are as follows:
In thousandsOperatingSales-TypeTotal
NW Natural:
Remainder of 2022$289 $8,460 $8,749 
202376 16,557 16,633 
202476 15,867 15,943 
202567 15,306 15,373 
202636 14,901 14,937 
Thereafter22 236,820 236,842 
Total minimum lease payments$566 $307,911 $308,477 
Less: imputed interest171,122 
Total leases receivable$136,789 
Other (NW Holdings):
Remainder of 2022$25 $— $25 
202351 — 51 
202452 — 52 
202553 — 53 
202656 — 56 
Thereafter914 — 914 
Total minimum lease payments$1,151 $— $1,151 
NW Holdings:
Remainder of 2022$314 $8,460 $8,774 
2023127 16,557 16,684 
2024128 15,867 15,995 
2025120 15,306 15,426 
202692 14,901 14,993 
Thereafter936 236,820 237,756 
Total minimum lease payments$1,717 $307,911 $309,628 
Less: imputed interest171,122 
Total leases receivable$136,789 

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 $4.9 million, $4.5 million and $4.7 million at June 30, 2022 and 2021 and December 31, 2021, 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 three months to 18 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.

25


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 thousands2022202120222021
NW Natural:
Operating lease expense$1,741 $1,710 $3,468 $3,388 
Short-term lease expense$416 $349 $579 $569 
Other (NW Holdings):
Operating lease expense$8 $18 $15 $36 
NW Holdings:
Operating lease expense$1,749 $1,728 $3,483 $3,424 
Short-term lease expense$416 $349 $579 $569 

Supplemental balance sheet information related to operating leases as of June 30, 2022 and 2021 and December 31, 2021 is as follows:
In thousandsJune 30,December 31,
202220212021
NW Natural:
Operating lease right of use asset$73,706 $76,211 $74,987 
Operating lease liabilities - current liabilities$1,298 $1,193 $1,273 
Operating lease liabilities - non-current liabilities78,789 80,043 79,431 
Total operating lease liabilities$80,087 $81,236 $80,704 
Other (NW Holdings):
Operating lease right of use asset$48 $83 $62 
Operating lease liabilities - non-current liabilities37 45 37 
Operating lease liabilities - current liabilities$17 $35 $23 
Total operating lease liabilities$54 $80 $60 
NW Holdings:
Operating lease right of use asset$73,754 $76,294 $75,049 
Operating lease liabilities - current liabilities$1,315 $1,228 $1,296 
Operating lease liabilities - non-current liabilities78,826 80,088 79,468 
Total operating lease liabilities$80,141 $81,316 $80,764 

The weighted-average remaining lease terms and weighted-average discount rates for the operating leases at NW Natural were as follows:
In thousandsJune 30,December 31,
202220212021
Weighted-average remaining lease term (years)17.718.718.2
Weighted-average discount rate7.2 %7.2 %7.2 %

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 $6.3 million, $5.0 million and $5.7 million as of June 30, 2022 and 2021 and December 31, 2021, respectively.
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Maturities of operating lease liabilities at June 30, 2022 were as follows:
In thousandsNW NaturalOther
(NW Holdings)		NW Holdings
Remainder of 2022$3,502 $12 $3,514 
20237,013 6 7,019 
20247,150 6 7,156 
20257,185 6 7,191 
20267,353 6 7,359 
Thereafter116,431 23 116,454 
Total lease payments148,634 59 148,693 
Less: imputed interest68,547 5 68,552 
Total lease obligations80,087 54 80,141 
Less: current obligations1,298 17 1,315 
Long-term lease obligations$78,789 $37 $78,826 

As of June 30, 2022, finance lease liabilities with maturities of less than one year were $0.1 million at NW Natural.

Supplemental cash flow information related to leases was as follows:
Three Months Ended June 30,Six Months Ended June 30,
In thousands2022202120222021
NW Natural:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases$1,733 $1,717 $3,466 $3,386 
Finance cash flows from finance leases$307 $134 $382 $678 
Right of use assets obtained in exchange for lease obligations
Operating leases$(14)$— $— $154 
Finance leases$120 $20 $220 $94 
Other (NW Holdings):
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases$6 $17 $12 $33 
NW Holdings:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases$1,739 $1,734 $3,478 $3,419 
Finance cash flows from finance leases$307 $134 $382 $678 
Right of use assets obtained in exchange for lease obligations
Operating leases$(14)$— $— $154 
Finance leases$120 $20 $220 $94 
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 $2.3 million, $1.9 million and $2.1 million at June 30, 2022 and 2021 and at December 31, 2021, respectively.

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8. STOCK-BASED COMPENSATION
Stock-based compensation plans are designed to promote stock ownership in NW Natural, and after October 1, 2018, NW Holdings by employees and officers of NW Natural and certain approved affiliates.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 stock-based compensation plans, see Note 68 in the 20172021 Form 10-K and the updates provided below.



20

Table of Contents




Long Term Incentive Plan
Performance Shares
LTIP performance shares incorporate a combination of market, performance, and service-based factors. During the ninesix months ended SeptemberJune 30, 2018, no2022, the final performance factor under the 2020 LTIP was approved and 31,830 performance-based shares were granted under the 2020 LTIP for accounting purposes. As such, NW Natural and other subsidiaries began recognizing compensation expense. In February 2018, the 20182021 and 2022, LTIP wasshares were awarded to participants; however, the agreement allowsagreements 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 quarterquarters of 2020,2023 and 2024, respectively, there is not a mutual understanding of the award’sawards' key terms and conditions between NW NaturalHoldings and the participants as of SeptemberJune 30, 2018,2022, and therefore, no expense was recognized for the 2018 award.2021 and 2022 awards. NW NaturalHoldings will calculate the grant date fair value and NW Natural will recognize expense over the remaining service period for each award once the final performance factor has been approved.


For the 20182021 and 2022 LTIP awardawards, share payouts range from a threshold of 0% to a maximum of 200% based on achievement of pre-established goals. The performance criteria for the 20182021 and 2022 performance shares consists of a three-year Return on Invested Capital (ROIC) threshold that must be satisfied and a cumulative EPS factor, which can be modified by a total shareholder return factor (TSR modifier) relative to the performance of the Russell 2500 Utilities Indexpeer group companies over the three-year performance period.period of three years for each respective award. If the target wastargets were achieved for the 2018 award,2021 and 2022 awards, NW Holdings would grant 34,702for accounting purposes 56,335 and 56,885 shares in the first quarterquarters of 2020.2023 and 2024, respectively.


As of SeptemberJune 30, 2018,2022, there was $1.3was $0.2 million of unrecognized compensation cost associated with the 2016 and 20172020 LTIP grants, which is expected to be recognized through 2019.2022.


Restricted Stock Units
During the ninesix months ended SeptemberJune 30, 2018, 31,4902022, 46,812 RSUs were granted under the LTIP with a weighted-average grant date fair value of $57.37$46.60 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. Generally, anThe majority of our RSU obligates us,grants obligate NW Holdings, upon vesting, to issue the RSU holder one share of common stock plusstock. 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 NW Holdings' common stock on the grant date. As of SeptemberJune 30, 2018,2022, there was $3.4$4.2 million of unrecognized compensation cost from grants of RSUs, which is expected to be recognized over a period extending through 2023.2026.


7.9. DEBT
Short-Term Debt
At SeptemberJune 30, 2018,2022, NW Holdings and NW Natural had short-term debt outstanding of $100.5$222.7 million which was comprised entirelyand $78.7 million, respectively. NW Holdings' short-term debt consisted of commercial paper. The carrying cost$144.0 million of balances outstanding under the credit agreement at NW Holdings and $78.7 million of commercial paper approximates fair value using Level 2 inputs. See Note 2 inoutstanding at NW Natural. The weighted average interest rate on the 2017 Form 10-K for a descriptioncredit agreement at June 30, 2022 was 2.7% at NW Holdings. The weighted average interest rate of the fair value hierarchy.commercial paper at June 30, 2022 was 2.0% at NW Natural. At SeptemberJune 30, 2018,2022, NW Natural's commercial paper had a maximum remaining maturity of 1222 days and an average remaining maturity of 713 days.


In June 2021, NW Natural entered into a $100.0 million 364-Day Term Loan Credit Agreement (Term Loan) and borrowed the full amount. All principal and interest under the Term Loan was repaid in December 2021.

Long-Term Debt
At SeptemberJune 30, 2018,2022, NW Holdings and NW Natural had long-term debt outstanding of $809.6$1,045.9 million and $986.8 million, respectively, which included $5.9$8.0 million and $7.9 million of unamortized debt issuance costs. Utilitycosts at NW Holdings and NW Natural, respectively. NW Natural's long-term debt consists of first mortgage bonds (FMBs) with maturity dates ranging from 20182023 through 2048,2051, interest rates ranging from 1.545%2.8% to 9.05%7.9%, and a weighted average couponinterest rate of 4.690%4.4%.

No long-term debt is scheduled to mature over the next twelve months following June 30, 2022 at NW Natural.

In March 2018,June 2019, NW Natural retired $22.0Water, a wholly-owned subsidiary of NW Holdings, entered into a two-year term loan agreement for $35.0 million. The loan was repaid in June 2021 upon its maturity date.

In June 2021, NW Natural Water entered into a five-year term loan credit agreement for $55.0 million and borrowed the full amount. The loan carried an interest rate of FMBs2.3% at June 30, 2022, which is based upon the one-month LIBOR rate. The loan is
28


guaranteed by NW Holdings and requires 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. NW Holdings was in compliance with this covenant at June 30, 2022, with a coupon rateconsolidated indebtedness to total capitalization ratio of 6.60%, and in September 2018, NW Natural issued $50.0 million of FMBs with a coupon rate of 4.110%, due in 2048.52.7%.


Fair Value of Long-Term Debt
NW Holdings' and NW Natural's outstanding debt does not trade in active markets. NW Natural estimates theThe fair value of long-term debt is estimated using utilitythe value of outstanding debt at natural gas distribution companies with similar credit ratings, terms, and remaining maturities to NW Holdings' and NW Natural's long-term debt that actively trade in public markets. Substantially all outstanding debt at NW Holdings is comprised of NW Natural debt. These valuations are based on Level 2 inputs as defined in the fair value hierarchy. See Note 2 in the 20172021 Form 10-K for a description of the fair value hierarchy.


The following table provides an estimate of the fair value of long-term debt, including current maturities of long-term debt, using market prices in effect on the valuation date:
June 30,December 31,
In thousands202220212021
NW Natural:
Gross long-term debt$994,700 $924,700 $994,700 
Unamortized debt issuance costs(7,938)(7,291)(8,205)
Carrying amount$986,762 $917,409 $986,495 
Estimated fair value(1)
$891,064 $1,043,696 $1,110,741 
NW Holdings:
Gross long-term debt$1,053,912 $983,221 $1,053,241 
Unamortized debt issuance costs(8,031)(7,446)(8,309)
Carrying amount$1,045,881 $975,775 $1,044,932 
Estimated fair value(1)
$950,597 $1,104,230 $1,174,500 
  September 30, December 31,
In thousands 2018 2017 2017
Gross long-term debt $815,534
 $786,700
 $786,700
Unamortized debt issuance costs (5,940) (7,276) (6,813)
Carrying amount $809,594
 $779,424
 $779,887
Estimated fair value(1)
 $833,962
 $847,068
 $853,339
(1) Estimated fair value does not include unamortized debt issuance costs.



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8.10. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS
NW Natural recognizes themaintains 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 theNW 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 for the pension and other postretirement benefit plans:
 Three Months Ended June 30,Six Months Ended June 30,
Pension BenefitsOther Postretirement
Benefits		Pension BenefitsOther
Postretirement Benefits
In thousands20222021202220212022202120222021
Service cost$1,529 $1,714 $47 $56 $3,059 $3,428 $94 $111 
Interest cost3,659 3,342 179 165 7,318 6,685 359 330 
Expected return on plan assets(6,427)(6,099)— — (12,854)(12,198)— — 
Amortization of prior service credit— — (84)(117)— — (167)(234)
Amortization of net actuarial loss3,199 5,500 99 131 6,397 11,001 198 262 
Net periodic benefit cost1,960 4,457 241 235 3,920 8,916 484 469 
Amount allocated to construction(616)(743)(17)(22)(1,280)(1,469)(35)(43)
Net periodic benefit cost charged to expense1,344 3,714 224 213 2,640 7,447 449 426 
Amortization of regulatory balancing account1,281 1,281 — — 4,082 4,082 — — 
Net amount charged to expense$2,625 $4,995 $224 $213 $6,722 $11,529 $449 $426 
29


  Three Months Ended September 30, Nine Months Ended September 30,
  Pension Benefits 
Other Postretirement
Benefits
 Pension Benefits 
Other
Postretirement
Benefits
In thousands 2018 2017 2018 2017 2018 2017 2018 2017
Service cost $1,757
 $1,881
 $80
 $98
 $5,371
 $5,621
 $239
 $295
Interest cost 4,336
 4,484
 241
 274
 12,702
 13,428
 723
 822
Expected return on plan assets (5,143) (5,112) —
 —
 (15,444) (15,337) —
 —
Amortization of prior service costs 11
 32
 (117) (117) 32
 95
 (351) (351)
Amortization of net actuarial loss 5,650
 3,656
 110
 138
 14,697
 10,899
 332
 415
Net periodic benefit cost 6,611
 4,941
 314
 393
 17,358
 14,706
 943
 1,181
Amount allocated to construction (659) (1,581) (27) (136) (2,026) (4,660) (82) (403)
Amount deferred to regulatory balancing account(1)
 (3,878) (1,484) —
 —
 (9,381) (4,519) —
 ���
Net amount charged to expense $2,074
 $1,876
 $287
 $257
 $5,951
 $5,527
 $861
 $778
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.
(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. On October 26, 2018 the OPUC ordered that the balancing account be frozen as of October 31, 2018, with recovery subject to future proceedings. Effective November 1, 2018 the OPUC authorized an additional $8.1 million to be included in rates for defined benefit pension plan expenses. 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 2017 Form 10-K.


The following table presents amounts recognized in accumulated other comprehensive loss (AOCL) and the changes in AOCL related to non-qualified employee benefit plans:
Three Months Ended June 30,Six Months Ended June 30,
In thousands2022202120222021
Beginning balance$(11,207)$(12,681)$(11,404)$(12,902)
Amounts reclassified from AOCL:
Amortization of actuarial losses268 301 536 602 
Total reclassifications before tax268 301 536 602 
Tax benefit(71)(80)(142)(160)
Total reclassifications for the period197 221 394 442 
Ending balance$(11,010)$(12,460)$(11,010)$(12,460)
  Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2018 2017 2018 2017
Beginning balance $(8,131) $(6,678) $(8,438) $(6,951)
Amounts reclassified from AOCL:        
Amortization of actuarial losses 209
 248
 627
 698
Total reclassifications before tax 209
 248
 627
 698
Tax (benefit) expense (55) (98) (166) (275)
Total reclassifications for the period 154
 150
 461
 423
Ending balance $(7,977) $(6,528) $(7,977) $(6,528)


Employer Contributions to Company-Sponsored Defined Benefit Pension Plans
For the nine months ended September 30, 2018, NW Natural made no cash contributions totaling $11.7 million to its qualified defined benefit pension plans.plans during the six months ended June 30, 2022 compared to $9.6 million for the same period in 2021. NW Natural expects furtherdoes not expect to make any plan contributions of $3.9 million during the remainder of 2018.2022 as a result of adopting the American Rescue Plan Act.


Defined Contribution Plan
TheNW Natural's Retirement K Savings Plan is a qualified defined contribution plan under Internal Revenue Code Sections 401(a) and 401(k). EmployerNW Natural contributions totaled $5.0$5.2 million and $4.1$4.7 million for the ninesix months ended SeptemberJune 30, 20182022 and 2017,2021, respectively.


See Note 810 in the 20172021 Form 10-K for more information concerning these retirement and other postretirement benefit plans.


9.11. 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.


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

Three Months Ended June 30,
NW HoldingsNW Natural
In thousands2022202120222021
Income tax at statutory rate (federal)$460 $(210)$744 $184 
State income tax161 (48)219 41 
Increase (decrease):
Differences required to be flowed-through by regulatory commissions(62)21 (62)21 
Other, net(89)(40)(91)42 
Total provision for income taxes$470 $(277)$810 $288 
Effective income tax rate21.5 %27.7 %22.9 %32.8 %

30


  Three Months Ended September 30, Nine Months Ended September 30,
Dollars in thousands 2018 2017 2018
2017
Income taxes at statutory rates (federal and state) $(4,136) $(5,440) $11,097
 $24,472
Increase (decrease):        
Differences required to be flowed-through by regulatory commissions (266) (302) 569
 1,282
Other, net 117
 20
 (475) (1,298)
Total provision (benefit) for income taxes on continuing operations $(4,285) $(5,722) $11,191
 $24,456
Effective tax rate for continuing operations 27.8% 42.0% 26.8% 39.4%
Six Months Ended June 30,
NW HoldingsNW Natural
In thousands2022202120222021
Income tax at statutory rate (federal)$16,243 $16,598 $16,859 $17,123 
State income tax6,674 7,260 6,803 7,366 
Increase (decrease): 
Differences required to be flowed-through by regulatory commissions(3,235)(3,584)(3,235)(3,584)
Other, net(289)(30)(294)(65)
Total provision for income taxes$19,393 $20,244 $20,133 $20,840 
Effective income tax rate25.1 %25.6 %25.1 %25.6 %


The NW Holdings and NW Natural effective income tax raterates for the three and ninesix months ended SeptemberJune 30, 20182022 compared to the same periodsperiod in 2017 decreased2021 changed primarily as a result of the TCJA and lowerchanges in pre-tax income. See "U.S. Federal TCJA Matters" below and Note 911 in the 20172021 Form 10-K for more detail on income taxes and effective tax rates.


The IRS Compliance Assurance Process (CAP) examination of the 20162020 tax year was completed during the first quarter of 2018.2022. There were no material changes to the return as filed. The 20172021 and 2022 tax year isyears are subject to examination under CAP and the 2018 tax year CAP application has been accepted by the IRS.CAP.

U.S. Federal TCJA Matters
On December 22, 2017, the TCJA was enacted and permanently lowered the U.S. federal corporate income tax rate to 21% from the previous maximum rate of 35%, effective for the tax year beginning January 1, 2018. The TCJA includes specific provisions related to regulated public utilities that provide for the continued deductibility of interest expense and the elimination of bonus depreciation on a prospective basis.

Under pre-TCJA law, business interest expense was generally deductible in the determination of taxable income. The TCJA imposes a new limitation on the deductibility of net business interest expense in excess of approximately 30% of adjusted taxable income beginning January 1, 2018. Taxpayers operating in the trade or business of public regulated utilities are excluded from these new interest expense limitations. There is ongoing uncertainty with regards to the application of the new interest expense limitation to non-regulated operations, primarily with respect to the allocation of interest between regulated and non-regulated trades or businesses. See Note 9 in the 2017 Form 10-K.

The TCJA generally provides for immediate full expensing for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. This would generally provide for accelerated cost recovery for capital investments. However, the definition of qualified property excludes property used in the trade or business of a public regulated utility. The definition of utility trade or business is the same as that used by the TCJA with respect to the imposition of the net interest expense limitation discussed above. As a result, ongoing uncertainty exists with respect to the application of full expensing to non-regulated activities. See Note 9 in the 2017 Form 10-K.

NW Natural had an estimated regulatory liability of $216.6 million and $213.3 million for the change in regulated utility deferred taxes as a result of the TCJA as of September 30, 2018 and December 31, 2017, respectively. These balances included a gross-up for income taxes of $57.4 million and $56.5 million, respectively. It is possible that this estimated balance may increase or decrease in the future as additional authoritative interpretation of the TCJA becomes available, or as a result of regulatory guidance from the OPUC or WUTC. NW Natural anticipates that until such time that customers receive the direct benefit of this regulatory liability, the balance, net of the additional gross-up for income taxes, will continue to provide an indirect benefit to customers by reducing the utility rate base which is a component of customer rates. It is not yet certain when the final resolution of these regulatory proceedings will occur, and as result, this regulatory liability is classified as long-term.

As noted in the 2017 Form 10-K, Note 9, the determination to exclude all assets placed in service after September 27, 2017 from bonus depreciation was provisional as provided for under Staff Accounting Bulletin (SAB) 118. During the third quarter, the Internal Revenue Service and Treasury issued Proposed Regulations addressing additional first year tax depreciation under the TCJA. These Proposed Regulations, while not definitive, indicate the IRS' initial interpretation that additional first year bonus depreciation was available for regulated utility assets placed in service after September 27, 2017 but before January 1, 2018. On the basis of these proposed regulations, NW Natural revised the provisional estimate of deferred taxes and income taxes payable. NW Natural recognized increases to prepaid income tax of $7.3 million, deferred income tax liability of $4.0 million, and regulatory liability of $3.3 million during the third quarter of 2018.

Utility rates in effect include an allowance to provide for the recovery of the anticipated provision for income taxes incurred as a result of providing regulated services. As a result of the newly enacted 21% federal corporate income tax rate, NW Natural recorded an additional regulatory liability in 2018 reflecting the estimated net reduction in the provision for income taxes. This revenue deferral is based on the estimated net benefit to customers using forecasted regulated utility earnings, considering

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average weather and associated volumes, and includes a gross-up for income taxes. As of September 30, 2018, a regulatory liability of $7.2 million, including accrued interest, was recorded to reflect this estimated revenue deferral.

10.12. PROPERTY, PLANT, AND EQUIPMENT
The following table sets forth the major classifications of property, plant, and equipment and accumulated depreciation of continuing operations:depreciation:

June 30,December 31,
In thousands202220212021
NW Natural:
NGD plant in service$3,782,197 $3,623,092 $3,721,939 
NGD construction work in progress195,118 99,646 135,398 
Less: Accumulated depreciation1,121,444 1,068,603 1,098,715 
NGD plant, net2,855,871 2,654,135 2,758,622 
Other plant in service69,623 66,315 69,332 
Other construction work in progress5,529 5,817 4,971 
Less: Accumulated depreciation21,167 20,140 20,646 
Other plant, net53,985 51,992 53,657 
Total property, plant, and equipment, net$2,909,856 $2,706,127 $2,812,279 
Other (NW Holdings):
Other plant in service$59,718 $50,148 $57,184 
Other construction work in progress17,051 4,774 8,419 
Less: Accumulated depreciation7,944 5,120 6,512 
Other plant, net$68,825 $49,802 $59,091 
NW Holdings:
Total property, plant, and equipment, net$2,978,681 $2,755,929 $2,871,370 
NW Natural:
Capital expenditures in accrued liabilities$44,052 $37,968 $37,537 
NW Holdings:
Capital expenditures in accrued liabilities$45,079 $38,395 $38,333 

  September 30, December 31,
In thousands 2018 2017 2017
Utility plant in service $3,068,234
 $2,934,424
 $2,975,217
Utility construction work in progress 227,200
 145,148
 159,924
Less: Accumulated depreciation 978,446
 937,498
 942,879
Utility plant, net 2,316,988
 2,142,074
 2,192,262
Other plant in service 69,449
 64,929
 65,372
Other construction work in progress 5,505
 4,044
 4,122
Less: Accumulated depreciation 18,548
 17,284
 17,598
Other plant, net (1)
 56,406
 51,689
 51,896
Total property, plant, and equipment $2,373,394
 $2,193,763
 $2,244,158
       
Capital expenditures in accrued liabilities (2)
 $27,692
 $41,675
 $34,761
NW Natural
(1)
Previously reported non-utility balances were restated due to the assets and liabilities associated with Gill Ranch now being classified as discontinued operations assets and liabilities on the consolidated balance sheets. See Note 16 for further discussion.
(2)
Previously reported capital expenditures in accrued liabilities were restated due to the assets and liabilities associated with Gill Ranch now being classified as discontinued operations assets and liabilities on the consolidated balance sheets. Capital expenditures in accrued liabilities related to Gill Ranch were approximately $0.3 million, $0.1 million, and $0.2 million as of September 30, 2018, September 30, 2017, and December 31, 2017, respectively.

