UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021March 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to____________
| | | | | | | | | |
| NORTHWEST NATURAL HOLDING COMPANY | NORTHWEST NATURAL HOLDING COMPANY | | NORTHWEST NATURAL GAS COMPANY | | NORTHWEST NATURAL HOLDING COMPANY | | NORTHWEST NATURAL GAS COMPANY | |
| (Exact name of registrant as specified in its charter) | (Exact name of registrant as specified in its charter) | | (Exact name of registrant as specified in its charter) | | (Exact name of registrant as specified in its charter) | | (Exact name of registrant as specified in its charter) | |
| Commission file number | Commission file number | 1-38681 | | Commission file number | 1-15973 | | Commission file number | 1-38681 | | Commission file number | 1-15973 | |
| Oregon | Oregon | 82-4710680 | | Oregon | 93-0256722 | | Oregon | 82-4710680 | | Oregon | 93-0256722 | |
(State or other jurisdiction of
incorporation or organization) | (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.) | | (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 Street | 250 SW Taylor Street | | 250 SW Taylor Street | | | 250 SW Taylor Street | | 250 SW Taylor Street | | |
| Portland | Portland | Oregon | 97204 | | Portland | Oregon | 97204 | | Portland | Oregon | 97204 | | Portland | Oregon | 97204 | |
| (Address of principal executive offices) | (Address of principal executive offices) | (Zip Code) | | (Address of principal executive offices) | (Zip Code) | | (Address of principal executive offices) | (Zip Code) | | (Address of principal executive offices) | (Zip Code) | |
| Registrant’s telephone number: | (503) | 226-4211 | | Registrant’s telephone number: | (503) | 226-4211 | | |
| Registrant’s telephone number, including area code: | | Registrant’s telephone number, including area code: | (503) | 226-4211 | | Registrant’s telephone number, including area code: | (503) | 226-4211 | |
| | Securities registered pursuant to Section 12(b) of the Act: | Securities registered pursuant to Section 12(b) of the Act: | | Securities registered pursuant to Section 12(b) of the Act: | |
| Registrant | Registrant | Title of each class | Trading Symbol | Name of each exchange on which registered | | Registrant | Title of each class | Trading Symbol | Name of each exchange on which registered | |
| NORTHWEST NATURAL HOLDING COMPANY | NORTHWEST NATURAL HOLDING COMPANY | Common Stock | NWN | New York Stock Exchange | | NORTHWEST NATURAL HOLDING COMPANY | Common Stock | NWN | New York Stock Exchange | |
| NORTHWEST NATURAL GAS COMPANY | NORTHWEST NATURAL GAS COMPANY | None | | | | NORTHWEST NATURAL GAS COMPANY | None | | | |
| | 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. | 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. | | 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 COMPANY | NORTHWEST NATURAL HOLDING COMPANY | Yes | ☒ | No | ☐ | | NORTHWEST NATURAL GAS COMPANY | Yes | ☒ | No | ☐ | | NORTHWEST NATURAL HOLDING COMPANY | Yes | ☒ | No | ☐ | | NORTHWEST NATURAL GAS COMPANY | Yes | ☒ | 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). | 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). | | 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 COMPANY | NORTHWEST NATURAL HOLDING COMPANY | Yes | ☒ | No | ☐ | | NORTHWEST NATURAL GAS COMPANY | Yes | ☒ | No | ☐ | | NORTHWEST NATURAL HOLDING COMPANY | Yes | ☒ | No | ☐ | | NORTHWEST NATURAL GAS COMPANY | Yes | ☒ | 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. | 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. | | 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 COMPANY | NORTHWEST NATURAL HOLDING COMPANY | | NORTHWEST NATURAL GAS COMPANY | | NORTHWEST NATURAL HOLDING COMPANY | | NORTHWEST NATURAL GAS COMPANY | |
| Large Accelerated Filer | Large Accelerated Filer | ☒ | | Large Accelerated Filer | ☐ | | | Large Accelerated Filer | ☒ | | Large Accelerated Filer | ☐ | | |
| Accelerated Filer | Accelerated Filer | ☐ | | Accelerated Filer | ☐ | | | Accelerated Filer | ☐ | | Accelerated Filer | ☐ | | |
| Non-accelerated Filer | Non-accelerated Filer | ☐ | | Non-accelerated Filer | ☒ | | | Non-accelerated Filer | ☐ | | Non-accelerated Filer | ☒ | | |
| Smaller Reporting Company | Smaller Reporting Company | ☐ | | Smaller Reporting Company | ☐ | | | Smaller Reporting Company | ☐ | | Smaller Reporting Company | ☐ | | |
| Emerging Growth Company | Emerging Growth Company | ☐ | | Emerging Growth 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. ☐ | 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. ☐ | | 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). | Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 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 COMPANY | NORTHWEST NATURAL HOLDING COMPANY | Yes | ☐ | No | ☒ | | NORTHWEST NATURAL GAS COMPANY | Yes | ☐ | No | ☒ | | NORTHWEST NATURAL HOLDING COMPANY | Yes | ☐ | No | ☒ | | NORTHWEST NATURAL GAS COMPANY | Yes | ☐ | No | ☒ | |
At July 23, 2021, 30,672,722 April 27, 2022, 34,255,926 shares of Northwest Natural Holding Company's Common Stock (the only class of Common Stock) were outstanding. All shares of Northwest Natural Gas Company's Common Stock (the only class of Common Stock) outstanding 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 June 30, 2021March 31, 2022
TABLE OF CONTENTS
| | | | | | | | |
| PART 1. | FINANCIAL INFORMATION | Page |
| | |
| | |
| | |
| Unaudited Financial Statements: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| PART II. | OTHER INFORMATION | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
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, seeks, believes, estimates, expects, will, 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;conditions, including impacts of inflation and interest rates;
•earnings and dividends;
•capital expenditures and allocation;
•capital markets or access to capital;
•capital or organizational structure;
•matters related to climate change and our role in decarbonization or a low-carbon renewable-energy future;
•renewable natural gas, environmental attributes related thereto, and hydrogen;
•our strategy to reduce greenhouse gas emissions;emissions and the efficacy of communicating that strategy to stakeholders and communities;
•the policies and priorities of the current presidential administration;administration and U.S. Congress;
•growth;
•customer rates;
•pandemic and related illness or quarantine;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 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;
•implementation and execution of our water strategy;
•pipeline capacity, demand, location, and reliability;
•adequacy of property rights and operations center development;
•technology implementation and cybersecurity practices;
•competition;
•procurement and development of gas (including renewable natural gas) and water supplies;
•estimated 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;
•uncollectible account amounts;
•rate or regulatory outcomes, recovery or 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 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;
•accuracyinternational, federal, state, and local efforts to regulate, in a variety of projections related to,ways, greenhouse gas emissions, and our ability to mitigate the effects of the novel coronavirus (COVID-19), variants thereof,those efforts;
•geopolitical factors, such as Delta variant, and the economic conditions resulting therefrom, the timing of our return to normal business practices and the recognition of late and disconnection fee revenue, as well as the timing, extent and impact of COVID-19 vaccine campaigns on our workforce and customers;Russia/Ukraine conflict;
•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 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 20202021 Annual Report on Form 10-K, Part I, Item 1A “Risk Factors” and Part II, Item 7 and Item 7A, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures about Market Risk”,” respectively, and in Part I of this report, Items 2 and 3, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk”, respectively, of Part II of this report.respectively.
Any forward-looking statement made in this report speaks only as of the date on which it is made. Factors or events that could cause 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.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| In thousands, except per share data | In thousands, except per share data | | 2021 | | 2020 | | 2021 | | 2020 | In thousands, except per share data | | | 2022 | | 2021 |
| | Operating revenues | Operating revenues | | $ | 148,917 | | | $ | 134,971 | | | $ | 464,863 | | | $ | 420,122 | | Operating revenues | | | $ | 350,301 | | | $ | 315,946 | |
| | Operating expenses: | Operating expenses: | | Operating expenses: | | |
| Cost of gas | Cost of gas | | 41,193 | | | 41,210 | | | 153,403 | | | 149,748 | | Cost of gas | | | 145,588 | | | 112,210 | |
| Operations and maintenance | Operations and maintenance | | 50,047 | | | 43,983 | | | 102,238 | | | 92,904 | | Operations and maintenance | | | 57,485 | | | 52,191 | |
| Environmental remediation | Environmental remediation | | 1,509 | | | 1,622 | | | 5,286 | | | 5,627 | | Environmental remediation | | | 4,703 | | | 3,777 | |
| General taxes | General taxes | | 8,914 | | | 8,373 | | | 20,283 | | | 18,268 | | General taxes | | | 12,104 | | | 11,369 | |
| Revenue taxes | Revenue taxes | | 5,671 | | | 4,454 | | | 18,335 | | | 16,197 | | Revenue taxes | | | 13,360 | | | 12,664 | |
| Depreciation and amortization | | 28,144 | | | 25,836 | | | 56,241 | | | 50,511 | | |
| Depreciation | | Depreciation | | | 28,429 | | | 28,097 | |
| Other operating expenses | Other operating expenses | | 815 | | | 551 | | | 1,747 | | | 1,479 | | Other operating expenses | | | 994 | | | 932 | |
| Total operating expenses | Total operating expenses | | 136,293 | | | 126,029 | | | 357,533 | | | 334,734 | | Total operating expenses | | | 262,663 | | | 221,240 | |
| Income from operations | Income from operations | | 12,624 | | | 8,942 | | | 107,330 | | | 85,388 | | Income from operations | | | 87,638 | | | 94,706 | |
| Other income (expense), net | Other income (expense), net | | (2,597) | | | (3,040) | | | (6,139) | | | (6,615) | | Other income (expense), net | | | (954) | | | (3,542) | |
| Interest expense, net | Interest expense, net | | 11,028 | | | 12,706 | | | 22,154 | | | 23,174 | | Interest expense, net | | | 11,522 | | | 11,126 | |
| Income (loss) before income taxes | | (1,001) | | | (6,804) | | | 79,037 | | | 55,599 | | |
| Income tax expense (benefit) | | (277) | | | (1,672) | | | 20,244 | | | 12,455 | | |
| Net income (loss) from continuing operations | | (724) | | | (5,132) | | | 58,793 | | | 43,144 | | |
| Income (loss) from discontinued operations, net of tax | | 0 | | | 280 | | | 0 | | | (498) | | |
| Net income (loss) | | (724) | | | (4,852) | | | 58,793 | | | 42,646 | | |
| Income before income taxes | | Income before income taxes | | | 75,162 | | | 80,038 | |
| Income tax expense | | Income tax expense | | | 18,923 | | | 20,521 | |
| | Net income | | Net income | | | 56,239 | | | 59,517 | |
| Other comprehensive income: | Other comprehensive income: | | | | | | | | | Other comprehensive income: | | | | | |
| Amortization of non-qualified employee benefit plan liability, net of taxes of $80 and $58 for the three months ended and $160 and $116 for the six months ended June 30, 2021 and 2020, respectively | | 221 | | | 160 | | | 442 | | | 320 | | |
| Amortization of non-qualified employee benefit plan liability, net of taxes of $71 and $80 for the three months ended March 31, 2022 and 2021, respectively | | Amortization of non-qualified employee benefit plan liability, net of taxes of $71 and $80 for the three months ended March 31, 2022 and 2021, respectively | | | 197 | | | 221 | |
| | Comprehensive income (loss) | | $ | (503) | | | $ | (4,692) | | | $ | 59,235 | | | $ | 42,966 | | |
| Comprehensive income | | Comprehensive income | | | $ | 56,436 | | | $ | 59,738 | |
| Average common shares outstanding: | Average common shares outstanding: | | | | | | | | | Average common shares outstanding: | | | | | |
| Basic | Basic | | 30,664 | | | 30,537 | | | 30,639 | | | 30,514 | | Basic | | | 31,187 | | | 30,614 | |
| Diluted | Diluted | | 30,664 | | | 30,537 | | | 30,671 | | | 30,559 | | Diluted | | | 31,212 | | | 30,633 | |
| Earnings (loss) from continuing operations per share of common stock: | | |
| | Earnings per share of common stock: | | Earnings per share of common stock: | | |
| Basic | Basic | | $ | (0.02) | | | $ | (0.17) | | | $ | 1.92 | | | $ | 1.41 | | Basic | | | $ | 1.80 | | | $ | 1.94 | |
| Diluted | Diluted | | (0.02) | | | (0.17) | | | 1.92 | | | 1.41 | | Diluted | | | 1.80 | | | 1.94 | |
| Earnings (loss) from discontinued operations per share of common stock: | | |
| Basic | | $ | 0 | | | $ | 0.01 | | | $ | 0 | | | $ | (0.01) | | |
| Diluted | | 0 | | | 0.01 | | | 0 | | | (0.01) | | |
| Earnings (loss) per share of common stock: | | |
| Basic | | $ | (0.02) | | | $ | (0.16) | | | $ | 1.92 | | | $ | 1.40 | | |
| Diluted | | (0.02) | | | (0.16) | | | 1.92 | | | 1.40 | | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | June 30, | | June 30, | | December 31, | | March 31, | | March 31, | | December 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2020 | In thousands | | 2022 | | 2021 | | 2021 |
| | Assets: | Assets: | | Assets: | |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 20,084 | | | $ | 137,057 | | | $ | 30,168 | | Cash and cash equivalents | | $ | 24,325 | | | $ | 17,907 | | | $ | 18,559 | |
| | Accounts receivable | Accounts receivable | | 60,713 | | | 35,196 | | | 88,083 | | Accounts receivable | | 103,131 | | | 105,226 | | | 101,495 | |
| Accrued unbilled revenue | Accrued unbilled revenue | | 13,592 | | | 15,393 | | | 57,949 | | Accrued unbilled revenue | | 41,772 | | | 41,907 | | | 82,169 | |
| Allowance for uncollectible accounts | Allowance for uncollectible accounts | | (3,283) | | | (1,592) | | | (3,219) | | Allowance for uncollectible accounts | | (2,488) | | | (3,503) | | | (2,018) | |
| Regulatory assets | Regulatory assets | | 60,672 | | | 30,021 | | | 31,745 | | Regulatory assets | | 64,481 | | | 47,789 | | | 72,391 | |
| Derivative instruments | Derivative instruments | | 46,168 | | | 5,996 | | | 13,678 | | Derivative instruments | | 84,438 | | | 19,914 | | | 48,130 | |
| Inventories | Inventories | | 39,024 | | | 44,009 | | | 42,691 | | Inventories | | 33,377 | | | 26,237 | | | 57,262 | |
| Gas reserves | | 8,444 | | | 13,646 | | | 11,409 | | |
| Income taxes receivable | Income taxes receivable | | 6,000 | | | 0 | | | 6,000 | | Income taxes receivable | | — | | | 6,000 | | | — | |
| | Other current assets | Other current assets | | 22,427 | | | 20,318 | | | 44,741 | | Other current assets | | 42,329 | | | 41,315 | | | 59,288 | |
| Discontinued operations - current assets (Note 17) | | 0 | | | 16,392 | | | 0 | | |
| | Total current assets | Total current assets | | 273,841 | | | 316,436 | | | 323,245 | | Total current assets | | 391,365 | | | 302,792 | | | 437,276 | |
| Non-current assets: | Non-current assets: | | | | | | | Non-current assets: | | | | | | |
| Property, plant, and equipment | Property, plant, and equipment | | 3,849,792 | | | 3,608,902 | | | 3,734,039 | | Property, plant, and equipment | | 4,041,894 | | | 3,788,283 | | | 3,997,243 | |
| Less: Accumulated depreciation | Less: Accumulated depreciation | | 1,093,863 | | | 1,062,299 | | | 1,079,269 | | Less: Accumulated depreciation | | 1,137,138 | | | 1,091,903 | | | 1,125,873 | |
| Total property, plant, and equipment, net | Total property, plant, and equipment, net | | 2,755,929 | | | 2,546,603 | | | 2,654,770 | | Total property, plant, and equipment, net | | 2,904,756 | | | 2,696,380 | | | 2,871,370 | |
| Gas reserves | | 29,852 | | | 41,459 | | | 34,484 | | |
| Regulatory assets | Regulatory assets | | 330,710 | | | 324,358 | | | 348,927 | | Regulatory assets | | 297,546 | | | 338,692 | | | 314,579 | |
| Derivative instruments | Derivative instruments | | 7,912 | | | 3,958 | | | 6,135 | | Derivative instruments | | 6,955 | | | 3,087 | | | 10,730 | |
| Other investments | Other investments | | 47,725 | | | 62,130 | | | 49,259 | | Other investments | | 96,266 | | | 79,034 | | | 89,278 | |
| Operating lease right of use asset, net | Operating lease right of use asset, net | | 76,294 | | | 78,566 | | | 77,446 | | Operating lease right of use asset, net | | 74,416 | | | 76,957 | | | 75,049 | |
| Assets under sales-type leases | Assets under sales-type leases | | 141,408 | | | 146,208 | | | 143,759 | | Assets under sales-type leases | | 137,837 | | | 142,586 | | | 138,995 | |
| Goodwill | Goodwill | | 69,313 | | | 70,183 | | | 69,225 | | Goodwill | | 70,570 | | | 69,330 | | | 70,570 | |
| Other non-current assets | Other non-current assets | | 50,516 | | | 51,446 | | | 49,129 | | Other non-current assets | | 74,923 | | | 49,767 | | | 56,757 | |
| | Total non-current assets | Total non-current assets | | 3,509,659 | | | 3,324,911 | | | 3,433,134 | | Total non-current assets | | 3,663,269 | | | 3,455,833 | | | 3,627,328 | |
| Total assets | Total assets | | $ | 3,783,500 | | | $ | 3,641,347 | | | $ | 3,756,379 | | Total assets | | $ | 4,054,634 | | | $ | 3,758,625 | | | $ | 4,064,604 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | June 30, | | June 30, | | December 31, | | March 31, | | March 31, | | December 31, |
| In thousands, including share information | In thousands, including share information | | 2021 | | 2020 | | 2020 | In thousands, including share information | | 2022 | | 2021 | | 2021 |
| | Liabilities and equity: | Liabilities and equity: | | Liabilities and equity: | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Short-term debt | Short-term debt | | $ | 240,000 | | | $ | 233,000 | | | $ | 304,525 | | Short-term debt | | $ | 332,500 | | | $ | 236,225 | | | $ | 389,500 | |
| Current maturities of long-term debt | Current maturities of long-term debt | | 60,274 | | | 35,209 | | | 95,344 | | Current maturities of long-term debt | | 339 | | | 95,265 | | | 345 | |
| Accounts payable | Accounts payable | | 97,854 | | | 79,903 | | | 97,966 | | Accounts payable | | 130,557 | | | 88,591 | | | 133,486 | |
| Taxes accrued | Taxes accrued | | 15,143 | | | 18,535 | | | 13,812 | | Taxes accrued | | 14,258 | | | 23,550 | | | 15,520 | |
| Interest accrued | Interest accrued | | 7,425 | | | 7,234 | | | 7,441 | | Interest accrued | | 10,886 | | | 9,491 | | | 7,503 | |
| Regulatory liabilities | Regulatory liabilities | | 103,210 | | | 41,126 | | | 50,362 | | Regulatory liabilities | | 111,791 | | | 81,314 | | | 112,281 | |
| Derivative instruments | Derivative instruments | | 3,393 | | | 3,067 | | | 4,198 | | Derivative instruments | | 3,855 | | | 1,038 | | | 10,402 | |
| Operating lease liabilities | Operating lease liabilities | | 1,228 | | | 931 | | | 1,105 | | Operating lease liabilities | | 1,303 | | | 1,213 | | | 1,296 | |
| Other current liabilities | Other current liabilities | | 43,946 | | | 54,323 | | | 52,330 | | Other current liabilities | | 52,778 | | | 48,978 | | | 54,432 | |
| Discontinued operations - current liabilities (Note 17) | | 0 | | | 13,574 | | | 0 | | |
| | Total current liabilities | Total current liabilities | | 572,473 | | | 486,902 | | | 627,083 | | Total current liabilities | | 658,267 | | | 585,665 | | | 724,765 | |
| Long-term debt | Long-term debt | | 915,501 | | | 918,887 | | | 860,081 | | Long-term debt | | 1,044,667 | | | 860,654 | | | 1,044,587 | |
| Deferred credits and other non-current liabilities: | Deferred credits and other non-current liabilities: | | | | | | | Deferred credits and other non-current liabilities: | | | | | | |
| Deferred tax liabilities | Deferred tax liabilities | | 325,600 | | | 297,995 | | | 319,292 | | Deferred tax liabilities | | 353,746 | | | 328,112 | | | 340,231 | |
| Regulatory liabilities | Regulatory liabilities | | 645,046 | | | 632,400 | | | 639,663 | | Regulatory liabilities | | 652,977 | | | 636,384 | | | 658,332 | |
| Pension and other postretirement benefit liabilities | Pension and other postretirement benefit liabilities | | 203,854 | | | 218,493 | | | 217,287 | | Pension and other postretirement benefit liabilities | | 164,530 | | | 210,811 | | | 166,684 | |
| Derivative instruments | Derivative instruments | | 453 | | | 1,658 | | | 2,852 | | Derivative instruments | | 592 | | | 1,272 | | | 412 | |
| Operating lease liabilities | Operating lease liabilities | | 80,088 | | | 80,159 | | | 80,621 | | Operating lease liabilities | | 79,162 | | | 80,414 | | | 79,468 | |
| Other non-current liabilities | Other non-current liabilities | | 117,659 | | | 120,852 | | | 120,767 | | Other non-current liabilities | | 112,749 | | | 118,989 | | | 114,979 | |
| | Total deferred credits and other non-current liabilities | Total deferred credits and other non-current liabilities | | 1,372,700 | | | 1,351,557 | | | 1,380,482 | | Total deferred credits and other non-current liabilities | | 1,363,756 | | | 1,375,982 | | | 1,360,106 | |
| Commitments and contingencies (Note 16) | Commitments and contingencies (Note 16) | | 0 | | 0 | | 0 | Commitments and contingencies (Note 16) | | 0 | | 0 | | 0 |
| Equity: | Equity: | | | | Equity: | | | |
| Common stock - 0 par value; authorized 100,000 shares; issued and outstanding 30,672, 30,546, and 30,589 at June 30, 2021 and 2020, and December 31, 2020, respectively | | 569,785 | | | 562,766 | | | 565,112 | | |
| Common stock - no par value; authorized 100,000 shares; issued and outstanding 31,380, 30,655, and 31,129 at March 31, 2022 and 2021, and December 31, 2021, respectively | | Common stock - no par value; authorized 100,000 shares; issued and outstanding 31,380, 30,655, and 31,129 at March 31, 2022 and 2021, and December 31, 2021, respectively | | 602,382 | | | 568,066 | | | 590,771 | |
| Retained earnings | Retained earnings | | 365,501 | | | 331,648 | | | 336,523 | | Retained earnings | | 396,769 | | | 380,939 | | | 355,779 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (12,460) | | | (10,413) | | | (12,902) | | Accumulated other comprehensive loss | | (11,207) | | | (12,681) | | | (11,404) | |
| Total equity | Total equity | | 922,826 | | | 884,001 | | | 888,733 | | Total equity | | 987,944 | | | 936,324 | | | 935,146 | |
| Total liabilities and equity | Total liabilities and equity | | $ | 3,783,500 | | | $ | 3,641,347 | | | $ | 3,756,379 | | Total liabilities and equity | | $ | 4,054,634 | | | $ | 3,758,625 | | | $ | 4,064,604 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
| | In thousands, except per share amounts | In thousands, except per share amounts | | Three Months Ended June 30, | | Six Months Ended June 30, | | In thousands, except per share amounts | | | Three Months Ended March 31, | |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | | | 2022 | | 2021 | |
| Total shareholders' equity, beginning balances | Total shareholders' equity, beginning balances | | $ | 936,324 | | | $ | 901,741 | | | $ | 888,733 | | | $ | 865,999 | | | Total shareholders' equity, beginning balances | | | $ | 935,146 | | | $ | 888,733 | | |
| | Common stock: | Common stock: | | | Common stock: | | | |
| Beginning balances | Beginning balances | | 568,066 | | | 561,264 | | | 565,112 | | | 558,282 | | | Beginning balances | | | 590,771 | | | 565,112 | | |
| Stock-based compensation | Stock-based compensation | | 416 | | | 254 | | | 2,446 | | | 3,626 | | | Stock-based compensation | | | 1,774 | | | 2,030 | | |
| Shares issued pursuant to equity-based plans, net of shares withheld for taxes | | 1,303 | | | 1,248 | | | 2,227 | | | 858 | | | |
| | Shares issued pursuant to equity based plans, net of shares withheld for taxes | | Shares issued pursuant to equity based plans, net of shares withheld for taxes | | | (76) | | | 924 | | |
| Issuance of common stock, net of issuance costs | | Issuance of common stock, net of issuance costs | | | 9,913 | | | — | | |
| | Ending balances | Ending balances | | 569,785 | | | 562,766 | | | 569,785 | | | 562,766 | | | Ending balances | | | 602,382 | | | 568,066 | | |
| | Retained earnings: | Retained earnings: | | | Retained earnings: | | | |
| Beginning balances | Beginning balances | | 380,939 | | | 351,050 | | | 336,523 | | | 318,450 | | | Beginning balances | | | 355,779 | | | 336,523 | | |
| Net income (loss) | | (724) | | | (4,852) | | | 58,793 | | | 42,646 | | | |
| Net income | | Net income | | | 56,239 | | | 59,517 | | |
| Dividends on common stock | Dividends on common stock | | (14,714) | | | (14,550) | | | (29,815) | | | (29,448) | | | Dividends on common stock | | | (15,249) | | | (15,101) | | |
| | Ending balances | Ending balances | | 365,501 | | | 331,648 | | | 365,501 | | | 331,648 | | | Ending balances | | | 396,769 | | | 380,939 | | |
| | Accumulated other comprehensive income (loss): | Accumulated other comprehensive income (loss): | | | Accumulated other comprehensive income (loss): | | | |
| Beginning balances | Beginning balances | | (12,681) | | | (10,573) | | | (12,902) | | | (10,733) | | | Beginning balances | | | (11,404) | | | (12,902) | | |
| Other comprehensive income | Other comprehensive income | | 221 | | | 160 | | | 442 | | | 320 | | | Other comprehensive income | | | 197 | | | 221 | | |
| | Ending balances | Ending balances | | (12,460) | | | (10,413) | | | (12,460) | | | (10,413) | | | Ending balances | | | (11,207) | | | (12,681) | | |
| | Total shareholders' equity, ending balances | Total shareholders' equity, ending balances | | $ | 922,826 | | | $ | 884,001 | | | $ | 922,826 | | | $ | 884,001 | | | Total shareholders' equity, ending balances | | | $ | 987,944 | | | $ | 936,324 | | |
| | Dividends per share of common stock | Dividends per share of common stock | | $ | 0.4800 | | | $ | 0.4775 | | | $ | 0.9600 | | | $ | 0.9550 | | | Dividends per share of common stock | | | $ | 0.4825 | | | $ | 0.4800 | | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | Six Months Ended June 30, | | Three Months Ended March 31, |
| In thousands | In thousands | | 2021 | | 2020 | In thousands | | 2022 | | 2021 |
| Operating activities: | Operating activities: | | | | | Operating activities: | |
| Net income | Net income | | $ | 58,793 | | | $ | 42,646 | | Net income | | $ | 56,239 | | | $ | 59,517 | |
| Adjustments to reconcile net income to cash provided by operations: | Adjustments to reconcile net income to cash provided by operations: | | Adjustments to reconcile net income to cash provided by operations: | |
| Depreciation and amortization | | 56,241 | | | 50,511 | | |
| Depreciation | | Depreciation | | 28,429 | | | 28,097 | |
| Regulatory amortization of gas reserves | Regulatory amortization of gas reserves | | 7,597 | | | 8,567 | | Regulatory amortization of gas reserves | | 1,481 | | | 3,634 | |