Other plant balances include non-utility gas storage assets at the Mist facility and other long-lived assets not related to NGD.

NW Holdings
Other plant balances include long-lived assets associated with water and wastewater operations and non-regulated activities.

Build-to-suit Assets
In October 2017,activities not held by NW Natural entered into a 20-year operating lease agreement commencing in 2020 for the new headquarters location in Portland, Oregon. NW Natural's existing headquarters lease expires in 2020. The search and evaluation process focused on seismic preparedness, safety, reliability, least cost to customers, and a continued commitment to employees and the communities we serve. The lease was analyzed in consideration of build-to-suit lease accounting guidance, and we concluded that NW Natural is the accounting owner of the asset during construction. As a result, NW Natural recognized $16.0 million and $0.5 million in property, plant and equipment and an obligation in other non-current liabilities for the same amount in the consolidated balance sheet at September 30, 2018 and December 31, 2017, respectively. In 2019, pursuant to the new lease standard issued by the FASB, NW Natural expects to de-recognize the associated build-to-suit asset and liability. See Note 14 in the 2017 Form 10-K.or its subsidiaries.

11. GAS RESERVES
NW Natural has invested approximately $188 million through the gas reserves program in the Jonah Field located in Wyoming as of September 30, 2018. Gas reserves are stated at cost, net of regulatory amortization, with the associated deferred tax benefits recorded as liabilities in the consolidated balance sheets. The investment in gas reserves provides long-term price protection for utility customers through the original agreement with Encana Oil & Gas (USA) Inc. under which NW Natural invested approximately $178 million and the amended agreement with Jonah Energy LLC under which an approximate additional $10 million was invested.

The cost of gas, including a carrying cost for the rate base investment, is included in the annual Oregon PGA filing, which allows NW Natural to recover these costs through customer rates. The investment under the original agreement, less accumulated amortization and deferred taxes, earns a rate of return.

Gas produced from the additional wells is included in the Oregon PGA at a fixed rate of $0.4725 per therm, which approximates the 10-year hedge rate plus financing costs at the inception of the investment.



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13. INVESTMENTS
The following table outlines net gas reserves investment:
  September 30, December 31,
In thousands 2018 2017 2017
Gas reserves, current $16,916
 $16,218
 $15,704
Gas reserves, non-current 170,391
 171,318
 171,832
Less: Accumulated amortization 99,835
 83,442
 87,779
Total gas reserves(1)
 87,472
 104,094
 99,757
Less: Deferred taxes on gas reserves 19,377
 29,298
 22,712
Net investment in gas reserves $68,095
 $74,796
 $77,045
(1)
The net investment in additional wells included in total gas reserves was $5.0 million, $6.0 million and $5.8 million at September 30, 2018 and 2017 and December 31, 2017, respectively.

The investment is included in the consolidated balance sheets underInvestments include gas reserves, with a maximum loss exposure limited to the investment balance.

12. INVESTMENTS
Investmentsfinancial investments in Gas Pipeline
Trail West Pipeline, LLC (TWP), a wholly-owned subsidiary of TWH, is pursuing the development of a new gas transmission pipeline that would provide an interconnection with NW Natural's utility distribution system. NWN Energy, then a wholly-owned subsidiary of NW Natural, owns 50% of TWH,life insurance policies, and 50% is owned by TransCanada American Investments Ltd., an indirect wholly-owned subsidiary of TransCanada Corporation.

Variable Interest Entity (VIE) Analysis
TWH is a VIE, with NW Natural's investment in TWP reported under equity method accounting. We have determined that NW Natural is not the primary beneficiary of TWH’s activities as it only has a 50% share of the entity, and there are no stipulations that allow a disproportionate influence over it. Investmentsinvestments. The following table summarizes other investments:

NW HoldingsNW Natural
June 30,December 31,June 30,December 31,
In thousands202220212021202220212021
Investments in life insurance policies$48,735 $47,695 $48,178 $48,735 $47,695 $48,178 
Investments in gas reserves, non-current24,695 29,852 26,608 24,695 29,852 26,608 
Investment in unconsolidated affiliates22,597 30 14,492 8,056 — — 
Total other investments$96,027 $77,577 $89,278 $81,486 $77,547 $74,786 

Investment in TWH and TWP are included in other investments in the balance sheet. If we do not develop this investment, the maximum loss exposure related to TWH is limited to the equity investment balance, less its share of any cash or other assets available as a 50% owner. The investment balance in TWH was $13.4 million at September 30, 2018 and 2017 and December 31, 2017. See Note 12 in the 2017 Form 10-K.

Other InvestmentsLife Insurance Policies
Other investments include financial investments in life insurance policies, which are accounted for at cash surrender value, net of policy loans. See Note 1213 in the 20172021 Form 10-K.


NW Natural Gas Reserves
13.NW Natural has invested $188 million through the gas reserves program in the Jonah Field located in Wyoming as of June 30, 2022. Gas reserves are stated at cost, net of regulatory amortization, with the associated deferred tax benefits of $5.3 million, $8.8 million, and $6.9 million, which are recorded as liabilities in the June 30, 2022, June 30, 2021, and December 31, 2021 consolidated balance sheets, respectively. NW Natural's investment is included in NW Holdings' and NW Natural's consolidated balance sheets under other current assets and other investments (non-current portion) with the maximum loss exposure limited to the investment balance. The amount of gas reserves included in other current assets was $4.3 million, $8.4 million, and $5.4 million as of June 30, 2022, June 30, 2021, and December 31, 2021, respectively. See Note 13 in the 2021 Form 10-K.

Investments in Unconsolidated Affiliates
In December 2021, NW Natural Water purchased a 37.3% ownership stake in Avion Water Company, Inc. (Avion Water), an investor-owned water utility for $14.5 million. In July 2022, NW Natural Water increased its ownership stake in Avion Water to 40.3% for an additional $1.0 million. Avion Water operates in Bend, Oregon and the surrounding communities, serving approximately 15,000 customer connections and employing 35 people. The carrying value of the equity method investment is $10.4 million higher than the underlying equity in the net assets of the investee at June 30, 2022 due to equity method goodwill. Equity in earnings (loss) of Avion Water is included in other income (expense), net.

In 2020, NW Natural began a partnership with BioCarbN to invest in up to 4 separate RNG development projects that will access biogas derived from water treatment at Tyson Foods’ processing plants, subject to approval by all parties. During the construction phase of the projects, NW Natural determined it is the primary beneficiary and fully consolidates each entity.

In 2022, commissioning of the first project, Lexington Renewable Energy LLC (Lexington), was completed and NW Natural determined it was no longer the primary beneficiary and deconsolidated the variable interest entity and recorded the investment in Lexington as an equity method investment. NW Natural accounts for its interest in Lexington using the equity method of accounting because NW Natural does not control but has the ability to exercise significant influence over Lexington's operations after commissioning. There was no gain or loss recognized upon deconsolidation. NW Natural determined the fair value of the investment approximated the carrying value which was primarily comprised of cash and property, plant and equipment. As of June 30, 2022, NW Natural had an investment balance in Lexington of $8.1 million. Equity in earnings (loss) of Lexington is included in cost of gas.
14. BUSINESS COMBINATIONS
On September 13, 2018, NWN Water, then a wholly-owned subsidiary of NW Natural, completed2022 Business Combinations
During the acquisition of Falls Water Co., Inc., a privately-owned water utility in the Pacific Northwest for preliminary non-cash consideration of $8.5 million, subject to closing adjustments, in the form of 125,000 shares of NW Natural common stock. Falls Water became a wholly-owned subsidiary ofsix months ended June 30, 2022, NWN Water and marked its firstsubsidiaries completed 1 acquisition inqualifying as a business combination. The fair value of the regulated water utility sector. This acquisition aligns with our water sector strategy as the acquisition providespreliminary consideration transferred was not material and is not significant to NW Holdings' results of operations.

2021 Business Combinations
During 2021, NWN Water entry into Idaho, expands service area, and opens further opportunity for growth. Falls Water is based in Idaho Falls, Idaho and serves approximately 5,300 connections.

Through the purchase of allits subsidiaries completed 4 acquisitions qualifying as business combinations. The aggregate fair value of the outstanding shares of Falls Water, NWN Water acquired the net assetspreliminary consideration transferred for these acquisitions were not material and 100% control of Falls Water. We determined that the Falls Water acquisition met the criteria of a business combination, and as such performed a preliminary allocation of the considerationare not significant to the acquired assets and assumed liabilities based on their fair value as of the acquisition date, the majority of which was allocated to goodwill. The allocation is considered preliminary as we continue to evaluate working capital adjustments, certain tax positions, and goodwill. We do not expect any subsequent adjustments to be significant, and expect any such adjustments to be completed within the one-year measurement period. The acquisition costs were insignificant and were expensed as incurred. TheNW Holdings' results of Falls Water are not material to the consolidated financial results.operations.


Preliminary goodwill of $6.6 million was recognized from this acquisition and is attributable to Falls Water's regulated service territory and experienced workforce as well as the strategic benefits expected from this high-growth service territory.
32


Goodwill
NW Natural has included this goodwill in other for segment reporting purposes, and it is not deductible for income tax purposes. No intangible assets aside from goodwill were acquired.

We allocateHoldings allocates goodwill to reporting units based on the expected benefit from the business combination. We perform an annual impairment assessment of goodwill at the reporting unit level, or more frequently if events and circumstances indicate that goodwill might be impaired. An impairment loss is recognized if the carrying value of a reporting unit’s goodwill exceeds its fair value.


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TableAs a result of Contents





An impairment analysis has not been performedall acquisitions completed, total goodwill was $70.7 million, $69.3 million, and $70.6 million as of June 30, 2022, June 30, 2021, and December 31, 2021, respectively. All of our goodwill is related to water and wastewater acquisitions and is included in the current year, since all goodwill was acquired in the Falls Water acquisition, which closed in the third quarter of 2018. We anticipate that another category for segment reporting purposes. The annual impairment assessment of goodwill will occuroccurs in the fourth quarter of each year, beginning in the fourth quarter of 2018.year. There have been no impairments recognized to date.

14.15. DERIVATIVE INSTRUMENTS
NW Natural enters into financial derivative contracts to hedge a portion of the utility’sNGD segment's natural gas sales requirements. These contracts include swaps, options, and combinations of option contracts. These derivative financial instruments are primarily used to manage commodity price variability. A small portion of theNW Natural's derivative hedging strategy involves foreign currency exchangeforward contracts.


NW Natural enters into these financial derivatives, up to prescribed limits, primarily to hedge price variability related to term physical gas supply contracts as well as to hedge spot purchases of natural gas. The foreign currency forward contracts are used to hedge the fluctuation in foreign currency exchange rates for pipeline demand charges paid in Canadian dollars.


In the normal course of business, NW Natural also enters into indexed-price physical forward natural gas commodity purchase contracts and options to meet the requirements of utilityNGD customers. These contracts qualify for regulatory deferral accounting treatment.


NW Natural also enters into exchange contracts related to the third-party asset management of its gas portfolio, some of which are derivatives that do not qualify for hedge accounting or only partial regulatory deferral, but are subject to NW Natural's regulatory sharing agreement. These derivatives are recognized in operating revenues, net of amounts shared with utilityNGD customers.


Notional Amounts
The following table presents the absolute notional amounts related to open positions on NW Natural derivative instruments:
June 30,December 31,
In thousands202220212021
Natural gas (in therms):
Financial718,965 680,335 618,815 
Physical516,590 419,148 431,628 
Foreign exchange$7,659 $6,477 $6,268 
  September 30, December 31,
In thousands 2018 2017 2017
Natural gas (in therms):      
Financial 513,850
 521,080
 429,100
Physical 760,925
 750,650
 520,268
Foreign exchange $7,184
 $6,933
 $7,669


Purchased Gas Adjustment (PGA)
DerivativesUnder the PGA mechanism in Oregon, derivatives entered into by the utilityNW Natural for the procurement or hedging of natural gas for future gas years generally receive regulatory deferral accounting treatment. In general, commodity hedging for the current gas year is completed prior to the start of the gas year, and hedge prices are reflected in the weighted-average cost of gas in the PGA filing. Hedge contracts entered into prior to the PGA filing were included in the PGA for the 2021-22 gas year. Hedge contracts entered into after the start of the PGA period are subject to the PGA incentive sharing mechanism in Oregon. Under the PGA mechanism in Washington, NW Natural incorporates risk-responsive hedging strategies and receives regulatory deferral accounting treatment for its Washington gas supplies.

NW Natural entered the 2017-18 and 2016-172021-22 gas year with its forecasted sales volumes hedged at 49% and 48%approximately 79% in total. The total hedged for Oregon was approximately 82%, including 62% in financial swaphedges and option contracts, and 26% and 27%19% in physical gas supplies, respectively. Hedge contracts entered into prior to the PGA filing,supplies. The total hedged for Washington was approximately 57%, including 44% in September 2017, were includedfinancial hedges and 13% in the PGA for the 2017-18physical gas year. Hedge contracts entered into after the PGA filing, and related to subsequent gas years, may be included in future PGA filings and qualify for regulatory deferral.supplies.



33


Unrealized and Realized Gain/Loss
The following table reflects the income statement presentation for the unrealized gains and losses from derivative instruments:
  Three Months Ended September 30,
  2018 2017
In thousands Natural gas commodity Foreign exchange Natural gas commodity Foreign exchange
Benefit (expense) to cost of gas $4,473
 $210
 $(2,566) $51
Operating revenues (286) —
 28
 —
 Amounts deferred to regulatory accounts on balance sheet
 (4,285) (210) 2,548
 (51)
Total gain (loss) in pre-tax earnings $(98) $—
 $10
 $—

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  Nine Months Ended September 30,
  2018 2017
In thousands Natural gas commodity Foreign exchange Natural gas commodity Foreign exchange
Benefit (expense) to cost of gas $1,384
 $—
 $(19,081) $275
Operating revenues (122) —
 (1,249) —
 Amounts deferred to regulatory accounts on balance sheet
 (1,305) —
 19,895
 (275)
Total gain (loss) in pre-tax earnings $(43) $—
 $(435) $—

UNREALIZED GAIN/LOSS.NW Natural's outstandingderivative instruments, which also represents all derivative instruments at NW Holdings:
Three Months Ended June 30,
20222021
In thousandsNatural gas commodityForeign exchangeNatural gas commodityForeign exchange
Benefit (expense) to cost of gas$(29,332)$(153)$16,323 $(45)
Operating revenues (expense)— — — — 
Amounts deferred to regulatory accounts on balance sheet29,332 153 (16,323)45 
Total gain (loss) in pre-tax earnings$— $— $— $— 

Six Months Ended June 30,
20222021
In thousandsNatural gas commodityForeign exchangeNatural gas commodityForeign exchange
Benefit (expense) to cost of gas$44,453 $(73)$36,805 $32 
Operating revenues (expense)— — (27)— 
Amounts deferred to regulatory accounts on balance sheet(44,453)73 (36,782)(32)
Total gain (loss) in pre-tax earnings$— $— $(4)$— 

Unrealized Gain/Loss
Outstanding derivative instruments related to regulated utilityNGD operations are deferred in accordance with regulatory accounting standards. The cost of foreign currency forward and natural gas derivative contracts are recognized immediately in the cost of gas; however, costs above or below the amount embedded in the current year PGA are subject to a regulatory deferral tariff and therefore, are recorded as a regulatory asset or liability.


REALIZED GAIN/LOSS. Realized Gain/Loss
NW Natural realized net lossesgains of $1.9$21.2 million and $15.6$57.2 million for the three and ninesix months ended SeptemberJune 30, 2018,2022, respectively, from the settlement of natural gas financial derivative contracts. Whereas,contracts, whereas, net gains of $1.0$4.2 million and $9.3 million were realized for the three and ninesix months ended SeptemberJune 30, 2017.2021, respectively. Realized gains and losses are recorded inoffset the higher or lower cost of gas deferred through regulatory accounts, and amortized through customer ratespurchased, resulting in the following year.no incremental amounts to collect or refund to customers.


Credit Risk Management of Financial Derivatives Instruments
No collateral was posted with or by NW Natural counterparties as of SeptemberJune 30, 20182022 or 2017.2021. NW Natural attempts to minimize the potential exposure to collateral calls by diversifying counterparties and using credit limits to manage liquidity risk. Counterparties generally allow a certain credit limit threshold before requiring usNW Natural to post collateral against unrealized loss positions. Given NW Natural's credit ratings, counterparty credit limits and portfolio diversification, it was not subject to collateral calls in 20182022 or 2017.2021. The collateral call exposure is set forth under credit support agreements, which generally contain credit limits. NW Natural could also be subject to collateral call exposure where it has agreed to provide adequate assurance, which is not specific as to the amount of credit limit allowed, but could potentially require additional collateral in the event of a material adverse change.

Based upon current commodity financial swap and option contracts outstanding, which reflect unrealized losses of $9.7 million at September 30, 2018, we have estimated the level of collateral demands, with and without potential adequate assurance calls, using current gas prices and various credit downgrade rating scenarios for NW Natural as follows:
    Credit Rating Downgrade Scenarios
In thousands (Current Ratings) A+/A3 BBB+/Baa1 BBB/Baa2 BBB-/Baa3 Speculative
With Adequate Assurance Calls $—
 $—
 $—
 $(2,587) $(7,023)
Without Adequate Assurance Calls —
 —
 —
 (2,587) (4,730)


NW Natural's financial derivative instruments are subject to master netting arrangements; however, they are presented on a gross basis in the consolidated balance sheets. NW Natural and its counterparties have the ability to set-off obligations to each other under specified circumstances. Such circumstances may include a defaulting party, a credit change due to a merger affecting either party, or any other termination event.


NW Natural's current commodity financial swap and option contracts outstanding reflect unrealized gains of $46.6 million and $54.3 million at June 30, 2022 and 2021. If netted by counterparty, NW Natural's physical and financial derivative position would result in an asset of $1.9$47.8 million and a liability of $10.1$3.4 million as of SeptemberJune 30, 2018,2022, an asset of $3.3$51.8 million and a liability of $12.6$1.6 million as of SeptemberJune 30, 2017,2021, and an asset of $2.9$51.8 million and a liability of $23.3$3.8 million as of December 31, 2017.2021.


NW Natural is exposed to derivative credit and liquidity risk primarily through securing fixed price natural gas commodity swaps with financial counterparties. NW Natural utilizes master netting arrangements through International Swaps and Derivatives Association contracts to hedgeminimize this risk along with collateral support agreements with counterparties based on their credit ratings. In certain cases, NW Natural may require the riskposting of price increases for natural gas purchases made on behalfcollateral, guarantees, or letters of customers.credit from counterparties to maintain its minimum credit requirement standards. See Note 1315 in the 20172021 Form 10-K for additional information.


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Fair Value
In accordance with fair value accounting, NW Natural includes non-performance risk in calculating fair value adjustments. This includes a credit risk adjustment based on the credit spreads of NW Natural counterparties when in an unrealized gain position, or on NW Natural's own credit spread when it is in an unrealized loss position. The inputs in our valuation models include natural gas futures, volatility, credit default swap spreads and interest rates. Additionally, the assessment of non-performance risk is generally derived from the credit default swap market and from bond market credit spreads. The impact of the credit risk adjustments for all outstanding derivatives was immaterial to the fair value calculation at SeptemberJune 30, 2018. Using significant other observable or Level 2 inputs, the2022. The net fair value was a liabilityan asset of $8.1$44.4 million, $9.3an asset of $50.2 million, and $20.3an asset of $48.0 million as of SeptemberJune 30, 20182022 and 2017,2021, and December 31, 2017,2021, respectively. No Level 3 inputs were used in our derivative valuations and there

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were no transfers between Level 1 or Level 2 during the ninesix months ended SeptemberJune 30, 20182022 and 2017.2021. See Note 2 in the 20172021 Form 10-K.


15.16. ENVIRONMENTAL MATTERS
NW Natural owns, or previously owned, properties that may require environmental remediation or action. NW Natural estimates theThe range of loss for environmental liabilities is estimated based on current remediation technology, enacted laws and regulations, industry experience gained at similar sites, and an assessment of the probable level of involvement and financial condition of other potentially responsible parties (PRPs). When amounts are prudently expended related to site remediation of those sites described herein, NW Natural has a recovery mechanismmechanisms in place to collect 96.68%96.7% of remediation costs fromallocable to Oregon customers and is allowed3.3% of costs allocable to defer environmental remediation costs allocated to customers in Washington annually until they are reviewed for prudence at a subsequent proceeding.customers.


These sites are subject to the remediation process prescribed by the Environmental Protection Agency (EPA) and the Oregon Department of Environmental Quality (ODEQ). The process begins with a remedial investigation (RI) to determine the nature and extent of contamination and then a risk assessment (RA) to establish whether the contamination at the site poses unacceptable risks to humans and the environment. Next, a feasibility study (FS) or an engineering evaluation/cost analysis (EE/CA) evaluates various remedial alternatives. It is at this point in the process when NW Natural is able to estimate a range of remediation costs and record a reasonable potential remediation liability, or make an adjustment to the existing liability. From this study, the regulatory agency selects a remedy and issues a Record of Decision (ROD). After a ROD is issued, NW Natural would seek to negotiate a consent decree or consent judgment for designing and implementing the remedy. NW Natural would have the ability to further refine estimates of remediation liabilities at that time.


Remediation may include treatment of contaminated media such as sediment, soil and groundwater, removal and disposal of media, institutional controls such as legal restrictions on future property use, or natural recovery. Following construction of the remedy, the EPA and ODEQ also have requirements for ongoing maintenance, monitoring and other post-remediation care that may continue for many years. Where appropriate and reasonably known, NW Natural will provide for these costs in the remediation liabilities described below.


Due to the numerous uncertainties surrounding the course of environmental remediation and the preliminary nature of several site investigations, in some cases, NW Natural may not be able to reasonably estimate the high end of the range of possible loss. In those cases, the nature of the possible loss has been disclosed, as has the fact that the high end of the range cannot be reasonably estimated where a range of potential loss is available. Unless there is an estimate within the range of possible losses that is more likely than other cost estimates within that range, NW Natural records the liability at the low end of this range. It is likely changes in these estimates and ranges will occur throughout the remediation process for each of these sites due to the continued evaluation and clarification concerning responsibility, the complexity of environmental laws and regulations and the determination by regulators of remediation alternatives. In addition to remediation costs, NW Natural could also be subject to Natural Resource Damages (NRD) claims. NW Natural will assess the likelihood and probability of each claim and recognize a liability if deemed appropriate. Refer to "Other"Other Portland Harbor"Harbor" below.


Environmental Sites
The following table summarizes information regarding liabilities related to environmental sites, which are recorded in other current liabilities and other noncurrent liabilities in theNW Natural's balance sheet:
Current LiabilitiesNon-Current Liabilities
June 30,December 31,June 30,December 31,
In thousands202220212021202220212021
Portland Harbor site:
Gasco/Siltronic Sediments$6,144 $6,658 $7,582 $40,740 $41,652 $42,076 
Other Portland Harbor2,313 2,195 2,592 8,613 6,588 9,570 
Gasco/Siltronic Upland site11,050 12,442 15,711 34,352 38,401 36,215 
Front Street site585 1,219 1,100 868 975 811 
Oregon Steel Mills— — — 179 179 179 
Total$20,092 $22,514 $26,985 $84,752 $87,795 $88,851 


35


  Current Liabilities Non-Current Liabilities
  September 30, December 31, September 30, December 31,
In thousands 2018 2017 2017 2018 2017 2017
Portland Harbor site:            
Gasco/Siltronic Sediments $2,471
 $860
 $2,683
 $44,410
 $43,796
 $45,346
Other Portland Harbor 1,392
 1,379
 1,949
 3,540
 3,618
 4,163
Gasco/Siltronic Upland site 8,847
 7,537
 13,422
 44,310
 48,758
 47,835
Central Service Center site 25
 31
 25
 —
 —
 —
Front Street site 6,011
 846
 1,009
 5,342
 10,788
 10,757
Oregon Steel Mills —
 —
 —
 179
 179
 179
Total $18,746

$10,653
 $19,088
 $97,781
 $107,139
 $108,280
Portland Harbor Site

PORTLAND HARBOR SITE.The Portland Harbor is an EPA listed Superfund site that is approximately 10 miles long on the Willamette River and is adjacent to NW Natural's Gasco uplands site. NW Natural is one of over one hundred100 PRPs, toeach jointly and severally liable, at the Superfund site. In January 2017, the EPA issued its Record of Decision, which selects the remedy for the clean-up of the

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Portland Harbor site (Portland Harbor ROD). The Portland Harbor ROD estimates the present value total cost at approximately $1.05 billion with an accuracy between -30% and +50% of actual costs.

TheNW Natural's potential liability is a portion of the costs of the remedy for the entire Portland Harbor Superfund site. The cost of that remedy is expected to be allocated among more than 100 PRPs. In addition, NW Natural is actively pursuing clarification and flexibility under the ROD in order to better understand its obligation under the clean-up. NW Natural is also participating in a non-binding allocation process with the other PRPs in an effort to resolve its potential liability. The Portland Harbor ROD does not provide any additional clarification around allocation of costs among PRPs and, as a result of issuance of the Portland Harbor ROD,PRPs; accordingly, NW Natural has not modified any of the recorded liabilities at this time.time as a result of the issuance of the Portland Harbor ROD.


NW Natural manages theits liability related to the Superfund site as two2 distinct remediation projects,projects: the Gasco/SiltronicGasco Sediments Site and Other Portland Harbor projects.


Gasco/Siltronic Sediments.GASCO SEDIMENTS. In 2009, NW Natural and Siltronic Corporation entered into a separate Administrative Order on Consent with the EPA to evaluate and design specific remedies for sediments adjacent to the Gasco uplands and Siltronic uplands sites. NW Natural submitted a draft EE/CA to the EPA in May 2012 to provide the estimated cost of potential remedial alternatives for this site. AtIn March 2020, NW Natural and the EPA amended the Administrative Order on Consent to include additional remedial design activities downstream of the Gasco sediments site and in the navigation channel. Siltronic Corporation is not a party to the amended order. In the second quarter of 2021, NW Natural began preliminary design discussions with the EPA for the Gasco sediments site. These preliminary design discussions did not include a cost estimate for cleanup. No design alternatives are more likely than the EE/CA alternatives at this time, and NW Natural expects further design discussion and iteration with the EPA.

The estimated costs for the various sediment remedy alternatives in the draft EE/CA, for the additional studies and design work needed before the cleanup can occur, and for regulatory oversight throughout the clean-upcleanup range from $46.9 million to $350 million. NW Natural has recorded a liability of $46.9 million for the Gasco sediment clean-up, which reflects the low end of the range. At this time, NW Natural believeswe believe sediments at thisthe Gasco sediments site represent the largest portion of itsNW Natural's liability related to the Portland Harbor site discussed above.


Other Portland Harbor.OTHER PORTLAND HARBOR.While NW Natural still believeswe believe liabilities associated with the Gasco/SiltronicGasco sediments site represent itsNW Natural's largest exposure, it does havethere are other potential exposures associated with the Portland Harbor ROD, including NRD costs and harborwide clean-upremedial design and cleanup costs (including downstream petroleum contamination), for which allocations among the PRPs have not yet been determined. 


NW Natural and other parties have signed a cooperative agreement with the Portland Harbor Natural Resource Trustee council to participate in a phased NRD assessment to estimate liabilities to support an early restoration-based settlement of NRD claims. OneNaN member of this Trustee council, the Yakama Nation, withdrew from the council in 2009, and in 2017, filed suit against NW Natural and 29 other parties seeking remedial costs and NRD assessment costs associated with the Portland Harbor site, set forth in the complaint. The complaint seeks recovery of alleged costs totaling $0.3 million in connection with the selection of a remedial action for the Portland Harbor site as well as declaratory judgment for unspecified future remedial action costs and for costs to assess the injury, loss or destruction of natural resources resulting from the release of hazardous substances at and from the Portland Harbor site. The Yakama Nation has filed two2 amended complaints addressing certain pleading defects and dismissing the State of Oregon. On the motion of NW Natural and certain other defendants, the federal court has stayed the case pending the outcome of the non-binding allocation proceeding discussed above. NW Natural has recorded a liability for NRD claims which is at the low end of the range of the potential liability; the high end of the range cannot be reasonably estimated at this time. The NRD liability is not included in the aforementioned range of costs provided in the Portland Harbor ROD.


GASCO UPLANDS SITE.Gasco Uplands Site
A predecessor of NW Natural, Portland Gas and Coke Company, owned a former gas manufacturing plant that was closed in 1958 (Gasco site) and is adjacent to the Portland Harbor site described above. The Gasco site has been under investigation by NW Natural for environmental contamination under the ODEQ Voluntary Clean-UpCleanup Program (VCP). It is not included in the range of remedial costs for the Portland Harbor site noted above. The Gasco site is managed in two2 parts, the uplands portion and the groundwater source control action.


NW Natural submitted a revised Remedial Investigation Report for the uplands to ODEQ in May 2007. In March 2015, ODEQ approved the RA,Risk Assessment (RA) for this site, enabling commencement of work on the FS in 2016. NW Natural has recognized a liability for the remediation of the uplands portion of the site which is at the low end of the range of potential liability; the high end of the range cannot be reasonably estimated at this time.


In October 2016, ODEQ and NW Natural agreed to amend their VCP agreement for the Gasco uplands to incorporate a portion of the Siltronic property formerly owned by Portland Gas & Coke between 1939 and 1960 into the Gasco RA and FS. Previously,
36


NW Natural was conducting an investigation of manufactured gas plant constituents on the entire Siltronic uplands for ODEQ. Siltronic will be working with ODEQ directly on environmental impacts to the remainder of its property.

In September 2013, NW Natural completed construction of a groundwater source control system, including a water treatment station, at the Gasco site. NW Natural has estimated the cost associated with the ongoing operation of the system and has recognized a liability which is at the low end of the range of potential cost. NW Natural cannot estimate the high end of the range at this time due to the uncertainty associated with the duration of running the water treatment station, which is highly dependent on the remedy determined for both the upland portion as well as the final remedy for the Gasco sediment exposure.sediments site.


OTHER SITES. Other Sites
In addition to those sites above, NW Natural has environmental exposures at three other sites: Central Service Center, Front Street and Oregon Steel Mills. NW Natural may have exposure at other sites that have not been identified at this time. Due to the uncertainty of the design of remediation, regulation, timing of the remediation and in the case of the Oregon Steel Mills site, pending litigation, liabilities for each of these sites have been recognized at their respective low end of the range of potential liability; the high end of the range could not be reasonably estimated at this time.


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Central Service Center site.NW Natural is currently performing an environmental investigation of the property under ODEQ's Independent Cleanup Pathway. This site is on ODEQ's list of sites with confirmed releases of hazardous substances, and cleanup is necessary. 
Front Street site.FRONT STREET SITE.The Front Street site was the former location of a gas manufacturing plant NW Natural operated (the former Portland Gas Manufacturing site, or PGM). At ODEQ’s request, itNW Natural conducted a sediment and source control investigation and provided findings to ODEQ. In December 2015, an FS on the former Portland Gas Manufacturing site was completed. 


In July 2017, ODEQ issued the PGM ROD. The ROD specifies the selected remedy, which requires a combination of dredging, capping, treatment, and natural recovery. In addition, the selected remedy also requires institutional controls and long-term inspection and maintenance. NW Natural revisedConstruction of the liabilityremedy began in July 2020 and was completed in October 2020. The first year of post-construction monitoring was completed in 2021 and demonstrated that the second quarter of 2017 to incorporate the estimated undiscounted cost of approximately $10.5 million for the selected remedy. Further,cap was intact and performing as designed. NW Natural has recognized an additional liability of $0.9$1.5 million for additional studies andcosts associated with the discovery during construction of World War II-era munitions, design costs, as well as regulatory oversight throughout the clean-up. and permitting issues, and post-construction work.

OREGON STEEL MILLS SITE. Refer to "Legal Proceedings" below.

Environmental Cost Deferral and Recovery
NW Natural planshas authorizations in Oregon and Washington to complete the remedial design in 2018defer costs related to remediation of properties that are owned or early 2019 and expects to construct the remedy during 2019.

were previously owned by NW Natural. In Oregon, Steel Mills site. Refer to the “Legal Proceedings,” below.
a Site Remediation and Recovery Mechanism (SRRM)
NW Natural has an SRRM through which it tracks and has the ability is currently in place to recover past deferred and future prudently incurred environmental remediation costs allocable to Oregon customers, subject to an earnings test,test. On October 21, 2019, the WUTC authorized an Environmental Cost Recovery Mechanism (ECRM) for those sites identified therein.recovery of prudently incurred costs allocable to Washington customers beginning November 1, 2019. See Note 1517 in the 20172021 Form 10-K for a description of the SRRM and ECRM collection process.processes.


The following table presents information regarding the total regulatory asset deferred:
June 30,December 31,
In thousands202220212021
Deferred costs and interest (1)
$48,814 $50,604 $45,122 
Accrued site liabilities (2)
104,798 110,237 115,773 
Insurance proceeds and interest(60,226)(69,730)(59,564)
Total regulatory asset deferral(1)
$93,386 $91,111 $101,331 
Current regulatory assets(3)
6,975 5,688 6,694 
Long-term regulatory assets(3)
86,411 85,423 94,636 
(1)     Includes pre-review and post-review deferred costs, amounts currently in amortization, and interest, net of amounts collected from customers.
(2)    Excludes 3.3% of the Front Street site liability as the OPUC only allows recovery of 96.7% of costs for those sites allocable to Oregon, including those that historically served only Oregon customers. Amounts excluded from regulatory assets were $47 thousand at June 30, 2022, $72 thousand at June 30, 2021, and $62 thousand at December 31, 2021.
(3)    Environmental costs relate to specific sites approved for regulatory deferral by the OPUC and WUTC. In Oregon, NW Natural earns a carrying charge on cash amounts paid, whereas amounts accrued but not yet paid do not earn a carrying charge until expended. It also accrues a carrying charge on insurance proceeds for amounts owed to customers. In Washington, neither the cash paid for insurance proceeds received accrue a carrying charge. Current environmental costs represent remediation costs management expects to collect from 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 $5.0 million tariff rider. The amounts allocable to Oregon are recoverable through NGD rates, subject to an earnings test.


37


  September 30, December 31,
In thousands 2018 2017 2017
Deferred costs and interest (1)
 $40,578
 $52,888
 $45,546
Accrued site liabilities (2)
 116,150
 117,388
 126,950
Insurance proceeds and interest (87,631) (100,575) (94,170)
Total regulatory asset deferral(1)
 $69,097
 $69,701
 $78,326
Current regulatory assets(3)
 5,633
 6,362
 6,198
Long-term regulatory assets(3)
 63,464
 63,339
 72,128
(1)
Includes pre-review and post-review deferred costs, amounts currently in amortization, and interest, net of amounts collected from customers.
(2)
Excludes 3.32% of the Front Street site liability, or $0.4 million in 2018 and $0.3 million in 2017, as the OPUC only allows recovery of 96.68% of costs for those sites allocable to Oregon, including those that historically served only Oregon customers.
(3)
Environmental costs relate to specific sites approved for regulatory deferral by the OPUC and WUTC. In Oregon, NW Natural earns a carrying charge on cash amounts paid, whereas amounts accrued but not yet paid do not earn a carrying charge until expended. It also accrues a carrying charge on insurance proceeds for amounts owed to customers. In Washington, a carrying charge related to deferred amounts will be determined in a future proceeding. Current environmental costs represent remediation costs management expects to collect from 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 $5.0 million tariff rider. The amounts allocable to Oregon are recoverable through utility rates, subject to an earnings test.

Environmental Earnings Test
ENVIRONMENTAL EARNINGS TEST. To the extent the utilityNW Natural earns at or below its authorized Return on Equity (ROE), as defined by the SRRM, remediation expenses and interest in excess of the $5.0 million tariff rider and $5.0 million insurance proceeds are recoverable through the SRRM. To the extent the utilityNW Natural earns more than its authorized ROE in a year, the utilityit is required to cover environmental expenses and interest on expenses greater than the $10.0 million with those earnings that exceed its authorized ROE.


Under the 2015 Order, the OPUC stated they would revisit the deferral and amortization of future remediation expenses, as well as the treatment of remaining insurance proceeds three years from the original Order, or earlier if NW Natural gains greater certainty about future remediation costs, to consider whether adjustments to the mechanism may be appropriate. NW Natural filed an update with the OPUC in March 2018 and recommended no changes.

WASHINGTON DEFERRAL. In Washington, cost recovery and carrying charges on amounts deferred for costs associated with services provided to Washington customers will be determined in a future proceeding.

Legal Proceedings
NW Holdings is not currently party to any direct claims or litigation, though in the future it may be subject to claims and litigation arising in the ordinary course of business.

NW Natural is subject to claims and litigation arising in the ordinary course of business.business including the matters discussed above. Although the final outcome of any of these legal proceedings cannot be predicted with certainty, including the matter relating to the Oregon Steel Mills site described below, NW Natural doesand NW Holdings do not expect that the ultimate disposition of any of these matters will have a material effect on their financial condition, results of operations or cash flows. See also Part II, Item 1, “Legal Proceedings".


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OREGON STEEL MILLS SITE.See Note 1517 in the 20172021 Form 10-K.


For additional information regarding other commitments and contingencies, see Note 1416 in the 20172021 Form 10-K.


16. DISCONTINUED OPERATIONS
17. SUBSEQUENT EVENT
On June 20, 2018, NWN Gas Storage, then a wholly owned subsidiary ofJuly 15, 2022, NW Natural entered into a Bond Purchase Agreement between NW Natural and Salethe institutional investors named as purchasers therein (the Bond Purchase Agreement). The Bond Purchase Agreement (the Agreement) that provides for the sale by NWN Gas Storageissuance of all of the membership interests in Gill Ranch. Gill Ranch owns a 75% interest in the natural gas storage facility located near Fresno, California known as the Gill Ranch Gas Storage Facility. Pacific Gas and Electric Company (PG&E) owns the remaining 25% interest in the Gill Ranch Gas Storage Facility.

The Agreement provides for an initial cash purchase price of $25.0$140.0 million (subject to a working capital adjustment), plus potential additional payments to NWN Gas Storage of up to $26.5 million in the aggregate if Gill Ranch achieves certain economic performance levels for the first three full gas storage years (April 1 of one year through March 31 of the following year) occurring after the closing and the remaining portion of the gas storage year during which the closing occurs.

NW Natural expects the transaction to close within 12 months of signing and in 2019. The closing of the transaction is subject to approval by the California Public Utilities Commission (CPUC) and other customary closing conditions. In July 2018, Gill Ranch filed an application with the CPUC for approval of this transaction.

As a resultprincipal amount of NW Natural's strategic shift away fromFirst Mortgage Bonds, 4.78% Series due 2052 (the Bonds). The Bonds are expected to be issued on or about September 30, 2022. The Bonds will bear interest at the California gas storage marketrate of 4.78% per annum, payable semi-annually on March 30 and September 30 of each year, commencing March 30, 2023, and will mature on September 30, 2052.The Bonds will be subject to redemption prior to maturity at the significance of Gill Ranch's financial results in 2017, NW Natural has concluded that the pending sale of Gill Ranch qualifies as assets and liabilities held for sale and discontinued operations. As such, the assets and liabilities associated with Gill Ranch have been classified as discontinued operations assets and discontinued operations liabilities, respectively, and, the results of Gill Ranch are presented separately, net of tax, as discontinued operations from the results of continuing operations for all periods presented. The expenses included in the results of discontinued operations are the direct operating expenses incurred by Gill Ranch that may be reasonably segregated from the costs of continuing operations.

The following table presents the carrying amounts of the major components of Gill Ranch that are classified as discontinued operations assets and liabilities on the consolidated balance sheets:
  September 30, December 31,
In thousands 2018 2017 2017
Assets:      
Accounts receivable $395
 $1,520
 $2,126
Inventories 661
 415
 396
Other current assets 107
 171
 535
Property, plant, and equipment 11,241
 235,578
 10,816
Less: Accumulated depreciation 7
 31,551
 —
Other non-current assets 247
 51
 1
Discontinued operations - current assets (1)
 12,644
 2,106
 3,057
Discontinued operations - non-current assets (1)
 —
 204,078
 10,817
Total discontinued operations assets $12,644
 $206,184
 $13,874
       
Liabilities:      
Accounts payable $751
 $353
 $1,287
Other current liabilities 405
 848
 306
Other non-current liabilities 11,847
 12,106
 12,043
Discontinued operations - current liabilities (1)
 13,003
 1,201
 1,593
Discontinued operations - non-current liabilities (1)
 —
 12,106
 12,043
Total discontinued operations liabilities $13,003
 $13,307
 $13,636
(1)
The total assets and liabilities of Gill Ranch are classified as current as of September 30, 2018 because it is probable that the sale will be completed within one year.

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The following table presents the operating results of Gill Ranch, which was reported within the gas storage segment historically, and is presented net of tax on the consolidated statements of comprehensive income:
  Three Months Ended September 30, Nine Months Ended September 30,
In thousands, except per share data 2018 2017 2018 2017
Revenues $748
 $1,977
 $2,831
 $5,338
Expenses:        
Operations and maintenance 1,549
 1,248
 4,139
 5,169
Depreciation and amortization 106
 1,131
 324
 3,394
Other expenses and interest (24) 603
 790
 1,799
Total expenses 1,631
 2,982
 5,253
 10,362
Loss from discontinued operations before income taxes (883) (1,005) (2,422) (5,024)
Income tax benefit 233
 397
 639
 1,983
Loss from discontinued operations, net of tax $(650) $(608) $(1,783) $(3,041)
  

 

    
Loss from discontinued operations per share of common stock:        
Basic $(0.02) $(0.02) $(0.06) $(0.11)
Diluted $(0.02) $(0.02) $(0.06) $(0.11)


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17. SUBSEQUENT EVENTS
Holding Company
On October 1, 2018, NW Holdings and NW Natural completed a reorganization into a holding company structure. NW Holdings is now the parent holding companyoption of NW Natural, NWN Water, NWN Gas Storage and other subsidiaries previously held by NW Natural.

This reorganization was approved by NW Holdings’ and NW Natural’s boards of directors, the Oregon, Washington and California public utility commissions, and NW Natural’s shareholdersin whole or in part, (i) at any time prior to March 30, 2052, at a redemption price equal to 100% of the reorganization.

As part of this reorganization, NW Natural shareholders automatically become shareholders of NW Holdings onprincipal amount thereof plus a one-for-one share basis with the same number of shares“make-whole” premium and same relative ownership percentage as shareholders held immediately prioraccrued and unpaid interest thereon to the reorganization.

Credit Agreements
On October 2, 2018, NW Holdings entered into a $100.0 million credit agreement, with a feature that allows NW Holdings to request increases in the total commitment amount, up to a maximum of $150.0 million. The maturity date of redemption, and (ii) at any time on and after March 30, 2052, at 100% of the agreement is October 2, 2023. The credit agreement permitsprincipal amount thereof plus accrued and unpaid interest thereon to the issuance of letters of credit in an aggregate amount of up to $40.0 million.

On October 2, 2018, NW Natural entered into a new multi-year credit agreement for unsecured revolving loans totaling $300.0 million, up to a maximum of $450.0 million, with a maturity date of October 2, 2023 and an available extension of commitments for two additional one-year periods, subject to lender approval (New Credit Agreement). The prior credit agreement was terminated upon the closing of this new agreement. The New Credit Agreement permits the issuance of letters of credit in an aggregate amount of up to $60.0 million.

The principal amount of borrowings under the credit agreements are due and payable on the maturity date. The credit agreements require NW Holdings and 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.

The agreements also require NW Holdings and NW Natural to maintain credit ratings with Standard & Poor's (S&P) and Moody's Investors Service, Inc. (Moody’s) and notify the lenders of any change in the respective companies' senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies, provided, however that in the event NW Holdings does not have a credit rating, its debt rating will be determined by a formula using NW Natural's credit rating. A change in 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.

Sunriver Agreement
On October 12, 2018, NWN Water of Oregon entered into, and NW Holdings guaranteed, an agreement with Sunriver Resort LP to acquire Sunriver Water, LLC and Sunriver Environmental, LLC (Sunriver Acquisition), which are a water utility and wastewater treatment company providing a current combined 9,400 connections at the Sunriver Resort community in Central Oregon.

The transaction is expected to close in the first half of 2019. The closing of the transaction is subject to approval by the Public Utility Commission of Oregon and other customary closing conditions.

redemption.
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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)NW Holdings' and NW Natural's financial condition, including the principal factors that affect results of operations. The discussion refers to NW Natural'sthe consolidated results from continuing operations for the three and ninesix months ended SeptemberJune 30, 20182022 and 2017.2021 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 the business results are seasonal in nature, and, as such, the results of operations for the three month periods areperiod is not necessarily indicative of expected fiscal year results. Therefore, this discussion should be read in conjunction with NW Holdings' and NW Natural's 20172021 Annual Report on Form 10-K, (2017as applicable (2021 Form 10-K), taking into consideration the changes mentioned in Notes 1, 4 and 15, as reflected in Exhibit 99.1 to .

NW Natural's Current Report on Form 8-K (Form 8-K) filed on September 24, 2018.
As of September 30, 2018, the consolidated financial statements included 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), which is presented as a discontinued operation;
Northwest Energy Corporation (Energy Corp);
◦NWN Gas Reserves LLC (NWN Gas Reserves);
NNG Financial Corporation (NNG Financial);
NW Natural Water Company, LLC (NWN Water);
◦Falls Water Co., Inc. (Falls Water);
◦Cascadia Water, LLC (Cascadia);
Northwest Natural Holding Company (NW Holdings); and
◦NWN Merger Sub, Inc. (NWN Holdco Sub).
On October 1, 2018, we completed our holding company restructuring. NW Holdings and its subsidiaries, considered together, now hold all of the assets and have all of the liabilities that NW Natural and its subsidiaries had immediately prior to the restructuring. Each of NW Holdings' subsidiaries is a separate legal entity with its own assets and liabilities. NW Natural continues to hold all of the assets and liabilities it had immediately prior to the restructuring except that, as described herein, certain subsidiaries of NW Natural have been transferred to NW Holdings andnatural gas distribution activities are no longer subsidiaries of NW Natural and NW Natural's obligations under certain stock compensation plans have been assumed by NW Holdings.