| Deferred income taxes | Deferred income taxes | | 1,048 | | | (2,004) | | Deferred income taxes | | 8,780 | | | 3,145 | |
| Qualified defined benefit pension plan expense | Qualified defined benefit pension plan expense | | 7,874 | | | 8,892 | | Qualified defined benefit pension plan expense | | 1,441 | | | 3,937 | |
| Contributions to qualified defined benefit pension plans | Contributions to qualified defined benefit pension plans | | (9,590) | | | (8,470) | | Contributions to qualified defined benefit pension plans | | — | | | (4,540) | |
| Deferred environmental expenditures, net | Deferred environmental expenditures, net | | (9,625) | | | (9,897) | | Deferred environmental expenditures, net | | (4,345) | | | (4,270) | |
| Amortization of environmental remediation | | 5,286 | | | 5,627 | | |
| Environmental remediation expense | | Environmental remediation expense | | 4,703 | | | 3,777 | |
| | Asset optimization revenue sharing bill credits | | Asset optimization revenue sharing bill credits | | (41,102) | | | (9,053) | |
| Other | Other | | 1,610 | | | (5,931) | | Other | | 6,325 | | | 6,134 | |
| Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
| Receivables, net | Receivables, net | | 73,133 | | | 73,954 | | Receivables, net | | 38,664 | | | 1,044 | |
| Inventories | Inventories | | 3,666 | | | (52) | | Inventories | | 23,885 | | | 16,454 | |
| Income and other taxes | Income and other taxes | | 21,467 | | | 20,966 | | Income and other taxes | | 14,436 | | | 22,975 | |
| Accounts payable | Accounts payable | | (17,239) | | | (18,919) | | Accounts payable | | (16,487) | | | (2,329) | |
| Deferred gas costs | Deferred gas costs | | (26,962) | | | 115 | | Deferred gas costs | | 11,728 | | | (28,912) | |
| Asset optimization revenue sharing | Asset optimization revenue sharing | | 36,872 | | | (11,657) | | Asset optimization revenue sharing | | (646) | | | 34,633 | |
| Decoupling mechanism | Decoupling mechanism | | (6,860) | | | 4,281 | | Decoupling mechanism | | 4,434 | | | 656 | |
| Other, net | Other, net | | (9,030) | | | 3,967 | | Other, net | | 3,072 | | | 2,166 | |
| Discontinued operations | | 0 | | | (547) | | |
| Cash provided by operating activities | Cash provided by operating activities | | 194,281 | | | 162,049 | | Cash provided by operating activities | | 141,037 | | | 137,065 | |
| Investing activities: | Investing activities: | | | | | Investing activities: | |
| Capital expenditures | Capital expenditures | | (130,108) | | | (122,282) | | Capital expenditures | | (68,514) | | | (65,702) | |
| Acquisitions, net of cash acquired | Acquisitions, net of cash acquired | | (55) | | | (37,940) | | Acquisitions, net of cash acquired | | — | | | (42) | |
| Leasehold improvement expenditures | | (163) | | | (7,519) | | |
| | Proceeds from the sale of assets | Proceeds from the sale of assets | | 2,234 | | | 7,905 | | Proceeds from the sale of assets | | 195 | | | 1,960 | |
| | Other | Other | | 209 | | | 263 | | Other | | (1,431) | | | (91) | |
| Discontinued operations | | 0 | | | (846) | | |
| Cash used in investing activities | Cash used in investing activities | | (127,883) | | | (160,419) | | Cash used in investing activities | | (69,750) | | | (63,875) | |
| Financing activities: | Financing activities: | | | | | Financing activities: | |
| | Proceeds from common stock issued | | 0 | | | 68 | | |
| Long-term debt issued | | 55,000 | | | 150,000 | | |
| Long-term debt retired | | (35,000) | | | (75,000) | | |
| Proceeds from term loan due within one year | | 100,000 | | | 150,000 | | |
| Repayments of commercial paper, maturities greater than 90 days | | (195,025) | | | 0 | | |
| Change in other short-term debt, net | | 30,500 | | | (66,100) | | |
| Proceeds from common stock issued, net | | Proceeds from common stock issued, net | | 9,938 | | | — | |
| | Repayment of commercial paper, maturities greater than three months | | Repayment of commercial paper, maturities greater than three months | | — | | | (100,000) | |
| Changes in other short-term debt, net | | Changes in other short-term debt, net | | (57,000) | | | 31,700 | |
| Cash dividend payments on common stock | Cash dividend payments on common stock | | (27,842) | | | (27,679) | | Cash dividend payments on common stock | | (14,452) | | | (13,858) | |
| | Other | Other | | (1,175) | | | (3,007) | | Other | | (1,250) | | | (974) | |
| Cash (used in) provided by financing activities | | (73,542) | | | 128,282 | | |
| Cash used in financing activities | | Cash used in financing activities | | (62,764) | | | (83,132) | |
| Increase (decrease) in cash, cash equivalents and restricted cash | Increase (decrease) in cash, cash equivalents and restricted cash | | (7,144) | | | 129,912 | | Increase (decrease) in cash, cash equivalents and restricted cash | | 8,523 | | | (9,942) | |
| Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | | 35,454 | | | 12,636 | | Cash, cash equivalents and restricted cash, beginning of period | | 27,120 | | | 35,454 | |
| Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | | $ | 28,310 | | | $ | 142,548 | | Cash, cash equivalents and restricted cash, end of period | | $ | 35,643 | | | $ | 25,512 | |
| | Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | | Supplemental disclosure of cash flow information: | |
| Interest paid, net of capitalization | Interest paid, net of capitalization | | $ | 21,971 | | | $ | 23,156 | | Interest paid, net of capitalization | | $ | 7,977 | | | $ | 8,976 | |
| Income taxes paid, net of refunds | Income taxes paid, net of refunds | | 7,405 | | | 544 | | Income taxes paid, net of refunds | | 773 | | | 800 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | In thousands | | | 2022 | | 2021 |
| | Operating revenues | Operating revenues | | $ | 144,579 | | | $ | 131,157 | | | $ | 456,929 | | | $ | 413,686 | | Operating revenues | | | $ | 346,624 | | | $ | 312,350 | |
| | Operating expenses: | Operating expenses: | | Operating expenses: | | |
| Cost of gas | Cost of gas | | 41,249 | | | 41,265 | | | 153,515 | | | 149,860 | | Cost of gas | | | 145,644 | | | 112,266 | |
| Operations and maintenance | Operations and maintenance | | 44,939 | | | 41,198 | | | 94,126 | | | 87,454 | | Operations and maintenance | | | 53,877 | | | 49,187 | |
| Environmental remediation | Environmental remediation | | 1,509 | | | 1,622 | | | 5,286 | | | 5,627 | | Environmental remediation | | | 4,703 | | | 3,777 | |
| General taxes | General taxes | | 8,783 | | | 8,211 | | | 20,042 | | | 18,010 | | General taxes | | | 11,989 | | | 11,259 | |
| Revenue taxes | Revenue taxes | | 5,650 | | | 4,454 | | | 18,305 | | | 16,197 | | Revenue taxes | | | 13,324 | | | 12,655 | |
| Depreciation and amortization | | 27,530 | | | 24,986 | | | 54,699 | | | 49,176 | | |
| Depreciation | | Depreciation | | | 27,637 | | | 27,169 | |
| Other operating expenses | Other operating expenses | | 780 | | | 522 | | | 1,699 | | | 1,442 | | Other operating expenses | | | 899 | | | 919 | |
| Total operating expenses | Total operating expenses | | 130,440 | | | 122,258 | | | 347,672 | | | 327,766 | | Total operating expenses | | | 258,073 | | | 217,232 | |
| Income from operations | Income from operations | | 14,139 | | | 8,899 | | | 109,257 | | | 85,920 | | Income from operations | | | 88,551 | | | 95,118 | |
| Other income (expense), net | Other income (expense), net | | (2,566) | | | (3,179) | | | (6,231) | | | (6,742) | | Other income (expense), net | | | (981) | | | (3,665) | |
| Interest expense, net | Interest expense, net | | 10,696 | | | 11,851 | | | 21,486 | | | 21,712 | | Interest expense, net | | | 10,831 | | | 10,790 | |
| Income (loss) before income taxes | | 877 | | | (6,131) | | | 81,540 | | | 57,466 | | |
| Income tax expense (benefit) | | 288 | | | (1,419) | | | 20,840 | | | 12,999 | | |
| Income before income taxes | | Income before income taxes | | | 76,739 | | | 80,663 | |
| Income tax expense | | Income tax expense | | | 19,323 | | | 20,552 | |
| | Net income (loss) | | 589 | | | (4,712) | | | 60,700 | | | 44,467 | | |
| Net income | | Net income | | | 57,416 | | | 60,111 | |
| Other comprehensive income: | Other comprehensive income: | | | | | | | | | Other comprehensive income: | | | | | |
| Amortization of non-qualified employee benefit plan liability, net of taxes of $80 and $58 for the three months ended and $160 and $116 for the six months ended June 30, 2021 and 2020, respectively | | 221 | | | 160 | | | 442 | | | 320 | | |
| Amortization of non-qualified employee benefit plan liability, net of taxes of $71 and $80 for the three months ended March 31, 2022 and 2021, respectively | | Amortization of non-qualified employee benefit plan liability, net of taxes of $71 and $80 for the three months ended March 31, 2022 and 2021, respectively | | | 197 | | | 221 | |
| | Comprehensive income (loss) | | $ | 810 | | | $ | (4,552) | | | $ | 61,142 | | | $ | 44,787 | | |
| Comprehensive income | | Comprehensive income | | | $ | 57,613 | | | $ | 60,332 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | June 30, | | June 30, | | December 31, | | March 31, | | March 31, | | December 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2020 | In thousands | | 2022 | | 2021 | | 2021 |
| | Assets: | Assets: | | Assets: | |
| Current assets: | Current assets: | | Current assets: | |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 11,488 | | | $ | 120,284 | | | $ | 10,453 | | Cash and cash equivalents | | $ | 10,165 | | | $ | 10,418 | | | $ | 12,271 | |
| | Accounts receivable | Accounts receivable | | 51,849 | | | 33,985 | | | 80,035 | | Accounts receivable | | 101,551 | | | 96,878 | | | 99,780 | |
| Accrued unbilled revenue | Accrued unbilled revenue | | 13,474 | | | 15,236 | | | 57,890 | | Accrued unbilled revenue | | 41,651 | | | 41,817 | | | 82,028 | |
| Receivables from affiliates | Receivables from affiliates | | 301 | | | 563 | | | 660 | | Receivables from affiliates | | 1,850 | | | 1,669 | | | 261 | |
| Allowance for uncollectible accounts | Allowance for uncollectible accounts | | (3,239) | | | (1,591) | | | (3,107) | | Allowance for uncollectible accounts | | (2,432) | | | (3,460) | | | (1,962) | |
| Regulatory assets | Regulatory assets | | 60,672 | | | 30,021 | | | 31,745 | | Regulatory assets | | 64,481 | | | 47,789 | | | 72,391 | |
| Derivative instruments | Derivative instruments | | 46,168 | | | 5,996 | | | 13,678 | | Derivative instruments | | 84,438 | | | 19,914 | | | 48,130 | |
| Inventories | Inventories | | 38,549 | | | 43,619 | | | 42,325 | | Inventories | | 32,757 | | | 25,737 | | | 56,752 | |
| Gas reserves | | 8,444 | | | 13,646 | | | 11,409 | | |
| | Other current assets | Other current assets | | 22,186 | | | 20,287 | | | 37,909 | | Other current assets | | 39,507 | | | 40,745 | | | 47,378 | |
| | Total current assets | Total current assets | | 249,892 | | | 282,046 | | | 282,997 | | Total current assets | | 373,968 | | | 281,507 | | | 417,029 | |
| Non-current assets: | Non-current assets: | | | | | | | Non-current assets: | | | | | | |
| Property, plant, and equipment | Property, plant, and equipment | | 3,794,870 | | | 3,564,707 | | | 3,683,776 | | Property, plant, and equipment | | 3,971,050 | | | 3,736,431 | | | 3,931,640 | |
| Less: Accumulated depreciation | Less: Accumulated depreciation | | 1,088,743 | | | 1,059,760 | | | 1,075,446 | | Less: Accumulated depreciation | | 1,129,837 | | | 1,087,391 | | | 1,119,361 | |
| Total property, plant, and equipment, net | Total property, plant, and equipment, net | | 2,706,127 | | | 2,504,947 | | | 2,608,330 | | Total property, plant, and equipment, net | | 2,841,213 | | | 2,649,040 | | | 2,812,279 | |
| Gas reserves | | 29,852 | | | 41,459 | | | 34,484 | | |
| Regulatory assets | Regulatory assets | | 330,670 | | | 324,320 | | | 348,887 | | Regulatory assets | | 297,482 | | | 338,652 | | | 314,539 | |
| Derivative instruments | Derivative instruments | | 7,912 | | | 3,958 | | | 6,135 | | Derivative instruments | | 6,955 | | | 3,087 | | | 10,730 | |
| Other investments | Other investments | | 47,695 | | | 48,673 | | | 49,242 | | Other investments | | 81,797 | | | 79,011 | | | 74,786 | |
| Operating lease right of use asset, net | Operating lease right of use asset, net | | 76,211 | | | 78,464 | | | 77,328 | | Operating lease right of use asset, net | | 74,361 | | | 76,857 | | | 74,987 | |
| Assets under sales-type leases | Assets under sales-type leases | | 141,408 | | | 146,208 | | | 143,759 | | Assets under sales-type leases | | 137,837 | | | 142,586 | | | 138,995 | |
| Other non-current assets | Other non-current assets | | 49,665 | | | 50,629 | | | 48,174 | | Other non-current assets | | 73,207 | | | 48,828 | | | 55,027 | |
| | Total non-current assets | Total non-current assets | | 3,389,540 | | | 3,198,658 | | | 3,316,339 | | Total non-current assets | | 3,512,852 | | | 3,338,061 | | | 3,481,343 | |
| Total assets | Total assets | | $ | 3,639,432 | | | $ | 3,480,704 | | | $ | 3,599,336 | | Total assets | | $ | 3,886,820 | | | $ | 3,619,568 | | | $ | 3,898,372 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | June 30, | | June 30, | | December 31, | | March 31, | | March 31, | | December 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2020 | In thousands | | 2022 | | 2021 | | 2021 |
| | Liabilities and equity: | Liabilities and equity: | | Liabilities and equity: | |
| Current liabilities: | Current liabilities: | | Current liabilities: | |
| Short-term debt | Short-term debt | | $ | 198,000 | | | $ | 153,000 | | | $ | 231,525 | | Short-term debt | | $ | 188,500 | | | $ | 175,225 | | | $ | 245,500 | |
| Current maturities of long-term debt | Current maturities of long-term debt | | 59,987 | | | 0 | | | 59,955 | | Current maturities of long-term debt | | — | | | 59,971 | | | — | |
| Accounts payable | Accounts payable | | 95,109 | | | 77,993 | | | 95,170 | | Accounts payable | | 127,569 | | | 87,823 | | | 131,475 | |
| Payables to affiliates | Payables to affiliates | | 22,869 | | | 18,450 | | | 13,820 | | Payables to affiliates | | 9,619 | | | 29,744 | | | 1,248 | |
| Taxes accrued | Taxes accrued | | 10,072 | | | 7,376 | | | 13,724 | | Taxes accrued | | 14,224 | | | 13,865 | | | 15,476 | |
| Interest accrued | Interest accrued | | 7,373 | | | 7,156 | | | 7,338 | | Interest accrued | | 10,708 | | | 9,460 | | | 7,296 | |
| Regulatory liabilities | Regulatory liabilities | | 103,210 | | | 41,126 | | | 50,362 | | Regulatory liabilities | | 111,791 | | | 81,314 | | | 112,281 | |
| Derivative instruments | Derivative instruments | | 3,393 | | | 3,067 | | | 4,198 | | Derivative instruments | | 3,855 | | | 1,038 | | | 10,402 | |
| Operating lease liabilities | Operating lease liabilities | | 1,193 | | | 868 | | | 1,054 | | Operating lease liabilities | | 1,286 | | | 1,167 | | | 1,273 | |
| Other current liabilities | Other current liabilities | | 43,389 | | | 52,939 | | | 51,907 | | Other current liabilities | | 52,053 | | | 48,488 | | | 53,591 | |
| | Total current liabilities | Total current liabilities | | 544,595 | | | 361,975 | | | 529,053 | | Total current liabilities | | 519,605 | | | 508,095 | | | 578,542 | |
| Long-term debt | Long-term debt | | 857,422 | | | 917,012 | | | 857,265 | | Long-term debt | | 986,627 | | | 857,365 | | | 986,495 | |
| Deferred credits and other non-current liabilities: | Deferred credits and other non-current liabilities: | | | | | | | Deferred credits and other non-current liabilities: | | | | | | |
| Deferred tax liabilities | Deferred tax liabilities | | 323,522 | | | 309,977 | | | 318,034 | | Deferred tax liabilities | | 351,191 | | | 326,301 | | | 337,717 | |
| Regulatory liabilities | Regulatory liabilities | | 644,177 | | | 631,531 | | | 638,793 | | Regulatory liabilities | | 651,995 | | | 635,515 | | | 657,350 | |
| Pension and other postretirement benefit liabilities | Pension and other postretirement benefit liabilities | | 203,854 | | | 218,493 | | | 217,287 | | Pension and other postretirement benefit liabilities | | 164,530 | | | 210,811 | | | 166,684 | |
| Derivative instruments | Derivative instruments | | 453 | | | 1,658 | | | 2,852 | | Derivative instruments | | 592 | | | 1,272 | | | 412 | |
| Operating lease liabilities | Operating lease liabilities | | 80,043 | | | 80,120 | | | 80,559 | | Operating lease liabilities | | 79,125 | | | 80,358 | | | 79,431 | |
| Other non-current liabilities | Other non-current liabilities | | 116,975 | | | 120,569 | | | 120,309 | | Other non-current liabilities | | 111,546 | | | 118,286 | | | 113,934 | |
| | Total deferred credits and other non-current liabilities | Total deferred credits and other non-current liabilities | | 1,369,024 | | | 1,362,348 | | | 1,377,834 | | Total deferred credits and other non-current liabilities | | 1,358,979 | | | 1,372,543 | | | 1,355,528 | |
| Commitments and contingencies (Note 16) | Commitments and contingencies (Note 16) | | | | | | | Commitments and contingencies (Note 16) | | 0 | | 0 | | 0 |
| Equity: | Equity: | | | | Equity: | | | |
| Common stock | Common stock | | 319,506 | | | 319,557 | | | 319,506 | | Common stock | | 436,042 | | | 319,506 | | | 435,515 | |
| Retained earnings | Retained earnings | | 561,345 | | | 530,225 | | | 528,580 | | Retained earnings | | 596,774 | | | 574,740 | | | 553,696 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (12,460) | | | (10,413) | | | (12,902) | | Accumulated other comprehensive loss | | (11,207) | | | (12,681) | | | (11,404) | |
| Total equity | Total equity | | 868,391 | | | 839,369 | | | 835,184 | | Total equity | | 1,021,609 | | | 881,565 | | | 977,807 | |
| Total liabilities and equity | Total liabilities and equity | | $ | 3,639,432 | | | $ | 3,480,704 | | | $ | 3,599,336 | | Total liabilities and equity | | $ | 3,886,820 | | | $ | 3,619,568 | | | $ | 3,898,372 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED)
| | In thousands | In thousands | | Three Months Ended June 30, | | Six Months Ended June 30, | | In thousands | | | Three Months Ended March 31, | |
| | | 2021 | | 2020 | | 2021 | | 2020 | | | | | 2022 | | 2021 | |
| Total shareholder's equity, beginning balances | Total shareholder's equity, beginning balances | | $ | 881,565 | | | $ | 857,739 | | | $ | 835,184 | | | $ | 822,196 | | | Total shareholder's equity, beginning balances | | | $ | 977,807 | | | $ | 835,184 | | |
| | Common stock: | | Common stock: | | | |
| Beginning balances | | Beginning balances | | | 435,515 | | | 319,506 | | |
| | Capital contributions from parent | | Capital contributions from parent | | | 527 | | | — | | |
| | Common stock | | 319,506 | | | 319,557 | | | 319,506 | | | 319,557 | | | |
| Ending balances | | Ending balances | | | 436,042 | | | 319,506 | | |
| | Retained earnings: | Retained earnings: | | | Retained earnings: | | | |
| Beginning balances | Beginning balances | | 574,740 | | | 548,755 | | | 528,580 | | | 513,372 | | | Beginning balances | | | 553,696 | | | 528,580 | | |
| Net income (loss) | | 589 | | | (4,712) | | | 60,700 | | | 44,467 | | | |
| Net income | | Net income | | | 57,416 | | | 60,111 | | |
| Dividends on common stock | Dividends on common stock | | (13,984) | | | (13,818) | | | (27,935) | | | (27,614) | | | Dividends on common stock | | | (14,338) | | | (13,951) | | |
| | Ending balances | Ending balances | | 561,345 | | | 530,225 | | | 561,345 | | | 530,225 | | | Ending balances | | | 596,774 | | | 574,740 | | |
| | Accumulated other comprehensive income (loss): | Accumulated other comprehensive income (loss): | | | Accumulated other comprehensive income (loss): | | | |
| Beginning balances | Beginning balances | | (12,681) | | | (10,573) | | | (12,902) | | | (10,733) | | | Beginning balances | | | (11,404) | | | (12,902) | | |
| Other comprehensive income | Other comprehensive income | | 221 | | | 160 | | | 442 | | | 320 | | | Other comprehensive income | | | 197 | | | 221 | | |
| | Ending balances | Ending balances | | (12,460) | | | (10,413) | | | (12,460) | | | (10,413) | | | Ending balances | | | (11,207) | | | (12,681) | | |
| | Total shareholder's equity, ending balances | Total shareholder's equity, ending balances | | $ | 868,391 | | | $ | 839,369 | | | $ | 868,391 | | | $ | 839,369 | | | Total shareholder's equity, ending balances | | | $ | 1,021,609 | | | $ | 881,565 | | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | Six Months Ended June 30, | | Three Months Ended March 31, |
| In thousands | In thousands | | 2021 | | 2020 | In thousands | | 2022 | | 2021 |
| | Operating activities: | Operating activities: | | Operating activities: | |
| Net income | Net income | | $ | 60,700 | | | $ | 44,467 | | Net income | | $ | 57,416 | | | $ | 60,111 | |
| Adjustments to reconcile net income to cash provided by operations: | Adjustments to reconcile net income to cash provided by operations: | | Adjustments to reconcile net income to cash provided by operations: | |
| Depreciation and amortization | | 54,699 | | | 49,176 | | |
| Depreciation | | Depreciation | | 27,637 | | | 27,169 | |
| Regulatory amortization of gas reserves | Regulatory amortization of gas reserves | | 7,597 | | | 8,567 | | Regulatory amortization of gas reserves | | 1,481 | | | 3,634 | |
| Deferred income taxes | Deferred income taxes | | 201 | | | (2,766) | | Deferred income taxes | | 8,744 | | | 2,592 | |
| Qualified defined benefit pension plan expense | Qualified defined benefit pension plan expense | | 7,874 | | | 8,892 | | Qualified defined benefit pension plan expense | | 1,441 | | | 3,937 | |
| Contributions to qualified defined benefit pension plans | Contributions to qualified defined benefit pension plans | | (9,590) | | | (8,470) | | Contributions to qualified defined benefit pension plans | | — | | | (4,540) | |
| Deferred environmental expenditures, net | Deferred environmental expenditures, net | | (9,625) | | | (9,897) | | Deferred environmental expenditures, net | | (4,345) | | | (4,270) | |
| Amortization of environmental remediation | | 5,286 | | | 5,627 | | |
| | Environmental remediation expense | | Environmental remediation expense | | 4,703 | | | 3,777 | |
| Asset optimization revenue sharing bill credits | | Asset optimization revenue sharing bill credits | | (41,102) | | | (9,053) | |
| | Other | Other | | 481 | | | (6,746) | | Other | | 5,786 | | | 5,454 | |
| Changes in assets and liabilities: | Changes in assets and liabilities: | | Changes in assets and liabilities: | |
| Receivables, net | Receivables, net | | 74,354 | | | 74,625 | | Receivables, net | | 36,920 | | | 421 | |
| Inventories | Inventories | | 3,775 | | | 249 | | Inventories | | 23,995 | | | 16,588 | |
| Income and other taxes | Income and other taxes | | 19,440 | | | 22,038 | | Income and other taxes | | 12,383 | | | 21,488 | |
| Accounts payable | Accounts payable | | (19,936) | | | (22,186) | | Accounts payable | | (15,525) | | | (711) | |
| Deferred gas costs | Deferred gas costs | | (26,962) | | | 115 | | Deferred gas costs | | 11,728 | | | (28,912) | |
| Asset optimization revenue sharing | Asset optimization revenue sharing | | 36,872 | | | (11,657) | | Asset optimization revenue sharing | | (646) | | | 34,633 | |
| Decoupling mechanism | Decoupling mechanism | | (6,860) | | | 4,281 | | Decoupling mechanism | | 4,434 | | | 656 | |
| Other, net | Other, net | | (8,361) | | | 5,979 | | Other, net | | 3,180 | | | 3,299 | |
| | Cash provided by operating activities | Cash provided by operating activities | | 189,945 | | | 162,294 | | Cash provided by operating activities | | 138,230 | | | 136,273 | |
| Investing activities: | Investing activities: | | | | | Investing activities: | | | | |
| Capital expenditures | Capital expenditures | | (125,167) | | | (118,227) | | Capital expenditures | | (64,317) | | | (64,098) | |
| Leasehold improvement expenditures | | (163) | | | (7,519) | | |
| | Proceeds from the sale of assets | Proceeds from the sale of assets | | 2,234 | | | 7,905 | | Proceeds from the sale of assets | | 195 | | | 1,960 | |
| Other | Other | | 209 | | | 269 | | Other | | (1,431) | | | (91) | |
| | Cash used in investing activities | Cash used in investing activities | | (122,887) | | | (117,572) | | Cash used in investing activities | | (65,553) | | | (62,229) | |
| Financing activities: | Financing activities: | | | | | Financing activities: | | | | |
| | Cash contributions received from parent | | Cash contributions received from parent | | 527 | | | — | |
| | Long-term debt issued | | 0 | | | 150,000 | | |
| Long-term debt retired | | 0 | | | (75,000) | | |
| Proceeds from term loan due within one year | | 100,000 | | | 150,000 | | |
| Repayments of commercial paper, maturities greater than 90 days | | (195,025) | | | 0 | | |
| Change in other short-term debt, net | | 61,500 | | | (122,100) | | |
| | Repayment of commercial paper, maturities greater than three months | | Repayment of commercial paper, maturities greater than three months | | — | | | (100,000) | |
| Changes in other short-term debt, net | | Changes in other short-term debt, net | | (57,000) | | | 43,700 | |
| Cash dividend payments on common stock | Cash dividend payments on common stock | | (27,935) | | | (27,614) | | Cash dividend payments on common stock | | (14,338) | | | (13,951) | |
| Other | Other | | (1,623) | | | (3,140) | | Other | | (1,215) | | | (1,509) | |
| | Cash (used in) provided by financing activities | | (63,083) | | | 72,146 | | |
| Cash used in financing activities | | Cash used in financing activities | | (72,026) | | | (71,760) | |
| Increase in cash, cash equivalents and restricted cash | Increase in cash, cash equivalents and restricted cash | | 3,975 | | | 116,868 | | Increase in cash, cash equivalents and restricted cash | | 651 | | | 2,284 | |
| Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | | 15,739 | | | 8,907 | | Cash, cash equivalents and restricted cash, beginning of period | | 20,832 | | | 15,739 | |
| Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | | $ | 19,714 | | | $ | 125,775 | | Cash, cash equivalents and restricted cash, end of period | | $ | 21,483 | | | $ | 18,023 | |
| | Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | | Supplemental disclosure of cash flow information: | |
| Interest paid, net of capitalization | Interest paid, net of capitalization | | $ | 21,285 | | | $ | 21,794 | | Interest paid, net of capitalization | | $ | 7,288 | | | $ | 8,585 | |
| Income taxes paid, net of refunds | Income taxes paid, net of refunds | | 10,910 | | | 950 | | Income taxes paid, net of refunds | | 3,300 | | | 2,880 | |
See Notes to Unaudited Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements represent the respective, consolidated financial results of NW HoldingsNorthwest Natural Holding Company (NW Holdings) and NWNorthwest Natural Gas Company (NW Natural) and all respective companies that each registrant directly or indirectly controls, either through majority ownership or otherwise. This is a combined report of NW Holdings and NW Natural, which includes separate consolidated financial statements for each registrant.