The completion of the holding company restructuring has resultedreported in the following:

former holders of outstanding shares of NW Natural common stock hold shares of NW Holdings common stock;
NW Holdings owns all of the outstanding shares of NW Natural common stock, and NW Natural continues to own NWN Energy and its wholly owned subsidiary,natural gas distribution (NGD) segment. The NGD segment also includes NWN Gas Reserves, which comprise partis a wholly-owned subsidiary of Energy Corp, the NGD-portion of NW Natural's regulated gas utility business (Utility Subsidiaries);
all of the subsidiaries formerly owned by NW Natural, except the Utility Subsidiaries, are owned by NW Holdings;
the outstanding first mortgage bonds of NW Natural will continue to be obligations of NW Natural and will not be direct obligations of, or guaranteed by, NW Holdings; and
stock options, restricted stock units and similar securities issued under executive compensation and other employee benefit plans will be satisfied with an equal number of shares of NW Holdings common stock and the plans were modified to relate to NW Holdings common stock.

On October 10, 2018, NW Holdings formed three additional subsidiaries of NWN Water: NW Natural Water ofMist storage facility in Oregon, LLC., NW Natural Water of Washington, LLC., and NW Natural Water of Idaho,RNG Holding Company, LLC. For additional information, see "Holding Company" below.

As of the filing date of this report, the company structure included NW Holdings and its direct and indirect wholly-owned subsidiaries including:
Northwest Natural Gas Company (NW Natural);
◦Northwest Energy Corporation (Energy Corp);
NWN Gas Reserves LLC (NWN Gas Reserves);
NW Natural RNG Holding Company, LLC holds an investment in Lexington Renewable Energy, LLC, (NWN Energy);
◦NW Natural Gas Storage, LLC (NWN Gas Storage);
▪Gill Ranch Storage, LLC (Gill Ranch), which is presented as a discontinued operation;

NNG Financial Corporation (NNG Financial);
NW Natural Water Company, LLC (NWN Water);
◦Falls Water Co., Inc. (Falls Water);
◦Salmon Valley Water Company;
◦Cascadia Water, LLC (Cascadia);
◦NW Natural Water of Oregon, LLC (NWN Water of Oregon);
◦NW Natural Water of Washington, LLC; and
◦NW Natural Water of Idaho, LLC.
We primarily operate in one reportable business segment, which is NW Natural's local gas distribution business and which is referred to asaccounted for under the utility segment. During the second quarter of 2018, we moved forward with long-term strategic plans, which include a shift away from the California gas storage business, by entering into a Purchase and Sale Agreement that provides for the sale of all of the membership interests in Gill Ranch, subject to various regulatory approvals and closing conditions. As such, we reevaluated our reportable segments and concluded that the gas storageequity method. Other activities no longer meet the requirements of a

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reportable segment. NW Natural's ongoing, non-utility gas storage activities, which include the interstate storage and asset management activities at our Mist gas storage facility, are now reported as other. We also have our regulated water operations, other investments, and business activities not specifically related to our utility segment, which are aggregated and reported as other. We referother at NW Natural include the non-NGD storage activity at Mist as well as asset management services and the appliance retail center operations. Other activities aggregated and reported as other at NW Holdings include NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline) 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 NW Natural's local gas distribution business aspursue investments in the utility and all other activities as non-utility.water sector. See Note 4 for further discussion of our business segment and other, 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, which are non-GAAP financial measures. Non-GAAP 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 EPSearnings 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,
2022202120222021
Earnings (loss) per share of common stock (diluted) - Total$0.05 $(0.02)$1.77 $1.92 
Diluted earnings (loss) per share - NGD segment(1)
— (0.05)1.70 1.71 
Diluted earnings per share - NW Holdings - other(1)
0.05 0.03 0.07 0.21 
(1) Non-GAAP financial measure

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EXECUTIVE SUMMARY
We manage our business
Current financial results and strategic initiatives with a long-term viewhighlights include:
•Reported net income of providing natural gas service safely and reliably$1.7 million or $0.05 per share (diluted) for the second quarter of 2022, compared to customers, working with regulators on key policy initiatives, and remaining focused on growing our business. See "2018 Outlook"net loss of $0.7 million or $0.02 per share (diluted) in the 2017 Form 10-Kprior year;
•Reported net income of $58.0 million or $1.77 per share (diluted) for more information. Current operational highlights include:the first six months of 2022, compared to net income of $58.8 million or $1.92 per share (diluted) in the prior year;
added over 12,500 customers•Issued and sold 2.9 million shares of common stock on April 1, 2022;
•Added nearly 10,200 meters during the past twelve months for a growth rate of 1.7%1.3% at SeptemberJune 30, 2018;2022;
invested $158.8•Invested more than $165 million in our utility systems in the distribution systemfirst six months of 2022 in an effort to achieve greater reliability and facilities for growth, safety, and reliability;resiliency;
resolved the majority of items•Filed multi-party settlements in the Oregon general rate case with a revenue requirement increase of $23.4 million or 3.72% effective November 1, 2018;case; and
advanced our water strategy with plans to acquire•Announced two water and wastewater businesses at the Sunriver Resortacquisitions near our existing service territory in Oregon, completed the acquisition of Falls Water Company in Idaho Falls, Idaho in the third quarter of 2018,Washington state and closed three otherone water acquisitionsacquisition in the fourth quarter of 2018.Texas.

Key quarter-to-date financial highlights for NW Holdings include:
Three Months Ended June 30,
20222021QTD
In thousands, except per share dataAmountPer ShareAmountPer ShareChange
Consolidated net income (loss)$1,715 $0.05 $(724)$(0.02)$2,439 
  Three Months Ended September 30,  
  2018 2017 $
In thousands, except per share data AmountPer Share AmountPer Share Change
Net income (loss) from continuing operations $(11,144)$(0.39) $(7,887)$(0.28) $(3,257)
Loss from discontinued operations, net of tax (650)(0.02) (608)(0.02) (42)
Consolidated net income (loss) $(11,794)$(0.41) $(8,495)$(0.30) $(3,299)
Utility margin $54,940
  $52,532
  $2,408


Key quarter-to-date financial highlights for NW Natural include:
Three Months Ended June 30,
20222021QTD
In thousandsAmountAmountChange
Consolidated net income$2,733 $589 $2,144 
Natural gas distribution margin$94,378 $91,206 $3,172 

THREE MONTHS ENDED SEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. Net loss from continuing operations2021.

Consolidated net income increased $3.3$2.1 million at NW Natural primarily due to the following factors:
a $3.3•$3.2 million increase in NGD segment margin driven by customer growth and higher usage by non-decoupled customers; and
•$2.6 million increase in other income (expense), net primarily due to lower pension costs; partially offset by
•$3.9 million increase in operations and maintenance expense largely from payroll and benefitsexpenses primarily due to additional headcounthigher contract labor, amortization expense related to cloud computing arrangements, and general salary increases;professional service fees; and
a $1.4•$0.5 million decreaseincrease in income tax benefit due to the decline of the U.S. federal corporate income tax rate to 21% in 2018 from 35% in the prior period. See additional discussion regarding "TCJA Timing Variance" below; partially offset by,
a $2.4 million increase in utility margin driven by a change in the revenue deferral associated with the decrease in the federal tax rate and customer growth.

  Nine Months Ended September 30,  
  2018 2017 $
In thousands, except per share data AmountPer Share AmountPer Share Change
Net income from continuing operations $30,528
$1.06
 $37,585
$1.31
 $(7,057)
Loss from discontinued operations, net of tax (1,783)(0.06) (3,041)(0.11) 1,258
Consolidated net income $28,745
$1.00
 $34,544
$1.20
 $(5,799)
Utility margin $257,402
  $269,172
  $(11,770)

NINE MONTHS ENDEDSEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. Net income from continuing operations decreased $7.1 millionexpense primarily due to the following factors:
a $11.8 milliondecrease in utility margin due to the regulatory revenue deferral of $7.0 million for the decline in tax rates during the interim period in 2018 before customer rates could be reset, as well as warmer than average weatherhigher pre-tax income in the current period compared to the prior period,year.

Consolidated net income increased $2.4 million at NW Holdings primarily due to the following factors:
•$2.1 million increase in consolidated net income at NW Natural as discussed above; and
•$0.3 million increase in other net income primarily reflecting lower business development costs, partially offset by customer growth; andhigher interest expense at the holding company.

Key year-to-date financial highlights for NW Holdings include:
Six Months Ended June 30,
20222021YTD
In thousands, except per share dataAmountPer ShareAmountPer ShareChange
Consolidated net income$57,954 $1.77 $58,793 $1.92 $(839)


40


a $8.4Key year-to-date financial highlights for NW Natural include:
Six Months Ended June 30,
20222021YTD
In thousandsAmountAmountChange
Consolidated net income$60,149 $60,700 $(551)
Natural gas distribution margin$272,110 $263,846 $8,264 
SIX MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021.
Consolidated net income decreased $0.6 million at NW Natural primarily due to the following factors:
•$8.6 million increase in operations and maintenance expense largely from payroll and benefitsexpenses due to additional headcounthigher contract labor, information technology costs, amortization expense related to cloud computing arrangements, and general salary increases as well as higher professional service costs; partially offset byfees; and
a $13.3•$5.4 million decrease in asset management revenue primarily due to the February 2021 cold weather event discussed below that did not recur in the current year; partially offset by
•$8.3 million increase in NGD segment margin driven by customer growth, new rates in Washington, and higher usage by non-decoupled customers; and
•$5.3 million increase in other income tax expense(expense), net primarily due to lower pre-taxpension costs.

Consolidated net income decreased $0.8 million at NW Holdings primarily due to the following factors:
•$0.6 million decrease in consolidated net income at NW Natural as discussed above; and
•$0.3 million decrease in other net income primarily reflecting higher interest expense at the holding company.

2021 COLD WEATHER EVENT.In February 2021, Portland, Oregon and the declinesurrounding region, like much of the U.S. federal corporate income tax ratecountry, experienced a severe winter storm with several days of colder temperatures resulting in elevated natural gas demand and significantly higher spot prices. Additional market gas purchases and other expenses resulted in approximately $29 million of higher commodity costs, of which approximately $27 million was deferred to 21%a regulatory asset for recovery in 2018 from 35%future rates. The result was approximately $2 million of lower natural gas utility margin in the prior period. See additional discussion regarding "TCJA Timing Variance" below.

TCJA Timing Variance
As previously reported, results during 2018 have been affected by a timing difference between the revenue deferral associated with tax reform and the effect on tax expense from the lower federal tax rate. For the first ninesix months of 2018,2021. The higher commodity costs were offset by approximately $39 million of asset management revenue, of which approximately $33 million was deferred to a regulatory liability for the deferralbenefit of customers.

CURRENT ECONOMIC CONDITIONS. We are evaluating and tax benefit largely offset; however, theremonitoring current economic conditions, which include but are not limited to: inflation, rising interest rates and commodity costs, heightened cybersecurity awareness, and supply chain disruptions. We have been timing variances each quarter. In the first quarter of 2018, the utility segment benefited from this timingenhanced cybersecurity monitoring in response to reports that cybersecurity attacks have and that benefit reversed in the second and third quarters. As of November 1, 2018, Oregon rates have been reset and a revenue deferral for tax savings is no longer necessary. Therefore, we do not anticipate significant timing variances going forward.


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HOLDING COMPANY
On October 1, 2018, NW Natural completed the formation of a holding company structure to best position itself to be able to respond to opportunities and risks in a manner that serves the best interests of its shareholders and customers. The structure involves placing a non-operating corporate entity over the existing consolidated structure, and “ring-fencing” NW Natural to insulate the gas utility from the operations of the holding company and its other direct and indirect subsidiaries. At the completion of the reorganization, NW Natural became a wholly-owned subsidiary of NW Holdings, with the NW Holdings common stock being listed and traded on the New York Stock Exchange. NW Natural common stock was converted into the same relative percentages of NW Holdings that each shareholder owned of NW Natural immediately prior to the reorganization. Our management continuously looks for growth opportunities that would build on core competencies and match the risk profile that NW Natural has and our shareholders seek. We believe a holding company structure is a more agile and efficient platform from which to pursue, finance and oversee new business growth opportunities, such as in the water sector. Following the formation of the holding company, NW Natural will continue to operate as a gas utilityincrease. We have not experienced material disruptions in our supply chain for goods and services to date. 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. We are continuing to actively monitor, and have formulated and continue to evaluate contingency plans as necessary.

See the jurisdiction of the OPUC and the WUTC. The regulatory approvals for the formation of a holding company require NW Natural and NW Holdings to enter into and file an agreement with the OPUC and the WUTC, which includes a number of “ring-fencing” conditions. The ring-fencing conditions are designed to operate the gas utility conservatively and insulate the gas utility from risks associated with the operations of NW Holdings and its other direct and indirect subsidiaries that are not subsidiaries of NW Natural. For more information regarding the holding company structure and ring-fencing provisions, see Part I, Item 1A "Risk Factorsdiscussion in "and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Holding Company” in NW Natural's 2017 Form 10-K.
", "Regulatory Matters" and "Financial Condition" below for additional detail regarding all significant activity that occurred during the second quarter of 2022.

DIVIDENDS
Dividend highlights include:  
Three Months Ended June 30,Six Months Ended June 30,QTD
Change		 YTD Change
Per common share2022202120222021
Dividends paid$0.4825 $0.4800 $0.9650 $0.9600 $0.0025 $0.0050 
  Three Months Ended September 30, Nine Months Ended September 30,    
Per common share 2018 2017 2018 2017 QTR Change YTD Change
Dividends paid $0.4725
 $0.4700
 $1.4175
 $1.4100
 $0.0025
 $0.0075


In October 2018,July 2022, the Board of Directors of NW Holdings declared a quarterly dividend on NW Holdings common stock of $0.4750$0.4825 per share, an increase from the prior quarter's NW Natural dividend.share. The dividend is payable on NovemberAugust 15, 2018,2022 to shareholders of record on October 31, 2018,July 29, 2022, reflecting an annual indicated dividend rate of $1.90$1.93 per share.



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RESULTS OF OPERATIONS

Regulatory Matters
For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in NW Natural's 2017 Form 10-K.

Regulation and Rates
UTILITY. NW Natural's 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 NW Natural. In 2017, approximately 89% of NW Natural's 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 NW Natural's ability to remain price competitive, control expenses, and obtain reasonable and timely regulatory recovery of its utility-related costs, including operating expenses and investment costs in utility plant and other regulatory assets. See "Most Recent Completed General Rate Cases" below.

MIST GAS STORAGE. NW Natural's interstate storage activity at Mist is subject to regulation by the OPUC, WUTC, and FERC with respect to, among other matters, rates and terms of service. The OPUC also regulates the issuance of securities, system of accounts, and regulates 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.

In 2017, approximately 70% of storage revenues were derived from FERC, Oregon, and Washington regulated operations and approximately 30% from California operations.

OTHER. In June 2018, NW Natural entered into a Purchase and Sale Agreement for the sale of all of its ownership interests in Gill Ranch, a natural gas storage facility located near Fresno, California, which is subject to approval by the CPUC and other customary closing conditions. See Note 16 for more information.


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Most Recent Completed General Rate Cases
OREGON. Effective November 1, 2012, the OPUC authorized rates to NW Natural 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.

Effective November 1, 2018, the OPUC authorized rates to customers based on an ROE of 9.4%, an overall rate of return of 7.317%, and a capital structure of 50% common equity and 50% long-term debt. For additional information, see "Regulatory Proceeding Updates" below.

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. 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. In December 2013, NW Natural filed a rate petition, which was approved in 2014, and allows for the maximum cost-based rates for its interstate gas storage services. These rates were effective January 1, 2014. In January 2018, various state parties filed a request with the FERC to adjust the revenue requirements of public utilities to reflect the recent reduction in the federal corporate income tax rate and other impacts resulting from the TCJA. In July 2018, the FERC issued an order finalizing its regulations regarding the effect of the TCJA. The new regulations required NW Natural to file a petition for rate approval or a cost and revenue study to reflect the new federal corporate income tax rate within thirty days of the rate effective date of our Oregon rate case. This is approximately the same timeframe when a new cost and revenue study would be required under FERC's pre-existing requirements. On October 12, 2018, NW Natural filed a rate petition with FERC for revised maximum cost-based rates, which incorporated the new federal corporate income tax rate. We expect minimal impact to our earnings from this filing.

NW Natural continuously monitors the utility and evaluates the need for rate cases in its jurisdictions. NW Natural is currently evaluating the need for a Washington rate case filing in late 2018 or early 2019.

Rate Mechanisms
During 2018, NW Natural's key approved rates and recovery mechanisms for each service area included:
 Oregon Washington
 2012 Rate Case
2018 Rate Case
(effective 11/1/2018)
 2009 Rate Case
Authorized Rate Structure:    
ROE9.5%9.4% 10.1%
ROR7.8%7.3% 8.4%
Debt/Equity Ratio50%/50%50%/50% 49%/51%
     
Key Regulatory Mechanisms:    
PGAXX X
Gas Cost Incentive SharingXX  
DecouplingXX  
WARMXX  
Environmental Cost DeferralXX X
SRRMXX  
Pension BalancingX   
Interstate Storage and Asset Management SharingXX X

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. 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.

Each year, NW Natural typically hedges gas prices on a portion of NW Natural's annual sales requirement based on normal weather, including both physical and financial hedges. NW Natural entered the 2017-18 gas year with its forecasted sales volumes hedged at 49% in financial swap and option contracts and 26% in physical gas supplies.

As of September 30, 2018, NW Natural also hedged in future gas years at approximately 66% for the 2018-19 gas year and between 2% and 17% for annual requirements over the subsequent five gas years. Hedge levels are subject to change based

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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 the utility.

In September 2018, NW Natural filed its annual PGA and received OPUC and WUTC approval in October 2018. PGA rate changes are effective November 1, 2018. Rates between states can vary due to different rate structures and mechanisms. In addition, as required with the Washington PGA filing, NW Natural provided the WUTC with a full strategy implementation plan to incorporate risk-responsive hedging strategies in its natural gas procurement process. NW Natural expects to begin implementing risk-responsive hedging strategies for the 2019-20 PGA. Also effective November 1 are a number of conditions under the agreement with the OPUC and the WUTC related to the formation of a holding company structure. One of the conditions is that, for three years, NW Natural will be required to provide an annual $500,000 credit to Oregon customers and a $55,000 credit to Washington customers. The first-year credit to both Oregon and Washington customers will be given in conjunction with the PGA filings, with the rate adjustments commencing on November 1, 2018.

Under the 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 current earnings from the incentive sharing is either 20% or 10% of the difference between actual and estimated gas costs, respectively. For the 2018-19 and 2017-18 gas year, 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 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 NW Natural selects the 80% deferral gas cost option, then it retains all of its earnings up to 150 basis points above the currently authorized ROE. If NW Natural selects the 90% deferral option, then it retains all of its earnings up to 100 basis points above the currently authorized ROE. For the 2016-17 and 2017-18 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 2017, the ROE threshold was 10.66%. NW Natural filed the 2017 earnings test in May 2018, and it was approved by the Commission in July 2018. As a result, NW Natural was not subject to a customer refund adjustment for 2017.

GAS RESERVES. In 2011, the OPUC approved the Encana gas reserves transaction to provide long-term gas price protection for utility customers and determined the costs under the agreement would be recovered, on an ongoing basis, through NW Natural's 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 NW Natural's 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. NW Natural's 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 NW Natural's amended proportionate working interest for each well in which it 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 did not participate in additional wells during the nine months ended September 30, 2018.

DECOUPLING. In Oregon, NW Natural has a decoupling mechanism covering all residential, small commercial and mid-size commercial sales customers. 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 2018 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.

WARM. In Oregon, NW Natural has an approved weather normalization mechanism, 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 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 2018 Oregon general rate case without an expiration date. Residential and commercial customers in

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Oregon are allowed to opt out of the weather normalization mechanism, and as of September 30, 2018, 8% of total customers had opted out. NW Natural does 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 NW Natural's major industrial customers, which are intended to give NW Natural certainty in the level of gas supplies it needs to acquire 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 SRRM. NW Natural has an SRRM through which it tracks and has the ability to recover past deferred and future prudently incurred environmental remediation costs allocable to Oregon, subject to an earnings test.

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 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 generally 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 $6.1 million, $7.4 million, and $10.0 million of deferred remediation expense approved by the OPUC for collection during the 2018-19, 2017-18 and 2016-17 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 NW Natural collects amounts from customers, it recognizes these collections as revenue and separately amortizes an equal and offsetting amount of its deferred regulatory asset balance through the environmental remediation operating expense line shown separately in the operating expense section of the Consolidated Statement of Comprehensive Income. For additional information, see Note 15 in NW Natural's 2017 Form 10-K.

The SRRM earnings test is an annual review of NW Natural's adjusted utility ROE compared to its authorized utility ROE. For 2018, the first ten months will be weighted at 9.5% and the last two months 9.4%, reflecting the ROE change from NW Natural's most recent rate case effective November 1, 2018. To apply the earnings test first NW Natural must 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 utility earns at or below NW Natural's authorized ROE, the total amount transferred to post-review is recoverable through the SRRM. To the extent the utility earns more than its authorized ROE 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 2017 based on the environmental earnings test that was submitted in May 2018 and approved by the Commission in July 2018.

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 the amount deferred for costs associated with services provided to Washington customers to be determined in a future proceeding. Annually, or more often if circumstances warrant, NW Natural reviews all regulatory assets for recoverability. If NW Natural should

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determine all or a portion of these regulatory assets no longer meet the criteria for continued application of regulatory accounting, then it 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. Prior to November 1, 2018, the OPUC permitted NW Natural to defer annual pension expenses above the amount set in rates, with recovery of these deferred amounts through a balancing account, which included the expectation of higher and lower pension expenses in future years. The recovery of these deferred balances included accrued interest on the account balance at the utility’s authorized rate of return.

On October 26, 2018, the OPUC issued an order in NW Natural's Oregon general rate case. This order freezes NW Natural's pension balancing account as of October 31, 2018 and beginning on November 1, 2018, permits NW Natural to recover the test year FAS 87 pension expense in base rates, resulting in an expected increase of approximately $8.1 million to NW Natural’s revenue requirement. NW Natural has implemented this order. The order directs NW Natural and other parties to the rate case to engage in further regulatory proceedings extending the Oregon general rate case to resolve open issues with respect to the recovery of the pension balancing account. The OPUC has ordered the parties to conclude these additional proceedings by February 1, 2019. For additional information, see "Regulatory Proceeding Updates—Oregon General Rate Case" below.

Pension expense deferrals, excluding interest, were $9.4 million and $4.5 million during the nine months ended September 30, 2018 and 2017, respectively.

INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING. On an annual basis, NW Natural credits amounts to Oregon and Washington utility customers as part of its regulatory incentive sharing mechanism related to net revenues earned from Mist gas storage and asset management activities. Generally, amounts are credited to Oregon customers in June, while credits are given to customers in Washington through reductions in rates through the annual PGA filing in November.

In 2018, NW Natural received regulatory approval to refund an interstate storage credit of $11.7 million to its Oregon utility customers. Of this amount, $10.2 million was reflected in customers' June bills with the remainder to be credited to their bills in the third quarter. The 2017 interstate storage credit was approximately $11.7 million.

Regulatory Proceeding Updates
During 2018, NW Natural was involved in the regulatory activities discussed below. For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in NW Natural's 2017 Form 10-K.

INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING. NW Natural 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 required a third-party cost study to be performed. In 2017, a third-party consultant completed a cost study and their final report was filed with the OPUC in February 2018. The OPUC concluded on this matter in the Oregon general rate case proceeding. For additional information, see "Oregon General Rate Case" below.

HOLDING COMPANY APPLICATION. In February 2017, NW Natural filed applications with the OPUC, WUTC, and CPUC for approval to reorganize under a holding company structure. In 2017, the OPUC and WUTC approved NW Natural's applications subject to certain restrictions or "ring-fencing" provisions applicable to NW Natural, the entity that currently, and would continue to, house our utility operations. During the second quarter of 2018, NW Natural received approval from the CPUC. On October 1, 2018 we completed the reorganization to a holding company structure.

TAX REFORM DEFERRAL. In December 2017, NW Natural filed applications with the OPUC and WUTC to defer the overall net benefit associated with the TCJA that was enacted on December 22, 2017 with a January 1, 2018 effective date. Through the Oregon general rate case, the OPUC issued an order directing NW Natural and the other parties to the rate case to engage in further regulatory proceedings, including the extended general rate case, to resolve open issues with respect to the treatment of the 10-month deferral period of benefits associated with the TCJA. The OPUC has ordered the parties to conclude these additional proceedings by February 1, 2019. NW Natural expects these proceedings to also determine the appropriateness of NW Natural's remeasurement of the regulated utility historical excess deferred income taxes pursuant to TCJA and the return of those excess historical deferred income taxes to customers directly or by using them for the customers' benefit. NW Natural expects to work with the WUTC regarding the Washington deferral for the TCJA in a future regulatory or rate case filing and is currently deferring all amounts for the benefit of Washington customers.

WATER BUSINESS. Since we initiated our water strategy in December 2017, we have entered into the following agreements:
Salmon Valley Water Company — based in Welches, Oregon, NWN Water signed an agreement with this privately-owned water utility in December 2017 and received regulatory approval for the acquisition in September 2018. The transaction closed on November 1, 2018.
Falls Water Company — based in Idaho Falls, Idaho, NWN Water signed an agreement with this privately-owned water utility in December 2017. We received regulatory approval in July 2018 from the Idaho Commission and closed the transaction in September 2018.

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Lehman Enterprises, Inc. and Sea View Water LLC — both based on Whidbey Island near Seattle, Washington, NWN Water signed an agreement with these two privately-owned water utilities in May 2018 and received regulatory approval from the WUTC in October 2018. These transactions closed on November 2, 2018.
Sunriver Water, LLC and Sunriver Environmental, LLC — both based in Central Oregon, Sunriver Water, LLC is a water utility and Sunriver Environmental, LLC is a wastewater treatment company. On October 12, 2018, NWN Water of Oregon entered into, and NW Holdings guaranteed, an agreement with Sunriver Resort LP to acquire these two entities, providing a current combined 9,400 connections at the Sunriver Resort community in Central Oregon. The transaction is expected to close in the first half of 2019. In October 2018, NWN Water of Oregon filed its application with the OPUC for these acquisitions and continues to work with the OPUC and anticipates receiving approvals in 2019. The closing of the transaction is subject to approval by the OPUC and other customary closing conditions.

These acquisitions described above will, upon the closing of the Sunriver transaction, represent approximately $67 million of aggregate investment.

OREGON GENERAL RATE CASE.On October 26, 2018, the OPUC issued an order regarding NW Natural's general rate case originally filed in December 2017 and approved the following items effective beginning November 1, 2018:
Annual revenue requirement increase of $23.4 million or 3.72% over NW Natural's revenue from existing rates, which includes approximately $12.1 million that would otherwise be recovered under the conservation tariff deferral;
Capital structure of 50% debt and 50% equity;
Return on equity of 9.4%;
Cost of capital of 7.317%;
Rate base of $1.186 billion, or an increase of $300 million since the last rate case in 2012;
Pension expenses will be recovered through rates with an increase of $8.1 million to revenue requirement; and
The sharing of asset management revenues related to utility pipeline and storage assets will be 90%/10% with 90% being credited to customers. Previously customers received 67% of these revenues.

The rate changes lowered residential customer rates by 2.1% in Oregon and 7.2% in Washington for the upcoming winter heating season from the combined effect of the PGA mechanism and the Oregon general rate case. The Order adopted two components of the Second Settlement and rejected the remainder. First, the Order freezes NW Natural’s pension balancing account as of October 31, 2018. Second, beginning on November 1, 2018, NW Natural is authorized to increase the amount of FAS 87 pension expense included in base rates by $8.1 million.

The Order directs NW Natural and the other parties to the rate case to engage in further regulatory proceedings extending the general rate case docket to resolve open issues with respect to the recovery of the pension balancing account, and treatment of the 10-month deferral period benefits associated with the TCJA. The OPUC has ordered the parties to conclude these additional proceedings by February 1, 2019. NW Natural expects these proceedings to also determine the appropriateness of NW Natural’s remeasurement of the regulated utility historical excess deferred income taxes pursuant to TCJA and the return of these excess historical deferred income taxes to customers directly or by using them for the customers’ benefit.

All the rate case changes were effective and implemented beginning November 1, 2018.

INTEGRATED RESOURCE PLAN (IRP). NW Natural files a full IRP biennially for Oregon and Washington with the OPUC and WUTC, respectively. NW Natural filed its 2018 Oregon and Washington IRPs on August 24, 2018 and anticipates acknowledgment from the OPUC and notice from the WUTC of the filings during the first quarter of 2019. The IRPs included analysis of different growth scenarios and corresponding resource acquisition strategies. This analysis is needed to develop supply and demand resource requirements, consider uncertainties in the planning process, and to establish a plan for providing reliable and low cost natural gas service.

DEPRECIATION STUDY. Under OPUC regulations, NW Natural is required to file a depreciation study every five years to update or justify maintaining the existing depreciation rates. In December 2016, NW Natural 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. In January 2018, OPUC issued an order adopting the stipulation. A corresponding docket was filed and approved in Washington for the same depreciation rates. The new depreciation rates were effective and implemented as of November 1, 2018 for both Oregon and Washington customers. The depreciation rates included in the stipulation do not materially change NW Natural's current depreciation rates, and their incorporation into NW Natural's rate recovery mechanisms remove any material impact to financial results.

Business SegmentsSegment - LocalNatural Gas Distribution Utility Operations(NGD)
UtilityNGD 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 utility margin is derived from natural gas sales to residential and commercial customers.patterns. In Oregon, 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. NW Natural also has a weather normalization tariff in Oregon, WARM, which adjusts customer bills up or down to

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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 NW Natural's utility’snatural gas distribution earnings. For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters—Matters—Rate Mechanisms" in NW Natural's 20172021 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.


UtilityThe 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 ChangeYTD Change
In thousands, except EPS data2022202120222021
NGD net income (loss)$157 $(1,381)$55,547 $52,544 $1,538 $3,003 
Diluted EPS - NGD segment$— $(0.05)$1.70 $1.71 $0.05 $(0.01)
Gas sold and delivered (in therms)268,553 213,714 696,939 644,834 54,839 52,105 
NGD margin(1)
$94,378 $91,206 $272,110 $263,846 $3,172 $8,264 
  Three Months Ended September 30, Nine Months Ended September 30, QTR Change YTD Change
Dollars and therms in thousands, except EPS data 2018 2017 2018 2017  
Utility net income (loss) $(11,983) $(10,349) $24,930
 $31,980
 $(1,634) $(7,050)
EPS - utility segment $(0.42) $(0.36) $0.86
 $1.11
 $(0.06) $(0.25)
Gas sold and delivered (in therms) 162,098
 163,621
 786,444
 865,903
 (1,523) (79,459)
Utility margin(1)
 $54,940
 $52,532
 $257,402
 $269,172
 $2,408
 $(11,770)
(1)See UtilityNatural Gas Distribution Margin Table below for a reconciliation and additional detail.

THREE MONTHS ENDED SEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. 2021. The primary factors contributing to the $1.6$1.5 million, or $0.06$0.05 per share, increase in utilityNGD net lossincome were as follows:
a $2.4•$3.2 millionincrease in NGD margin due to:
•$1.5 million increase in operationsdriven by customer growth; and maintenance expense largely from payroll and benefits due to additional headcount and general salary increases;
a $1.1 million increase in depreciation expense as a result of higher utility plant balances; partially offset by
a $2.4 million increase in utility margin primarily due to:
a $2.2•$0.8 million increase due to a changehigher usage from colder weather, net of the loss from the Oregon gas cost incentive sharing mechanism; and
•$0.7 million increase due to new customer rates from the 2021 Washington rate case that went into effect on November 1, 2021.
•$2.7 million increase in other income (expense), net driven by lower pension non-service costs; partially offset by
•$4.1 million increase in NGD operating and maintenance expenses due primarily to higher contract labor, amortization expense related to cloud computing arrangements, and professional service fees; and
•$0.4 million increase in income tax expense primarily due to higher pre-tax income in the revenue deferral associated withcurrent period compared to the decrease in the federal tax rate; andprior year.
a $0.8 million increase from customer growth.

For the three months ended SeptemberJune 30, 2018,2022, total utilityNGD volumes sold and delivered decreased 1%increased 26% over the same period in 2017.2021 primarily due to 23% colder than average weather in the second quarter of 2022 compared to 40% warmer than average weather in the prior period.

NINESIX MONTHS ENDEDSEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. 2021. The primary factors contributing to the $7.1$3.0 million or $0.25 per share, decreaseincrease in utilityNGD net income were as follows:
a $11.8•$8.3 milliondecreaseincrease in utilityNGD margin due to:
a $7.0•$3.6 million decreaseincrease driven by customer growth;
•$3.0 million increase due to higher usage from colder comparative weather, net of the loss from the Oregon gas cost incentive sharing mechanism; and
•$2.4 million increase due to new customer rates from the 2021 Washington rate case that went into effect on November 1, 2021.
•$5.2 million increase in other income (expense), net driven by lower pension non-service costs; partially offset by
•$8.8 million increase in NGD operations and maintenance expenses due to higher contract labor, amortization expense related to cloud computing arrangements, information technology costs, and professional service fees.
Diluted EPS for the NGD segment decreased $0.01 per share primarily due to a regulatory revenue deferral associated withcommon share issuance on April 1, 2022, partially offset by an increase in NGD net income.

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For the decline ofsix months ended June 30, 2022, total NGD volumes sold and delivered increased 8% over the U.S. federal corporate income tax ratesame period in 2021 primarily due to 21% in 2018 from 35%2% warmer than average weather in the prior period until customer rates can be resetfirst six months of 2022 compared to reflect the lower tax rate; partially offset by
a $3.2 million increase from customer growth.
The majority of the remaining decrease was due to 24% colder12% warmer than average weather in the prior period compared to the current period.
a $6.1 million increase in operations and maintenance expense largely from payroll and benefits due to additional headcount and general salary increases as well as higher professional service costs; and
a $1.8 million net increase in other expenses and income primarily related to higher depreciation and property taxes; partially offset by
a $12.6 million decrease in income tax expense due to lower pre-tax income and the decline of the U.S. federal corporate income tax rate to 21% in 2018 compared to 35% in the prior period.

For the nine months ended September 30, 2018, total utility volumes sold and delivered decreased 9% over the same period in 2017 due to 11% warmer than average weather in 2018, compared to 24% colder than average weather in 2017.

Overall, the TCJA increased utility net income for the first nine months of 2018 by approximately $0.1 million as a result of a $5.2 million tax expense benefit substantially offset by the $5.1 million revenue deferral on an after-tax basis. Results during 2018 have been affected by a timing difference between the revenue deferral associated with tax reform and the tax expense benefit from the lower federal tax rate. For the first nine months of 2018, the deferral and tax benefit largely offset; however, there have been timing variances each quarter.

See "Regulatory Matters - Tax Reform Deferral and Oregon General Rate Case" above. The revenue deferral is primarily based on the estimated net benefit of the TCJA to customers for the year using forecasted regulated utility earnings, considering average weather and associated volumes. Additionally, during 2018, we expect the lower tax rate will increase the seasonality of gas utility earnings as the lower rate improves earnings in the heating season and reduces the tax benefit associated with losses in the non-heating periods.

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UTILITYNATURAL GAS DISTRIBUTION MARGIN TABLE. The following table summarizes the composition of utilityNGD 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 data2022202120222021QTD ChangeYTD Change
NGD volumes (therms)
Residential and commercial sales147,447 102,469 441,374 400,291 44,978 41,083 
Industrial sales and transportation121,106 111,245 255,565 244,543 9,861 11,022 
Total NGD volumes sold and delivered268,553 213,714 696,939 644,834 54,839 52,105 
Operating Revenues
Residential and commercial sales$159,792 $120,360 $474,399 $398,944 $39,432 $75,455 
Industrial sales and transportation19,526 14,093 40,799 31,472 5,433 9,327 
Other distribution revenues409 396 1,016 986 13 30 
Other regulated services4,907 4,765 9,818 9,550 142 268 
Total operating revenues184,634 139,614 526,032 440,952 45,020 85,080 
Less: Cost of gas79,776 41,249 225,420 153,515 (38,527)(71,905)
Less: Environmental remediation expense2,272 1,509 6,970 5,286 (763)(1,684)
Less: Revenue taxes8,208 5,650 21,532 18,305 (2,558)(3,227)
NGD margin$94,378 $91,206 $272,110 $263,846 $3,172 $8,264 
Margin(1)
Residential and commercial sales$83,535 $78,900 $246,663 $239,672 $4,635 $6,991 
Industrial sales and transportation8,065 7,407 16,991 16,161 658 830 
Gain (loss) from gas cost incentive sharing(2,518)(223)(2,448)(2,486)(2,295)38 
Other margin390 357 1,088 952 33 136 
Other regulated services4,906 4,765 9,816 9,547 141 269 
NGD Margin$94,378 $91,206 $272,110 $263,846 $3,172 $8,264 
Degree days(2)
Average(3)
305 305 1,631 1,631 — — 
Actual374 182 1,591 1,443 105 %10 %
Percent colder (warmer) than average weather23 %(40)%(2)%(12)%

As of June 30,
20222021ChangeGrowth
NGD Meters - end of period:
Residential meters720,537 710,543 9,994 1.4%
Commercial meters68,827 68,756 71 0.1%
Industrial meters1,074 980 94 9.6%
Total number of meters790,438 780,279 10,159 1.3%

(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, 2020, average weather is calculated over the period June 1, 1994 through May 31, 2019, as determined in NW Natural’s 2020 Oregon general rate case.
43
  Three Months Ended September 30, Nine Months Ended September 30, 
Favorable/
(Unfavorable)
In thousands, except degree day and customer data 2018 2017 2018 2017 QTR Change YTD Change
Utility volumes (therms):            
Residential and commercial sales 57,368
 54,557
 439,024
 495,949
 2,811
 (56,925)
Industrial sales and transportation 104,730
 109,064
 347,420
 369,954
 (4,334) (22,534)
Total utility volumes sold and delivered 162,098
 163,621
 786,444
 865,903
 (1,523) (79,459)
Utility operating revenues:      
Residential and commercial sales $68,768
 $69,294
 $420,878
 $466,867
 $(526) $(45,989)
Industrial sales and transportation 12,780
 13,488
 43,572
 47,182
 (708) (3,610)
Other revenues 3,529
 606
 (2,925) 3,149
 2,923
 (6,074)
Less: Revenue taxes(1)
 —
 2,262
 —
 13,251
 2,262
 13,251
Total utility operating revenues 85,077
 81,126
 461,525
 503,947
 3,951
 (42,422)
Less: Cost of gas 25,593
 27,239
 175,864
 223,855
 1,646
 47,991
Less: Environmental remediation expense 1,022
 1,355
 7,528
 10,920
 333
 3,392
Less: Revenue taxes(1)
 3,522
 —
 20,731
 —
 (3,522) (20,731)
Utility margin $54,940
 $52,532
 $257,402
 $269,172
 $2,408
 $(11,770)
Utility margin:(2)
            
Residential and commercial sales $44,069
 $44,612
 $236,559
 $241,617
 $(543) $(5,058)
Industrial sales and transportation 7,283
 7,272
 22,625
 23,529
 11
 (904)
Miscellaneous revenues 1,167
 606
 3,604
 3,144
 561
 460
Gain (loss) from gas cost incentive sharing 80
 102
 1,088
 940
 (22) 148
Other margin adjustments(5)
 2,341
 (60) (6,474) (58) 2,401
 (6,416)
Utility margin $54,940
 $52,532
 $257,402
 $269,172
 $2,408
 $(11,770)
Degree days(3)
            
Average(4)
 10
 10
 1,637
 1,637
 —
 —
Actual(6)
 —
 14
 1,449
 2,037
 NM
 (29)%
Percent colder (warmer) than average weather(6)
 NM
 NM
 (11)% 24%    
             
  As of September 30,        
Customers - end of period: 2018 2017 Change Growth    
Residential customers 674,167
 662,555
 11,612
 1.8%    
Commercial customers 68,192
 67,248
 944
 1.4%    
Industrial customers 1,027
 1,021
 6
 0.6%    
Total number of customers 743,386
 730,824
 12,562
 1.7%    

(1)
The change in presentation of revenue taxes was a result of the adoption of ASU 2014-09 "Revenue From Contracts with Customers" and all related amendments on January 1, 2018. This change had no impact on utility margin results. For additional information, see Note 2.
(2)
Amounts reported as margin for each category of customers are total operating revenues less cost of gas, environmental remediation expense, and revenue tax expense.
(3)
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.
(4)
Average weather represents the 25-year average of heating degree days, over the period 1986 - 2010, as determined in NW Natural's 2012 Oregon general rate case.
(5)
Other margin adjustments include the net reduction of the revenue deferral of $2.2 million for the three months ended September 30, 2018 and $7.0 million regulatory revenue deferral for the nine months ended September 30, 2018 associated with the decline of the U.S. federal corporate income tax rate.
(6)
NM indicates that the calculated value is not meaningful.

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Residential and Commercial Sales
Residential and commercial sales highlights include:
Three Months Ended June 30,Six Months Ended June 30,QTD ChangeYTD Change
In thousands2022202120222021
Volumes (therms)
Residential sales90,016 61,346 276,345 255,837 28,670 20,508 
Commercial sales57,431 41,123 165,029 144,454 16,308 20,575 
Total volumes147,447 102,469 441,374 400,291 44,978 41,083 
Operating revenues
Residential sales$107,292 $82,310 $324,475 $278,112 $24,982 $46,363 
Commercial sales52,500 38,050 149,924 120,832 14,450 29,092 
Total operating revenues$159,792 $120,360 $474,399 $398,944 $39,432 $75,455 
NGD margin
Residential NGD margin$60,046 $56,926 $179,878 $174,809 $3,120 $5,069 
Commercial NGD margin23,489 21,974 66,785 64,863 1,515 1,922 
Total NGD margin$83,535 $78,900 $246,663 $239,672 $4,635 $6,991 
  Three Months Ended September 30, Nine Months Ended September 30, QTR Change YTD Change
In thousands 2018 2017 2018 2017  
Volumes (therms):            
Residential sales 30,758
 29,308
 269,643
 307,655
 1,450
 (38,012)
Commercial sales 26,610
 25,249
 169,381
 188,294
 1,361
 (18,913)
Total volumes 57,368
 54,557
 439,024
 495,949
 2,811
 (56,925)
Operating revenues:            
Residential sales $43,119
 $43,290
 $279,350
 $308,416
 $(171) $(29,066)
Commercial sales 25,649
 26,004
 141,528
 158,451
 (355) (16,923)
Total operating revenues $68,768
 $69,294
 $420,878
 $466,867
 $(526) $(45,989)
Utility margin:            
Residential:            
Sales $28,563
 $28,628
 $160,699
 $178,998
 $(65) $(18,299)
Alternative revenue:            
Weather normalization —
 1
 2,985
 (11,779) (1) 14,764
Decoupling 824
 1,187
 (326) 54
 (363) (380)
Amortization of alternative revenue 133
 —
 1,184
 —
 133
 1,184
Total residential utility margin 29,520
 29,816
 164,542
 167,273
 (296) (2,731)
Commercial:            
Sales 13,512
 12,593
 70,575
 70,824
 919
 (249)
Alternative revenue:            
Weather normalization —
 —
 1,004
 (4,511) —
 5,515
Decoupling 1,982
 2,203
 6,699
 8,031
 (221) (1,332)
Amortization of alternative revenue (945) —
 (6,261) —
 (945) (6,261)
Total commercial utility margin 14,549
 14,796
 72,017
 74,344

(247) (2,327)
Total utility margin $44,069
 $44,612
 $236,559
 $241,617
 $(543) $(5,058)


THREE MONTHS ENDED SEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. 2021. Residential and commercial utility margin decreased slightly reflecting lower contributionsincreased $4.6 million compared to the prior period. The increase was primarily driven by higher usage from NW Natural's gas reserve investments, which decreased due to regular amortization, partially offset by customernon-decoupled customers, 1.4% growth in both the residential meters, and commercial sectors.

NINE MONTHS ENDEDSEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. The primary factor contributing to the $5.1 million decrease in residential and commercial utility margin is a decline in usage from colder than average weather in the prior period, and the effect on customers that opt out of NW Natural's weather normalization mechanism in Oregon and customersnew customer rates in Washington that do not have this mechanism. Partially offsetting this declinetook effect on November 1, 2021. Volumes increased 45.0 million therms due to higher usage driven by comparatively colder weather.

SIX MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021. Residential and commercial margin increased $7.0 million compared to the prior period. The increase was primarily driven by 1.4% growth in residential meters, new customer rates in Washington that took effect on November 1, 2021, and higher customer growth.usage from non-decoupled customers. Volumes increased 41.1 million therms due to higher usage driven by comparatively colder weather and higher usage from commercial customers as COVID-19 restrictions and closures were lifted.



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Industrial Sales and Transportation
Industrial sales and transportation highlights include:
Three Months Ended June 30,Six Months Ended June 30,QTD ChangeYTD Change
In thousands2022202120222021
Volumes (therms)
Firm and interruptible sales24,329 20,002 53,189 46,245 4,327 6,944 
Firm and interruptible transportation96,777 91,243 202,376 198,298 5,534 4,078 
Total volumes - sales and transportation121,106 111,245 255,565 244,543 9,861 11,022 
NGD margin
Firm and interruptible sales$3,191 $2,741 $6,890 $6,298 $450 $592 
Firm and interruptible transportation4,874 4,666 10,101 9,863 208 238 
Total margin - sales and transportation$8,065 $7,407 $16,991 $16,161 $658 $830 
  Three Months Ended September 30, Nine Months Ended September 30, QTR Change YTD Change
In thousands 2018 2017 2018 2017  
Volumes (therms):            
Industrial - firm sales 8,203
 7,870
 26,069
 25,883
 333
 186
Industrial - firm transportation 34,846
 33,826
 118,590
 121,452
 1,020
 (2,862)
Industrial - interruptible sales 9,871
 10,207
 37,851
 40,388
 (336) (2,537)
Industrial - interruptible transportation 51,810
 57,161
 164,910
 182,231
 (5,351) (17,321)
Total volumes 104,730
 109,064
 347,420
 369,954
 (4,334) (22,534)
Utility margin:            
Industrial - firm and interruptible sales $2,921
 $2,755
 $8,626
 $8,870
 $166
 $(244)
Industrial - firm and interruptible transportation 4,362
 4,517
 13,999
 14,659
 (155) (660)
Industrial - sales and transportation $7,283
 $7,272
 $22,625
 $23,529
 $11
 $(904)


THREE MONTHS ENDED SEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. Sales2021.Industrial sales and transportation volumes decreased by 4.3margin increased $0.7 million compared to the prior period. Volumes increased 9.9 million therms or 4%, with minimal impactprimarily due to industrial margin ashigher usage from multiple customers, most notably in the volume oflight manufacturing and electric manufacturing industries, partially offset by lower margin therms decreased.usage from customers in the pulp and paper industry.


NINESIX MONTHS ENDEDSEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. Sales2021.Industrial sales and transportation volumes decreased by 22.5margin increased $0.8 million compared to the prior period. Volumes increased 11.0 million therms or 6%, and industrial utility margin decreased by $0.9 millionprimarily due to warmer than average weatherhigher usage from multiple customers, most notably in 2018 compared to colder than average weatherthe primary metals and light manufacturing industries, partially offset by lower usage from customers in 2017.the plastic manufacturing industry.