NW Natural's regulated natural gas distribution activities are reported in the natural 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 activities, water businesses, and other investments are aggregated and reported as other at their respective registrant.
NW Holdings and NW Natural consolidate all entities in which they have a controlling financial interest. Investments in corporate joint ventures and partnerships that NW Holdings does not directly or indirectly control, and for which it is not the primary beneficiary, include NNG Financial's investment in Kelso-Beaver Pipeline and NWN Water's investment in Avion Water Company, Inc., which isare accounted for under the equity method, and NWN Energy'smethod. NW Natural RNG Holding Company, LLC holds an investment in Trail West Holdings,Lexington Renewable Energy, LLC, (TWH), which wasis also accounted for under the equity method through August 6, 2020.method. See Note 13 for activity related to TWH.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.
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 combined 20202021 Annual Report on Form 10-K (2020(2021 Form 10-K). 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. Seasonality affects the comparability of the results of other operations across quarters but not across years.
In June 2018, NWN Gas Storage, a wholly-owned subsidiary of NW Natural at the time and now a wholly-owned subsidiary of NW Holdings, 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. We concluded that the sale of Gill Ranch qualified as assets and liabilities held for sale and discontinued operations. As such, the results of Gill Ranch were presented as a discontinued operation for NW Holdings for all periods presented on the consolidated statements of comprehensive income and cash flows, and the assets and liabilities associated with Gill Ranch have been classified as discontinued operations assets and liabilities on the NW Holdings consolidated balance sheet. The sale closed on December 4, 2020. See Note 17 for additional information.
Notes to the consolidated financial statements reflect the activity of continuing operations for both NW Holdings and NW Natural for all periods presented, unless otherwise noted. Certain reclassifications have been made to conform prior period information 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 20202021 Form 10-K. There were no material changes to those accounting policies during the sixthree months ended June 30, 2021March 31, 2022 other than those set forth in this Note 2. The following are current updates to certain critical accounting policy estimates and new accounting standards.
Industry Regulation
In applying regulatory accounting principles, NW Holdings and NW Natural capitalize or defer 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), 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.
Amounts deferred as regulatory assets and liabilities for NW Holdings and NW Natural were as follows:
| | | Regulatory Assets | | Regulatory Assets |
| | June 30, | | December 31, | | March 31, | | December 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2020 | In thousands | | 2022 | | 2021 | | 2021 |
| NW Natural: | NW Natural: | | NW Natural: | |
| Current: | Current: | | Current: | |
Unrealized loss on derivatives(1) | Unrealized loss on derivatives(1) | | $ | 3,393 | | | $ | 2,956 | | | $ | 4,198 | | Unrealized loss on derivatives(1) | | $ | 3,855 | | | $ | 1,038 | | | $ | 10,402 | |
| Gas costs | Gas costs | | 29,486 | | | 6,046 | | | 1,979 | | Gas costs | | 33,215 | | | 21,851 | | | 35,641 | |
Environmental costs(2) | Environmental costs(2) | | 5,688 | | | 4,176 | | | 4,992 | | Environmental costs(2) | | 7,082 | | | 5,396 | | | 6,694 | |
Decoupling(3) | Decoupling(3) | | 1,011 | | | 85 | | | 361 | | Decoupling(3) | | 469 | | | 4 | | | 969 | |
Pension balancing(4) | Pension balancing(4) | | 7,131 | | | 7,131 | | | 7,131 | | Pension balancing(4) | | 7,131 | | | 7,131 | | | 7,131 | |
| Income taxes | Income taxes | | 2,345 | | | 2,208 | | | 3,484 | | Income taxes | | 2,299 | | | 2,273 | | | 2,568 | |
Other(5) | Other(5) | | 11,618 | | | 7,419 | | | 9,600 | | Other(5) | | 10,430 | | | 10,096 | | | 8,986 | |
| Total current | Total current | | $ | 60,672 | | | $ | 30,021 | | | $ | 31,745 | | Total current | | $ | 64,481 | | | $ | 47,789 | | | $ | 72,391 | |
| Non-current: | Non-current: | | | | | | | Non-current: | | | | | | |
Unrealized loss on derivatives(1) | Unrealized loss on derivatives(1) | | $ | 453 | | | $ | 1,658 | | | $ | 2,852 | | Unrealized loss on derivatives(1) | | $ | 592 | | | $ | 1,272 | | | $ | 412 | |
Pension balancing(4) | Pension balancing(4) | | 40,342 | | | 45,315 | | | 43,383 | | Pension balancing(4) | | 35,974 | | | 41,111 | | | 38,302 | |
| Income taxes | Income taxes | | 13,903 | | | 17,608 | | | 15,368 | | Income taxes | | 11,129 | | | 13,895 | | | 12,609 | |
| Pension and other postretirement benefit liabilities | Pension and other postretirement benefit liabilities | | 160,385 | | | 164,091 | | | 170,812 | | Pension and other postretirement benefit liabilities | | 113,494 | | | 165,598 | | | 116,440 | |
Environmental costs(2) | Environmental costs(2) | | 85,423 | | | 81,757 | | | 90,623 | | Environmental costs(2) | | 87,566 | | | 84,977 | | | 94,636 | |
| Gas costs | Gas costs | | 5,742 | | | 94 | | | 3,925 | | Gas costs | | 10,054 | | | 11,242 | | | 15,477 | |
Decoupling(3) | Decoupling(3) | | 198 | | | 0 | | | 1,031 | | Decoupling(3) | | — | | | 2 | | | — | |
Other(5) | Other(5) | | 24,224 | | | 13,797 | | | 20,893 | | Other(5) | | 38,673 | | | 20,555 | | | 36,663 | |
| Total non-current | Total non-current | | $ | 330,670 | | | $ | 324,320 | | | $ | 348,887 | | Total non-current | | $ | 297,482 | | | $ | 338,652 | | | $ | 314,539 | |
| Other (NW Holdings) | Other (NW Holdings) | | 40 | | | 38 | | | 40 | | Other (NW Holdings) | | 64 | | | 40 | | | 40 | |
| Total non-current - NW Holdings | Total non-current - NW Holdings | | $ | 330,710 | | | $ | 324,358 | | | $ | 348,927 | | Total non-current - NW Holdings | | $ | 297,546 | | | $ | 338,692 | | | $ | 314,579 | |
| | | Regulatory Liabilities | | Regulatory Liabilities |
| | June 30, | | December 31, | | March 31, | | December 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2020 | In thousands | | 2022 | | 2021 | | 2021 |
| NW Natural: | NW Natural: | | NW Natural: | |
| Current: | Current: | | Current: | |
| Gas costs | Gas costs | | $ | 1,519 | | | $ | 3,767 | | | $ | 1,118 | | Gas costs | | $ | 1,922 | | | $ | 2,575 | | | $ | 70 | |
Unrealized gain on derivatives(1) | Unrealized gain on derivatives(1) | | 46,168 | | | 5,950 | | | 13,674 | | Unrealized gain on derivatives(1) | | 84,438 | | | 19,914 | | | 48,130 | |
Decoupling(3) | Decoupling(3) | | 5,821 | | | 11,498 | | | 11,793 | | Decoupling(3) | | 8,236 | | | 10,134 | | | 4,475 | |
| Income taxes | Income taxes | | 8,217 | | | 7,098 | | | 8,217 | | Income taxes | | 7,318 | | | 8,217 | | | 8,192 | |
| Asset optimization revenue sharing | Asset optimization revenue sharing | | 39,348 | | | 7,116 | | | 10,298 | | Asset optimization revenue sharing | | 5,186 | | | 35,878 | | | 45,124 | |
Other(5) | Other(5) | | 2,137 | | | 5,697 | | | 5,262 | | Other(5) | | 4,691 | | | 4,596 | | | 6,290 | |
| Total current | Total current | | $ | 103,210 | | | $ | 41,126 | | | $ | 50,362 | | Total current | | $ | 111,791 | | | $ | 81,314 | | | $ | 112,281 | |
| Non-current: | Non-current: | | | | | | | Non-current: | | | | | | |
| Gas costs | Gas costs | | $ | 101 | | | $ | 538 | | | $ | 314 | | Gas costs | | $ | 532 | | | $ | 634 | | | $ | 250 | |
Unrealized gain on derivatives(1) | Unrealized gain on derivatives(1) | | 7,912 | | | 3,958 | | | 6,135 | | Unrealized gain on derivatives(1) | | 6,955 | | | 3,087 | | | 10,730 | |
Decoupling(3) | Decoupling(3) | | 652 | | | 2,108 | | | 1,723 | | Decoupling(3) | | 3,585 | | | 2,652 | | | 3,412 | |
Income taxes(6) | Income taxes(6) | | 182,977 | | | 193,414 | | | 189,587 | | Income taxes(6) | | 176,138 | | | 182,511 | | | 181,404 | |
Accrued asset removal costs(7) | Accrued asset removal costs(7) | | 439,685 | | | 414,719 | | | 427,960 | | Accrued asset removal costs(7) | | 450,973 | | | 434,489 | | | 445,952 | |
| Asset optimization revenue sharing | | Asset optimization revenue sharing | | — | | | — | | | 1,810 | |
Other(5) | Other(5) | | 12,850 | | | 16,794 | | | 13,074 | | Other(5) | | 13,812 | | | 12,142 | | | 13,792 | |
| Total non-current - NW Natural | Total non-current - NW Natural | | $ | 644,177 | | | $ | 631,531 | | | $ | 638,793 | | Total non-current - NW Natural | | $ | 651,995 | | | $ | 635,515 | | | $ | 657,350 | |
| Other (NW Holdings) | Other (NW Holdings) | | 869 | | | 869 | | | 870 | | Other (NW Holdings) | | 982 | | | 869 | | | 982 | |
| Total non-current - NW Holdings | Total non-current - NW Holdings | | $ | 645,046 | | | $ | 632,400 | | | $ | 639,663 | | Total non-current - NW Holdings | | $ | 652,977 | | | $ | 636,384 | | | $ | 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 footnote (3) of the Deferred Regulatory AssetEnvironmental 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.
(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.
(7)Estimated costs of removal on certain regulated properties are collected through rates.
We believe all costs incurred and deferred at June 30, 2021March 31, 2022 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. Prior period amounts have been reclassified to conform prior period information to the current presentation.
The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Holdings as of June 30,March 31, 2022 and 2021 and 2020 and December 31, 2020:2021:
| | | June 30, | | December 31, | | March 31, | | December 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2020 | In thousands | | 2022 | | 2021 | | 2021 |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 20,084 | | | $ | 137,057 | | | $ | 30,168 | | Cash and cash equivalents | | $ | 24,325 | | | $ | 17,907 | | | $ | 18,559 | |
| Restricted cash included in other current assets | Restricted cash included in other current assets | | 8,226 | | 5,491 | | 5,286 | Restricted cash included in other current assets | | 11,318 | | 7,605 | | 8,561 |
| Cash, cash equivalents and restricted cash | Cash, cash equivalents and restricted cash | | $ | 28,310 | | | $ | 142,548 | | | $ | 35,454 | | Cash, cash equivalents and restricted cash | | $ | 35,643 | | | $ | 25,512 | | | $ | 27,120 | |
The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Natural as of June 30,March 31, 2022 and 2021 and 2020 and December 31, 2020:2021:
| | | June 30, | | December 31, | | March 31, | | December 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2020 | In thousands | | 2022 | | 2021 | | 2021 |
| Cash and cash equivalents | Cash and cash equivalents | | $ | 11,488 | | | $ | 120,284 | | | $ | 10,453 | | Cash and cash equivalents | | $ | 10,165 | | | $ | 10,418 | | | $ | 12,271 | |
| Restricted cash included in other current assets | Restricted cash included in other current assets | | 8,226 | | 5,491 | | 5,286 | Restricted cash included in other current assets | | 11,318 | | 7,605 | | 8,561 |
| Cash, cash equivalents and restricted cash | Cash, cash equivalents and restricted cash | | $ | 19,714 | | | $ | 125,775 | | | $ | 15,739 | | Cash, cash equivalents and restricted cash | | $ | 21,483 | | | $ | 18,023 | | | $ | 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
Accounts receivable consist primarily of amounts due for natural gas sales and transportation services to NGD customers and amounts due for gas storage services. The payment term of these 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 enhance our review and analysis.
After consideringDuring 2020 and 2021, we considered the significant exposure to quarantine-relatedCOVID-19 related job losses in Oregon and Washington state, NW Holdings and NW Natural expanded our standard review procedures for our allowance for uncollectible accounts calculation,at NW Holdings and NW Natural, including analyzing the significant indications of unemployment rate and comparing it to historic economic data during the 2007-2009 time period when the country experienced an economic recession. We thenalso considered other qualitative information including recent customer interactions related to payment plans and credit issues, statistics from our website related to credit inquiries, and economic stimulus provided bybill assistance programs including the federal government which could have a beneficial impact on residential and commercial customers' abilities to ultimately make payment on their accounts. Our provision calculation for residential accounts is estimated based on the factors noted above including a review of percentage of accounts with no payment received for 90 or more days. In addition, forarrearage management program. For the residential allowance calculation, we alsocontinue to consider the funds applied or granted to customers through a variety of assistance programs including the special COVIDCOVID-19 arrearage forgivenessmanagement programs in Oregon and Washington. During the third quarter of 2021, the normal collection process for residential accounts resumed. For residential and commercial accounts, we have resumed normal 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.
The following table presents the activity related to the NW Holdings provision for uncollectible accounts by pool, substantially all of which is related to NW Natural's accounts receivable:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of | | | | As of |
| December 31, 2020 | | Six Months Ended June 30, 2021 | | June 30, 2021 |
| In thousands | Beginning Balance | | Provision recorded, net of adjustments | | Write-offs recognized, net of recoveries | | Ending Balance(1) |
| Allowance for uncollectible accounts: | | | | | | | |
| Residential | $ | 2,153 | | | $ | 1,294 | | | $ | (637) | | | $ | 2,810 | |
| Commercial | 704 | | | (233) | | | (265) | | | 206 | |
| Industrial | 142 | | | (68) | | | 5 | | | 79 | |
| Accrued unbilled and other | 220 | | | 22 | | | (54) | | | 188 | |
| Total | $ | 3,219 | | | $ | 1,015 | | | $ | (951) | | | $ | 3,283 | |
(1) Includes $2.9 million that was deferred to a regulatory asset for costs associated with COVID-19 that are recoverable in future rates. | | | | | | | | | | | | | | | | | | | | | | | |
| As of | | | | As of |
| December 31, 2021 | | Three Months Ended March 31, 2022 | | March 31, 2022 |
| In thousands | Beginning Balance | | Provision recorded, net of adjustments | | Write-offs recognized, net of recoveries | | Ending Balance |
| Allowance for uncollectible accounts: | | | | | | | |
| Residential | $ | 1,460 | | | $ | 479 | | | $ | (22) | | | $ | 1,917 | |
| Commercial | 178 | | | 137 | | | (11) | | | 304 | |
| Industrial | 67 | | | 9 | | | (26) | | | 50 | |
| Accrued unbilled and other | 313 | | | (9) | | | (87) | | | 217 | |
| Total | $ | 2,018 | | | $ | 616 | | | $ | (146) | | | $ | 2,488 | |
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 67 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 uncollectabilityuncollectibility 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,March 31, 2022 and 2021, we deferred tohad a regulatory asset of approximately $5.8$11.2 million and $5.0 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 Holdings' or NW Natural's consolidated financial position or results of operations.
Recently Adopted Accounting Pronouncements
INCOME TAXES.LEASES. On December 18, 2019,In July 2021, the FASB issued ASU 2019-12, "Income Taxes2021-05, "Leases (Topic 740): Simplifying the Accounting for Income Taxes.842), Lessors - Certain Leases with Variable Lease Payments." The purpose of the amendment is to reduce cost and complexity relatedrequire lessors to accountingaccount for income taxes by removing certain exceptions to the general principles and improving consistent application for other areas in Topic 740.lease transactions that contain variable lease payments as operating leases. The amendments in this ASU wereare 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 beginningon January 1, 2021. The amended presentation2022 and disclosure guidance was applied retrospectively.adopted using a prospective approach. The adoption did not materially affect the financial statements and disclosures of NW Holdings or NW Natural.
REFERENCE RATE REFORM. On March 12, 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The purpose of the amendment is to provide optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.
On January 7, 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." The purpose of the amendment is to clarify guidance on reference rate reform activities, specifically related to accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting, margining, and contract price alignment (the "discounting transition"). The amendments in ASUs 2020-04 and 2021-01 are effective for all entities as of March 12, 2020 through December 31, 2022. We do not expect the ASUs to materially affect the financial statements and disclosures of NW Holdings or NW Natural.
3. EARNINGS PER SHARE
Basic earnings per share are computed using NW Holdings' net income 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. Anti-dilutive stock awards are excluded from the calculation of diluted earnings per common share.
NW Holdings' diluted earnings or loss per share are calculated as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| In thousands, except per share data | In thousands, except per share data | | 2021 | | 2020 | | 2021 | | 2020 | In thousands, except per share data | | | 2022 | | 2021 |
| Net income (loss) from continuing operations | | $ | (724) | | | $ | (5,132) | | | $ | 58,793 | | | $ | 43,144 | | |
| Income (loss) from discontinued operations, net of tax | | 0 | | | 280 | | | 0 | | | (498) | | |
| Net income (loss) | | $ | (724) | | | $ | (4,852) | | | $ | 58,793 | | | $ | 42,646 | | |
| | Net income | | Net income | | | 56,239 | | | 59,517 | |
| Average common shares outstanding - basic | Average common shares outstanding - basic | | 30,664 | | | 30,537 | | | 30,639 | | | 30,514 | | Average common shares outstanding - basic | | | 31,187 | | | 30,614 | |
| Additional shares for stock-based compensation plans (See Note 7) | | 0 | | | 0 | | | 32 | | | 45 | | |
| Additional shares for stock-based compensation plans (See Note 8) | | Additional shares for stock-based compensation plans (See Note 8) | | | 25 | | | 19 | |
| Average common shares outstanding - diluted | Average common shares outstanding - diluted | | 30,664 | | | 30,537 | | | 30,671 | | | 30,559 | | Average common shares outstanding - diluted | | | 31,212 | | | 30,633 | |
| Earnings (loss) from continuing operations per share of common stock: | | | | | | | | | |
| Basic | | $ | (0.02) | | | $ | (0.17) | | | $ | 1.92 | | | $ | 1.41 | | |
| Diluted | | $ | (0.02) | | | $ | (0.17) | | | $ | 1.92 | | | $ | 1.41 | | |
| Earnings (loss) from discontinued operations per share of common stock: | | |
| Basic | | $ | 0 | | | $ | 0.01 | | | $ | 0 | | | $ | (0.01) | | |
| Diluted | | $ | 0 | | | $ | 0.01 | | | $ | 0 | | | $ | (0.01) | | |
| Earnings (loss) per share of common stock: | | |
| | Earnings per share of common stock: | | Earnings per share of common stock: | | | | | |
| Basic | Basic | | $ | (0.02) | | | $ | (0.16) | | | $ | 1.92 | | | $ | 1.40 | | Basic | | | $ | 1.80 | | | $ | 1.94 | |
| Diluted | Diluted | | $ | (0.02) | | | $ | (0.16) | | | $ | 1.92 | | | $ | 1.40 | | Diluted | | | $ | 1.80 | | | $ | 1.94 | |
| Additional information: | Additional information: | | Additional information: | | |
| Anti-dilutive shares | Anti-dilutive shares | | 48 | | | 41 | | | 7 | | | 0 | | Anti-dilutive shares | | | 5 | | | 12 | |
4. SEGMENT INFORMATION
We primarily operate in 1 reportable business segment, which is NW Natural's local gas distribution business and is referred to as the NGD segment. NW Natural and NW Holdings also have investments and business activities not specifically related to the NGD, which are aggregated and reported as other and described below for each entity.
Natural Gas Distribution
NW Natural's local gas distribution segment is a regulated utility principally engaged in the purchase, sale, and delivery of natural gas and related services to customers in Oregon and southwest Washington. 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, a holding company established to invest in the development and procurement of renewable natural gas.
NW Natural
NW Natural's activities in Other include Interstate Storage Services and third-party asset management service for NW Natural’s contracted interstate pipeline and storage capacity, appliance retail center operations, and corporate operating and non-operating revenues and expenses that cannot be allocated to NGD operations.
Earnings from third party asset management include earnings from the management of upstream interstate pipeline and storage capacity when not needed to serve NGD customers. Under the Oregon sharing mechanism, NW Natural retains 80% of the pre-tax income from these services when the costs of the capacity were not included in NGD rates, or 10% of the pre-tax income when the costs have been included in these rates. The remaining 20% and 90%, respectively, are recorded in a deferred regulatory account for prospective NGD customer billing credits.
NW Holdings
NW Holdings' activities in Other include all remaining activities not associated with NW Natural, specifically: NWN Water, which consolidates the water and wastewater utility operations and is pursuing other investments in the water sector through itself and wholly-owned subsidiaries; NWN Water's equity investment in Avion Water Company, Inc.; NWN Gas Storage, a wholly-owned subsidiary of NWN Energy; NWN Energy's equity investment in TWH through August 6, 2020; and other pipeline assets in NNG Financial. For more information on the sale of TWH, see Note 13.Financial; and NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities. Other also includes corporate revenues and expenses that cannot be allocated to other operations, including certain business development activities.
Segment Information Summary
Inter-segment transactions were immaterial for the periods presented. The following table presents summary financial information concerning the reportable segment and other of continuing operations. See Note 17 for information regarding discontinued operations for NW Holdings.other.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| In thousands | NGD | | Other
(NW Natural) | | | | NW Natural | | Other
(NW Holdings) | | NW Holdings |
| 2021 | | | | | | | | | | | |
| Operating revenues | $ | 139,614 | | | $ | 4,965 | | | | | $ | 144,579 | | | $ | 4,338 | | | $ | 148,917 | |
| Depreciation and amortization | 27,273 | | | 257 | | | | | 27,530 | | | 614 | | | 28,144 | |
| Income (loss) from operations | 11,331 | | | 2,808 | | | | | 14,139 | | | (1,515) | | | 12,624 | |
| Net income (loss) from continuing operations | (1,381) | | | 1,970 | | | | | 589 | | | (1,313) | | | (724) | |
| Capital expenditures | 60,376 | | | 693 | | | | | 61,069 | | | 3,337 | | | 64,406 | |
| 2020 | | | | | | | | | | | |
| Operating revenues | $ | 126,992 | | | $ | 4,165 | | | | | $ | 131,157 | | | $ | 3,814 | | | $ | 134,971 | |
| Depreciation and amortization | 24,738 | | | 248 | | | | | 24,986 | | | 850 | | | 25,836 | |
| Income (loss) from operations | 6,434 | | | 2,465 | | | | | 8,899 | | | 43 | | | 8,942 | |
| Net income (loss) from continuing operations | (6,347) | | | 1,635 | | | | | (4,712) | | | (420) | | | (5,132) | |
| Capital expenditures | 61,472 | | | 521 | | | | | 61,993 | | | 2,843 | | | 64,836 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| In thousands | | NGD | | Other
(NW Natural) | | | | NW Natural | | Other
(NW Holdings) | | NW Holdings |
| 2021 | | | | | | | | | | | | |
| Operating revenues | | $ | 440,952 | | | $ | 15,977 | | | | | $ | 456,929 | | | $ | 7,934 | | | $ | 464,863 | |
| Depreciation and amortization | | 54,186 | | | 513 | | | | | 54,699 | | | 1,542 | | | 56,241 | |
| Income (loss) from operations | | 97,818 | | | 11,439 | | | | | 109,257 | | | (1,927) | | | 107,330 | |
| Net income (loss) from continuing operations | | 52,544 | | | 8,156 | | | | | 60,700 | | | (1,907) | | | 58,793 | |
| Capital expenditures | | 124,368 | | | 799 | | | | | 125,167 | | | 4,941 | | | 130,108 | |
| Total assets at June 30, 2021 | | 3,587,966 | | | 51,466 | | | | | 3,639,432 | | | 144,068 | | | 3,783,500 | |
| 2020 | | | | | | | | | | | | |
| Operating revenues | | $ | 405,479 | | | $ | 8,207 | | | | | $ | 413,686 | | | $ | 6,436 | | | $ | 420,122 | |
| Depreciation and amortization | | 48,684 | | | 492 | | | | | 49,176 | | | 1,335 | | | 50,511 | |
| Income (loss) from operations | | 81,692 | | | 4,228 | | | | | 85,920 | | | (532) | | | 85,388 | |
| Net income (loss) from continuing operations | | 41,596 | | | 2,871 | | | | | 44,467 | | | (1,323) | | | 43,144 | |
| Capital expenditures | | 117,629 | | | 598 | | | | | 118,227 | | | 4,055 | | | 122,282 | |
Total assets at June 30, 2020(1) | | 3,470,306 | | | 10,398 | | | | | 3,480,704 | | | 144,251 | | | 3,624,955 | |
| Total assets at December 31, 2020 | | 3,549,868 | | | 49,468 | | | | | 3,599,336 | | | 157,043 | | | 3,756,379 | |
(1) Total assets for NW Holdings exclude assets related to discontinued operations of $16.4 million as of June 30, 2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| In thousands | | NGD | | Other
(NW Natural) | | | | NW Natural | | Other
(NW Holdings) | | NW Holdings |
| 2022 | | | | | | | | | | | | |
| Operating revenues | | $ | 341,398 | | | $ | 5,226 | | | | | $ | 346,624 | | | $ | 3,677 | | | $ | 350,301 | |
| Depreciation | | 27,373 | | | 264 | | | | | 27,637 | | | 792 | | | 28,429 | |
| Income (loss) from operations | | 85,663 | | | 2,888 | | | | | 88,551 | | | (913) | | | 87,638 | |
| Net income (loss) | | 55,390 | | | 2,026 | | | | | 57,416 | | | (1,177) | | | 56,239 | |
| Capital expenditures | | 64,280 | | | 37 | | | | | 64,317 | | | 4,197 | | | 68,514 | |
| Total assets at March 31, 2022 | | 3,835,222 | | | 51,598 | | | | | 3,886,820 | | | 167,814 | | | 4,054,634 | |
| 2021 | | | | | | | | | | | | |
| Operating revenues | | $ | 301,338 | | | $ | 11,012 | | | | | $ | 312,350 | | | $ | 3,596 | | | $ | 315,946 | |
| Depreciation | | 26,913 | | | 256 | | | | | 27,169 | | | 928 | | | 28,097 | |
| Income (loss) from operations | | 86,487 | | | 8,631 | | | | | 95,118 | | | (412) | | | 94,706 | |
| Net income (loss) | | 53,925 | | | 6,186 | | | | | 60,111 | | | (594) | | | 59,517 | |
| Capital expenditures | | 63,992 | | | 106 | | | | | 64,098 | | | 1,604 | | | 65,702 | |
| Total assets at March 31, 2021 | | 3,570,153 | | | 49,415 | | | | | 3,619,568 | | | 139,057 | | | 3,758,625 | |
| Total assets at December 31, 2021 | | 3,846,112 | | | 52,260 | | | | | 3,898,372 | | | 166,232 | | | 4,064,604 | |
Natural Gas Distribution Margin
NGD margin is athe primary financial measure used by the Chief Operating Decision Maker (CODM), consisting of NGD operating revenues, reduced by the associated cost of gas, environmental remediation expense, and revenue taxes. The cost of gas purchased for NGD customers is generally a pass-through cost in the amount of revenues billed to regulated NGD customers. Environmental remediation expense represents collections received from customers through the environmental recovery mechanism in Oregon as well as adjustments for the environmental earnings test when applicable. This is offset by environmental remediation expense presented in operating expenses. Revenue taxes are collected from NGD customers and remitted to taxing authorities. The collections from customers are offset by the expense recognition of the obligation to the taxing
authority. By subtracting cost of gas, environmental remediation expense, and revenue taxes from NGD operating revenues, NGD margin provides a key metric used by the CODM in assessing the performance of the NGD segment.
The following table presents additional segment information concerning NGD margin:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | In thousands | | | 2022 | | 2021 |
| NGD margin calculation: | NGD margin calculation: | | NGD margin calculation: | | |
| NGD distribution revenues | NGD distribution revenues | | $ | 134,849 | | | $ | 122,071 | | | $ | 431,402 | | | $ | 395,632 | | NGD distribution revenues | | | $ | 336,487 | | | $ | 296,553 | |
| Other regulated services | Other regulated services | | 4,765 | | | 4,921 | | | 9,550 | | | 9,847 | | Other regulated services | | | 4,911 | | | 4,785 | |
| Total NGD operating revenues | Total NGD operating revenues | | 139,614 | | | 126,992 | | | 440,952 | | | 405,479 | | Total NGD operating revenues | | | 341,398 | | | 301,338 | |
| Less: NGD cost of gas | Less: NGD cost of gas | | 41,249 | | | 41,265 | | | 153,515 | | | 149,860 | | Less: NGD cost of gas | | | 145,644 | | | 112,266 | |
| Environmental remediation | Environmental remediation | | 1,509 | | | 1,622 | | | 5,286 | | | 5,627 | | Environmental remediation | | | 4,698 | | | 3,777 | |
| Revenue taxes | Revenue taxes | | 5,650 | | | 4,454 | | | 18,305 | | | 16,197 | | Revenue taxes | | | 13,324 | | | 12,655 | |
| NGD margin | NGD margin | | $ | 91,206 | | | $ | 79,651 | | | $ | 263,846 | | | $ | 233,795 | | NGD margin | | | $ | 177,732 | | | $ | 172,640 | |
5. COMMON STOCK
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 quarter ended March 31, 2022, NW Holdings issued and sold 195,901 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $10.1 million, net of fees and commissions paid to agents of $0.3 million. As of March 31, 2022, NW Holdings had issued and sold 571,621 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $27.6 million, net of fees and commissions paid to agents of $0.7 million. The ATM equity program was initiated to raise funds for general corporate purposes, including for NW Holdings’ subsidiaries, that are reflected as equity transfers on occurrence. Contributions received by NW Natural may also be used, in part, to repay short-term indebtedness.
6. REVENUE
The following tables present disaggregated revenue from continuing operations:revenue:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| In thousands | | NGD | | Other
(NW Natural) | | NW Natural | | Other
(NW Holdings) | | NW Holdings |
| 2021 | | | | | | | | | | |
| Natural gas sales | | $ | 123,739 | | | $ | 0 | | | $ | 123,739 | | | $ | 0 | | | $ | 123,739 | |
| Gas storage revenue, net | | 0 | | | 2,805 | | | 2,805 | | | 0 | | | 2,805 | |
| Asset management revenue, net | | 0 | | | 817 | | | 817 | | | 0 | | | 817 | |
| Appliance retail center revenue | | 0 | | | 1,343 | | | 1,343 | | | 0 | | | 1,343 | |
| Other revenue | | 399 | | | 0 | | | 399 | | | 4,338 | | | 4,737 | |
| Revenue from contracts with customers | | 124,138 | | | 4,965 | | | 129,103 | | | 4,338 | | | 133,441 | |
| | | | | | | | | | |
| Alternative revenue | | 11,083 | | | 0 | | | 11,083 | | | 0 | | | 11,083 | |
| Leasing revenue | | 4,393 | | | 0 | | | 4,393 | | | 0 | | | 4,393 | |
| Total operating revenues | | $ | 139,614 | | | $ | 4,965 | | | $ | 144,579 | | | $ | 4,338 | | | $ | 148,917 | |
| | | | | | | | | | |
| 2020 | | | | | | | | | | |
| Natural gas sales | | $ | 116,682 | | | $ | 0 | | | $ | 116,682 | | | $ | 0 | | | $ | 116,682 | |
| Gas storage revenue, net | | 0 | | | 2,449 | | | 2,449 | | | 0 | | | 2,449 | |
| Asset management revenue, net | | 0 | | | 910 | | | 910 | | | 0 | | | 910 | |
| Appliance retail center revenue | | 0 | | | 806 | | | 806 | | | 0 | | | 806 | |
| Other revenue | | 332 | | | 0 | | | 332 | | | 3,814 | | | 4,146 | |
| Revenue from contracts with customers | | 117,014 | | | 4,165 | | | 121,179 | | | 3,814 | | | 124,993 | |
| | | | | | | | | | |
| Alternative revenue | | 5,365 | | | 0 | | | 5,365 | | | 0 | | | 5,365 | |
| Leasing revenue | | 4,613 | | | 0 | | | 4,613 | | | 0 | | | 4,613 | |
| Total operating revenues | | $ | 126,992 | | | $ | 4,165 | | | $ | 131,157 | | | $ | 3,814 | | | $ | 134,971 | |
| | | | Six Months Ended June 30, | | | Three Months Ended March 31, |
| In thousands | In thousands | | NGD | | Other
(NW Natural) | | NW Natural | | Other
(NW Holdings) | | NW Holdings | In thousands | | NGD | | Other
(NW Natural) | | NW Natural | | Other
(NW Holdings) | | NW Holdings |
| 2022 | | 2022 | | |
| Natural gas sales | | Natural gas sales | | $ | 337,296 | | | $ | — | | | $ | 337,296 | | | $ | — | | | $ | 337,296 | |
| Gas storage revenue, net | | Gas storage revenue, net | | — | | | 2,757 | | | 2,757 | | | — | | | 2,757 | |
| Asset management revenue, net | | Asset management revenue, net | | — | | | 752 | | | 752 | | | — | | | 752 | |
| Appliance retail center revenue | | Appliance retail center revenue | | — | | | 1,717 | | | 1,717 | | | — | | | 1,717 | |
| Other revenue | | Other revenue | | 630 | | | — | | | 630 | | | 3,677 | | | 4,307 | |
| Revenue from contracts with customers | | Revenue from contracts with customers | | 337,926 | | | 5,226 | | | 343,152 | | | 3,677 | | | 346,829 | |
| | Alternative revenue | | Alternative revenue | | (827) | | | — | | | (827) | | | — | | | (827) | |
| Leasing revenue | | Leasing revenue | | 4,299 | | | — | | | 4,299 | | | — | | | 4,299 | |
| Total operating revenues | | Total operating revenues | | $ | 341,398 | | | $ | 5,226 | | | $ | 346,624 | | | $ | 3,677 | | | $ | 350,301 | |
| | 2021 | 2021 | | | 2021 | | |
| Natural gas sales | Natural gas sales | | $ | 419,822 | | | $ | 0 | | | $ | 419,822 | | | $ | 0 | | | $ | 419,822 | | Natural gas sales | | $ | 296,083 | | | $ | — | | | $ | 296,083 | | | $ | — | | | $ | 296,083 | |
| Gas storage revenue, net | Gas storage revenue, net | | 0 | | | 5,300 | | | 5,300 | | | 0 | | | 5,300 | | Gas storage revenue, net | | — | | | 2,495 | | | 2,495 | | | — | | | 2,495 | |
| Asset management revenue, net | Asset management revenue, net | | 0 | | | 7,745 | | | 7,745 | | | 0 | | | 7,745 | | Asset management revenue, net | | — | | | 6,928 | | | 6,928 | | | — | | | 6,928 | |
| Appliance retail center revenue | Appliance retail center revenue | | 0 | | | 2,932 | | | 2,932 | | | 0 | | | 2,932 | | Appliance retail center revenue | | — | | | 1,589 | | | 1,589 | | | — | | | 1,589 | |
| Other revenue | Other revenue | | 814 | | | 0 | | | 814 | | | 7,934 | | | 8,748 | | Other revenue | | 415 | | | — | | | 415 | | | 3,596 | | | 4,011 | |
| Revenue from contracts with customers | Revenue from contracts with customers | | 420,636 | | | 15,977 | | | 436,613 | | | 7,934 | | | 444,547 | | Revenue from contracts with customers | | 296,498 | | | 11,012 | | | 307,510 | | | 3,596 | | | 311,106 | |
| | Alternative revenue | Alternative revenue | | 11,536 | | | 0 | | | 11,536 | | | 0 | | | 11,536 | | Alternative revenue | | 453 | | | — | | | 453 | | | — | | | 453 | |
| Leasing revenue | Leasing revenue | | 8,780 | | | 0 | | | 8,780 | | | 0 | | | 8,780 | | Leasing revenue | | 4,387 | | | — | | | 4,387 | | | — | | | 4,387 | |
| Total operating revenues | Total operating revenues | | $ | 440,952 | | | $ | 15,977 | | | $ | 456,929 | | | $ | 7,934 | | | $ | 464,863 | | Total operating revenues | | $ | 301,338 | | | $ | 11,012 | | | $ | 312,350 | | | $ | 3,596 | | | $ | 315,946 | |
| | 2020 | | | |
| Natural gas sales | | $ | 390,686 | | | $ | 0 | | | $ | 390,686 | | | $ | 0 | | | $ | 390,686 | | |
| Gas storage revenue, net | | 0 | | | 4,785 | | | 4,785 | | | 0 | | | 4,785 | | |
| Asset management revenue, net | | 0 | | | 1,060 | | | 1,060 | | | 0 | | | 1,060 | | |
| Appliance retail center revenue | | 0 | | | 2,362 | | | 2,362 | | | 0 | | | 2,362 | | |
| Other revenue | | 669 | | | 0 | | | 669 | | | 6,436 | | | 7,105 | | |
| Revenue from contracts with customers | | 391,355 | | | 8,207 | | | 399,562 | | | 6,436 | | | 405,998 | | |
| | Alternative revenue | | 4,893 | | | 0 | | | 4,893 | | | 0 | | | 4,893 | | |
| Leasing revenue | | 9,231 | | | 0 | | | 9,231 | | | 0 | | | 9,231 | | |
| Total operating revenues | | $ | 405,479 | | | $ | 8,207 | | | $ | 413,686 | | | $ | 6,436 | | | $ | 420,122 | | |
NW Natural's revenue represents substantially all of NW Holdings' revenue and is recognized for both registrants when the obligation to customers is satisfied and in the amount expected to be received in exchange for transferring goods or providing services. Revenue from contracts with customers contains one performance obligation that is generally satisfied over time, using the output method based on time elapsed, due to the continuous nature of the service provided. The transaction price is determined by a set price agreed upon in the contract or dependent on regulatory tariffs. Customer accounts are settled on a monthly basis or paid at time of sale and based on historical experience. It is probable that we will collect substantially all of the consideration to which we are entitled. We evaluated the probability of collection in accordance with the current expected credit losses standard.
NW Holdings and NW Natural do not have any material contract assets, as net accounts receivable and accrued unbilled revenue balances are unconditional and only involve the passage of time until such balances are billed and collected. NW Holdings and NW Natural do not have any material contract liabilities.
Revenue taxes are included in operating revenues with an equal and offsetting expense recognized in operating expenseexpenses in the consolidated statements of comprehensive income. Revenue-based taxes are primarily franchise taxes, which are collected from NGD customers and remitted to taxing authorities.
Natural Gas Distribution
Natural Gas Sales
NW Natural's primary source of revenue is providing natural gas to customers in the NGD service territory, which includes residential, commercial, industrial and transportation customers. NGD revenue is generally recognized over time upon delivery of the gas commodity or service to the customer, and the amount of consideration received and recognized as revenue is dependent on the Oregon and Washington tariffs. Customer accounts are to be paid in full each month, and there is 0no right of return or warranty for services provided. Revenues include firm and interruptible sales and transportation services, franchise taxes recovered from the customer, late payment fees, service fees, and accruals for gas delivered but not yet billed (accrued unbilled revenue). The accrued unbilled revenue balance is based on estimates of deliveries during the period from the last meter reading and management judgment is required for a number of factors used in this calculation, including customer use and weather factors.
We applied the significant financing practical expedient and have not adjusted the consideration NW Natural expects to receive from NGD customers for the effects of a significant financing component as all payment arrangements are settled annually. Due to the election of the right to invoice practical expedient, we do not disclose the value of unsatisfied performance obligations.
Alternative Revenue
Weather normalization (WARM) and decoupling mechanisms are considered to be alternative revenue programs. Alternative revenue programs are considered to be contracts between NW Natural and its regulator and are excluded from revenue from contracts with customers.
Leasing Revenue
Leasing revenue primarily consists of revenues from NW Natural's North Mist Storage contract with 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 from small leases of property owned by NW Natural to third parties. The majority of these transactions are accounted for as operating leases and the revenue is recognized over the term of the lease agreement. Lease revenue is excluded from revenue from contracts with customers. See Note 67 for additional information.
NW Natural Other
Gas Storage Revenue
NW Natural's other revenue includes gas storage activity, which includes Interstate Storage Services used to store natural gas for customers. Gas storage revenue is generally recognized over time as the gas storage service is provided to the customer and the amount of consideration received and recognized as revenue is dependent on set rates defined per the storage agreements. Noncash consideration in the form of dekatherms of natural gas is received as consideration for providing gas injection services to gas storage customers. This noncash consideration is measured at fair value using the average spot rate. Customer accounts are generally paid in full each month, and there is 0no right of return or warranty for services provided. Revenues include firm and interruptible storage services, net of the profit sharing amount refunded to NGD customers.
Asset Management Revenue
Revenues include the optimization of third-party storage assets and pipeline capacity and are provided net of the profit sharing amount refunded to NGD customers. Certain asset management revenues received are recognized over time using a straight-line approach over the term of each contract, and the amount of consideration received and recognized as revenue is dependent on a variable pricing model. Variable revenues earned above guaranteed amounts are estimated and recognized at the end of each period using the most likely amount approach. Additionally, other asset management revenues may be based on a fixed rate. Generally, asset management accounts are settled on a monthly basis.
As of June 30, 2021,March 31, 2022, unrecognized revenue for the fixed component of the transaction price related to gas storage and asset management revenue was approximately $79.2$93.5 million. Of this amount, approximately $9.6$14.9 million will be recognized during the remainder of 2021, $19.4 million in 2022, $17.8$18.1 million in 2023, $14.0$15.6 million in 2024, $11.1$13.5 million in 2025, $9.4 million in 2026 and $7.3$22.0 million thereafter. The amounts presented here are calculated using current contracted rates.
Appliance Retail Center Revenue
NW Natural owns and operates an appliance store that is open to the public, where customers can purchase natural gas home appliances. Revenue from the sale of appliances is recognized at the point in time in which the appliance is transferred to the third party responsible for delivery and installation services and when the customer has legal title to the appliance. It is required that the sale be paid for in full prior to transfer of legal title. The amount of consideration received and recognized as revenue varies with changes in marketing incentives and discounts offered to customers.
NW Holdings Other
NW Holdings' primary source of other revenue is providing water and wastewater services to customers. Water and wastewater service revenue is generally recognized over time upon delivery of the water commodity or service to the customer, and the amount of consideration received and recognized as revenue is dependent on the tariffs established in the state we operate. Customer accounts are to be paid in full each month, and there is 0no 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.
6.
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 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 0no 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 0no 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, | | | | Three Months Ended March 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | In thousands | | | 2022 | | 2021 |
| Lease revenue | Lease revenue | | Lease revenue | | |
| Operating leases | Operating leases | | $ | 25 | | | $ | 25 | | | $ | 43 | | | $ | 53 | | Operating leases | | | $ | 18 | | | $ | 18 | |
| Sales-type leases | Sales-type leases | | 4,368 | | | 4,588 | | | 8,737 | | | 9,178 | | Sales-type leases | | | 4,281 | | | 4,369 | |
| Total lease revenue | Total lease revenue | | $ | 4,393 | | | $ | 4,613 | | | $ | 8,780 | | | $ | 9,231 | | Total lease revenue | | | $ | 4,299 | | | $ | 4,387 | |
Additionally, lease revenue of $0.1 million was recognized for the three months ended March 31, 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.
Total future minimum lease payments to be received under non-cancellable leases at June 30, 2021March 31, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| In thousands | | Operating | | Sales-Type | | Total |
| NW Natural: | | | | | | |
| Remainder of 2021 | | $ | 36 | | | $ | 8,701 | | | $ | 8,737 | |
| 2022 | | 72 | | | 17,026 | | | 17,098 | |
| 2023 | | 64 | | | 16,557 | | | 16,621 | |
| 2024 | | 65 | | | 15,867 | | | 15,932 | |
| 2025 | | 60 | | | 15,306 | | | 15,366 | |
| Thereafter | | 229 | | | 251,721 | | | 251,950 | |
| Total lease revenue | | $ | 526 | | | $ | 325,178 | | | $ | 325,704 | |
| Less: imputed interest | | | | 183,237 | | | |
| Total leases receivable | | | | $ | 141,941 | | | |
| | | | | | |
| Other (NW Holdings): | | | | | | |
| Remainder of 2021 | | $ | 25 | | | $ | 0 | | | $ | 25 | |
| 2022 | | 50 | | | 0 | | | 50 | |
| 2023 | | 51 | | | — | | | 51 | |
| 2024 | | 52 | | | 0 | | | 52 | |
| 2025 | | 53 | | | 0 | | | 53 | |
| Thereafter | | 970 | | | 0 | | | 970 | |
| Total lease revenue | | $ | 1,201 | | | $ | 0 | | | $ | 1,201 | |
| | | | | | |
| NW Holdings: | | | | | | |
| Remainder of 2021 | | $ | 61 | | | $ | 8,701 | | | $ | 8,762 | |
| 2022 | | 122 | | | 17,026 | | | 17,148 | |
| 2023 | | 115 | | | 16,557 | | | 16,672 | |
| 2024 | | 117 | | | 15,867 | | | 15,984 | |
| 2025 | | 113 | | | 15,306 | | | 15,419 | |
| Thereafter | | 1,199 | | | 251,721 | | | 252,920 | |
| Total lease revenue | | $ | 1,727 | | | $ | 325,178 | | | $ | 326,905 | |
| Less: imputed interest | | | | 183,237 | | | |
| Total leases receivable | | | | $ | 141,941 | | | |
| | | | | | | | | | | | | | | | | | | | |
| In thousands | | Operating | | Sales-Type | | Total |
| NW Natural: | | | | | | |
| Remainder of 2022 | | $ | 433 | | | $ | 12,728 | | | $ | 13,161 | |
| 2023 | | 74 | | | 16,557 | | | 16,631 | |
| 2024 | | 74 | | | 15,867 | | | 15,941 | |
| 2025 | | 66 | | | 15,306 | | | 15,372 | |
| 2026 | | 36 | | | 14,901 | | | 14,937 | |
| Thereafter | | 22 | | | 236,820 | | | 236,842 | |
| Total minimum lease payments | | $ | 705 | | | $ | 312,179 | | | $ | 312,884 | |
| Less: imputed interest | | | | 174,122 | | | |
| Total leases receivable | | | | $ | 138,057 | | | |
| | | | | | |
| Other (NW Holdings): | | | | | | |
| Remainder of 2022 | | $ | 38 | | | $ | — | | | $ | 38 | |
| 2023 | | 51 | | | — | | | 51 | |
| 2024 | | 52 | | | — | | | 52 | |
| 2025 | | 53 | | | — | | | 53 | |
| 2026 | | 56 | | | — | | | 56 | |
| Thereafter | | 914 | | | — | | | 914 | |
| Total minimum lease payments | | $ | 1,164 | | | $ | — | | | $ | 1,164 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| NW Holdings: | | | | | | |
| Remainder of 2022 | | $ | 471 | | | $ | 12,728 | | | $ | 13,199 | |
| 2023 | | 125 | | | 16,557 | | | 16,682 | |
| 2024 | | 126 | | | 15,867 | | | 15,993 | |
| 2025 | | 119 | | | 15,306 | | | 15,425 | |
| 2026 | | 92 | | | 14,901 | | | 14,993 | |
| Thereafter | | 936 | | | 236,820 | | | 237,756 | |
| Total minimum lease payments | | $ | 1,869 | | | $ | 312,179 | | | $ | 314,048 | |
| Less: imputed interest | | | | 174,122 | | | |
| Total leases receivable | | | | $ | 138,057 | | | |
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 $4.5$4.8 million, $4.1$4.4 million and $4.3$4.7 million at June 30,March 31, 2022 and 2021 and 2020 and December 31, 2020,2021, 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 corporate operations center. Our leases have remaining lease terms of twothree months to 1918 years. Many of our lease agreements include options to extend the lease, which we do not include in our minimum lease terms unless they are reasonably certain to be exercised. Short-term leases with a term of 12 months or less are not recorded on the balance sheet. As most of our leases do not provide an implicit rate and are entered into by NW Natural, we use an estimated discount rate representing the rate we would have incurred to finance the funds necessary to purchase the leased asset and is based on information available at the lease commencement date in determining the present value of lease payments.