44


Cost of Gas
Cost of gas highlights include:
Three Months Ended June 30,Six Months Ended June 30,QTD ChangeYTD Change
In thousands2022202120222021
Cost of gas$79,776 $41,249 $225,420 $153,515 $38,527 $71,905 
Volumes sold (therms)(1)
171,776 122,471 494,563 446,536 49,305 48,027 
Average cost of gas (cents per therm)$0.46 $0.34 $0.46 $0.34 $0.12 $0.12 
Loss from gas cost incentive sharing(2)
$(2,518)$(223)$(2,448)$(2,486)$(2,295)$38 
  Three Months Ended September 30, Nine Months Ended September 30, QTR Change YTD Change
Dollars and therms in thousands 2018 2017 2018 2017  
Cost of gas $25,593
 $27,239
 $175,864
 $223,855
 $(1,646) $(47,991)
Volumes sold (therms)(1)
 75,442
 72,634
 502,944
 562,220
 2,808
 (59,276)
Average cost of gas (cents per therm) $0.34
 $0.38
 $0.35
 $0.40
 $(0.04) $(0.05)
Gain (loss) from gas cost incentive sharing(2)
 $80
 $102
 $1,088
 $940
 $(22) $148
(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 2017 Form 10-K.

(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 2021 Form 10-K.

THREE MONTHS ENDED SEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. 2021. Cost of gas decreased $1.6increased $38.5 million or 6%, primarily due to an 11% decreasea 35% increase in average cost of gas duewith the majority of these higher gas costs embedded in the PGA and customer growth. Volumes sold increased 49.3 million therms driven by 23% colder than average weather in the second quarter of 2022 compared to lower natural gas prices, slightly offset by a 4% increase40% warmer than average weather in volumes sold associated with customer growth.the prior period.


NINESIX MONTHS ENDEDSEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. 2021. Cost of gas decreased $48.0increased $71.9 million or 21%, primarily due to a 13% decrease35% increase in average cost of gas from lowerwith the majority of these higher gas costs embedded in the PGA and customer growth. Volumes sold increased 48.0 million therms driven by 2% warmer than average weather in the first six months of 2022 compared to 12% warmer than average weather in the prior period.

Other Regulated Services Margin
Other regulated services margin highlights include:
Three Months Ended June 30,Six Months Ended June 30,QTD ChangeYTD Change
In thousands2022202120222021
North Mist storage services$4,857 $4,715 $9,715 $9,431 $142 $284 
Other services49 50 101 116 (1)(15)
Total other regulated services$4,906 $4,765 $9,816 $9,547 $141 $269 

THREE MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021. Other regulated services margin was relatively flat when compared to the prior period. The North Mist expansion facility did not experience any significant fluctuations in storage service revenue. See Note 7 for information regarding North Mist expansion lease accounting.

SIX MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021. Other regulated services margin increased $0.3 million compared to the prior period due to scheduled rate increases in storage service revenue.

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 pricesactivities; NWN Water, which owns and an 11% decreasecontinues to pursue investments in volumes sold, partially offset by customer growth.

Other
During the second quarter of 2018, we reevaluated our reportable segmentswater sector; and concluded that the remaining gas storageNWN Water's investment in Avion Water Company, Inc. (Avion Water). Other activities no longer meet the requirements to beaggregated and reported as a segment. The ongoing non-utility gasother at NW Natural include the non-NGD storage activity at Mist is nowas well as asset management services and the appliance retail center operations. See Note 4 for further discussion of our business segment and other, as well as our direct and indirect wholly-owned subsidiaries. See Note 13 for information on our Avion Water investment.

The following table presents the results of activities aggregated and reported as other for both NW Holdings and all prior periods presented reflect this change and the removal of our discontinued operation, Gill Ranch Storage.NW Natural:

Three Months Ended June 30,Six Months Ended June 30,QTD ChangeYTD Change
In thousands, except EPS data2022202120222021
NW Natural other - net income$2,576 $1,970 $4,602 $8,156 $606 $(3,554)
Other NW Holdings activity(1,018)(1,313)(2,195)(1,907)295 (288)
NW Holdings other - net income$1,558 $657 $2,407 $6,249 $901 $(3,842)
Diluted EPS - NW Holdings - other$0.05 $0.03 $0.07 $0.21 $0.02 $(0.14)
Other primarily consists of our non-utility gas storage operations at Mist; asset management services using our utility and non-utility storage and transportation capacity; our appliance retail center operations; NNG Financial's investment in KB Pipeline; an equity investment in TWH, which has invested in the Trail West pipeline project; costs associated with our water sector strategy and holding company activities; our regulated water operations; and other non-utility investments and business development activities.



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Other highlights include:
  Three Months Ended September 30, Nine Months Ended September 30, QTR Change YTD Change
In thousands, except EPS data 2018 2017 2018 2017  
Other net income $839
 $2,462
 $5,598
 $5,605
 $(1,623) $(7)
EPS - other $0.03
 $0.09
 $0.19
 $0.20
 $(0.06) $(0.01)

THREE MONTHS ENDED SEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017.2021.Other net income decreased $1.6increased $0.9 million at NW Holdings and $0.6 million at NW Natural. The increase at NW Natural was primarily due to an increase in costs associated withasset management revenues. The increase at NW Holdings was driven by the increase at NW Natural and lower business development activities,costs, partially offset by increasedhigher interest expense at the holding company.

SIX MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021.Other net income decreased $3.6 million at NW Natural and $3.8 million at NW Holdings. The decrease at NW Natural was primarily due to $5.4 million of lower asset management revenue mainly related to the 2021 cold weather event, partially offset by $1.4 million lower income tax expense associated with the lower revenue that did not recur in the current year. The decrease at NW Holdings was driven by the decrease at NW Natural and higher interest expense at the holding company, partially offset by higher net income from our non-utility gas storage operations at Mist.water and wastewater subsidiaries.

NINE MONTHS ENDEDSEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. Other net income remained flat due to several offsetting factors including increased income from our non-utility gas storage operations at Mist offset by an increase in costs associated with business development activities.

See Note 4 and Note 12 for further details on other activities and the investment in TWH, respectively.

Consolidated Operations

Operations and Maintenance
Operations and maintenance highlights include:
Three Months Ended June 30,Six Months Ended June 30,QTDYTD
In thousands2022202120222021ChangeChange
NW Natural$48,879 $44,939 $102,756 $94,126 $3,940 $8,630 
Other NW Holdings operations and maintenance4,296 5,108 7,904 8,112 (812)(208)
NW Holdings$53,175 $50,047 $110,660 $102,238 $3,128 $8,422 
  Three Months Ended September 30, Nine Months Ended September 30,    
In thousands 2018 2017 2018 2017 QTR Change YTD Change
Operations and maintenance $37,569
 $34,267
 $115,120
 $106,710
 $3,302
 $8,410


THREE MONTHS ENDED SEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. 2021. Operations and maintenance expense increased $3.3$3.1 millionreflecting higher utility payroll at NW Holdings and benefits due$3.9 million at NW Natural. The increase at NW Natural was driven by the following:
•$1.5 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects;
•$0.7 million increase in amortization expense related to additional headcountcloud computing arrangements; and general salary increases, as well as higher
•$0.6 million increase in professional services.service fees.


NINEThe $0.8 million decrease in other NW Holdings operations and maintenance expense primarily reflects lower business development costs at the holding company.

SIX MONTHS ENDEDSEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. 2021.Operations and maintenance expense increased$8.4 millionreflecting higher utility payroll at NW Holdings and benefits$8.6 million at NW Natural. The increase at NW Natural was driven by the following:
•$3.7 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects;
•$1.4 million increase in amortization expense related to cloud computing arrangements;
•$0.9 million increase in professional service fees; and
•$0.9 million increase in information technology maintenance and support.

The $0.2 million decrease in other NW Holdings operations and maintenance expense primarily reflects lower business development costs at the holding company.

Depreciation
Depreciation highlights include:
Three Months Ended June 30,Six Months Ended June 30,QTDYTD
In thousands2022202120222021ChangeChange
NW Natural$27,328 $27,530 $54,965 $54,699 $(202)$266 
Other NW Holdings depreciation782 614 1,574 1,542 168 32 
NW Holdings$28,110 $28,144 $56,539 $56,241 $(34)$298 

THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Depreciation expense decreased $34 thousand and $0.2 million at NW Holdings and NW Natural, respectively, primarily due to the amortization of cloud computing arrangements, which are recorded within operations and maintenance expenses beginning in 2022.

SIX MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Depreciation expense increased $0.3 million at both NW Holdings and NW Natural, respectively, primarily due to additional headcountcapital investments in the distribution system, Mist storage, and general salary increases,information technology systems, as well as higher professional services.renovation and construction of resource and operations service centers. The increase was partially offset by the amortization of cloud computing arrangements, which are recorded within operations and maintenance expenses beginning in 2022.

Depreciation and Amortization
Depreciation and amortization highlights include:
46

  Three Months Ended September 30, Nine Months Ended September 30,    
In thousands 2018 2017 2018 2017 QTR Change YTD Change
Depreciation and amortization $21,485
 $20,352
 $63,507
 $60,529
 $1,133
 $2,978


THREE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. Depreciation and amortization expense increased $1.1 million due to utility plant additions that included investments in NW Natural's natural gas transmission and distribution system, facility upgrades, and enhanced technology.

NINE MONTHS ENDEDSEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. Depreciation and amortization expense increased $3.0 million due to utility plant additions that included investments in NW Natural's natural gas transmission and distribution system, facility upgrades, and enhanced technology.

Other Income (Expense), Net
Other income (expense), net highlights include:
Three Months Ended June 30,Six Months Ended June 30,QTDYTD
In thousands2022202120222021ChangeChange
NW Natural other income (expense), net$17 $(2,566)$(964)$(6,231)$2,583 $5,267 
Other NW Holdings activity209 (31)236 92 240 144 
NW Holdings other income (expense), net$226 $(2,597)$(728)$(6,139)$2,823 $5,411 
  Three Months Ended September 30, Nine Months Ended September 30,    
In thousands 2018 2017 2018 2017 QTR Change YTD Change
Other income (expense), net $(312) $139
 $(1,139) $(624) $(451) $(515)



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THREE MONTHS ENDED SEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. NW Natural's net income position in 2017 in 2021.Other income (expense), net switched to a net expense position in 2018 by $0.5changed $2.8 million and $2.6 million at NW Holdings and NW Natural, respectively, primarily due to slightly higher overall expense activitylower pension non-service costs. Costs related to our defined benefit pension plan for 2022 are expected to decrease compared to the prior year due to changes in assumptions and adecrease ingains on plan assets. The change at other NW Holdings was driven by the change at NW Natural. Other income (expense), net primarily consists of regulatory interest, income, partially offset by an increase in the equity portion of AFUDC.pension and other postretirement non-service costs, gains from company-owned life insurance, and donations.


NINESIX MONTHS ENDEDSEPTEMBER JUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. 2021.Other income (expense), net changed $5.4 million and $5.3 million at NW Natural's net expense position increased $0.5 millionHoldings and NW Natural, respectively, primarily due to an increaselower pension non-service costs. Costs related to our defined benefit pension plan for 2022 are expected to decrease compared to the prior year due to changes in higher overall expense activityassumptions and a $0.4 million decrease in regulatory interest income, partially offsetgains on plan assets. The change at other NW Holdings was driven by a $1.4 millionincrease in the equity portion of AFUDC.change at NW Natural.


Interest Expense, Net
Interest expense, net highlights include:
Three Months Ended June 30,Six Months Ended June 30,QTDYTD
In thousands2022202120222021ChangeChange
NW Natural$10,599 $10,696 $21,430 $21,486 $(97)$(56)
Other NW Holdings interest expense, net981 332 1,672 668 649 1,004 
NW Holdings$11,580 $11,028 $23,102 $22,154 $552 $948 
  Three Months Ended September 30, Nine Months Ended September 30,    
In thousands 2018 2017 2018 2017 QTR Change YTD Change
Interest expense, net $9,006
 $9,208
 $27,051
 $28,311
 $(202) $(1,260)


THREE MONTHS ENDED SEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017.2021. Interest expense, net increased $0.6 million at NW Holdings and decreased $0.2$0.1 million at NW Natural. Interest expense, net at NW Natural decreased $0.6 million due to a $0.6 million increase in thehigher Allowance for Funds Used During Construction (AFUDC) debt portion of AFUDC,interest income, partially offset by $0.5 million of higher interest expense on short and long-term debt. The increase at NW Holdings is primarily due to higher interest expense on the Holdings' credit facility as a $0.4result of higher balances outstanding.

SIX MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Interest expense, net increased $0.9 million at NW Holdings and decreased $0.1 million at NW Natural. Interest expense, net at NW Natural decreased $1.0 million due to higher AFUDC debt interest income, partially offset by $0.9 million of higher interest expense on short and long-term debt. The increase at NW Holdings is primarily due to higher interest expense on Holdings' credit facility as a result of higher balances outstanding.

Income Tax Expense (Benefit)
Income tax expense (benefit) highlights include:
Three Months Ended June 30,Six Months Ended June 30,QTDYTD
In thousands2022202120222021ChangeChange
NW Natural income tax expense$810 $288 $20,133 $20,840 $522 $(707)
NW Holdings income tax expense (benefit)$470 $(277)$19,393 $20,244 $747 $(851)

THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Income tax expense increased $0.5 million at NW Natural and $0.7 million at NW Holdings. The increase in interestincome tax expense fromis primarily due to a higher long-term debt balances as of September 30, 2018pre-tax income in the current period compared to the prior period.year.


NINESIX MONTHS ENDEDSEPTEMBER JUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. Interest2021. Income tax expense net decreased $1.3$0.7 million at NW Natural and $0.9 million at NW Holdings. The decrease in income tax expense is primarily due to a $1.9 million increase decrease in pre-tax income.

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Regulatory Matters
For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the debt portion2021 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 AFUDC, partially offsetservice, systems of accounts, and issuances of securities by NW Natural. At June 30, 2022, 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, 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 $0.7 million increasemaximum 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 interest expense from higher long-term debt balances as of September 30, 2018 comparedtheir last regulatory filing. The OPUC Schedule 80 rates are tied to the prior period.FERC rates, and are updated whenever NW Natural modifies FERC maximum rates.


Income Tax Expense
Income tax expense highlights include:
  Three Months Ended September 30, Nine Months Ended September 30,    
In thousands 2018 2017 2018 2017 QTR Change YTD Change
Income tax expense (benefit) $(4,285) $(5,722) $11,191
 $24,456
 $1,437
 $(13,265)

THREE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. Income tax benefits decreased $1.4 million due to the lower tax benefit in loss periods from the declineOTHER. The wholly owned regulated water businesses of the U.S. federal corporate income tax rate to 21% in 2018 from 35% in the prior period and changes in pre-tax loss.

NINE MONTHS ENDEDSEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. Income tax expense decreased $13.3 million due to the benefit from the decline of the U.S. federal corporate income tax rate to 21% in 2018 from 35% in the prior period, as well as lower pre-tax income.

Pending sale of Gill Ranch Storage
On June 20, 2018, NWN Gas Storage,Water, a wholly owned subsidiary of NW Holdings, sinceare subject to regulation by the utility commissions in the states in which they are located, which currently includes Oregon, Washington, Idaho, and Texas.

Most Recent Completed Rate Cases
OREGON.On October 1, 2018, entered into a Purchase and Sale Agreement (the Agreement) that16, 2020, the OPUC issued an order concluding NW Natural's general rate case filed in December 2019 (OPUC Order). The OPUC Order provides for a total revenue requirement increase of approximately $45 million over revenues from existing rates. The revenue requirement is based on the sale by NWN Gas Storagefollowing assumptions:
•Capital structure of all50% common equity and 50% long-term debt;
•Return on equity of 9.4%;
•Cost of capital of 6.965%; and
•Average rate base of $1.44 billion or an increase of $242.1 million since the last rate case.

Under the terms of the membership interestsOPUC Order, NW Natural was authorized to begin to recover the expense associated with the Oregon Corporate Activity Tax (CAT) as a component of base rates. See "Corporate Activity Tax" below.

In NW Natural's previous Oregon rate case in Gill Ranch. Gill Ranch owns a 75% interestMarch 2019, the OPUC ordered specific terms by which excess deferred income taxes (EDIT) associated with the Tax Cuts and Jobs Act (TCJA) would be provided to customers directly or applied for the benefit of customers. The Order in the natural gas storage facility located near Fresno, California knownmost recent Oregon rate case directs NW Natural to include a true-up credit to customers of approximately $1.0 million as a temporary rate adjustment to be amortized over the Gill Ranch Gas Storage Facility. Pacific Gas2020-21 PGA year.

In addition, the OPUC Order approved the application of NW Natural’s decoupling calculation for the months of November and Electric Company (PG&E) ownsMay to the remaining 25% interestmonth of April. The decoupling mechanism is intended to encourage customers to conserve energy without adversely affecting earnings due to reductions in sales volumes.

New rates authorized by the OPUC Order were effective November 1, 2020.

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 the Gill Ranch Gas Storage Facility.first year beginning November 1, 2021 (Year One), and up to a 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.

From November 1, 2019 through October 31, 2021, the WUTC authorized rates to customers based on an ROE of 9.4% and an overall rate of return of 7.161% with a capital structure of 50.0% long-term debt, 1.0% short-term debt, and 49.0% common equity. The WUTC also authorized the recovery of environmental remediation expenses allocable to Washington customers
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through an Environmental Cost Recovery Mechanism (ECRM) and directed NW Holdings expectsNatural to provide federal tax reform benefits 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 transaction to close withinexisting rates for its interstate storage services. On October 12, months2018, NW Natural filed a rate petition with FERC for revised cost-based maximum rates, which incorporated the new federal corporate income tax rate. The revised rates were effective beginning November 1, 2018.

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

Regulatory Proceeding Updates
2022 OREGON GENERAL RATE CASE. On December 17, 2021, NW Natural filed a request for a general rate case (Rate Case) with the OPUC. On May 31, 2022, NW Natural, the OPUC staff, the Oregon Citizens' Utility Board (CUB), the Alliance of signingWestern Energy Consumers (AWEC), and in 2019. The closingthe Small Business Utility Advocates (SBUA), which comprise some of the transactionparties to the Rate Case, filed a stipulation with the OPUC addressing a number of issues in the Rate Case as well as a second docket, which was consolidated with the Rate Case (Stipulation).

The Stipulation provides for a total revenue requirement increase of $62.65 million over revenues from existing rates, subject to adjustment for capital additions and revenues related to new customers added in the test year and completion of capital projects identified as being placed into service prior to the rate effective date. The revenue requirement is based on the following assumptions:
•Capital structure of 50% common equity and 50% long-term debt;
•Return on equity of 9.4%;
•Cost of capital of 6.836%; and
•Average rate base of $1.77 billion or an increase of $337 million compared to the last rate case.

On June 29, 2022, NW Natural, the OPUC staff, the Oregon CUB, AWEC, and the Coalition of Communities of Color, Climate Solutions, Verde, Columbia Riverkeeper, Oregon Environmental Council, Community Energy Project, and Sierra Club ("Coalition"), which comprise some of the parties to the Rate Case, filed a second stipulation with the OPUC addressing a number of issues in the Rate Case that were not addressed in the first Stipulation ("Second Stipulation" and with the Stipulation, the Stipulations). The Second Stipulation addresses the following:
•Eliminates deposits for new customers;
•Updates to the Oregon low-income energy efficiency program; and
•Addresses recovery of the COVID-19 deferral over two years starting November 1, 2022.

The Stipulations do not address all aspects of the Rate Case. We expect remaining items to be subject to the ongoing regulatory litigation process. The Stipulations are subject to review and approval by the CPUC and other customary closing conditions. In July 2018, Gill Ranch filed an application withOPUC. For the CPUC for approval of this transaction.

The results of Gill Ranch Storage have been determinednew rates to be discontinued operationseffective, the OPUC must issue an order, which may approve or deny the terms of the Stipulations or be issued under the OPUC's own terms. NW Natural currently expects new rates to take effect November 1, 2022.

Rate Mechanisms
During 2022 and 2021, NW Natural's key approved rates and recovery mechanisms for each service area included:
OregonWashington
2020 Rate Case (effective 11/1/2020)
2019 Rate Case
(effective 11/1/2019)
2021 Rate Case
(effective 11/1/2021)
Authorized Rate Structure:
Return on Equity9.4%9.4%**
Rate of Return7.0%7.2%6.8%
Debt/Equity Ratio50%/50%51%/49%**
Key Regulatory Mechanisms:
Purchased Gas Adjustment (PGA)XXX
Gas Cost Incentive SharingX
DecouplingX
Weather Normalization (WARM)X
Environmental Cost RecoveryXXX
Interstate Storage and Asset Management SharingXXX
** The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity.

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PURCHASED GAS ADJUSTMENT. Rate changes are presented separately, netestablished for NW Natural each year under PGA mechanisms in Oregon and Washington to reflect changes in the expected cost of tax,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 resultswithdrawal of continuing operations for all periods presented. See Note 16 for more information onstorage inventories, the Agreementproduction of gas reserves, interstate pipeline demand costs, temporary rate adjustments, which amortize balances of deferred regulatory accounts, and the resultsremoval of discontinued operations.

The CPUC regulates Gill Ranch under a market-basedtemporary rate model which allowsadjustments effective for the priceprevious year.

Each year, NW Natural hedges gas prices on a portion of storage servicesNW Natural's annual sales requirement based on normal weather, including both physical and financial hedges. NW Natural entered the 2021-22 gas year with its forecasted sales volumes hedged at approximately 79% in total. The total hedged for Oregon was approximately 82%, including 62% in financial hedges and 19% in physical gas supplies. The total hedged for Washington was approximately 57%, including 44% in financial hedges and 13% in physical gas supplies. During 2021, there was increased volatility and pricing in the current and forward gas markets. In response to be set byhigher than normal volatility in forward gas markets in 2021, NW Natural increased its hedging level for the marketplace. The CPUC2021-22 PGA year in Oregon to 82% compared to 74% in the 2020-2021 PGA year.

NW Natural is also regulateshedged between 12% and 50% for annual requirements over the issuancesubsequent three gas years, which consists of securities, system of accounts,between 13% and regulates intrastate storage services. The California Department of Oil Gas48% in Oregon and Geothermal Resources (DOGGR) regulations forbetween 0% and 67% 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 wells were finalizedinventory levels may increase or decrease with storage expansion, changes in June 2018,storage contracts with third parties, variations in the heat content of the gas, and/or storage recall by NW Natural. As the Company plans for the 2022-23 gas year, gas price volatility has remained high with current and the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration (PHMSA) proposed new federal regulations for underground naturalforward gas storage facilities, which are expected to be finalized during 2019 and increase costs for all storage providers.prices increasing substantially in 2022. We will continue to monitor gas prices as we begin to fill storage and assesslook at hedging plans for future gas years. Gas purchases and hedges entered into for the coming winter are included in the Company’s PGA filings in OR and WA which we anticipate filing later this year in September 2022.

In September 2021, NW Natural filed its annual PGA and received OPUC and WUTC approval in October 2021. PGA rate changes were effective November 1, 2021. Rates may vary between states due to different rate structures, rate mechanisms and hedging policies.

Under the 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 2021-22 and 2020-21 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 2020-21 and 2021-22 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 2021, the ROE threshold was 10.40%. NW Natural filed the 2021 earnings test in April 2022, indicating no customer refund adjustment. NW Natural does not expect a customer
refund adjustment for 2022 based on results.