The components of lease expense, a portion of which is capitalized, were as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | In thousands | | | 2022 | | 2021 |
| NW Natural: | NW Natural: | | NW Natural: | | |
| Operating lease expense | Operating lease expense | | $ | 1,710 | | | $ | 914 | | | $ | 3,388 | | | $ | 2,116 | | Operating lease expense | | | $ | 1,727 | | | $ | 1,678 | |
| Short-term lease expense | Short-term lease expense | | $ | 349 | | | $ | 285 | | | $ | 569 | | | $ | 483 | | Short-term lease expense | | | $ | 163 | | | $ | 220 | |
| | Other (NW Holdings): | Other (NW Holdings): | | Other (NW Holdings): | | |
| Operating lease expense | Operating lease expense | | $ | 18 | | | $ | 40 | | | $ | 36 | | | $ | 92 | | Operating lease expense | | | $ | 7 | | | $ | 18 | |
| | | NW Holdings: | NW Holdings: | | NW Holdings: | | |
| Operating lease expense | Operating lease expense | | $ | 1,728 | | | $ | 954 | | | $ | 3,424 | | | $ | 2,208 | | Operating lease expense | | | $ | 1,734 | | | $ | 1,696 | |
| Short-term lease expense | Short-term lease expense | | $ | 349 | | | $ | 285 | | | $ | 569 | | | $ | 483 | | Short-term lease expense | | | $ | 163 | | | $ | 220 | |
Supplemental balance sheet information related to operating leases as of June 30, 2021March 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| In thousands | | June 30, | | December 31, |
| | 2021 | | 2020 | | 2020 |
| NW Natural: | | | | | | |
| Operating lease right of use asset | | $ | 76,211 | | | $ | 78,464 | | | $ | 77,328 | |
| | | | | | |
| Operating lease liabilities - current liabilities | | $ | 1,193 | | | $ | 868 | | | $ | 1,054 | |
| Operating lease liabilities - non-current liabilities | | 80,043 | | | 80,120 | | | 80,559 | |
| Total operating lease liabilities | | $ | 81,236 | | | $ | 80,988 | | | $ | 81,613 | |
| | | | | | |
| Other (NW Holdings): | | | | | | |
| Operating lease right of use asset | | $ | 83 | | | $ | 102 | | | $ | 118 | |
| | | | | | |
| Operating lease liabilities - current liabilities | | $ | 35 | | | $ | 63 | | | $ | 51 | |
| Operating lease liabilities - non-current liabilities | | 45 | | | 39 | | | 62 | |
| Total operating lease liabilities | | $ | 80 | | | $ | 102 | | | $ | 113 | |
| | | | | | |
| NW Holdings: | | | | | | |
| Operating lease right of use asset | | $ | 76,294 | | | $ | 78,566 | | | $ | 77,446 | |
| | | | | | |
| Operating lease liabilities - current liabilities | | $ | 1,228 | | | $ | 931 | | | $ | 1,105 | |
| Operating lease liabilities - non-current liabilities | | 80,088 | | | 80,159 | | | 80,621 | |
| Total operating lease liabilities | | $ | 81,316 | | | $ | 81,090 | | | $ | 81,726 | |
| | | | | | | | | | | | | | | | | | | | |
| In thousands | | March 31, | | December 31, |
| | 2022 | | 2021 | | 2021 |
| NW Natural: | | | | | | |
| Operating lease right of use asset | | $ | 74,361 | | | $ | 76,857 | | | $ | 74,987 | |
| | | | | | |
| Operating lease liabilities - current liabilities | | $ | 1,286 | | | $ | 1,167 | | | $ | 1,273 | |
| Operating lease liabilities - non-current liabilities | | 79,125 | | | 80,358 | | | 79,431 | |
| Total operating lease liabilities | | $ | 80,411 | | | $ | 81,525 | | | $ | 80,704 | |
| | | | | | |
| Other (NW Holdings): | | | | | | |
| Operating lease right of use asset | | $ | 55 | | | $ | 100 | | | $ | 62 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Operating lease liabilities - current liabilities | | $ | 17 | | | $ | 46 | | | $ | 23 | |
| Operating lease liabilities - non-current liabilities | | 37 | | | 56 | | | 37 | |
| Total operating lease liabilities | | $ | 54 | | | $ | 102 | | | $ | 60 | |
| | | | | | |
| NW Holdings: | | | | | | |
| Operating lease right of use asset | | $ | 74,416 | | | $ | 76,957 | | | $ | 75,049 | |
| | | | | | |
| Operating lease liabilities - current liabilities | | $ | 1,303 | | | $ | 1,213 | | | $ | 1,296 | |
| Operating lease liabilities - non-current liabilities | | 79,162 | | | 80,414 | | | 79,468 | |
| Total operating lease liabilities | | $ | 80,465 | | | $ | 81,627 | | | $ | 80,764 | |
The weighted-average remaining lease terms and weighted-average discount rates for the operating leases at NW Natural were as follows:
| | In thousands | In thousands | | June 30, | | December 31, | In thousands | | March 31, | | December 31, |
| | 2021 | | 2020 | | 2020 | | 2022 | | 2021 | | 2021 |
| Weighted-average remaining lease term (years) | Weighted-average remaining lease term (years) | | 18.7 | | 19.7 | | 19.2 | Weighted-average remaining lease term (years) | | 18.0 | | 18.9 | | 18.2 |
| Weighted-average discount rate | Weighted-average discount rate | | 7.2 | % | | 7.2 | % | | 7.2 | % | Weighted-average discount rate | | 7.2 | % | | 7.2 | % | | 7.2 | % |
Commencement of SignificantHeadquarters and Operations Center Lease
NW Natural commenced a 20-year operating lease agreement in March 2020 for a new corporateheadquarters and operations center in Portland, Oregon. Total estimated base rent payments over the life of the lease are $159.4 million. 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 $5.0$6.0 million, $2.4$4.6 million and $4.2$5.7 million as of June 30,March 31, 2022 and 2021 and 2020 and December 31, 2020,2021, respectively.
Maturities of operating lease liabilities at June 30, 2021March 31, 2022 were as follows:
| | In thousands | In thousands | | NW Natural | | Other
(NW Holdings) | | NW Holdings | In thousands | | NW Natural | | Other
(NW Holdings) | | NW Holdings |
| Remainder of 2021 | | $ | 3,445 | | | $ | 25 | | | $ | 3,470 | | |
| 2022 | | 6,933 | | | 24 | | | 6,957 | | |
| Remainder of 2022 | | Remainder of 2022 | | $ | 5,235 | | | $ | 18 | | | $ | 5,253 | |
| 2023 | 2023 | | 6,986 | | | 6 | | | 6,992 | | 2023 | | 7,013 | | | 6 | | | 7,019 | |
| 2024 | 2024 | | 7,150 | | | 6 | | | 7,156 | | 2024 | | 7,150 | | | 6 | | | 7,156 | |
| 2025 | 2025 | | 7,185 | | | 6 | | | 7,191 | | 2025 | | 7,185 | | | 6 | | | 7,191 | |
| 2026 | | 2026 | | 7,353 | | | 6 | | | 7,359 | |
| Thereafter | Thereafter | | 123,784 | | | 24 | | | 123,808 | | Thereafter | | 116,432 | | | 17 | | | 116,449 | |
| Total lease payments | Total lease payments | | 155,483 | | | 91 | | | 155,574 | | Total lease payments | | 150,368 | | | 59 | | | 150,427 | |
| Less: imputed interest | Less: imputed interest | | 74,247 | | | 11 | | | 74,258 | | Less: imputed interest | | 69,957 | | | 5 | | | 69,962 | |
| Total lease obligations | Total lease obligations | | 81,236 | | | 80 | | | 81,316 | | Total lease obligations | | 80,411 | | | 54 | | | 80,465 | |
| Less: current obligations | Less: current obligations | | 1,193 | | | 35 | | | 1,228 | | Less: current obligations | | 1,286 | | | 17 | | | 1,303 | |
| Long-term lease obligations | Long-term lease obligations | | $ | 80,043 | | | $ | 45 | | | $ | 80,088 | | Long-term lease obligations | | $ | 79,125 | | | $ | 37 | | | $ | 79,162 | |
As of June 30, 2021,March 31, 2022, finance lease liabilities with maturities of less than one year were $0.2$0.3 million at NW Natural.
Supplemental cash flow information related to leases was as follows:
| | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | In thousands | | | 2022 | | 2021 |
| NW Natural: | NW Natural: | | NW Natural: | | |
| Cash paid for amounts included in the measurement of lease liabilities | Cash paid for amounts included in the measurement of lease liabilities | | Cash paid for amounts included in the measurement of lease liabilities | | |
| Operating cash flows from operating leases | Operating cash flows from operating leases | | $ | 1,717 | | | $ | 931 | | | $ | 3,386 | | | $ | 2,127 | | Operating cash flows from operating leases | | | $ | 1,733 | | | $ | 1,669 | |
| Finance cash flows from finance leases | Finance cash flows from finance leases | | $ | 134 | | | $ | 302 | | | $ | 678 | | | $ | 457 | | Finance cash flows from finance leases | | | $ | 75 | | | $ | 544 | |
| Right of use assets obtained in exchange for lease obligations | Right of use assets obtained in exchange for lease obligations | | Right of use assets obtained in exchange for lease obligations | | |
| Operating leases | Operating leases | | $ | 0 | | | $ | 445 | | | $ | 154 | | | $ | 78,433 | | Operating leases | | | $ | 14 | | | $ | 154 | |
| Finance leases | Finance leases | | $ | 20 | | | $ | 477 | | | $ | 94 | | | $ | 710 | | Finance leases | | | $ | 100 | | | $ | 74 | |
| | | Other (NW Holdings): | | |
| Cash paid for amounts included in the measurement of lease liabilities | | |
| Operating cash flows from operating leases | | $ | 17 | | | $ | 39 | | | $ | 33 | | | $ | 91 | | |
| | | NW Holdings: | | |
| Cash paid for amounts included in the measurement of lease liabilities | | |
| Operating cash flows from operating leases | | $ | 1,734 | | | $ | 970 | | | $ | 3,419 | | | $ | 2,218 | | |
| Finance cash flows from finance leases | | $ | 134 | | | $ | 302 | | | $ | 678 | | | $ | 457 | | |
| Right of use assets obtained in exchange for lease obligations | | |
| Operating leases | | $ | 0 | | | $ | 445 | | | $ | 154 | | | $ | 78,433 | | |
| Finance leases | | $ | 20 | | | $ | 477 | | | $ | 94 | | | $ | 710 | | |
|
| | | | | | | | | | | | | | | | | | |
| Other (NW Holdings): | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | |
| Operating cash flows from operating leases | | | | | | $ | 6 | | | $ | 16 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| NW Holdings: | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | |
| Operating cash flows from operating leases | | | | | | $ | 1,739 | | | $ | 1,685 | |
| Finance cash flows from finance leases | | | | | | $ | 75 | | | $ | 544 | |
| Right of use assets obtained in exchange for lease obligations | | | | | | | | |
| Operating leases | | | | | | $ | 14 | | | $ | 154 | |
| Finance leases | | | | | | $ | 100 | | | $ | 74 | |
| | | | | | | | |
| | | | | | | | |
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 0no remaining liability. The right of use assets for finance leases were $2.2 million, $1.9 million $1.1 million and $1.8$2.1 million at June 30,March 31, 2022 and 2021 and 2020 and at December 31, 2020,2021, respectively.
7.8. STOCK-BASED COMPENSATION
Stock-based compensation plans are designed to promote stock ownership in NW Holdings by employees and 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 8 in the 20202021 Form 10-K and the updates provided below.
Long Term Incentive Plan
Performance Shares
LTIP performance shares incorporate a combination of market, performance, and service-based factors. During the sixthree months ended June 30, 2021,March 31, 2022, the final performance factor under the 20192020 LTIP was approved and 28,86631,830 performance-based shares were granted under the 20192020 LTIP for accounting purposes. As such, NW Natural and other subsidiaries began recognizing compensation expense. In February 20202021 and 2021,2022, LTIP shares were awarded to participants; however, the agreements allow for one of the performance factors to remain variable until the first quarter of the third year of the award period. As the performance factor will not be approved until the first quarters of 20222023 and 2023,2024, respectively, there is not a mutual understanding of the awards' key terms and conditions between NW Holdings and the participants as of June 30, 2021,March 31, 2022, and therefore, 0no expense was recognized for the 20202021 and 20212022 awards. NW Holdings 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 20202021 and 20212022 LTIP awards, 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 20202021 and 20212022 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 peer group companies over the performance period of three years for each respective award. If the targets were achieved for the 20202021 and 20212022 awards, NW Holdings would grant for accounting purposes 31,83056,335 and 56,33556,885 shares in the first quarters of 20222023 and 2023,2024, respectively.
As of June 30, 2021,March 31, 2022, there was $0.2$0.3 million of unrecognized compensation cost associated with the 20192020 LTIP grants, which is expected to be recognized through 2021.2022.
Restricted Stock Units
During the sixthree months ended June 30, 2021, 37,756March 31, 2022, 46,812 RSUs were granted under the LTIP with a weighted-average grant date fair value of $49.16$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. The majority of our RSU grants obligate NW Holdings, upon vesting, to issue the RSU holder one share of common stock. The grant may also include a cash payment equal to the total amount of dividends paid per share between the grant date and vesting date of that portion of the RSU depending on the structure of the award agreement. The fair value of an RSU is equal to the closing market price of common stock on the grant date. As of June 30, 2021,March 31, 2022, there was $4.2$4.6 million of unrecognized compensation cost from grants of RSUs, which is expected to be recognized by NW Natural and other subsidiaries over a period extending through 2025.2026.
Restated Stock Option Plan
The Restated Stock Option Plan (Restated SOP) was terminated with respect to new grants in 2012; however, options granted before the Restated SOP was terminated remained outstanding until the earlier of their expiration, forfeiture, or exercise. Options were exercisable for shares of NW Holdings common stock. As of June 30, 2021 there were 0 options exercisable or outstanding.
26
8.
9. DEBT
Short-Term Debt
At March 31, 2022, NW Holdings and NW Natural had short-term debt outstanding of $332.5 million and $188.5 million, respectively. NW Holdings' short-term debt consisted of $144.0 million in revolving credit agreement loans at NW Holdings and $188.5 million of commercial paper outstanding at NW Natural. The weighted average interest rate on the revolving credit agreement at March 31, 2022 was 1.5% at NW Holdings. The weighted average interest rate of commercial paper at March 31, 2022 was 0.8% at NW Natural. At March 31, 2022, NW Natural's commercial paper had a maximum remaining maturity of 39 days and an average remaining maturity of 17 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 unpaid interest under the Term Loan is due and payablewas repaid in June 2022. The Term Loan 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, 2021, with a consolidated indebtedness to total capitalization ratio of 56.2%.
At June 30, 2021, NW Holdings and NW Natural had short-term debt outstanding of $240.0 million and $198.0 million, respectively. NW Holdings' short-term debt consisted of $42.0 million in revolving credit agreement loans at NW Holdings, $98.0 million of commercial paper outstanding at NW Natural, and the aforementioned $100.0 million Term Loan. The weighted average interest rate on the revolving credit agreement at June 30, 2021 was 1.1% at NW Holdings. The weighted average interest rate of commercial paper and the Term Loan outstanding at June 30, 2021 was 0.2% and 0.6%, respectively, at NW Natural. At June 30, 2021, NW Natural's commercial paper had a maximum remaining maturity of 29 days and an average remaining maturity of 15 days.December 2021.
Long-Term Debt
At June 30, 2021,March 31, 2022, NW Holdings and NW Natural had long-term debt outstanding of $975.8$1,045.0 million and $917.4$986.6 million, respectively, which included $7.4$8.2 million and $7.3$8.1 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 20212023 through 2050,2051, interest rates ranging from 2.8% to 9.1%7.9%, and a weighted average interest rate of 4.6%4.4%.
No long-term debt is scheduled to mature over the next twelve months following March 31, 2022 at NW Natural.
In June 2019, NW Natural Water, a wholly-owned subsidiary of NW Holdings, entered into a two-yeartwo-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-yearfive-year term loan credit agreement for $55.0 million and borrowed the full amount. The loan carried an interest rate of 0.9%1.2% at June 30, 2021,March 31, 2022, which is based upon the one-month LIBOR rate plus a spread. Therate. 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, 2021,March 31, 2022, with a consolidated indebtedness to total capitalization ratio of 56.8%58.2%.
Fair Value of Long-Term Debt
NW Holdings' and NW Natural's outstanding debt does not trade in active markets. The fair value of long-term debt is estimated using the value of outstanding debt at natural gas distribution companies with similar credit ratings, terms, and remaining maturities to NW Holdings' and NW Natural's 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 20202021 Form 10-K for a description of the fair value hierarchy.
The following table provides an estimate of the fair value of NW Holdings' long-term debt, including current maturities of long-term debt, using market prices in effect on the valuation date:
| | | | | | | | | | | | | | | | | | | | |
| | NW Holdings |
| | June 30, | | December 31, |
| In thousands | | 2021 | | 2020 | | 2020 |
| Gross long-term debt | | $ | 983,221 | | | $ | 961,784 | | | $ | 962,905 | |
| Unamortized debt issuance costs | | (7,446) | | | (7,688) | | | (7,480) | |
| Carrying amount | | $ | 975,775 | | | $ | 954,096 | | | $ | 955,425 | |
Estimated fair value(1) | | $ | 1,104,230 | | | $ | 1,135,349 | | | $ | 1,136,311 | |
(1) Estimated fair value does not include unamortized debt issuance costs.
The following table provides an estimate of the fair value of NW Natural's long-term debt, including current maturities of long-term debt, using market prices in effect on the valuation date:
| | | NW Natural | | | | | | | | | | | | | | | | | |
| | June 30, | | December 31, | | March 31, | | December 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2020 | In thousands | | 2022 | | 2021 | | 2021 |
| NW Natural: | | NW Natural: | |
| Gross long-term debt | Gross long-term debt | | $ | 924,700 | | | $ | 924,700 | | | $ | 924,700 | | Gross long-term debt | | $ | 994,700 | | | $ | 924,700 | | | $ | 994,700 | |
| Unamortized debt issuance costs | Unamortized debt issuance costs | | (7,291) | | | (7,688) | | | (7,480) | | Unamortized debt issuance costs | | (8,073) | | | (7,364) | | | (8,205) | |
| Carrying amount | Carrying amount | | $ | 917,409 | | | $ | 917,012 | | | $ | 917,220 | | Carrying amount | | $ | 986,627 | | | $ | 917,336 | | | $ | 986,495 | |
Estimated fair value(1) | Estimated fair value(1) | | $ | 1,043,696 | | | $ | 1,097,188 | | | $ | 1,097,348 | | Estimated fair value(1) | | $ | 997,196 | | | $ | 1,014,527 | | | $ | 1,110,741 | |
| | NW Holdings: | | NW Holdings: | |
| Gross long-term debt | | Gross long-term debt | | $ | 1,053,177 | | | $ | 963,283 | | | $ | 1,053,241 | |
| Unamortized debt issuance costs | | Unamortized debt issuance costs | | (8,171) | | | (7,364) | | | (8,309) | |
| Carrying amount | | Carrying amount | | $ | 1,045,006 | | | $ | 955,919 | | | $ | 1,044,932 | |
Estimated fair value(1) | | Estimated fair value(1) | | $ | 1,059,629 | | | $ | 1,053,036 | | | $ | 1,174,500 | |
(1) Estimated fair value does not include unamortized debt issuance costs.
9.
10. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS
NW Natural maintains a qualified non-contributory defined benefit pension plan (Pension Plan), non-qualified supplemental pension plans for eligible executive officers and other key employees, and other postretirement employee benefit plans. NW Natural also has a qualified defined contribution plan (Retirement K Savings Plan) for all eligible employees. The Pension Plan and Retirement K Savings Plan have plan assets, which are held in qualified trusts to fund retirement benefits.
The service cost component of net periodic benefit cost for NW Natural pension and other postretirement benefit plans is recognized in operations and maintenance expense in the consolidated statements of comprehensive income. The other non-service cost components are recognized in other income (expense), net in the consolidated statements of comprehensive income.
The following table provides the components of net periodic benefit cost for the pension and other postretirement benefit plans:
| | | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| | Pension Benefits | | Other Postretirement
Benefits | | Pension Benefits | | Other
Postretirement Benefits | | | | Pension Benefits | | Other
Postretirement Benefits |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | In thousands | | | 2022 | | 2021 | | 2022 | | 2021 |
| Service cost | Service cost | | $ | 1,714 | | | $ | 1,658 | | | $ | 56 | | | $ | 64 | | | $ | 3,428 | | | $ | 3,315 | | | $ | 111 | | | $ | 128 | | Service cost | | | $ | 1,530 | | | $ | 1,714 | | | $ | 47 | | | $ | 55 | |
| Interest cost | Interest cost | | 3,342 | | | 4,011 | | | 165 | | | 223 | | | 6,685 | | | 8,022 | | | 330 | | | 446 | | Interest cost | | | 3,659 | | | 3,343 | | | 180 | | | 165 | |
| Expected return on plan assets | Expected return on plan assets | | (6,099) | | | (5,496) | | | 0 | | | 0 | | | (12,198) | | | (10,992) | | | 0 | | | 0 | | Expected return on plan assets | | | (6,427) | | | (6,099) | | | — | | | — | |
| Amortization of prior service credit | Amortization of prior service credit | | 0 | | | 0 | | | (117) | | | (117) | | | 0 | | | 0 | | | (234) | | | (234) | | Amortization of prior service credit | | | — | | | — | | | (83) | | | (117) | |
| Amortization of net actuarial loss | Amortization of net actuarial loss | | 5,500 | | | 4,778 | | | 131 | | | 142 | | | 11,001 | | | 9,556 | | | 262 | | | 285 | | Amortization of net actuarial loss | | | 3,198 | | | 5,501 | | | 99 | | | 131 | |
| | Net periodic benefit cost | Net periodic benefit cost | | 4,457 | | | 4,951 | | | 235 | | | 312 | | | 8,916 | | | 9,901 | | | 469 | | | 625 | | Net periodic benefit cost | | | 1,960 | | | 4,459 | | | 243 | | | 234 | |
| Amount allocated to construction | Amount allocated to construction | | (743) | | | (680) | | | (22) | | | (23) | | | (1,469) | | | (1,348) | | | (43) | | | (46) | | Amount allocated to construction | | | (664) | | | (726) | | | (18) | | | (21) | |
| | Net periodic benefit cost charged to expense | Net periodic benefit cost charged to expense | | 3,714 | | | 4,271 | | | 213 | | | 289 | | | 7,447 | | | 8,553 | | | 426 | | | 579 | | Net periodic benefit cost charged to expense | | | 1,296 | | | 3,733 | | | 225 | | | 213 | |
| | Amortization of regulatory balancing account | Amortization of regulatory balancing account | | 1,281 | | | 1,281 | | | 0 | | | 0 | | | 4,082 | | | 4,082 | | | 0 | | | 0 | | Amortization of regulatory balancing account | | | 2,801 | | | 2,801 | | | — | | | — | |
| Net amount charged to expense | Net amount charged to expense | | $ | 4,995 | | | $ | 5,552 | | | $ | 213 | | | $ | 289 | | | $ | 11,529 | | | $ | 12,635 | | | $ | 426 | | | $ | 579 | | Net amount charged to expense | | | $ | 4,097 | | | $ | 6,534 | | | $ | 225 | | | $ | 213 | |
Net periodic benefit costs are reduced by amounts capitalized to NGD plant. In addition, net periodic benefit costs were recorded to a regulatory balancing account as approved by the OPUC and amortized accordingly.
The following table presents amounts recognized in accumulated other comprehensive loss (AOCL) and the changes in AOCL related to non-qualified employee benefit plans:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | Three Months Ended March 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | In thousands | | | 2022 | | 2021 |
| Beginning balance | Beginning balance | | $ | (12,681) | | | $ | (10,573) | | | $ | (12,902) | | | $ | (10,733) | | Beginning balance | | | $ | (11,404) | | | $ | (12,902) | |
| | Amounts reclassified from AOCL: | Amounts reclassified from AOCL: | | Amounts reclassified from AOCL: | | |
| Amortization of actuarial losses | Amortization of actuarial losses | | 301 | | | 218 | | | 602 | | | 436 | | Amortization of actuarial losses | | | 268 | | | 301 | |
| | Total reclassifications before tax | Total reclassifications before tax | | 301 | | | 218 | | | 602 | | | 436 | | Total reclassifications before tax | | | 268 | | | 301 | |
| Tax benefit | Tax benefit | | (80) | | | (58) | | | (160) | | | (116) | | Tax benefit | | | (71) | | | (80) | |
| Total reclassifications for the period | Total reclassifications for the period | | 221 | | | 160 | | | 442 | | | 320 | | Total reclassifications for the period | | | 197 | | | 221 | |
| Ending balance | Ending balance | | $ | (12,460) | | | $ | (10,413) | | | $ | (12,460) | | | $ | (10,413) | | Ending balance | | | $ | (11,207) | | | $ | (12,681) | |
Employer Contributions to Company-Sponsored Defined Benefit Pension Plans
For the six months ended June 30, 2021, NW Natural made no cash contributions totaling $9.6 million to its qualified defined benefit pension plans. The American Rescue Plan, which was signed into law onplans during the three months ended March 11, 2021, includes a provision for pension relief that extends the amortization period for required contributions from 731, 2022 compared to 15 years and provides$4.5 million for the stabilization of interest rates used to calculate future required contributions. As a result,same period in 2021. NW Natural does not expect to make any further plan contributions during the remainder of 2021.2022.
Defined Contribution Plan
The Retirement K Savings Plan is a qualified defined contribution plan under Internal Revenue Code Sections 401(a) and 401(k). Employer contributions totaled $4.7$2.9 million and $4.4$2.6 million for the sixthree months ended June 30,March 31, 2022 and 2021, and 2020, respectively.
See Note 10 in the 20202021 Form 10-K for more information concerning these retirement and other postretirement benefit plans.
10.
11. INCOME TAX
An estimate of annual income tax expense is made each interim period using estimates for annual pre-tax income, regulatory flow-through adjustments, tax credits, and other items. The estimated annual effective tax rate is applied to year-to-date, pre-tax income to determine income tax expense for the interim period consistent with the annual estimate. Discrete events are recorded in the interim period in which they occur or become known.
The effective income tax rate varied from the federal statutory rate due to the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | NW Holdings | | NW Natural |
| In thousands | | 2021 | | 2020 | | 2021 | | 2020 |
| Income tax at statutory rate (federal) | | $ | (210) | | | $ | (1,429) | | | $ | 184 | | | $ | (1,287) | |
| State income tax | | (48) | | | (333) | | | 41 | | | (281) | |
| Increase (decrease): | | | | | | | | |
| Differences required to be flowed-through by regulatory commissions | | 21 | | | 173 | | | 21 | | | 173 | |
| Other, net | | (40) | | | (83) | | | 42 | | | (24) | |
| Total provision for income taxes on continuing operations | | $ | (277) | | | $ | (1,672) | | | $ | 288 | | | $ | (1,419) | |
| Effective income tax rate for continuing operations | | 27.7 | % | | 24.6 | % | | 32.8 | % | | 23.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | Three Months Ended March 31, |
| | NW Holdings | | NW Natural |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 |
| Income tax at statutory rate (federal) | | $ | 15,783 | | | $ | 16,808 | | | $ | 16,115 | | | $ | 16,939 | |
| State income tax | | 6,513 | | | 7,308 | | | 6,584 | | | 7,325 | |
| Increase (decrease): | | | | | | | | |
| Differences required to be flowed-through by regulatory commissions | | (3,173) | | | (3,605) | | | (3,173) | | | (3,605) | |
| Other, net | | (200) | | | 10 | | | (203) | | | (107) | |
| Total provision for income taxes | | $ | 18,923 | | | $ | 20,521 | | | $ | 19,323 | | | $ | 20,552 | |
| Effective income tax rate | | 25.2 | % | | 25.6 | % | | 25.2 | % | | 25.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | Six Months Ended June 30, |
| | NW Holdings | | NW Natural |
| In thousands | | 2021 | | 2020 | | 2021 | | 2020 |
| Income tax at statutory rate (federal) | | $ | 16,598 | | | $ | 11,676 | | | $ | 17,123 | | | $ | 12,068 | |
| State income tax | | 7,260 | | | 3,344 | | | 7,366 | | | 3,456 | |
| Increase (decrease): | | | | | | | | |
| Differences required to be flowed-through by regulatory commissions | | (3,584) | | | (2,352) | | | (3,584) | | | (2,352) | |
| Other, net | | (30) | | | (213) | | | (65) | | | (173) | |
| Total provision for income taxes on continuing operations | | $ | 20,244 | | | $ | 12,455 | | | $ | 20,840 | | | $ | 12,999 | |
| Effective income tax rate for continuing operations | | 25.6 | % | | 22.4 | % | | 25.6 | % | | 22.6 | % |
The NW Holdings and NW Natural effective income tax rates for the sixthree months ended June 30, 2021March 31, 2022 compared to the same period in 20202021 changed primarily as a result of changes in pre-tax income, the Oregon Corporate Activity Tax (CAT), and regulatory amortization of deferred Tax Cuts and Jobs Act (TCJA) benefits.income. See Note 11 in the 20202021 Form 10-K for more detail on income taxes and effective tax rates.
The IRS Compliance Assurance Process (CAP) examination of the 20192020 tax year was completed during the first quarter of 2021.2022. There were no material changes to the return as filed. The 20202021 and 20212022 tax years are subject to examination under CAP.
11.12. 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, | | March 31, | | December 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2020 | In thousands | | 2022 | | 2021 | | 2021 |
| NW Natural: | NW Natural: | | NW Natural: | |
| NGD plant in service | NGD plant in service | | $ | 3,623,092 | | | $ | 3,404,145 | | | $ | 3,548,543 | | NGD plant in service | | $ | 3,740,105 | | | $ | 3,594,226 | | | $ | 3,721,939 | |
| NGD work in progress | NGD work in progress | | 99,646 | | | 90,903 | | | 63,901 | | NGD work in progress | | 156,575 | | | 70,766 | | | 135,398 | |
| Less: Accumulated depreciation | Less: Accumulated depreciation | | 1,068,603 | | | 1,040,616 | | | 1,055,809 | | Less: Accumulated depreciation | | 1,108,930 | | | 1,067,502 | | | 1,098,715 | |
| NGD plant, net | NGD plant, net | | 2,654,135 | | | 2,454,432 | | | 2,556,635 | | NGD plant, net | | 2,787,750 | | | 2,597,490 | | | 2,758,622 | |
| Other plant in service | Other plant in service | | 66,315 | | | 64,317 | | | 66,300 | | Other plant in service | | 69,333 | | | 66,314 | | | 69,332 | |
| Other construction work in progress | Other construction work in progress | | 5,817 | | | 5,342 | | | 5,032 | | Other construction work in progress | | 5,037 | | | 5,125 | | | 4,971 | |
| Less: Accumulated depreciation | Less: Accumulated depreciation | | 20,140 | | | 19,144 | | | 19,637 | | Less: Accumulated depreciation | | 20,907 | | | 19,889 | | | 20,646 | |
| Other plant, net | Other plant, net | | 51,992 | | | 50,515 | | | 51,695 | | Other plant, net | | 53,463 | | | 51,550 | | | 53,657 | |
| Total property, plant, and equipment, net | Total property, plant, and equipment, net | | $ | 2,706,127 | | | $ | 2,504,947 | | | $ | 2,608,330 | | Total property, plant, and equipment, net | | $ | 2,841,213 | | | $ | 2,649,040 | | | $ | 2,812,279 | |
| | Other (NW Holdings): | Other (NW Holdings): | | Other (NW Holdings): | |
| Other plant in service | Other plant in service | | $ | 54,922 | | | $ | 44,195 | | | $ | 50,263 | | Other plant in service | | $ | 70,844 | | | $ | 51,852 | | | $ | 65,603 | |
| Less: Accumulated depreciation | Less: Accumulated depreciation | | 5,120 | | | 2,539 | | | 3,823 | | Less: Accumulated depreciation | | 7,301 | | | 4,512 | | | 6,512 | |
| Other plant, net | Other plant, net | | $ | 49,802 | | | $ | 41,656 | | | $ | 46,440 | | Other plant, net | | $ | 63,543 | | | $ | 47,340 | | | $ | 59,091 | |
| | NW Holdings: | NW Holdings: | | NW Holdings: | |
| Total property, plant, and equipment, net | Total property, plant, and equipment, net | | $ | 2,755,929 | | | $ | 2,546,603 | | | $ | 2,654,770 | | Total property, plant, and equipment, net | | $ | 2,904,756 | | | $ | 2,696,380 | | | $ | 2,871,370 | |
| | NW Natural: | NW Natural: | | NW Natural: | |
| Capital expenditures in accrued liabilities | Capital expenditures in accrued liabilities | | $ | 37,968 | | | $ | 31,847 | | | $ | 25,129 | | Capital expenditures in accrued liabilities | | $ | 45,964 | | | $ | 20,969 | | | $ | 37,537 | |
| | NW Holdings: | NW Holdings: | | NW Holdings: | |
| Capital expenditures in accrued liabilities | Capital expenditures in accrued liabilities | | $ | 38,395 | | | $ | 31,847 | | | $ | 25,129 | | Capital expenditures in accrued liabilities | | $ | 47,797 | | | $ | 21,118 | | | $ | 38,333 | |
NW Holdings
Other plant balances include long-lived assets associated with water and wastewater utility operations and non-regulated activities not held by NW Natural or its subsidiaries.29
NW Natural
Other plant balances primarily include non-utility gas storage assets at the Mist facility and other long-lived assets not related to NGD.
12. GAS RESERVES
NW Natural has invested $188 million through the gas reserves program in the Jonah Field located in Wyoming as of June 30, 2021. 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 NGD customers through the original agreement with Encana Oil & Gas (USA) Inc. under which NW Natural invested $178 million and the amended agreement with Jonah Energy LLC under which an 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. See Note 13 in the 2020 Form 10-K.
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.
The following table outlines NW Natural's net gas reserves investment:
| | | | | | | | | | | | | | | | | | | | |
| | June 30, | | December 31, |
| In thousands | | 2021 | | 2020 | | 2020 |
| Gas reserves, current | | $ | 8,444 | | | $ | 13,646 | | | $ | 11,409 | |
| Gas reserves, non-current | | 178,863 | | | 173,661 | | | 175,898 | |
| Less: Accumulated amortization | | 149,011 | | | 132,202 | | | 141,414 | |
Total gas reserves(1) | | 38,296 | | | 55,105 | | | 45,893 | |
| Less: Deferred taxes on gas reserves | | 8,760 | | | 13,324 | | | 10,572 | |
| Net investment in gas reserves | | $ | 29,536 | | | $ | 41,781 | | | $ | 35,321 | |
(1) The net investment in additional wells included in total gas reserves was $2.7 million, $3.4 million and $3.0 million at June 30, 2021 and 2020 and December 31, 2020, respectively.
NW Natural's investment is included inHoldings
Other plant balances include long-lived assets associated with water and wastewater operations and non-regulated activities not held by NW Holdings' and NW Natural's consolidated balance sheets under gas reserves with the maximum loss exposure limited to the investment balance.Natural or its subsidiaries.
13. INVESTMENTS
Investments include gas reserves, financial investments in life insurance policies, and equity method investments. The following table summarizes other investments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | NW Holdings | | NW Natural |
| | March 31, | | December 31, | | March 31, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 | | 2022 | | 2021 | | 2021 |
| Investments in life insurance policies | | $ | 48,486 | | | $ | 47,411 | | | $ | 48,178 | | | $ | 48,486 | | | $ | 47,411 | | | $ | 48,178 | |
| Investments in gas reserves, non-current | | 25,364 | | | 31,600 | | | 26,608 | | | 25,364 | | | 31,600 | | | 26,608 | |
| Investment in unconsolidated affiliates | | 22,416 | | | 23 | | | 14,492 | | | 7,947 | | | — | | | — | |
| Total other investments | | $ | 96,266 | | | $ | 79,034 | | | $ | 89,278 | | | $ | 81,797 | | | $ | 79,011 | | | $ | 74,786 | |
Investment in Life 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 1413 in the 20202021 Form 10-K.
NW Natural Gas Reserves
NW Natural has invested $188 million through the gas reserves program in the Jonah Field located in Wyoming as of March 31, 2022. Gas reserves are stated at cost, net of regulatory amortization, with the associated deferred tax benefits of $11.0 million $9.8 million and $6.9 million, which are recorded as liabilities in the March 31, 2022, March 31, 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 $5.2 million, $10.7 million, and $5.4 million as of March 31, 2022, March 31, 2021, and December 31, 2021, respectively. See Note 13 in the 2021 Form 10-K.
Investments in Gas PipelineUnconsolidated Affiliates
On August 6,December 17, 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. 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 March 31, 2022 due to equity method goodwill. Equity in earnings of Avion Water is included in other income (expense), net.
In 2020, NWNNW 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 sale of 100% ofprimary 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 Trail West Holdings, LLC (TWH)Lexington using the equity method of accounting because NW Natural does not control but has the ability to an unrelated third party for a purchase priceexercise significant influence over Lexington's operations after commissioning. There was no gain or loss recognized upon deconsolidation. NW Natural determined the fair value of $14.0 million, $7.0 million ofthe investment approximated the carrying value which was paid upon closing the transaction,primarily comprised of cash and $7.0 million is to be paid upon the one-year anniversaryproperty, plant and equipment. As of the close date. The completionMarch 31, 2022, NW Natural had an investment balance in Lexington of the sale resulted in an after-tax gain of approximately $0.5$7.9 million.
30
TWH was a variable interest entity reported under equity method accounting through its sale. The investment in TWH did not meet the criteria to be classified as held for sale or discontinued operations. The investment balance in TWH was $13.4 million at June 30, 2020. See Note 14 in the 2020 Form 10-K.
14. BUSINESS COMBINATIONS
2022 Business Combinations
During the three months ended March 31, 2022, there were no acquisitions qualifying as business combinations.
2021 Business Combinations
During the six months ended June 30, 2021, NWN Water completed 1 acquisition of a water system that qualified as a business combination. The aggregate fair value of the preliminary consideration transferred for this acquisition was not material and is not significant to NW Holdings' results of operations.
2020 Business Combinations
During 2020, NWN Water and its subsidiaries completed 2 significant4 acquisitions qualifying as business combinations. The aggregate fair value of the total cash consideration transferred for these acquisitions was $38.1 million, most of which was allocated to property, plant and equipment and goodwill. These transactions align with NW Holdings' water sector strategy as it continues to expand its water services territories in the Pacific Northwest and beyond and included:
•Suncadia Water Company, LLC and Suncadia Environmental Company, LLC which were acquired by NWN Water of Washington on January 31, 2020, and
•T&W Water Service Company which was acquired by NWN Water of Texas on March 2, 2020.
As each of these acquisitions met the criteria of a business combination, a preliminary allocation of the consideration to the acquired net assets based on their estimated fair value as of the acquisition date was performed. In accordance with U.S. GAAP, the fair value determination involves management judgment in determining the significant estimates and assumptions used and was made using existing regulatory conditions for net assets associated with Suncadia Water Company, LLC and T&W Water Service Company.
Final goodwill of $18.2 million was recognized from the acquisitions described above. NaN intangible assets aside from goodwill were acquired. The goodwill recognized is attributable to the regulated water utility service territories, experienced workforces, and the strategic benefits from both the water and wastewater utilities expected from growth in their service territories. The total amount of goodwill that is expected to be deductible for income tax purposes is approximately $16.5 million. The acquisition costs associated with each business combination were expensed as incurred. The results of these business combinations were not material to the consolidated financial results of NW Holdings.
Other Business Combinations
During 2020, NWN Water completed 3 additional acquisitions, comprised of four water systems and one wastewater system, which qualified as business combinations. The aggregate fair value of the preliminary consideration transferred for these acquisitions was approximately $1.5 million. These business combinations were not material and are not significant to NW Holdings' results of operations.
Goodwill
NW Holdings 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.
As a result of all acquisitions completed, total goodwill was $70.6 million, $69.3 million, $70.2 million and $69.2$70.6 million as of June 30,March 31, 2022, March 31, 2021, June 30, 2020 and December 31, 2020,2021, respectively. The decrease in the goodwill balance from the second quarter of 2020 is primarily due to a measurement period adjustment that occurred in the fourth quarter of 2020, partially offset by acquisitions in the water sector. The increase in the goodwill balance from the fourth quarter of 2020 is primarily due to additions associated with our acquisitions in the water sector. All of our goodwill is related to water and wastewater acquisitions and is included in the other category for segment reporting purposes. The annual impairment assessment of goodwill occurs in the fourth quarter of each year. There have been 0no impairments recognized to date.
15. DERIVATIVE INSTRUMENTS
NW Natural enters into financial derivative contracts to hedge a portion of the NGD 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 NW 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 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 NGD 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 NGD customers.
Notional Amounts
The following table presents the absolute notional amounts related to open positions on NW Natural derivative instruments:
| | | June 30, | | December 31, | | March 31, | | December 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2020 | In thousands | | 2022 | | 2021 | | 2021 |
| Natural gas (in therms): | Natural gas (in therms): | | Natural gas (in therms): | |
| Financial | Financial | | 680,335 | | | 654,145 | | | 784,400 | | Financial | | 449,710 | | | 597,495 | | | 618,815 | |
| Physical | Physical | | 419,148 | | | 570,600 | | | 457,593 | | Physical | | 317,840 | | | 187,595 | | | 431,628 | |
| Foreign exchange | Foreign exchange | | $ | 6,477 | | | $ | 7,176 | | | $ | 5,896 | | Foreign exchange | | $ | 5,216 | | | $ | 5,954 | | | $ | 6,268 | |
Purchased Gas Adjustment (PGA)
DerivativesUnder the PGA mechanism in Oregon, derivatives entered into by NW 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. Rates and hedging approaches may vary between states dueHedge contracts entered into prior to different rate structures and mechanisms.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 2020-21 and 2019-20 2021-22 gas yearsyear with its forecasted sales volumes hedged at 53% and 52%approximately79% in total. The total hedged for Oregon was approximately 82%, including 62% in financial swap and option contracts, and 17%hedges and 19% in physical gas supplies, respectively. Hedge contracts entered into prior to the PGA filingsupplies. The total hedged for Washington was approximately 57%, including 44% in September 2020 were includedfinancial hedges and 13% in the PGA for the 2020-21physical 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.
Unrealized and Realized Gain/Loss
The following table reflects the income statement presentation for the unrealized gains and losses from NW Natural's derivative instruments, which also represents all derivative instruments at NW Holdings:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 2021 | | 2020 |
| In thousands | | Natural gas commodity | | Foreign exchange | | Natural gas commodity | | Foreign exchange |
| Benefit (expense) to cost of gas | | $ | 16,323 | | | $ | (45) | | | $ | 5,492 | | | $ | 459 | |
| Operating revenues (expense) | | 0 | | | 0 | | | 754 | | | 0 | |
| Amounts deferred to regulatory accounts on balance sheet | | (16,323) | | | 45 | | | (6,119) | | | (459) | |
| Total gain (loss) in pre-tax earnings | | $ | 0 | | | $ | 0 | | | $ | 127 | | | $ | 0 | |
| | | Six Months Ended June 30, | | Three Months Ended March 31, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| In thousands | In thousands | | Natural gas commodity | | Foreign exchange | | Natural gas commodity | | Foreign exchange | In thousands | | Natural gas commodity | | Foreign exchange | | Natural gas commodity | | Foreign exchange |
| Benefit (expense) to cost of gas | Benefit (expense) to cost of gas | | $ | 36,805 | | | $ | 32 | | | $ | 149 | | | $ | (7) | | Benefit (expense) to cost of gas | | $ | 73,785 | | | $ | 80 | | | $ | 20,482 | | | $ | 77 | |
| Operating revenues (expense) | Operating revenues (expense) | | (27) | | | 0 | | | (1,679) | | | 0 | | Operating revenues (expense) | | — | | | — | | | (27) | | | — | |
| Amounts deferred to regulatory accounts on balance sheet | Amounts deferred to regulatory accounts on balance sheet | | (36,782) | | | (32) | | | 1,286 | | | 7 | | Amounts deferred to regulatory accounts on balance sheet | | (73,785) | | | (80) | | | (20,459) | | | (77) | |
| Total gain (loss) in pre-tax earnings | Total gain (loss) in pre-tax earnings | | $ | (4) | | | $ | 0 | | | $ | (244) | | | $ | 0 | | Total gain (loss) in pre-tax earnings | | $ | — | | | $ | — | | | $ | (4) | | | $ | — | |
Unrealized Gain/Loss
Outstanding derivative instruments related to regulated NGD 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
NW Natural realized net gains of $4.2$36.0 million and $9.3$5.1 million for the three and six months ended June 30,March 31, 2022 and 2021, respectively, from the settlement of natural gas financial derivative contracts, whereas, net losses of $1.1 million and $3.2 million were realized for the three and six months ended June 30, 2020.contracts. Realized gains and losses offset the higher or lower cost of gas purchased, resulting in 0no incremental amounts to collect or refund to customers.
Credit Risk Management of Financial Derivatives Instruments
NaNNo collateral was posted with or by NW Natural counterparties as of June 30, 2021March 31, 2022 or 2020.2021. 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 NW 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 20212022 or 2020.2021. 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. If credit-risk related contingent features within these contracts were triggered as of June 30, 2021, assuming current gas prices and a credit rating downgrade to a speculative level, we would not be required to post collateral calls, including estimates for adequate assurance.
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’sNatural's current commodity financial swap and option contracts outstanding reflect unrealized gains of $54.3$88.6 million and $5.3$21.3 million at June 30, 2021March 31, 2022 and June 30, 2020, respectively.2021. If netted by counterparty, NW Natural's physical and financial derivative position would result in an asset of $89.3 million and a liability of $2.4 million as of March 31, 2022, an asset of $21.2 million and a liability of $0.5 million as of March 31, 2021, and an asset of $51.8 million and a liability of $1.6 million as of June 30, 2021, an asset of $6.7 million and a liability of $1.5 million as of June 30, 2020, and an asset of $14.1 million and a liability of $1.3$3.8 million as of December 31, 2020.2021.
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 minimize this risk along with collateral support agreements with counterparties based on their credit ratings. In certain cases, NW Natural requiresmay require guarantees or letters of credit from counterparties to meet its minimum credit requirement standards. See Note 1615 in the 20202021 Form 10-K for additional information.
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 June 30, 2021. Using significant other observable or Level 2 inputs, theMarch 31, 2022. The net fair value was an asset of $50.2$86.9 million, an asset of $5.2$20.7 million, and an asset of $12.8$48.0 million as of June 30,March 31, 2022 and 2021, and 2020, and December 31, 2020,2021, respectively. No Level 3 inputs were used in our derivative valuations during the sixthree months ended June 30, 2021March 31, 2022 and 2020.2021. See Note 2 in the 20202021 Form 10-K.
16. ENVIRONMENTAL MATTERS
NW Natural owns, or previously owned, properties that may require environmental remediation or action. The 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 recovery mechanisms in place to collect 96.7% of remediation costs allocable to Oregon customers and 3.3% of costs allocable to Washington 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 Portland 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 NW Natural's balance sheet:
| | | Current Liabilities | | Non-Current Liabilities | | Current Liabilities | | Non-Current Liabilities |
| | June 30, | | December 31, | | June 30, | | December 31, | | March 31, | | December 31, | | March 31, | | December 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2020 | | 2021 | | 2020 | | 2020 | In thousands | | 2022 | | 2021 | | 2021 | | 2022 | | 2021 | | 2021 |
| Portland Harbor site: | Portland Harbor site: | | Portland Harbor site: | |
| Gasco/Siltronic Sediments | Gasco/Siltronic Sediments | | $ | 6,658 | | | $ | 10,431 | | | $ | 7,596 | | | $ | 41,652 | | | $ | 41,945 | | | $ | 43,725 | | Gasco/Siltronic Sediments | | $ | 6,086 | | | $ | 7,026 | | | $ | 7,582 | | | $ | 41,408 | | | $ | 42,374 | | | $ | 42,076 | |
| Other Portland Harbor | Other Portland Harbor | | 2,195 | | | 2,434 | | | 1,942 | | | 6,588 | | | 6,228 | | | 7,020 | | Other Portland Harbor | | 2,198 | | | 2,175 | | | 2,592 | | | 9,092 | | | 6,954 | | | 9,570 | |
| Gasco/Siltronic Upland site | Gasco/Siltronic Upland site | | 12,442 | | | 10,979 | | | 14,887 | | | 38,401 | | | 41,878 | | | 40,250 | | Gasco/Siltronic Upland site | | 13,203 | | | 13,135 | | | 15,711 | | | 35,283 | | | 39,302 | | | 36,215 | |
| | Front Street site | Front Street site | | 1,219 | | | 10,222 | | | 3,816 | | | 975 | | | 1,059 | | | 1,107 | | Front Street site | | 799 | | | 1,258 | | | 1,100 | | | 868 | | | 1,132 | | | 811 | |
| Oregon Steel Mills | Oregon Steel Mills | | 0 | | | 0 | | | 0 | | | 179 | | | 179 | | | 179 | | Oregon Steel Mills | | — | | | — | | | — | | | 179 | | | 179 | | | 179 | |
| Total | Total | | $ | 22,514 | | | $ | 34,066 | | | $ | 28,241 | | | $ | 87,795 | | | $ | 91,289 | | | $ | 92,281 | | Total | | $ | 22,286 | | | $ | 23,594 | | | $ | 26,985 | | | $ | 86,830 | | | $ | 89,941 | | | $ | 88,851 | |
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 100 PRPs, each 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 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.
NW 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. NW Natural is 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; accordingly, NW Natural has not modified any of the recorded liabilities at this time as a result of the issuance of the Portland Harbor ROD.
NW Natural manages its liability related to the Superfund site as 2 distinct remediation projects: the Gasco/SiltronicGasco Sediments Site and Other Portland Harbor projects.
GASCO/SILTRONICGASCO 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. In 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.EPA for the Gasco sediments site. These preliminary design discussions did not include a cost estimate for alternatives, none of thecleanup. No design alternatives are more likely than othersthe 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 cleanup range from $48.3$47.5 million to $350 million. NW Natural has recorded a liability of $48.3$47.5 million for the Gasco sediment clean-up, which reflects the low end of the range. At this time, we believe sediments at the Gasco sediments site represent the largest portion of NW Natural's liability related to the Portland Harbor site discussed above.
OTHER PORTLAND HARBOR. While we believe liabilities associated with the Gasco/SiltronicGasco sediments site represent NW Natural's largest exposure, there are other potential exposures associated with the Portland Harbor ROD, including NRD costs and harborwide remedial 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. NaN 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 2 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
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 Cleanup 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 2 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 Remedialthe 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 adjacent to the Gasco site formerly owned by Portland Gas & Coke between 1939 and 1960 into the Gasco RA and FS, excluding the uplands for Siltronic.FS. Previously, 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
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.