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. The Oregon decoupling baseline usage per customer was reset in the 2020 Oregon general rate case. The Order in the 2020 Oregon general rate case also approved extending NW Natural’s decoupling calculation for the months of November and May to the month of April. This mechanism employs a use-per-customer decoupling calculation, which adjusts margin revenues
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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.

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, 2022, 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 $6.3 million and $4.2 million of deferred remediation expense approved by the OPUC for collection during the 2021-22 and 2020-21 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 2021 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.
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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 2021 based on the environmental earnings test that was submitted in April 2022.

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 and asset management activities. Previously, amounts were credited to Oregon customers in June. Starting in 2021, Oregon customers received this credit in February per the 2020 Oregon rate case order. Credits are given to customers in Washington as reductions in rates through the annual PGA filing in November.

During the first quarter of 2022, NW Natural refunded an interstate storage and asset management sharing credit of approximately $41.1 million to Oregon customers over three equal installments in January, February and March. This includes revenue generated for the November 2020 through October 2021 PGA year. A majority of this revenue is from the cold weather event in February 2021 disclosed above. 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 2021 were approximately $9.1 million and $3.1 million, respectively.

Regulatory Proceeding Updates
During 2022, 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 2021 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 of June 30, 2022, we believe that approximately $17.0 million of the financial effects related to COVID-19 are recoverable and deferred to a regulatory asset approximately $13.4 million for incurred costs. In addition, we expect to recognize revenue in a future period for an additional $3.6 million related to forgone late fee revenue.

The following table outlines some of the key items approved by the respective Commissions:

OregonWashington
Reinstituting Disconnections for Nonpayment:
ResidentialAugust 1, 2021September 30, 2021
Small CommercialDecember 1, 2020September 30, 2021
Large Commercial/IndustrialNovember 3, 2020October 20, 2020
Resuming Residential Reconnection Fee ChargesOctober 1, 2022***
Reinstituting Late Fees for Nonpayment:
ResidentialOctober 1, 2022***
Small CommercialDecember 1, 2020**
Large Commercial/IndustrialNovember 3, 2020October 20, 2020
Extended Time Payment Arrangements:
ResidentialUp to 24 monthsUp to 18 months
Small CommercialUp to 6 monthsUp to 12 months
Arrearage Management Program1.5% of Retail Revenues1% of Retail Revenues
* Jurisdiction retains discretion to re-evaluate date based on ongoing pandemic and economic conditions.
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** Date is pending a Commission review of its existing credit and collection practices that is expected to be completed over the next year.

ARREARAGE MANAGEMENT PROGRAMS.As part of the approved term sheets, NW Natural established programs in Oregon and Washington to identify and mitigate residential customer arrearages associated with COVID-19. Under the Washington program, income-eligible customers may receive up to $2,500 per year. In March 2022, the Oregon program was expanded to include additional funding and a low-income focus. Under the Oregon program, NW Natural can provide a one-time grant of up to $1,600 per eligible residential customer. AMP is funded by NW Natural with recovery facilitated through the COVID-19 deferral dockets. As of June 30, 2022, the amount granted and deferred to a regulatory asset related to AMP was $9.0 million of the total funds available of $9.9 million.

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. We expect the program will be available for qualifying customers by November 1, 2022. Costs for the bill discount program include simultaneous recovery from all customers. Start-up and administrative costs of the program are authorized to be deferred for later inclusion in rates.
Total Household IncomeBill Discount Percentage
Tier 0At or below 15% SMI40%
Tier 116% - 30% of SMI25%
Tier 231% - 45% of SMI20%
Tier 346% - 60% of SMI15%

RENEWABLE NATURAL GAS.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 opened a docket in August 2019 regarding the rules for the bill. After working with parties, 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 new regulations untillaw 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 sale is complete,transportation system, industrial use or blended into the natural gas pipeline system.

WATER UTILITIES.In the second quarter of 2022, NWN Water signed two purchase agreements for water utilities, representing approximately 1,400 connections in Washington near its existing Cascadia Water utilities. The acquisitions received approval by the WUTC in July 2022 and are expected to close in August 2022. Also in the second quarter of 2022, NWN Water closed the purchase of a water and wastewater utility, representing approximately 150 combined connections in Texas near its Blue Topaz Utilities. In the first quarter of 2022, NWN Water signed two additional purchase agreements for water utilities, representing approximately 900 connections in Texas also near its existing Blue Topaz Utilities. These applications were filed in the second quarter of 2022 with the PUCT and decisions are expected in late 2022 or 2023. In December 2021, NWN Water agreed to purchase the water and wastewater utilities of Far West Water & Sewer, Inc. located in Arizona. In March 2022, we filed our acquisition application with the Arizona Corporation Commission. In June 2022, Arizona staff recommended approval of the Far West acquisition with the docket awaiting Commission review, which is expected in 2019.the third quarter of 2022. The Far West acquisition is expected to close in the fourth quarter of 2022.



For our acquired water utilities, we have been executing general rate cases. In February 2022, the OPUC adopted a comprehensive stipulation in Sunriver Water's rate case with new rates effective May 2022. In January 2022, we filed a general rate case for Suncadia Water and the WUTC allowed rates to go into effect in May 2022 by operation of law.

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 2018 IRP for both Oregon and Washington in August 2018, and received both a letter of compliance from the WUTC and acknowledgment by the OPUC in February 2019. The 2018 IRP included analysis of different scenarios, examining several potential future states and the corresponding least cost, least risk resource acquisition strategies. In addition to these strategies, the 2018 IRP published an emissions forecast for each of these potential futures. NW Natural filed an update to the 2018 IRP in March 2021 and received acknowledgement of the requested capital projects by the OPUC in September 2021.

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The development of Contentsan IRP filing is an extensive and complex process that engages multiple stakeholders in an effort to build a robust and commonly understood analysis. The final product is intended to provide a long-term outlook of the supply-side and demand-side resource and compliance requirements for reliable and low cost natural gas service. The IRP examines and analyses uncertainties in the planning process, including potential changes in governmental and regulatory policies. As a result of the executive order (EO) issued by the governor of Oregon, new regulations and requirements have been developed resulting in a new program known as the Climate Protection Plan. The Washington Department of Ecology is currently undergoing rule-making for the Climate Commitment Act. Both of these policies have the potential to impact long-term resource decisions. NW Natural received approval from both the OPUC and the WUTC to extend the filing of our full IRP until September 23, 2022 due to the implementation of new resource planning optimization software.



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 notified owners and operators of natural gas pipeline facilities (including local distribution companies) that TSA has determined to be critical. The first security directive required notified owners/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 security directive requires notified entities to implement a significant number of specified cyber security controls and processes. The TSA recently released a third security directive, which replaces the second directive. The third security directive provides a framework based on risk and outcome objectives and is effective until July 2023. NW Natural is currently in the process of evaluating and implementing the security directives while ensuring safe and reliable operations. NW Natural is providing frequent updates to the TSA on NW Natural's progress on achieving the security directives. NW Natural filed requests with the OPUC and WUTC to defer the costs associated with complying with the second security directive and plans to seek recovery of these costs in future ratemaking proceedings. As of June 30, 2022, NW Natural has deferred to a regulatory asset $3.1 million of costs incurred and $27.6 million was invested in information technology to date. 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.



Short-term liquidity for Gill Ranch isERP UPGRADE DEFERRALS. In the fourth quarter of 2020, NW Natural filed requests to defer expenses pertaining to a project to upgrade the existing enterprise resource planning (ERP) system with the OPUC and WUTC. A stipulation supported by cash balances,all parties in the Oregon docket was filed and approved by the OPUC in the third quarter of 2021. Under the settlement agreement, NW Natural can recover 100% of costs incurred up to the $8.55 million estimate of Oregon-allocated costs provided in the docket. For costs that exceed $8.55 million up to $12 million, 80% may be recovered from customers. For costs that exceed $12 million, 50% may be recovered. As of June 30, 2022, NW Natural deferred to a regulatory asset $7.9 million of expenses incurred to date. Approval of the Washington deferral was resolved as part of the most recent general rate case.

Environmental, Legislation and Regulation Matters
There is a growing international and domestic focus on climate change and the contribution of greenhouse gas (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, 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. 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. Some of these initiatives may include repeal of policies, executive orders or rules implemented by the prior administration.

The U.S. Congress has not yet passed any federal climate change legislation, and we cannot predict when or if Congress will pass such legislation and in what form. In the absence of such legislation, the Environmental Protection Agency (EPA) regulates
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GHG emissions pursuant to the Clean Air Act. In September 2009, the EPA issued a final rule requiring the annual reporting of greenhouse gas emissions from certain industries, specified large GHG emission sources, and facilities that emit 25,000 metric tons or more of CO2 equivalents per year. NW Natural began reporting emission information in 2011. 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 Federal Energy Regulatory Commission, are beginning to address greenhouse gas emissions through changes in their regulatory oversight approach and policies.

Additionally, the Securities and Exchange Commission (SEC) recently proposed new rules relating to the disclosure of a range of climate-related matters. These include corporate governance and risk management, disaggregated financial disclosure in the notes to audited financial statements, and detailed disclosure concerning GHG emissions. We are currently assessing these proposed rules. We cannot predict what any final rules adopted by the SEC may require, nor can we predict the time periods for compliance, the costs of implementation, or any potential impacts resulting from any final climate-related rules that may be adopted. To the extent these rules are finalized as proposed or in modified form, we or our customers could incur increased costs related to the assessment and disclosure of climate-related risks. These could include internal cash flowcosts 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 2021, Washington comprised approximately 11% of NW Natural’s revenues, as well as 1.5% and 25.5% of new meters from operations,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, if final action is taken in November 2022 are expected to restrict or eliminate the use of gas space and water heating in new commercial construction beginning in July 2023. In May 2022, the SBCC is expected to begin reviewing building energy code updates for new residential construction that may include similar requirements. Utilities and other organizations, including NW Natural, are reviewing the proposed building energy code updates, the process by which the updates have been considered, and the legality of the building code updates. We currently expect that the building code changes will be subject to legal challenge if they become final.

NW Natural continues to work with policymakers and a coalition of utilities, labor groups and business coalitions in Washington to communicate the role of direct use natural gas, and in the coming years renewable natural gas and hydrogen, can play in pursuing more effective policies to reduce GHGs while preserving reliability, resiliency, energy choice, equity, contributionsand energy affordability.

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 on January 1, 2023, resulting in an overall reduction of GHG emissions to 95% below 1990 levels by 2050. The Washington Department of Ecology has been directed to develop 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 or obtain allowances and approved offset credits to cover any remaining emissions. These rules are expected by the end of 2022. NW Natural is subject to the CCA 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 parent company,statutory authority and ifduties, and in doing so to focus on equitable impacts to low-income customers.

In December 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 intend to pursue inclusion of compliance costs for the CPP in rates. The CPP has been subject to legal challenge by a number of utilities, companies and organizations, including NW Natural.

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NW Natural is also engaged in an OPUC Fact-Finding (“Fact-Finding Docket”), opened in response to the EO for the purpose of analyzing the potential natural gas utility bill impacts that may result from the ODEQ’s CPP and to identify appropriate regulatory tools to mitigate potential customer impacts. The OPUC Staff has indicated that the ultimate goal of the Fact-Finding Docket is to inform future policy decisions and other key analyses to be considered in 2022, or thereafter, after the CPP is in place. We expect the Oregon Commission to issue a final report in the last half of 2022.

NW Natural is working with policymakers and a coalition of utilities in Oregon to help stakeholders understand the role direct use natural gas, and in the coming years renewable natural gas and hydrogen, can play in pursuing more effective policies to reduce greenhouse gases while preserving reliability, resiliency, energy choice, equity, and energy affordability.

Local Jurisdictions and Other Advocacy
In addition to legislative activities at the state level, ballot measures may be proposed by advocacy groups. Some local and county governments in the United States also have been proposing or passing renewable energy resolutions, restrictions, taxes, or fees with advocates seeking to accelerate climate action goals. A number of cities across the country, and several in our service territory are currently considering actions such as limitations or bans on the use of natural gas in new construction or otherwise. For example, in July 2022, the Eugene City Council passed several motions, including one directing the city manager to draft an ordinance that could prohibit the use of natural gas in low rise residential buildings beginning with permits submitted after June of 2023, to allow the Eugene City Council an opportunity to consider one or more draft ordinances or actions, and to hear further from the citizens of Eugene regarding such actions. NW Natural is actively engaged with such cities, local governments, and other advocates, including, among others the cities of Eugene and Milwaukie, Oregon, in our service territory and is working with these communities to help them understand the ways in which the natural gas system, and renewable fuels, can help them meet their decarbonization goals.

NW Natural Decarbonization Initiatives & 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, will require additional resources and compliance tools. The developing and changing 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. Given that CCA rules are in development and the recency of the adoption of the final CPP rules, we have not completed our full integrated resources planning process to identify our compliance obligations and expected costs. Even as we develop these compliance and cost projections, they will be uncertain and subject to significant change over the nearly 30-year time horizon. It is our current expectation that costs associated with compliance generally would be recovered in rates and would result in an increase in the prices charged to customers. 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. The projected customer bill impact of the CPP varies 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.

It is difficult to assess whether building code changes that could make the use of natural gas more expensive for home builders, lower levels of recovery in rates for construction costs related to new customer services, or higher customer bills as compliance costs are included in rates will affect the competitiveness of our business or result in a decline in demand for natural gas. All of these developments could negatively affect our gas utility customer growth. 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 that compliance with these and other laws will substantially 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-fired 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.
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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 earnings and gas consumption by customer 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. Yet, the sales of natural gas to our residential and commercial customers account for approximately 6% of Oregon’s GHG emissions according to data for recent years from the State of Oregon Department of Environmental Quality In-Boundary GHG Inventory. We intend to continue to provide this necessary additional external financing.energy to our communities with the goal of using our modern pipeline system to help the Pacific Northwest transition to a clean 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 powerful potential to reduce net GHG emissions. Methane that would otherwise be released to the atmosphere is captured from these organic materials as they decompose and is conditioned to pipeline quality, so it can be added into the existing natural gas 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 is engaging in longer-term efforts to increase the amount of RNG on our system and explore 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. In addition, 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 with a second underway and planned to be commissioned in early 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 ourNW Holdings' long-term goalsgoal is to maintain a strong and balanced consolidated capital structure withstructure. NW Natural targets a long-term target utilityregulatory capital structure of 50% common stockequity and 50% long-term debt, at NW Natural. 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 7.
9. Achieving theour target capital structure and maintaining sufficient liquidity to meet operating requirements areis necessary to maintain attractive credit ratings and provide access to the capital markets at reasonable costs.


NW Holdings' consolidated capital structure, excluding short-term debt, was as follows:
June 30,December 31,
202220212021
Common equity52.1 %48.6 %47.2 %
Long-term debt (including current maturities)47.9 51.4 52.8 
Total100.0 %100.0 %100.0 %

NW Natural's consolidated capital structure, excluding short-term debt, was as follows:
June 30,December 31,
202220212021
Common equity54.3 %48.6 %49.8 %
Long-term debt (including current maturities)45.7 51.4 50.2 
Total100.0 %100.0 %100.0 %

Including short-term debt balances, as of June 30, 2022 and 2021, and December 31, 2021, NW Holdings' consolidated capital structure included common equity of 47.3%, 43.2% and 39.5%; long-term debt of 43.4%, 42.8% and 44.0%; and short-term debt including current maturities of long-term debt of 9.3%, 14.0% and 16.5%, respectively. As of June 30, 2022 and 2021, and
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  September 30, December 31,
  2018 2017 2017
Common stock equity 44.8% 52.1% 47.1%
Long-term debt 44.0
 46.6
 43.3
Short-term debt, including current maturities of long-term debt 11.2
 1.3
 9.6
Total 100.0% 100.0% 100.0%
December 31, 2021, NW Natural's consolidated capital structure included common equity of 52.4%, 43.8%, and 44.2%; long-term debt of 44.1%, 43.2% and 44.7%; and short-term debt including current maturities of long-term debt of 3.5%, 13.0%, and 11.1%, respectively.


Liquidity and Capital Resources
At SeptemberJune 30, 2018,2022 and 2021, NW Holdings had approximately $17.2 million and $20.1 million, and NW Natural had $30.0approximately $10.3 million and $11.5 million of cash and cash equivalents, compared to $15.8 million at September 30, 2017.respectively. In order to maintain sufficient liquidity during periods when capital markets are volatile, NW Holdings and NW Natural may elect to maintain higher cash balances and add short-term borrowing capacity. In addition, itNW Holdings and NW Natural may also pre-fund utilitytheir 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.

NW Natural Holdings and NW Natural continue to monitor interest rates and financing options for all of its businesses. Interest rates have increased in 2022 resulting from actions taken by the U.S. Federal Reserve to increase short-term rates as inflation rates rise. NW Natural recovers interest expense on its long-term debt through its authorized cost of capital and capital.

Equity Issuance
On April 1, 2022, NW Holdings issued and sold 2,875,000 shares of its common stock pursuant to a registration statement on Form S-3 and related prospectus supplement. NW Holdings received net offering proceeds, after deducting the underwriter's discounts and commissions and expenses payable by NW Holdings of approximately $138.6 million. The proceeds are to be used for general corporate purposes, including repayment of its short-term indebtedness and/or making equity contributions to NW Holdings' subsidiaries, NW Natural, NW Natural Water and NW Natural Renewables. Contributions to NW Natural, NW Natural Water and NW Natural Renewables are to be used for general corporate purposes. Of the contributions received by NW Natural, $130.0 million was used to repay its short-term indebtedness.

ATM Equity Program
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, 2022, NW Holdings issued and sold 482,200 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $25.1 million, net of fees and commissions paid to agents of $0.4 million. During the six months ended June 30, 2022, NW Holdings issued and sold 678,101 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $35.2 million, net of fees and commissions paid to agents of $0.7 million. As of June 30, 2022, NW Holdings had $146.2 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. Contributions to NW Natural and NW Natural Water will be used for general corporate purposes.

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,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. NW Holdings long-term debt, if any, and equity issuances are primarily used to provide equity contributions to NW Holdings’ operating subsidiaries for operating and capital expenditures and other corporate purposes. From 2022 through 2024, we estimate NW Holdings’ and NW Natural's combined incremental capital needs to be in the range of $600 million to $700 million. NW Holdings has issued more than $170 million of equity through July 2022 and NW Natural entered into a $140 million private placement FMB that we expect to receive the proceeds on September 30, 2022. 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 equity securities and most forms of debt securities are subject to approval by the OPUC and WUTC. However, its use of retained earnings is not subject to those same restrictions, andregulation by state public utility commissions, but the dividends from NW Natural to NW Holdings is notare subject to eitherregulatory ring-fencing provisions. NW Holdings guarantees the debt of these restrictions. Effective October 1, 2018, underits wholly-owned subsidiary, NWN Water. See "Long-Term Debt" below for more information regarding NWN Water debt.

As part of the ring-fencing conditions agreed upon with the OPUC and WUTC in connection with the holding company reorganization, NW Natural's ring-fencing provisions,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.

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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 subjectrequired to certain dividend restrictions based on its credit ratingnotify the OPUC, and if the common equity levels.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, 2022, 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 utilityNGD business segment, the short-term borrowing requirements typically peak during colder winter months when the utilityNGD business borrows money to cover the lag between natural gas purchases and bill collections from customers. Short-term liquidity for the utilityNGD 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-ownedcompany-owned life insurance policies, the sale of long-term debt, and equity contributions from NW Natural's parent companyHoldings. NW Natural Holdings as of October 1, 2018. UtilityNatural's long-term debt proceeds and equity contributions from NW Holdings are primarily used to finance utilityNGD capital expenditures, refinance maturing debt, of the utility, and provide temporary funding for other general corporate purposes of the utility. NGD business.

Based on its current debt ratings (see "Credit Ratings" below), NW Natural has been able to issue commercial paper and long-term debt at attractive rates and has not needed to borrow or issue letters of credit from its back-up credit facility. See "Credit Ratings" below.rates. In the event NW Natural is not able to issue new long-term debt due to adverse market conditions or other reasons, itNW 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 itsa committed credit facility. NW Natural also has a universal shelf registration statement filed with the SEC for the issuance of secured and unsecured debt subject to market conditions and certain regulatory approvals, and for secured debt, the provisions of its mortgage.securities.


In the event NW Natural'sNatural senior unsecured long-term debt ratings are downgraded, or its outstanding derivative position exceedspositions exceed a certain credit threshold, counterparties under derivative contracts could require NW Natural to post cash, a letter of credit, or other forms of collateral, which could result in exposureexpose NW Natural to additional cash requirements and may trigger increases in short-term borrowings while in a net loss position. NW Natural was not required to post collateral at SeptemberJune 30, 2018. However, if the credit risk-related contingent features underlying these contracts were triggered on September 30, 2018, assuming NW Natural's long-term debt ratings dropped to non-investment grade levels, it could have been required to post $7.0 million in collateral with counterparties.2022. See "Credit Ratings" below and Note 14.15.


In October 2017, NW Natural entered into a 20-year operating lease agreement for the new headquarters location in Portland, Oregon. The existing headquarters lease expires in 2020, and payments under the new lease are expected to commence in 2020. Total estimated base rent payments over the life of the lease are approximately $160.0 million. NW Natural has the option to extend the term of the lease for two additional seven-year periods. See Note 10.


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Other items that may have a significant impact on NW Natural's liquidity and capital resources include NW Natural's pension contribution requirements bonus depreciation,and environmental expenditures, dividend policy, and off-balance sheet arrangements.expenditures. For additional information, see Part II, Item 7 "Financial Condition""Financial Condition"in NW Natural's 2017the 2021 Form 10-K.


Based on several factors, including
Short-Term Debt
The primary source of short-term liquidity for NW Natural's currentHoldings is cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a multi-year credit ratings, the commercial paper program, current cash reserves, committedfacility, and short-term credit facilities and expected abilityit may enter into from time to issue anticipated amountstime.

The primary source of long-term debt in the capital markets,short-term liquidity for NW Natural believes its liquidity is sufficient to meet anticipated near-term cash requirements, including all contractual obligations, investing, and financing activities discussed below.

SHORT-TERM DEBT. The primary sources of NW Natural short-term liquidity arefrom 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. CommercialFor NW Natural, commercial paper and bank loans are periodically refinanced through the sale of long-term debt or equity securities. Whencontributions from NW Natural hasHoldings. 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.


In June 2021, NW Natural entered into a $100.0 million 364-Day Term Loan Credit Agreement (Term Loan) and borrowed the full amount. All principal and interest under the Term Loan was repaid in December 2021.

At SeptemberJune 30, 2018,2022 and 2021, NW Holdings had short-term debt outstanding of $222.7 million and $240.0 million, respectively. At June 30, 2022 and 2021, NW Natural had $100.5 million short-term debt outstanding due to the saleof $78.7 million and $198.0 million, respectively. NW Holdings' short-term debt at June 30, 2022 consisted of $144.0 million in revolving credit agreement loans at NW Holdings and $78.7 million of commercial paper compared to none outstanding at September 30, 2017.NW Natural. The weighted average interest rate on short-term debt outstanding at September 30, 2018 was 2.3%.

CREDIT AGREEMENTS. As of September 30, 2018, NW Natural had a $300.0 millionthe revolving credit agreement (Prior Credit Agreement), with a feature that allowed NW Natural to request increases in the total commitment amount, up to a maximum of $450.0 million. The maturity date of the agreement was December 20, 2019.