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, NW 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. Construction of the remedy began in early July 2020 and was completed in October 2020. The first year of post-construction monitoring was completed in 2021 and demonstrated that the cap was intact and performing as designed. NW Natural has recognized an additional liability of $2.2$1.7 million for long term monitoring,munitions and design costs, regulatory and permitting issues, and post-construction work.
OREGON STEEL MILLS SITE. Refer to "Legal Proceedings" below.
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. On October 21, 2019, the WUTC authorized an Environmental Cost Recovery Mechanism (ECRM) for recovery of prudently incurred costs allocable to Washington customers beginning November 1, 2019. See Note 1817 in the 20202021 Form 10-K for a description of SRRM and ECRM collection processes.
The following table presents information regarding the total regulatory asset deferred:
| | | June 30, | | December 31, | | March 31, | | December 31, |
| In thousands | In thousands | | 2021 | | 2020 | | 2020 | In thousands | | 2022 | | 2021 | | 2021 |
Deferred costs and interest (1) | Deferred costs and interest (1) | | $ | 50,604 | | | $ | 42,098 | | | $ | 44,516 | | Deferred costs and interest (1) | | $ | 45,482 | | | $ | 46,409 | | | $ | 45,122 | |
Accrued site liabilities (2) | Accrued site liabilities (2) | | 110,237 | | | 124,981 | | | 120,352 | | Accrued site liabilities (2) | | 109,061 | | | 113,456 | | | 115,773 | |
| Insurance proceeds and interest | Insurance proceeds and interest | | (69,730) | | | (81,146) | | | (69,253) | | Insurance proceeds and interest | | (59,895) | | | (69,492) | | | (59,564) | |
Total regulatory asset deferral(1) | Total regulatory asset deferral(1) | | $ | 91,111 | | | $ | 85,933 | | | $ | 95,615 | | Total regulatory asset deferral(1) | | $ | 94,648 | | | $ | 90,373 | | | $ | 101,331 | |
Current regulatory assets(3) | Current regulatory assets(3) | | 5,688 | | | 4,176 | | | 4,992 | | Current regulatory assets(3) | | 7,082 | | | 5,396 | | | 6,694 | |
Long-term regulatory assets(3) | Long-term regulatory assets(3) | | 85,423 | | | 81,757 | | | 90,623 | | Long-term regulatory assets(3) | | 87,566 | | | 84,977 | | | 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 $0.1 million at June 30, 2021, $0.4March 31, 2022, $0.1 million at June 30, 2020,March 31, 2021, and $0.2$0.1 million at December 31, 2020,2021.
(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 norfor 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.
Environmental Earnings Test
To the extent NW 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 NW Natural earns more than its authorized ROE in a year, it is required to cover environmental expenses and interest on expenses greater than the $10.0 million with those earnings that exceed its authorized ROE.
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 including the matters discussed above and ordinary course claims and litigation noted below.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 and 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".
Oregon Steel Mills Site
See Note 1817 in the 20202021 Form 10-K.
For additional information regarding other commitments and contingencies, see Note 1716 in the 20202021 Form 10-K.
17. DISCONTINUED OPERATIONS SUBSEQUENT EVENT
0On April 1, 2022, NW Holdings
On June 20, 2018, NWN Gas Storage, then issued and sold 2,875,000 shares of its common stock pursuant to a wholly-owned subsidiaryregistration statement on Form S-3 and related prospectus settlement. NW Holdings received net offering proceeds, after deducting the underwriter's discounts and commissions and estimated 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, entered into a PurchaseNW Natural Water and Sale Agreement (the Agreement) that providedNW Natural Renewables. Contributions to NW Natural, NW Natural Water and NW Natural Renewables are to be used for general corporate purposes. Of the salecontributions received by NWN Gas Storage 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.
On December 4, 2020, NWN Gas Storage closed the sale of all of the membership interests in Gill Ranch and received payment of the initial cash purchase price of $13.5NW Natural, $130.0 million less the $1.0 million deposit previously paid. Furthermore, additional paymentswas used to NWN Gas Storage may be made subject to a maximum amount of $15.0 million in the aggregate (subject to a working capital adjustment) based on the economic performance of Gill Ranch for each full gas storage year (April 1 of one year through March 31 of the following year) occurring after the closing and the remaining portion of the 2020-2021 gas storage year and will continue until such time as the maximum amount has been paid. The fair value of this arrangement at the closing date was zero based on a discounted cash flow forecast. Subsequent changes in the fair value will be recorded in earnings. The completion of the sale resulted in an after-tax gain of $5.9 million for the year ended December 31, 2020.repay its short-term indebtedness.
As a result of the disposition of the membership interests in Gill Ranch, there were 0 assets or liabilities classified as held for sale at June 30, 2021 or December 31, 2020 and there was no activity in the consolidated statement of comprehensive income for the three and six months ended June 30, 2021. The assets and liabilities of the discontinued operations classified as held for sale in the consolidated balance sheet at June 30, 2020 include the following:
| | | | | | | | | | | | |
| | | | NW Holdings
Discontinued Operations |
In thousands | | | | June 30, 2020 | | |
Assets: | | | | | | |
Accounts receivable | | | | $ | 1,621 | | | |
Inventories | | | | 821 | | | |
Other current assets | | | | 250 | | | |
Property, plant, and equipment, net | | | | 13,328 | | | |
Operating lease right of use asset | | | | 118 | | | |
Other non-current assets | | | | 254 | | | |
| | | | | | |
| | | | | | |
Total discontinued operations assets - current assets (1)
| | | | $ | 16,392 | | | |
| | | | | | |
Liabilities: | | | | | | |
Accounts payable | | | | $ | 999 | | | |
| | | | | | |
Other current liabilities | | | | 1,119 | | | |
Operating lease liabilities | | | | 112 | | | |
Other non-current liabilities | | | | 11,344 | | | |
| | | | | | |
| | | | | | |
Total discontinued operations liabilities - current liabilities (1)
| | | | $ | 13,574 | | | |
(1) The total assets and liabilities of Gill Ranch were classified as current because it was probable that the sale would be completed within one year.
The following table presents the operating results of Gill Ranch and is presented net of tax on the consolidated statements of comprehensive income:
| | | | | | | | | | | | | | | | | | |
| | | | NW Holdings
Discontinued Operations |
| | | | Three Months Ended June 30, | | | | Six Months Ended June 30, |
| In thousands, except per share data | | | | 2020 | | | | 2020 |
| Revenues | | | | $ | 3,374 | | | | | $ | 4,282 | |
| Expenses: | | | | | | | | |
| Operations and maintenance | | | | 2,604 | | | | | 4,184 | |
| General taxes | | | | 53 | | | | | 100 | |
| Depreciation and amortization | | | | 106 | | | | | 212 | |
| Other expenses and interest | | | | 228 | | | | | 459 | |
| Total expenses | | | | 2,991 | | | | | 4,955 | |
| Income (loss) from discontinued operations before income taxes | | | | 383 | | | | | (673) | |
| Income tax expense (benefit) | | | | 103 | | | | | (175) | |
| Income (loss) from discontinued operations, net of tax | | | | $ | 280 | | | | | $ | (498) | |
| | | | | | | | |
| Earnings (loss) from discontinued operations per share of common stock: | | | | | | | | |
| Basic | | | | $ | 0.01 | | | | | $ | (0.01) | |
| Diluted | | | | $ | 0.01 | | | | | $ | (0.01) | |
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s assessment of NW Holdings' and NW Natural's financial condition, including the principal factors that affect results of operations. The discussion refers to the consolidated results from continuing operations for the three and six months ended June 30,March 31, 2022 and 2021 and 2020 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 period is not necessarily indicative of expected fiscal year results. Therefore, this discussion should be read in conjunction with NW Holdings' and NW Natural's 20202021 Annual Report on Form 10-K, as applicable (2020(2021 Form 10-K).
NW Natural's natural gas distribution activities are reported in the natural gas distribution (NGD) segment. The NGD segment also includes our NW Natural local gas distribution business, NWN Gas Reserves, which is a wholly ownedwholly-owned subsidiary of Energy Corp, the NGD-portion of NW Natural's Mist storage facility in Oregon, and NW Natural RNG Holding Company, LLC. NW Natural RNG Holding Company, LLC holds an investment in Lexington Renewable Energy, LLC, which is accounted for under the equity method. Other activities aggregated and reported as other 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 NWN Energy's equity investment in Trail West Holdings, LLC (TWH) through August 6, 2020; 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 pursue investments in the water sector. 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 TWH investment.
In addition, NW Holdings reported discontinued operations results related to the sale of Gill Ranch Storage, LLC (Gill Ranch). NW Natural Gas Storage, LLC (NWN Gas Storage), an indirect wholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement during the second quarter of 2018 that provided for the sale of all 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. The sale was completed on December 4, 2020. See Note 17 for information on discontinued operations.
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. All references in this section to earnings per share (EPS) are on the basis of diluted shares. We use such non-GAAP financial measures to analyze our financial performance because we believe they provide useful information to our investors 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 March 31, |
| | 2022 | | 2021 |
| Earnings per share of common stock (diluted) - Total | | $ | 1.80 | | | $ | 1.94 | |
Diluted EPS - NGD segment(1) | | 1.77 | | | 1.76 | |
Diluted EPS - NW Holdings - other(1) | | 0.03 | | | 0.18 | |
(1) Non-GAAP financial measure
EXECUTIVE SUMMARY
Our core mission is to provide safe, reliableCurrent financial results and affordable essential utility services in an environmentally responsible way to better the lives of the public we serve. See "2021 Outlook" in the 2020 Form 10-K for more information. Current highlights include:
•Reported a net lossincome of $0.02$1.80 per share (diluted) for the secondfirst quarter of 2021,2022, compared to a net lossincome of $0.16$1.94 per share (diluted) in the prior year;
•Reported net income of $1.92 per share (diluted) for the first six months of 2021, compared to net income of $1.40 per share (diluted) in the prior year;
•Reached a multi-party settlement in the Washington general rate case;
•Added over 12,000more than 10,800 meters during the past twelve months for a growth rate of 1.6%1.4% at June 30, 2021;March 31, 2022;
•Invested nearly $70 million in our utility systems in the first three months of 2022 for greater reliability and resiliency;
•Commenced operations at the first renewable natural gas (RNG) facility under the landmark Oregon legislation Senate Bill 98, which is producing RNG on behalf of our gas utility customers;
•Construction began on the first RNG facility in which our competitive renewables business is investing; and
•Continued executing our water and wastewater acquisition and investment strategy, and providing clean, reliable water and wastewaterannouncing acquisitions near our existing service to approximately 64,000 people through 27,000 connections.territory in Texas.
Key quarter-to-dateyear-to-date financial highlights for NW Holdings include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
| | 2021 | | 2020 | | QTD |
| In thousands, except per share data | | Amount | Per Share | | Amount | Per Share | | Change |
| Net loss from continuing operations | | $ | (724) | | $ | (0.02) | | | $ | (5,132) | | $ | (0.17) | | | $ | 4,408 | |
| Income from discontinued operations, net of tax | | — | | — | | | 280 | | 0.01 | | | (280) | |
| Consolidated net loss | | $ | (724) | | $ | (0.02) | | | $ | (4,852) | | $ | (0.16) | | | $ | 4,128 | |
| NGD margin | | $ | 91,206 | | | | $ | 79,651 | | | | $ | 11,555 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | YTD |
| In thousands, except per share data | | Amount | | Per Share | | Amount | | Per Share | | Change |
| | | | | | | | | | |
| | | | | | | | | | |
| Consolidated net income | | $ | 56,239 | | | $ | 1.80 | | | $ | 59,517 | | | $ | 1.94 | | | $ | (3,278) | |
| | | | | | | | | | |
Key quarter-to-dateyear-to-date financial highlights for NW Natural include:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
| | 2021 | | 2020 | | QTD |
| In thousands | | Amount | | Amount | | Change |
| Consolidated net income (loss) | | $ | 589 | | | $ | (4,712) | | | $ | 5,301 | |
| NGD margin | | $ | 91,206 | | | $ | 79,651 | | | $ | 11,555 | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | YTD |
| In thousands | | Amount | | Amount | | Change |
| Consolidated net income | | $ | 57,416 | | | $ | 60,111 | | | $ | (2,695) | |
| Natural gas distribution margin | | $ | 177,732 | | | $ | 172,640 | | | $ | 5,092 | |
THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.
Consolidated net income increased $5.3decreased $2.7 million at NW Natural primarily due to the following factors:
•$11.65.9 million increasedecrease in NGD segment margin driven by the 2020 Oregon rate case and the recovery of commercial customer activity comparedasset management revenue primarily due to the priorFebruary 2021 cold weather event discussed below that did not recur in the current year; and
•$1.2 million decrease in interest expense primarily due to lower short-term debt balances; partially offset by
•$3.74.7 million increase in operations and maintenance expenses due to higher lease expense, professional servicecontract labor, compensation costs, information technology expenses and information technology costs;amortization expense related to cloud computing arrangements; partially offset by
•$2.55.1 million increase in depreciationNGD segment margin driven by the 2021 Washington rate case, customer growth and amortization expense due to property, plant, and equipment additions as we continued to investa benefit from the gas cost incentive sharing mechanism;
•$2.7 million increase in our natural gas utility systems;other income (expense), net driven by lower pension non-service costs; and
•$1.71.2 million increasedecrease in income tax expense primarily due to an increasea decrease in pretax income.
Net loss from continuing operationsConsolidated net income decreased $4.4$3.3 million at NW Holdings primarily due to the following factors:
•$5.32.7 million increasedecrease in consolidated net income at NW Natural as discussed above; partially offset by
•$0.9 million decrease in other net income primarily reflecting higher holding company expenses.
Key year-to-date financial highlights for NW Holdings include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
| | 2021 | | 2020 | | YTD |
| In thousands, except per share data | | Amount | | Per Share | | Amount | | Per Share | | Change |
| Net income from continuing operations | | $ | 58,793 | | | $ | 1.92 | | | $ | 43,144 | | | $ | 1.41 | | | $ | 15,649 | |
| Loss from discontinued operations, net of tax | | — | | | — | | | (498) | | | (0.01) | | | 498 | |
| Consolidated net income | | $ | 58,793 | | | $ | 1.92 | | | $ | 42,646 | | | $ | 1.40 | | | $ | 16,147 | |
| | | | | | | | | | |
Key year-to-date financial highlights for NW Natural include:
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
| | 2021 | | 2020 | | YTD |
| In thousands | | Amount | | Amount | | Change |
| Consolidated net income | | $ | 60,700 | | | $ | 44,467 | | | $ | 16,233 | |
| Natural gas distribution margin | | $ | 263,846 | | | $ | 233,795 | | | $ | 30,051 | |
SIX MONTHS ENDEDJUNE 30, 2021 COMPARED TO JUNE 30, 2020.
Consolidated net income increased $16.2 million at NW Natural primarily due to the following factors:
•$30.1 million increase in NGD segment margin driven by the 2020 Oregon rate case and residential customer growth; and
•$7.2 million increase in asset management revenue primarily due to the 2021 cold weather event discussed below; partially offset by
•$7.8 million increase in income tax expense due to an increase in pretax income and the Oregon Corporate Activity Tax;
•$6.7 million increase in operations and maintenance expenses due to higher lease expense, compensation and benefit costs, and professional service expenses;
•$5.5 million increase in depreciation expense due to property, plant, and equipment additions as we continued to invest in our natural gas utility systems; and
•$2.0 million increase in general taxes primarily due to higher assessed property values.
Net income from continuing operations increased $15.6 million at NW Holdings primarily due to the following factors:
•$16.2 million increase in consolidated net income at NW Natural as discussed above; partially offset by
•$0.6 million decrease in other net income primarily reflecting higher business development costs at the holding company expenses.related to water and wastewater utilities.
2021 COLD WEATHER EVENT. In February 2021, Portland, Oregon and the surrounding region, like much of the country, 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 a regulatory asset for recovery in future rates. The result was approximately $2 million of lower natural gas utility margin in the first sixthree months of 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 benefit of customers.
COVID-19 AND CURRENT ECONOMIC CONDITIONS. The novel coronavirus (COVID-19),We are evaluating and monitoring current economic conditions, which was declared a pandemic by the World Health Organizationinclude but are not limited to: inflation, rising interest rates and commodity costs, heightened cybersecurity awareness, and supply chain disruptions. We have enhanced cybersecurity monitoring in March 2020, has resulted in severe and widespread global, national, and local economic and societal disruptions. As a critical infrastructure energy company that provides an essential service to our customers, NW Natural has well-defined emergency response command structures and protocols. In response to the pandemic, NW Natural mobilized its incident command teamreports that cybersecurity attacks have and business continuity planswill continue to increase. We have not experienced material disruptions in early March 2020, with a focus on the safety of our 1,200 employeessupply chain for goods and the 2.5 million people, business partners and communities we serve. For employees whose role requires themservices to work in the field or onsite, we are following CDC, OSHA, and state specific requirements.date. Our water companies are following similar protocols.
The states we operate in have reopened with many businesses beginning to return to normal operating practices; however, the timing for recovery of businesses and local economies remains difficult to predict and dependent on the future impacts of the COVID-19 pandemic, resurgences or mutations of the virus, or efficacy of vaccines. We currently have the following expectations and beliefs:
•Both NW Natural and NW Natural Water expect their capital projects in 2021 to move forward as planned.
•NW Natural's customer growth rate is affected by both new meter connections and when existing customers close their accounts and disconnect their meters. Customer growth from construction and conversions remained strong during the first six months of 2021 and commercial customer counts remained steady. A slow economic recovery could result in a decline in new meter connections, which could adversely affect margin in 2021 and the following periods. In addition, we are closely monitoring our approximately 70,000 commercial and industrial natural gas meters, as a substantial decline in these meters could materially affect margin in 2021 and the following periods. We don't anticipate significant residential meter disconnections.
•NW Natural has seen lower utility margin from a reduction in overall sales volumes during the first six months of 2021 and 2020 attributed to COVID-19. While we are substantially through our peak heating season this spring, we may still see declines in volumes, depending on the resiliency of businesses in the communities in which we serve through the remainder of 2021. However, volumes do not translate directly to earnings as the majority of our NGD margin is not dependent on volumes.
•The state of Oregon reopened June 30, 2021 and the majority of our commercial and industrial customers have returned to normal business practices. In Oregon, residential customers began the process of resuming normal business practices on June 30, 2021 and Washington residential customers are expected to resume beginning September 30, 2021. The recognition of late and disconnection fee revenue may be delayed beyond our current expectations.
•As the pandemic continued into the 2020-2021 winter heating season, certain customers were faced with seasonally higher natural gas usage and bills. This could have a financial strain on our customers and impact their ability to pay their bills in a timely manner thus potentially increasing our working capital needs.
•While we deferred to a regulatory asset certain COVID-related financial impacts as agreed upon with regulators, ultimate recovery of these costs and prudence review will be determined through separate proceedings andsuppliers may be subject to modificationlack 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 a result of those proceedings.necessary.
Given the evolving nature of the pandemic and resulting economic conditions, we are continually monitoring our business operations and the larger trends and developments to take additional measures we believe are warranted to continue providing safe and reliable service to our customers and communities while protecting our employees.
See the discussion in "Results of Operations", "Regulatory Matters" and "Financial Condition" below for additional detail regarding all significant activity that occurred during the secondfirst quarter of 2021.2022.
DIVIDENDS
Dividend highlights include:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | QTD
Change | | YTD Change | | | | Three Months Ended March 31, | | | YTD Change |
| Per common share | Per common share | | 2021 | | 2020 | | 2021 | | 2020 | | Per common share | | | 2022 | | 2021 | | |
| Dividends paid | Dividends paid | | $ | 0.4800 | | | $ | 0.4775 | | | $ | 0.9600 | | | $ | 0.9550 | | | $ | 0.0025 | | | $ | 0.0050 | | Dividends paid | | | $ | 0.4825 | | | $ | 0.4800 | | | | $ | 0.0025 | |
In July 2021,April 2022, the Board of Directors of NW Holdings declared a quarterly dividend on NW Holdings common stock of $0.4800$0.4825 per share. The dividend is payable on AugustMay 13, 20212022 to shareholders of record on July 30, 2021,April 29, 2022, reflecting an annual indicated dividend rate of $1.92$1.93 per share.
RESULTS OF OPERATIONS
Business Segment - Natural Gas Distribution (NGD)
NGD margin results are primarily affected by customer growth, revenues from rate-base additions, and, to a certain extent, by changes in delivered volumes due to weather and customers’ gas usage patterns. In Oregon, NW Natural has a conservation tariff (also called the decoupling mechanism), which adjusts 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 offset changes in 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 natural gas distribution earnings. For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters—Rate Mechanisms" in NW Natural's 2021 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.
The NGD business is primarily seasonal in nature due to higher gas usage by residential and commercial customers during the cold winter heating months. Other categories of customers experience seasonality in their usage but to a lesser extent. Seasonality affects the comparability of the results of operations of the NGD business across quarters but not across years.
NGD segment highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD Change |
| In thousands, except EPS data | | | | | | 2022 | | 2021 | | |
| NGD net income | | | | | | $ | 55,390 | | | $ | 53,925 | | | | | $ | 1,465 | |
| Diluted EPS - NGD segment | | | | | | $ | 1.77 | | | $ | 1.76 | | | | | $ | 0.01 | |
| Gas sold and delivered (in therms) | | | | | | 428,386 | | | 431,120 | | | | | (2,734) | |
NGD margin(1) | | | | | | $ | 177,732 | | | $ | 172,640 | | | | | $ | 5,092 | |
(1) See Natural Gas Distribution Margin Table below for additional detail.
THREE MONTHS ENDEDMARCH 31, 2022 COMPARED TO MARCH 31, 2021. The primary factors contributing to the $1.5 million, or $0.01 per share, increase in NGD net income were as follows:
•$5.1 millionincrease in NGD margin due to:
•$1.6 million increase due to new customer rates, primarily from the 2021 Washington rate case that went into effect on November 1, 2021;
•$2.0 million increase due to customer growth; and
•$2.3 million increase driven by the gas cost incentive sharing mechanism as the prior year included the effect of purchasing higher priced gas for the February 2021 cold weather event.
In addition to the increase in margin, NGD net income for 2022 reflects:
•$4.7 million increase in NGD operations and maintenance expenses due to higher contract labor, compensation costs, information technology expenses and amortization expense related to cloud computing arrangements; and
•$2.5 million increase in other income (expense), net driven by lower pension non-service costs.
For the three months ended March 31, 2022, total NGD volumes sold and delivered decreased 1% over the same period in 2021 primarily due to 8% warmer than average weather in the first three months of 2022 compared to 5% warmer than average weather in the prior period.
NATURAL GAS DISTRIBUTION MARGIN TABLE. The following table summarizes the composition of NGD gas volumes, revenues, and cost of sales:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | Favorable/
(Unfavorable) |
| In thousands, except degree day and customer data | | | | | | 2022 | | 2021 | | | | YTD Change |
| NGD volumes (therms) | | | | | | | | | | | | |
| Residential and commercial sales | | | | | | 293,927 | | | 297,822 | | | | | (3,895) | |
| Industrial sales and transportation | | | | | | 134,459 | | | 133,298 | | | | | 1,161 | |
| Total NGD volumes sold and delivered | | | | | | 428,386 | | | 431,120 | | | | | (2,734) | |
| Operating Revenues | | | | | | | | | | | | |
| Residential and commercial sales | | | | | | $ | 314,607 | | | $ | 278,584 | | | | | $ | 36,023 | |
| Industrial sales and transportation | | | | | | 21,273 | | | 17,379 | | | | | 3,894 | |
| Other distribution revenues | | | | | | 607 | | | 590 | | | | | 17 | |
| Other regulated services | | | | | | 4,911 | | | 4,785 | | | | | 126 | |
| Total operating revenues | | | | | | 341,398 | | | 301,338 | | | | | 40,060 | |
| Less: Cost of gas | | | | | | 145,644 | | | 112,266 | | | | | (33,378) | |
| Less: Environmental remediation expense | | | | | | 4,698 | | | 3,777 | | | | | (921) | |
| Less: Revenue taxes | | | | | | 13,324 | | | 12,655 | | | | | (669) | |
| NGD margin | | | | | | $ | 177,732 | | | $ | 172,640 | | | | | $ | 5,092 | |
| | | | | | | | | | | | |
Margin(1) | | | | | | | | | | | | |
| Residential and commercial sales | | | | | | $ | 163,128 | | | $ | 160,772 | | | | | $ | 2,356 | |
| Industrial sales and transportation | | | | | | 8,926 | | | 8,754 | | | | | 172 | |
| | | | | | | | | | | | |
| Gain (loss) from gas cost incentive sharing | | | | | | 70 | | | (2,263) | | | | | 2,333 | |
| Other margin | | | | | | 698 | | | 595 | | | | | 103 | |
| Other regulated services | | | | | | 4,910 | | | 4,782 | | | | | 128 | |
| NGD Margin | | | | | | $ | 177,732 | | | $ | 172,640 | | | | | $ | 5,092 | |
| | | | | | | | | | | | |
Degree days(2) | | | | | | | | | | | | |
Average(3) | | | | | | 1,326 | | | 1,326 | | | | | — | |
| Actual | | | | | | 1,217 | | | 1,261 | | | | | (3) | % |
| Percent warmer than average weather | | | | | | (8) | % | | (5) | % | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, | | | | | | | | |
| | 2022 | | 2021 | | Change | | Growth | | | | |
| NGD Meters - end of period: | | | | | | | | | | | | |
| Residential meters | | 718,820 | | | 708,041 | | | 10,779 | | | 1.5% | | | | |
| Commercial meters | | 68,878 | | | 68,938 | | | (60) | | | (0.1)% | | | | |
| Industrial meters | | 1,074 | | | 987 | | | 87 | | | 8.8% | | | | |
| Total number of meters | | 788,772 | | | 777,966 | | | 10,806 | | | 1.4% | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) Amounts reported as margin for each category of meters are operating revenues, which are net of revenue taxes, less cost of gas and environmental remediation expense, 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. From November 1, 2018 through October 31, 2020, average weather was calculated over the period May 31, 1992 through May 30, 2017, as determined in NW Natural's 2018 Oregon general rate case.