All lenders under the Prior Credit Agreement were major financial institutions with committed balances and investment grade credit ratings as of September 30, 2018 as follows:
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In millions 
Lender rating, by categoryLoan Commitment
AA/Aa$201
A/A199
Total$300


In October 2018, NW Natural entered into a new multi-year credit agreement for unsecured revolving loans totaling $300.0 million, with a feature that allows NW Natural to request increases in the total commitment amount, up to a maximum of $450.0 million, and with a maturity date of October 2, 2023 with an available extension of commitments for two additional one-year periods, subject to lender approval (New Credit Agreement). The Prior Credit Agreement was terminated upon the closing of the New Credit Agreement.
All lenders under the New Credit Agreement are major financial institutions with committed balances and investment grade credit as follows:
In millions 
Lender rating, by categoryLoan Commitment
AA/Aa$300
A/A1—
Total$300

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, we do not believe this risk to be imminent due to the lenders' strong investment-grade credit ratings.

The New Credit Agreement permits the issuance of letters of credit in an aggregate amount of up to $60.0 million. The principal amount of borrowings under the New Credit Agreement is due and payable on the maturity date. There were no outstanding balances under the Prior Credit Agreement at September 30, 2018 or 2017. The Prior Credit Agreement and New Credit Agreement require 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 September 30, 2018 and 2017, with consolidated indebtedness to total capitalization ratios of 55.2% and 47.9%, respectively.

The Prior Credit Agreement and New Credit Agreement also require NW Natural to maintain credit ratings with Standard & Poor's (S&P) and Moody's Investors Service, Inc. (Moody’s) and notify the lenders of any change in NW Natural's senior

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unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies. A change inagreement at June 30, 2022 was 2.7% at NW Natural's debt ratings by S&P or Moody’s is not an eventHoldings. The weighted average interest rate 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 New 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 agreements when ratings are changed. See "Credit Ratings" below.

CREDIT RATINGS. NW Natural's credit ratings are a factor of its liquidity, potentially affecting access to the capital markets including the commercial paper market.at June 30, 2022 was 2.0% at 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 NW Natural's current credit ratings:Natural.

S&PMoody's
Commercial paper (short-term debt)A-1P-2
Senior secured (long-term debt)AA-A1
Senior unsecured (long-term debt)n/aA3
Corporate credit ratingA+n/a
Ratings outlookStableNegative

In January 2018, Moody's revised NW Natural's ratings outlook from "stable" to "negative". This revision was a result of their view of the potential negative impact that the TCJA could have on NW Natural's regulated utility cash flow metrics. An increase in cash taxes in the near term as a result of the elimination of bonus depreciation on regulated utilities is expected. However, NW Natural expects to see a net increase in cash flows as a result of the TCJA over the longer term, as taxes are a pass through to customers and lower deferred tax liabilities are expected to increase regulatory returns.

The above credit ratings 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 Natural securities. Each rating should be evaluated independently of any other rating.

LONG-TERM DEBT. NW Natural retired $22.0 million of FMBs with a coupon rate of 6.60% in March 2018 and issued $50.0 million of FMBs with a coupon rate of 4.11% in September 2018. No other debt was retired or issued in the nine months ended September 30, 2018. Over the next twelve months, $75.0 million of FMBs with a coupon rate of 1.545% will mature in December 2018 and $10.0 million of FMBs with a coupon rate of 8.310% will mature in September 2019.

See Part II, Item 7, "Financial Condition—Contractual Obligations" in NW Natural's 2017 Form 10-K for long-term debt maturing over the next five years.

Credit Agreements
NW Holdings
CREDIT AGREEMENTS. On October 2, 2018,At June 30, 2022, NW Holdings entered intohad a $100.0$200 million sustainability-linked credit agreement, with a feature that allows it to request increases in the total commitment amount, up to a maximum of $150.0$300 million. The maturity date of the agreement is October 2, 2023.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 June 30, 2022 as follows:
In millions
Lender rating, by categoryLoan Commitment
AA/Aa$200 
Total$200 

Based on credit market conditions, it is possible one or more lending commitments could be unavailable to NW Holdings if the lender defaulted due to lack of funds or insolvency; however, NW Holdings does not believe this risk to be imminent due to the lenders' strong investment-grade credit ratings. At June 30, 2022, June 30, 2021 and December 31, 2021, $144.0 million, $42.0 million and $144.0 million were drawn under the NW Holdings Credit Agreement, respectively.

The NW Holdings credit agreement permits the issuance of letters of credit in an aggregate amount of up to $40.0$40 million. The principal amount of borrowings under the credit agreement is due and payable on the maturity date. The credit agreement requires 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. NW Holdings was in compliance with this covenant at June 30, 2022 and 2021, with consolidated indebtedness to total capitalization ratios of 52.7% and 56.8%, respectively.


The NW Holdings credit agreement also requires NW 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 its senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies. A change in 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.


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.

Interest charges on the NW Holdings credit agreement are indexed to the London Interbank Offered Rate (LIBOR). The agreement contains provisions addressing the end of the use of LIBOR as a benchmark rate of interest and a mechanism for determining an alternative benchmark rate of interest without an amendment to the credit agreement. If the provisions are triggered, LIBOR would be replaced by a secured overnight financing rate (SOFR)-based rate, if one can be determined, or, if not, LIBOR may be replaced by a rate selected by NW Holdings and the administrative agent under the agreement. The replacement rate is also subject to a spread adjustment which may be positive, negative or zero.

NW Holdings had no letters of credit issued and outstanding at June 30, 2022 and 2021.

NW Natural
At June 30, 2022, 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, 2022 as follows:
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In millions
Lender rating, by categoryLoan 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, 2022, June 30, 2021 and December 31, 2021.

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, 2022 or 2021. 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, 2022 and 2021, with consolidated indebtedness to total capitalization ratios of 47.6% and 56.2%, 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.

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.

Interest charges on the NW Natural credit agreement are indexed to LIBOR. The agreement contains provisions addressing the end of the use of LIBOR as a benchmark rate of interest and a mechanism for determining an alternative benchmark rate of interest without an amendment to the credit agreement. If the provisions are triggered, LIBOR would be replaced by a secured overnight financing rate (SOFR)-based rate, if one can be determined, or, if not, LIBOR may be replaced by a rate selected by NW Natural and the administrative agent under the agreement. The replacement rate is also subject to a spread adjustment which may be positive, negative or zero.

Credit Ratings
NW Holdings does not currently maintain credit ratings with S&P or Moody's. NW Natural's credit ratings are a factor of liquidity, potentially affecting access to the capital markets including the commercial paper market. 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 NW Natural's current credit ratings:

S&PMoody's
Commercial paper (short-term debt)A-1P-2
Senior secured (long-term debt)AA-A2
Senior unsecured (long-term debt)n/aBaa1
Corporate credit ratingA+n/a
Ratings outlookStableStable


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
On July 15, 2022, NW Natural entered into a Bond Purchase Agreement between NW Natural and the institutional investors named as purchasers therein (the Bond Purchase Agreement). The Bond Purchase Agreement provides for the issuance of $140.0 million aggregate principal amount of NW Natural's First Mortgage Bonds, 4.78% Series due 2052 (the Bonds). The
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Bonds are expected to be issued on or about September 30, 2022. The Bonds will bear interest at the rate of 4.78% per annum, payable semi-annually on March 30 and September 30 of each year, commencing March 30, 2023, and will mature on September 30, 2052. The Bonds will be subject to redemption prior to maturity at the option of NW Natural, in whole or in part, (i) at any time prior to March 30, 2052, at a redemption price equal to 100% of the principal amount thereof plus a “make-whole” premium and accrued and unpaid interest thereon to the date of redemption, and (ii) at any time on and after March 30, 2052, at 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption.

In November 2021, NW Natural issued $130.0 million of First Mortgage Bonds (FMBs) with an interest rate of 3.08% due in 2051. Issued as a sustainability bond, net proceeds from the sale of the FMBs were added to the general funds of NW Natural and used for general corporate purposes, while an amount equivalent to the net proceeds from the sale of the bonds was or will be allocated to finance and/or refinance, in whole or in part, investments in one or more new or existing projects of NW Natural deemed to be an eligible project in the bond offering. Projects deemed eligible for the FMB offering included expenditures related to RNG and hydrogen generation and infrastructure, programs related to energy efficiency, expenditures related to operations or service centers that have or are expected to receive LEED Gold or Platinum certification, and expenditures and program investments related to enabling opportunities for diverse business enterprises.

In June 2021, NW Natural Water entered into a five-year term loan agreement for $55.0 million. The loan carried an interest rate of 2.3% at June 30, 2022, which is based upon the one-month LIBOR rate. The loan is guaranteed by NW Holdings and requires 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. NW Holdings was in compliance with this covenant at June 30, 2022, with a consolidated indebtedness to total capitalization ratio of 52.7%.

At June 30, 2022, NW Holdings and NW Natural had long-term debt outstanding of $1,045.9 million and $986.8 million, respectively, which included $8.0 million and $7.9 million of 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 2051, interest rates ranging from 2.8% to 7.9%, and a weighted average interest rate of 4.4%.

No long-term debt is scheduled to mature over the next twelve months as of June 30, 2022 at NW Natural. See Part II, Item 7, "Financial Condition—Long-Term Debt" in the 2021 Form 10-K for long-term debt maturing over the next five years.

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, 2022. 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 operating cash flows are primarily affected by net income or loss, changeschanges in working capital requirements, and other cash and non-cash adjustments to operating results.

Six Months Ended June 30,
In thousands20222021YTD Change
NW Natural cash provided by operating activities$193,436 $189,945 $3,491 
NW Holdings cash provided by operating activities$196,564 $194,281 $2,283 
Operating activity highlights include:
  Nine Months Ended September 30,  
In thousands 2018 2017 YTD Change
Cash provided by operating activities $158,529
 $192,856
 $(34,327)

NINESIX MONTHS ENDEDSEPTEMBERJUNE 30, 2018 2022 COMPARED TO SEPTEMBERJUNE 30, 2017. 2021.Cash provided by operating activities increased $2.3 million at NW Holdings and increased $3.5 million at NW Natural. The significant factors contributing to the $34.3increase at NW Holdings were as follows:
•$29.6 million decrease in cash flows provided by operating activities were as follows:
a net decrease of $0.5 million from changes in working capital related to receivables, inventories, and accounts payable reflecting warmer than average weather in 2018 compared to the prior period;
a decrease of $11.0 million in cash flow benefits from changes in deferred gas cost balancescosts as gas costs for the six months ended June 30, 2021 were 27% above the PGA estimates primarily due to lower volumesthe 2021 cold weather event;
•$23.3 million increase in accounts receivable and accrued unbilled revenue resulting from warmer weatherhigher balances due to colder weather; and
•$16.5 million increase in 2018 comparedNW Natural's decoupling mechanism; partially offset by
•$32.9 million decrease in the regulatory incentive sharing mechanism related to revenues earned from Mist gas storage and asset management activities primarily related to the prior year;2021 cold weather event; and
an•$32.0 million increase of $10.4 million of cash outflow duein asset optimization revenue sharing bill credits to $22.0 million of income taxes paid in 2018 compared to $11.6 million in the prior period;customers.


During the nine months ended September 30, 2018, NW Natural contributed $11.7 milliondid not make any cash contributions to its utility's qualified defined benefit pension plan,plans during the six months ended June 30, 2022 compared to $15.4$9.6 million for the same period in 2017.2021. NW Natural does not expect to make any plan contributions during the remainder of 2022. The amount and timing of future contributions will depend on market interest rates and investment returns on the plans' assets. For additional information, see Note 8.10.


Bonus depreciation of 50% was available for federal and Oregon purposes for most of 2017, which reduced taxable income and
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The increase in cash provided cash flow benefits. As a result of the TCJA, bonus depreciation was eliminated for property acquired after September 27, 2017. Accordingly, we do not anticipate similar cash flow benefits related to bonus depreciation in the future.

by operating activities at NW Natural haswas primarily driven by the increase discussed above.

NW Holdings and NW Natural have lease and purchase commitments relating to itstheir operating activities that are financed with cash flows from operations.operations. For additional information on cash flow requirements related to leases and other purchase commitments, see Part II, ItemNote 7 "Financial Condition—Contractual Obligations" and Note 1416 in NW Natural's 2017the 2021 Form 10-K.


Investing Activities
Investing activity highlights include:
Six Months Ended June 30,
In thousands20222021YTD Change
NW Natural cash used in investing activities$(158,180)$(122,887)$(35,293)
NW Holdings cash used in investing activities$(169,687)$(127,883)$(41,804)

  Nine Months Ended September 30,  
In thousands 2018 2017 YTD Change
Total cash used in investing activities $(161,075) $(146,572) $(14,503)
Capital expenditures supporting continuing operations (158,795) (145,274) (13,521)

NINESIX MONTHS ENDEDSEPTEMBERJUNE 30, 20182022 COMPARED TO SEPTEMBERJUNE 30, 2017. 2021. Cash used in investing activities increased $41.8 million at NW Holdings and increased $35.3 million at NW Natural. The $14.5 million increase in cash used in investing activities was primarily due to higheran increase of $37.6 million and $31.0 million of capital expenditures primarily relatedat NW Holdings and NW Natural, respectively.

NW Natural capital expenditures in 2022 (including cloud-based software classified as other assets) are anticipated to system reinforcementbe in the range of $310 million to $350 million and customer growth.

Overfor the five-year period 2018 throughfrom 2022 to 2026 are expected to range from $1.3 billionto $1.5 billion. NW Natural Water is expected to invest approximately $15 million in 2022 related to maintenance capital expenditures for water and wastewater utilities currently owned as of December 31, 2021, and for the five-year period from 2022 to 2026, capital expenditures are estimatedexpected to be between $750 and $850 million. The estimated capital expenditures in this range include, but are not limited to, the following items:
$650 to $700approximately $60 million of core utility capital expenditures that will support continued customer growth, distribution system maintenance and improvements, technology investments, and utility gas storage facility maintenance;
$60 to $70 million related to planned upgradesmillion. Investments in our infrastructure during and refurbishments to utility storage facilitiesafter 2022 will depend largely on additional regulations, growth, and resource centers; and
$20 to $30 million of additional investments in 2018 for the North Mist gas storage facility expansion with a total estimated cost of $144 million for the project and a target in-service date of March 31, 2019.

Most of the requiredopportunities. Required funds for thesethe investments are expected to be internally generated over the five-year period,or financed with short-term and long-term debt or equity, as appropriate.

Financing Activities
Six Months Ended June 30,
In thousands20222021YTD Change
NW Natural cash used in financing activities$(32,995)$(63,083)$30,088 
NW Holdings cash used in financing activities$(23,962)$(73,542)$49,580 

SIX MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021. Cash used in financing activities decreased $49.6 million and equity providing liquidity.

$30.1 million at NW Natural's 2018 utility capital expenditures are estimated to be between $190Holdings and $220 million. This range includes $20 to $30 million for the construction of the North Mist gas storage facility expansion. NW Natural, expectsrespectively. The decrease at NW Holdings was attributable to invest less than $5net proceeds from the issuance of common stock and the ATM equity program of $174.1 million, partially offset by changes in non-utility capital investments for gas storage and other activities in 2018. Additional spend for gas storage and other investments during or after 2018 are expecteddebt. The decrease at NW Natural was attributable to be paid from working capital and additional equitycash contributions from NW Natural as needed.


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Financing Activities
Financing activity highlights include:
  Nine Months Ended September 30,  
In thousands 2018 2017 YTD Change
Total cash provided by (used in) financing activities $29,039
 $(34,025) $63,064
Change in short-term debt 46,300
 (53,300) 99,600
Change in long-term debt 28,000
 60,000
 (32,000)

NINE MONTHS ENDEDSEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. The $63.1$165.5 million, increase in cash provided by financing activities was primarily due to lower repayments of $99.6 million of short-term debt compared to the prior period, as well as lower repayments of $18.0 million of long-term debt compared to the prior period, partially offset by a $50.0 million decreasechanges in proceeds from long-term debt compared to the prior period.debt.


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 NW Natural's 2017the 2021 Form 10-K. At SeptemberJune 30, 2018,2022, NW Natural's total estimated liability related to environmental sites is $116.5$104.8 million. See "Results of Operations—Regulatory Matters—Rate Mechanisms—Environmental Costs" in NW Natural's 2017the 2021 Form 10-K and Note 15.16.

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APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing the 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 critical accounting policies to be those which are most important to the representation of 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. NW Natural'sOur 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
business combinations; and
•impairment of long-lived assets.assets and goodwill.


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There have been no material changes to the information provided in the 20172021 Form 10-K with respect to the application of critical accounting policies and estimates other than those incorporated in Note 5, Note 13, and Note 16 relating to revenue, business combinations and goodwill, and discontinued operations, respectively.estimates. See Part II, Item 7, "Application of Critical Accounting Policies and Estimates," in the 20172021 Form 10-K.


Management has discussed its current estimates and judgments used in the application of critical accounting policies with the Audit CommitteeCommittees of the Board.Boards of NW Holdings and NW Natural. Within the context of 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 financial condition, results of operations or cash flows, see Note 2.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
NW Holdings and NW Natural isare exposed to various forms of market risk including commodity supply risk, commodity price risk, interest rate risk, foreign currency risk, credit risk and weather risk. This section describes NW Holdings' and NW Natural's exposure to these risks, as applicable. Management monitors and manages these financial exposures as an integral part of ourNW Holdings' and NW Natural's overall risk management program. No material changes have occurred related to our disclosures about market risk for the ninesix months ended SeptemberJune 30, 2018.2022. 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 20172021 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES
 
(a) Evaluation of Disclosure Controls and Procedures
 
The management ofNW Holdings and NW Natural and NW Holdings,management, under the supervision and with the participation of theirthe Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the design and operation of the 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, the Chief Executive Officer and Chief Financial Officer of NW Natural and NW Holdingseach registrant have concluded that, as of the end of the period covered by this report, the disclosure controls and procedures of NW Natural and NW Holdings were effective to ensure that information required to be disclosed by themeach such registrant and included in their 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, of NW Natural and NW Holdings, as appropriate to allow timely decisions regarding required disclosure.
 
(b) Changes in Internal Control Over Financial Reporting
 
The management ofNW Holdings and NW Natural and NW Holdings ismanagement are 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 no changes in NW Natural's or NW Holdings' internal control over financial reporting that occurred during the quarter ended SeptemberJune 30, 20182022 that have materially affected, or are reasonably likely to materially affect, their 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 31.231.4 should be considered in light of, and read together with, the information set forth in this Item 4(b).



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Table of Contents




PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS


Other than the proceedings disclosed in Note 1516 and those proceedings disclosed and incorporated by reference in Part I, Item 3, “Legal Proceedings” in the 20172021 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 the 20172021 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.


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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
The following table provides information about purchases of NW Natural'sHoldings' equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the quarter ended SeptemberJune 30, 2018:2022:
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 
04/01/22-04/30/22— — — — 
05/01/22-05/31/223,100 50.03 — — 
06/01/22-06/30/22— $— — — 
Total3,100 $50.03 2,124,528 $16,732,648 
(1)During the quarter ended June 30, 2022, 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. However, 3,100 shares of NW Holdings common stock were purchased on the open market to meet the requirements of share-based compensation programs. During the quarter ended June 30, 2022, no shares of NW Holdings common stock were accepted as payment for stock option exercises pursuant to the NW Natural Restated Stock Option Plan.
(2)During the quarter ended June 30, 2022, no shares of NW Holdings common stock were repurchased pursuant to the Board-approved share repurchase program. In May 2019, we received NW Holdings Board approval to extend the repurchase program through May 2022. 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 2021 Form 10-K.

ITEM 5. OTHER INFORMATION
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
07/01/18-07/31/18 —
 $—
 —
 —
08/01/18-08/31/18 126,225
 63.62
 —
 —
09/01/18-09/30/18 —
 —
 —
 —
Total 126,225
 63.62
 2,124,528
 $16,732,648
(1)
During the quarter ended September 30, 2018, no shares of NW Natural's common stock were purchased on the open market to meet the requirements of NW Natural's Dividend Reinvestment and Direct Stock Purchase Plan. However, 1,225 shares of NW Natural's common stock were purchased on the open market to meet the requirements of NW Natural's share-based programs. During the quarter ended September 30, 2018, no shares of NW Natural's common stock were accepted as payment for stock option exercises pursuant to NW Natural's Restated Stock Option Plan. An additional 125,000 shares were purchased on the open market to complete the acquisition of Falls Water Co., Inc.
(2)
During the quarter ended September 30, 2018, no shares of NW Natural's common stock were repurchased pursuant to NW Natural's Board-Approved share repurchase program. In May 2018, we received Board Approval to extend the repurchase program, however this program terminated as to NW Natural, but was approved as to NW Holdings as of October 1, 2018. NW Holdings' Board extended this repurchase program through May 31, 2019. For more information on this program, refer to Note 5 in NW Natural's 2017 Form 10-K.


The following disclosure is intended to satisfy any obligation to provide disclosures pursuant to Item 5.03 of Form 8-K.

Bylaws Amendment
Effective August 3, 2022, the Board of Directors approved the amendment and restatement of NW Holdings’ Amended and Restated Bylaws (Bylaws). In addition to certain ministerial changes, the amendments to the Bylaws generally included the following changes:

•Article II, Sections 1 and 2 of the Bylaws were amended to allow NW Holdings flexibility to hold its annual meeting or any special meeting in the City of Portland, or such other place as determined by the Board of Directors.
•Article II, Section 9 of the Bylaws was amended to clarify that a shareholder must be a shareholder of record to properly bring notice of business to be conducted at the meeting.
•Article II, Section 10 of the Bylaws was amended to include additional procedural and informational requirements for shareholders to nominate director candidates and incorporate provisions related to the Securities and Exchange Commission’s (SEC)’s new universal proxy rules.
•Article VII, Section 1 of the Bylaws was amended to eliminate the requirement that the Board annually elect the President and Secretary, consistent with other officer appointments.

The foregoing description of the amendments to the Bylaws does not purport to be complete and is qualified in its entirety by reference to the full text of the Bylaws, which are attached to this Quarterly Report on Form 10-Q as Exhibit 3.1 and are incorporated by reference herein.

The following disclosure is intended to satisfy any obligation to provide disclosures pursuant to Item 8.01 of Form 8-K.

Share Repurchase Program
Effective August 3, 2022, NW Holdings’ Board of Directors approved an extension to the Company’s previously authorized share repurchase program for our common stock, under which the Company purchases shares on the open market or through privately negotiated transactions. The Company has Board authorization to repurchase up to an aggregate of 2.8 million shares or up to an aggregate of $100 million. Such authorization will continue until the program is used, terminated or replaced. Since the program’s inception in 2000, the Company has repurchased 2.1 million shares of common stock at a total cost of $83.3 million.

ITEM 6. EXHIBITS


See the Exhibit Index below, which is incorporated by reference herein.


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65




NORTHWEST NATURAL GAS COMPANY
NORTHWEST NATURAL HOLDING COMPANY
Exhibit Index to Quarterly Report on Form 10-Q
For the Quarter Ended SeptemberJune 30, 20182022
 
Exhibit Index
Exhibit Number
Document
Exhibit Index
Exhibit Number
Document
4.13.2
101.101
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.
104The cover page from Northwest Natural Gasthe Company's Quarterly Report on Form 10-Q for the quarter ended SeptemberJune 30, 2018,2022, 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 not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.


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SIGNATURES
SIGNATURE


Pursuant to the requirements of the Securities Exchange Act of 1934, 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 4, 2022
Dated:November 6, 2018
/s/ Brody J. Wilson
Brody J. Wilson
Principal Accounting Officer

Vice President, Treasurer, Chief Accounting Officer and Controller


NORTHWEST NATURAL HOLDING COMPANY
(Registrant)
Dated:August 4, 2022
Dated:November 6, 2018
/s/ Brody J. Wilson
Brody J. Wilson
Principal Accounting Officer

Vice President, Treasurer, Chief Accounting Officer and Controller


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