Residential and Commercial Sales
Residential and commercial sales highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD Change |
| In thousands | | | | | | 2022 | | 2021 | | |
| Volumes (therms) | | | | | | | | | | | | |
| Residential sales | | | | | | 186,329 | | | 194,491 | | | | | (8,162) | |
| Commercial sales | | | | | | 107,598 | | | 103,331 | | | | | 4,267 | |
| Total volumes | | | | | | 293,927 | | | 297,822 | | | | | (3,895) | |
| Operating revenues | | | | | | | | | | | | |
| Residential sales | | | | | | $ | 217,183 | | | $ | 195,802 | | | | | $ | 21,381 | |
| Commercial sales | | | | | | 97,424 | | | 82,782 | | | | | 14,642 | |
| Total operating revenues | | | | | | $ | 314,607 | | | $ | 278,584 | | | | | $ | 36,023 | |
| NGD margin | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Residential NGD margin | | | | | | $ | 119,832 | | | $ | 117,883 | | | | | $ | 1,949 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Commercial NGD margin | | | | | | 43,296 | | | 42,889 | | | | | 407 | |
| Total NGD margin | | | | | | $ | 163,128 | | | $ | 160,772 | | | | | $ | 2,356 | |
THREE MONTHS ENDEDMARCH 31, 2022 COMPARED TO MARCH 31, 2021. Residential and commercial margin increased $2.4 million compared to the prior period. The increase was primarily driven by new customer rates in Washington that took effect on November 1, 2021 and 1.5% growth in residential meters. Volumes decreased by 3.9 million therms due to lower usage from residential customers driven by warmer weather. The decrease was partially offset by higher usage from commercial customers as COVID-19 restrictions and closures were lifted.
Industrial Sales and Transportation
Industrial sales and transportation highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD Change |
| In thousands | | | | | | 2022 | | 2021 | | |
| Volumes (therms) | | | | | | | | | | | | |
| Firm and interruptible sales | | | | | | 28,860 | | | 26,243 | | | | | 2,617 | |
| Firm and interruptible transportation | | | | | | 105,599 | | | 107,055 | | | | | (1,456) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total volumes - sales and transportation | | | | | | 134,459 | | | 133,298 | | | | | 1,161 | |
| NGD margin | | | | | | | | | | | | |
| Firm and interruptible sales | | | | | | $ | 3,699 | | | $ | 3,557 | | | | | $ | 142 | |
| Firm and interruptible transportation | | | | | | 5,227 | | | 5,197 | | | | | 30 | |
| Total margin - sales and transportation | | | | | | $ | 8,926 | | | $ | 8,754 | | | | | $ | 172 | |
THREE MONTHS ENDEDMARCH 31, 2022 COMPARED TO MARCH 31, 2021.Industrial sales and transportation margin increased by $0.2 million compared to the prior period. Volumes increased by 1.2 million therms primarily due to higher usage from multiple customers, most notably in the high-tech and electric manufacturing industries, partially offset by lower usage from customers in the pulp and paper industries.
Cost of Gas
Cost of gas highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD Change |
| In thousands | | | | | | 2022 | | 2021 | | |
| Cost of gas | | | | | | $ | 145,644 | | | $ | 112,266 | | | | | $ | 33,378 | |
Volumes sold (therms)(1) | | | | | | 322,787 | | | 324,065 | | | | | (1,278) | |
| Average cost of gas (cents per therm) | | | | | | $ | 0.45 | | | $ | 0.35 | | | | | $ | 0.10 | |
Gain (loss) from gas cost incentive sharing(2) | | | | | | $ | 70 | | | $ | (2,263) | | | | | $ | 2,333 | |
(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 ENDEDMARCH 31, 2022 COMPARED TO MARCH 31, 2021. Cost of gas increased $33.4 million, or 30%, primarily due to a 29% increase in average cost of gas with the majority of these higher gas costs embedded in the PGA and customer growth. Volumes sold decreased 1.3 million therms driven by 8% warmer than average weather.
Other Regulated Services Margin
Other regulated services margin highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD Change |
| In thousands | | | | | | 2022 | | 2021 | | |
| North Mist storage services | | | | | | $ | 4,858 | | | $ | 4,716 | | | | | $ | 142 | |
| Other services | | | | | | 52 | | | 66 | | | | | (14) | |
| Total other regulated services | | | | | | $ | 4,910 | | | $ | 4,782 | | | | | $ | 128 | |
THREE MONTHS ENDEDMARCH 31, 2022 COMPARED TO MARCH 31, 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.
Other
Other activities aggregated and reported as other 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); NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities; NWN Water, which owns and continues to pursue investments in the water sector; and NWN Water's investment in Avion Water Company, Inc. (Avion Water). 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 NW Natural:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD Change |
| In thousands, except EPS data | | | | | | 2022 | | 2021 | | |
| NW Natural other - net income | | | | | | $ | 2,026 | | | $ | 6,186 | | | | | $ | (4,160) | |
| Other NW Holdings activity | | | | | | (1,177) | | | (594) | | | | | (583) | |
| NW Holdings other - net income | | | | | | $ | 849 | | | $ | 5,592 | | | | | $ | (4,743) | |
| Diluted EPS - NW Holdings - other | | | | | | $ | 0.03 | | | $ | 0.18 | | | | | $ | (0.15) | |
THREE MONTHS ENDEDMARCH 31, 2022 COMPARED TO MARCH 31, 2021.Other net income decreased $4.2 million at NW Natural and $4.7 million at NW Holdings. The decrease at NW Natural was primarily due to $5.9 million of lower asset management revenue mainly related to the 2021 cold weather event, partially offset by $1.6 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 business development costs at the holding company related to water and wastewater utilities.
Consolidated Operations
Operations and Maintenance
Operations and maintenance highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD |
| In thousands | | | | | | 2022 | | 2021 | | | | Change |
| NW Natural | | | | | | $ | 53,877 | | | $ | 49,187 | | | | | $ | 4,690 | |
| Other NW Holdings operations and maintenance | | | | | | 3,608 | | | 3,004 | | | | | 604 | |
| NW Holdings | | | | | | $ | 57,485 | | | $ | 52,191 | | | | | $ | 5,294 | |
THREE MONTHS ENDEDMARCH 31, 2022 COMPARED TO MARCH 31, 2021.Operations and maintenance expense increased$5.3 million at NW Holdings and $4.7 million at NW Natural. The increase at NW Natural was driven by the following:
•$2.2 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects;
•$0.9 million increase in compensation costs due to higher headcount and wage increases;
•$0.7 million increase in information technology maintenance and support; and
•$0.7 million increase in amortization expense related to cloud computing arrangements.
The $0.6 million increase in other NW Holdings operations and maintenance expense primarily reflects higher business development costs at the holding company and higher operating expenses at our water and wastewater subsidiaries.
Depreciation
Depreciation highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD |
| In thousands | | | | | | 2022 | | 2021 | | | | Change |
| NW Natural | | | | | | $ | 27,637 | | | $ | 27,169 | | | | | $ | 468 | |
| Other NW Holdings depreciation | | | | | | 792 | | | 928 | | | | | (136) | |
| NW Holdings | | | | | | $ | 28,429 | | | $ | 28,097 | | | | | $ | 332 | |
THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO MARCH 31, 2021. Depreciation expense increased $0.3 million and $0.5 million at NW Holdings and NW Natural, respectively, primarily due to additional capital investments in the distribution system, Mist storage, and information technology systems, as well as renovation and construction of resource and operations service centers.
Other Income (Expense), Net
Other income (expense), net highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD |
| In thousands | | | | | | 2022 | | 2021 | | | | Change |
| NW Natural other income (expense), net | | | | | | $ | (981) | | | $ | (3,665) | | | | | $ | 2,684 | |
| Other NW Holdings activity | | | | | | 27 | | | 123 | | | | | (96) | |
| NW Holdings other income (expense), net | | | | | | $ | (954) | | | $ | (3,542) | | | | | $ | 2,588 | |
THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO MARCH 31, 2021.Other income (expense), net changed $2.6 million and $2.7 million at NW Holdings and NW Natural, respectively, primarily due to lower 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 gains on plan assets. The change at other NW Holdings was driven by the change at NW Natural.
Interest Expense, Net
Interest expense, net highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD |
| In thousands | | | | | | 2022 | | 2021 | | | | Change |
| NW Natural | | | | | | $ | 10,831 | | | $ | 10,790 | | | | | $ | 41 | |
| Other NW Holdings interest expense, net | | | | | | 691 | | | 336 | | | | | 355 | |
| NW Holdings | | | | | | $ | 11,522 | | | $ | 11,126 | | | | | $ | 396 | |
THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO MARCH 31, 2021. Interest expense, net was relatively flat at NW Natural and increased $0.4 million at NW Holdings. Interest expense, net at NW Natural decreased $0.4 million due to higher Allowance for Funds Used During Construction or AFUDC debt interest income, offset by $0.4 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 credit facility at NW Holdings.
Income Tax Expense
Income tax expense highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD |
| In thousands | | | | | | 2022 | | 2021 | | | | Change |
| NW Natural income tax expense | | | | | | $ | 19,323 | | | $ | 20,552 | | | | | $ | (1,229) | |
| NW Holdings income tax expense | | | | | | $ | 18,923 | | | $ | 20,521 | | | | | $ | (1,598) | |
THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO MARCH 31, 2021. Income tax expense decreased $1.2 million at NW Natural and $1.6 million at NW Holdings. The decrease in income tax expense is primarily due to a decrease in pre-tax income.
Regulatory Matters
For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the 20202021 Form 10-K.
Regulation and Rates
NATURAL GAS DISTRIBUTION. NW Natural's natural gas distribution business is subject to regulation by the OPUC and WUTC with respect to, among other matters, rates and terms of service, systems of accounts, and issuances of securities by NW Natural. At June 30, 2021,March 31, 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 General Rate Cases" below.
MIST INTERSTATE GAS STORAGE. NW Natural's interstate storage activity at Mist is subject to regulation by the OPUC, WUTC, and the Federal Energy Regulatory Commission (FERC) with respect to, among other matters, rates and terms of service. The OPUC also regulates the intrastate storage services at Mist, while FERC regulates the interstate storage services at Mist. The FERC uses a maximum cost of service model which allows for gas storage prices to be set at or below the cost of service as approved by each agency in their last regulatory filing. The OPUC Schedule 80 rates are tied to the FERC rates, and are updated whenever NW Natural modifies FERC maximum rates.
OTHER. The wholly owned regulated water businesses of NWN Water, a wholly owned subsidiary of NW Holdings, are subject to regulation by the utility commissions in the states in which they are located, which currently includeincludes Oregon, Washington, Idaho, and Texas.
Most Recent Completed General Rate Cases
OREGON. On October 16, 2020, the OPUC issued an order concluding NW Natural's general rate case filed in December 2019 (Order)(OPUC Order). The OPUC Order providedprovides for a total revenue requirement increase of approximately $45 million over revenues from pre-existingexisting rates. 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 6.965%; 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 OPUC 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 March 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 most 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 2020-21 PGA year.
In addition, the OPUC Order approvesapproved the application of NW Natural’s decoupling calculation for the months of November and May to the month of April. The decoupling mechanism is intended to encourage customers to conserve energy without adversely affecting earnings due to reductions in sales volumes.
FromNew rates authorized by the OPUC Order were effective November 1, 2018 through October 31, 2020, 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.2020.
WASHINGTON. EffectiveOn 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 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 49% common equity, 1%50.0% long-term debt, 1.0% short-term debt, and 50% long-term debt.49.0% common equity. The WUTC also authorized the recovery of environmental remediation expenses allocable to Washington customers
through an Environmental Cost Recovery Mechanism (ECRM) and directed NW Natural to provide federal tax reform benefits to customers. See "Rate Mechanisms - Environmental Cost Deferral and Recovery - Washington ECRM" below.
FERC. NW Natural is required under its Mist interstate storage certificate authority and rate approval orders to file every five years either a petition for rate approval or a cost and revenue study to change or justify maintaining the existing rates for its interstate storage services. On October 12, 2018, NW Natural filed a rate petition with FERC for revised cost-based maximum rates, which incorporated the 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
2021 WASHINGTON2022 OREGON GENERAL RATE CASE. On December 18, 2020,17, 2021, NW Natural filed a request for a general rate increase with the WUTC. On July 27, 2021, NW Natural, Staff of the WUTC, Alliance of Western Energy Consumers, andOPUC. The Energy Project, which comprise all of the parties to the rate case other than the Public Counsel Unit of the Washington State Office of the Attorney General, filedfiling includes a settlement with the WUTC that addresses all issues in the rate case (Comprehensive Settlement). The Comprehensive Settlement, if approved by the WUTC, would resolve all disputed issues in the rate case. The Comprehensive Settlement is subject to review and approval of the WUTC, and Staff's recommendation to approve the Comprehensive Settlement is not binding on the WUTC itself. For new rates to be effective, the WUTC must issue an order, which may approve or deny the terms of the Comprehensive Settlement or be issued under the WUTC's own terms with respect to the elements of the rate case.
The Comprehensive Settlement provides for anrequested $73.5 million annual revenue requirement increase over two years, consisting of a 6.4% or $5.0 million increase in the 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 revenue requirement increase for Year Two includes the addition to rate base of capital projects expected to be placed in-service by November 1, 2022 and is subject to a review and adjustments according to actual costs incurred and any additional direct offsetting factors. Under the terms of the Comprehensive Settlement, NW Natural will provide customers with an estimated $2.3 million offset to rates spread over the two years via suspension of amortization of a regulatory asset associated with NW Natural’s energy efficiency programs and via application of proceeds from the sale of real property in Oregon, which is expected to reduce the Year One rate increase to approximately 5.1% or $4.0 million and the Year Two rate increase to approximately 3.4% or $2.8 million. This two-year rate plan and mitigating provisions strive to balance the need to recover long-planned investments that support continued safe and reliable service to customers with the need to maintain affordable rates, especially during the challenging times and economic environment brought on by the COVID-19 pandemic. The increase is based upon the following assumptions:assumptions or requests:
•Return on equity of 9.5%;
•Cost of capital of 6.814%6.886%; 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.$1.73 billion.
The partiesfiling includes an increase in average rate base of $294 million compared to the Comprehensive Settlement have agreed notlast rate case due to specifyseveral long-planned investments by NW Natural including the underlying inputs tofollowing:
•Upgrading technology including our enterprise resource planning system, cybersecurity and other critical technology systems;
•Supporting distribution system reinforcement and expansion as well as enhancing the costresilience of capital, including capital structureour operating facilities and return on equity.systems; and
•Investing in components of our Mist storage facility, which provides service during peak winter heating months.
The filing requests an additional incremental revenue amount of $8.4 million primarily related to a renewable natural gas investment and technology upgrades and expenses, including cybersecurity items, that are not considered in NW Natural's annual revenue requirement.
NW Natural’s filing will be reviewed by the OPUC and other stakeholders. The process is anticipated to take up to 10 months with new rates expected to take effect November 1, 2022.
Rate Mechanisms
During 20212022 and 2020,2021, NW Natural's key approved rates and recovery mechanisms for each service area included:
| | | Oregon | | Washington | | Oregon | | Washington |
| | 2018 Rate Case | | 2020 Rate Case (effective 11/1/2020) | | 2019 Rate Case (effective 11/1/2019) | | | 2020 Rate Case (effective 11/1/2020) | | 2019 Rate Case (effective 11/1/2019) | | 2021 Rate Case (effective 11/1/2021) |
| Authorized Rate Structure: | Authorized Rate Structure: | | | Authorized Rate Structure: | |
| ROE | 9.4% | | 9.4% | | 9.4% | | |
| ROR | 7.3% | | 7.0% | | 7.2% | | |
| Return on Equity | | Return on Equity | 9.4% | | 9.4% | | ** |
| Rate of Return | | Rate of Return | 7.0% | | 7.2% | | 6.8% |
| Debt/Equity Ratio | Debt/Equity Ratio | 50%/50% | | 50%/50% | | 51%/49% | | Debt/Equity Ratio | 50%/50% | | 51%/49% | | ** |
| | Key Regulatory Mechanisms: | Key Regulatory Mechanisms: | | | Key Regulatory Mechanisms: | |
| Purchased Gas Adjustment (PGA) | Purchased Gas Adjustment (PGA) | X | | X | | X | | Purchased Gas Adjustment (PGA) | X | | X | | X |
| Gas Cost Incentive Sharing | Gas Cost Incentive Sharing | X | | X | | | Gas Cost Incentive Sharing | X | |
| Decoupling | Decoupling | X | | X | | | Decoupling | X | |
| Weather Normalization (WARM) | Weather Normalization (WARM) | X | | X | | | Weather Normalization (WARM) | X | |
| Environmental Cost Recovery | Environmental Cost Recovery | X | | X | | X | | Environmental Cost Recovery | X | | X | | X |
| Interstate Storage and Asset Management Sharing | Interstate Storage and Asset Management Sharing | X | | X | | X | | Interstate Storage and Asset Management Sharing | X | | X | | X |
** The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity.
PURCHASED GAS ADJUSTMENT. Rate changes are established for NW Natural each year under PGA mechanisms in Oregon and Washington to reflect changes in the expected cost of natural gas commodity purchases. The PGA filings include gas costs under spot purchases as well as contract supplies, gas cost hedges, gas costs from the 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 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 2020-21 2021-22 gas year with its forecasted sales volumes hedged at 47%approximately79% in total. The total hedged for Oregon was approximately 82%, including 62% in financial swaphedges and option contracts,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 higher than normal volatility in forward gas markets in 2021, NW Natural increased its hedging of 46%level for the 2021-22 PGA year in Oregon and 58%to 82% compared to 74% in Washington. The percentage of total forecasted sales volume hedged was approximately 60% for Oregon and approximately 69% for Washington.
NW Natural is also hedged between 2%3% and 61%30% for annual requirements over the subsequent fivethree gas years, which consists of between 2%4% and 60%27% in Oregon and between 0% and 69%50% in Washington. Hedge levels are subject to change based on actual load volumes, which depend to a certain extent on weather, economic conditions, and estimated gas reserve production. Also, gas storage inventory levels may increase or decrease with storage expansion, changes in storage contracts with third parties, variations in the heat content of the gas, and/or storage recall by NW Natural. As the Company plans for the 2022-23 gas year, gas price volatility has remained high with current and forward gas prices increasing substantially in April 2022. We will continue to monitor gas prices as we begin to fill storage and look 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 2020,2021, NW Natural filed its annual PGA and received OPUC and WUTC approval in October 2020.2021. PGA rate changes were effective November 1, 2020.2021. Rates and hedging approaches may vary between states due to different rate structures, rate mechanisms and mechanisms.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 2019-202021-22 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 2019-202020-21 and 2020-212021-22 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 2020,2021, the ROE threshold was 10.40%. NW Natural filed the 20202021 earnings test in April 20212022, indicating no customer refund adjustment. NW Natural does not expect a customer
refund adjustment for 20212022 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 of 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 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 smallsmall commercial customers in Oregon are allowed to opt out of the weather normalization mechanism, and as of June 30, 2021, 8%March 31, 2022, 7% of total eligible customers had opted out. NW Natural does not have a weather normalization mechanism approved for Washington customers,customers, which account for aboutabout 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 SRRMResidential and Commercial Sales
Under the Oregon SRRM collection process there are three types of deferred environmental remediation expense:Residential and commercial sales highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD Change |
| In thousands | | | | | | 2022 | | 2021 | | |
| Volumes (therms) | | | | | | | | | | | | |
| Residential sales | | | | | | 186,329 | | | 194,491 | | | | | (8,162) | |
| Commercial sales | | | | | | 107,598 | | | 103,331 | | | | | 4,267 | |
| Total volumes | | | | | | 293,927 | | | 297,822 | | | | | (3,895) | |
| Operating revenues | | | | | | | | | | | | |
| Residential sales | | | | | | $ | 217,183 | | | $ | 195,802 | | | | | $ | 21,381 | |
| Commercial sales | | | | | | 97,424 | | | 82,782 | | | | | 14,642 | |
| Total operating revenues | | | | | | $ | 314,607 | | | $ | 278,584 | | | | | $ | 36,023 | |
| NGD margin | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Residential NGD margin | | | | | | $ | 119,832 | | | $ | 117,883 | | | | | $ | 1,949 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Commercial NGD margin | | | | | | 43,296 | | | 42,889 | | | | | 407 | |
| Total NGD margin | | | | | | $ | 163,128 | | | $ | 160,772 | | | | | $ | 2,356 | |
•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.
•THREE MONTHS ENDEDPost-review - This class of costs represents remediation spend that has been deemed prudentMARCH 31, 2022 COMPARED TO MARCH 31, 2021. Residential 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 equalcommercial margin increased $2.4 million compared to the five-year treasury rate plus 100 basis points.
•Amortization - This class of costs represents amounts included in currentprior period. The increase was primarily driven by new customer rates for collectionin Washington that took effect on November 1, 2021 and is calculated1.5% growth in residential meters. Volumes decreased by 3.9 million therms due to lower usage from residential customers driven by warmer weather. The decrease was partially offset by higher usage from commercial customers 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 $4.2 millionCOVID-19 restrictions and $5.1 million of deferred remediation expense approved by the OPUC for collection during the 2020-21 and 2019-20 PGA years, respectively.closures were lifted.
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 adjustmentsIndustrial Sales and separately amortizes an equalTransportation
Industrial sales 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. For additional information, see Note 18 in the 2020 Form 10-K.transportation highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD Change |
| In thousands | | | | | | 2022 | | 2021 | | |
| Volumes (therms) | | | | | | | | | | | | |
| Firm and interruptible sales | | | | | | 28,860 | | | 26,243 | | | | | 2,617 | |
| Firm and interruptible transportation | | | | | | 105,599 | | | 107,055 | | | | | (1,456) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total volumes - sales and transportation | | | | | | 134,459 | | | 133,298 | | | | | 1,161 | |
| NGD margin | | | | | | | | | | | | |
| Firm and interruptible sales | | | | | | $ | 3,699 | | | $ | 3,557 | | | | | $ | 142 | |
| Firm and interruptible transportation | | | | | | 5,227 | | | 5,197 | | | | | 30 | |
| Total margin - sales and transportation | | | | | | $ | 8,926 | | | $ | 8,754 | | | | | $ | 172 | |
The SRRM earnings test is an annual review of adjusted NGD ROETHREE MONTHS ENDEDMARCH 31, 2022 COMPARED TO MARCH 31, 2021.Industrial sales and transportation margin increased by $0.2 million 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 transferredperiod. Volumes increased by 1.2 million therms primarily due to post-review is negative. The negative amount is carried over to offset annual spendhigher usage from multiple customers, most notably in the following year.
(2) Deferred interest is added to annual spend tohigh-tech and electric manufacturing industries, partially offset by lower usage from customers in the extent the spend is recoverable.pulp and paper industries.
To the extent the NGD business earns at or below its authorized ROE as definedCost of Gas
Cost of gas highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD Change |
| In thousands | | | | | | 2022 | | 2021 | | |
| Cost of gas | | | | | | $ | 145,644 | | | $ | 112,266 | | | | | $ | 33,378 | |
Volumes sold (therms)(1) | | | | | | 322,787 | | | 324,065 | | | | | (1,278) | |
| Average cost of gas (cents per therm) | | | | | | $ | 0.45 | | | $ | 0.35 | | | | | $ | 0.10 | |
Gain (loss) from gas cost incentive sharing(2) | | | | | | $ | 70 | | | $ | (2,263) | | | | | $ | 2,333 | |
(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 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 2020 based on the environmental earnings test that was submitted in April 2021.
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 are to be 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.
THREE MONTHS ENDEDMARCH 31, 2022 COMPARED TO MARCH 31, 2021. Cost of Contentsgas increased $33.4 million, or 30%, primarily due to a 29% increase in average cost of gas with the majority of these higher gas costs embedded in the PGA and customer growth. Volumes sold decreased 1.3 million therms driven by 8% warmer than average weather.
Other Regulated Services Margin
Other regulated services margin highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD Change |
| In thousands | | | | | | 2022 | | 2021 | | |
| North Mist storage services | | | | | | $ | 4,858 | | | $ | 4,716 | | | | | $ | 142 | |
| Other services | | | | | | 52 | | | 66 | | | | | (14) | |
| Total other regulated services | | | | | | $ | 4,910 | | | $ | 4,782 | | | | | $ | 128 | |
INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING.THREE MONTHS ENDED On an annual basis, NW Natural credits amountsMARCH 31, 2022 COMPARED TO MARCH 31, 2021. Other regulated services margin was relatively flat when compared to Oregon and Washington customers as part of a regulatory incentive sharing mechanism related to net revenues earned fromthe prior period. The North Mist gasexpansion facility did not experience any significant fluctuations in 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.service revenue.
During the first quarter of 2021,
Other
Other activities aggregated and reported as other at NW Natural refunded an interstateinclude the non-NGD storage andactivity at Mist as well as asset management sharing creditservices 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); NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities; NWN Water, which owns and continues to pursue investments in the water sector; and NWN Water's investment in Avion Water Company, Inc. (Avion Water). See Note 4 for further discussion of approximatelour 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 NW Natural:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD Change |
| In thousands, except EPS data | | | | | | 2022 | | 2021 | | |
| NW Natural other - net income | | | | | | $ | 2,026 | | | $ | 6,186 | | | | | $ | (4,160) | |
| Other NW Holdings activity | | | | | | (1,177) | | | (594) | | | | | (583) | |
| NW Holdings other - net income | | | | | | $ | 849 | | | $ | 5,592 | | | | | $ | (4,743) | |
| Diluted EPS - NW Holdings - other | | | | | | $ | 0.03 | | | $ | 0.18 | | | | | $ | (0.15) | |
THREE MONTHS ENDEDy $9.1MARCH 31, 2022 COMPARED TO MARCH 31, 2021.Other net income decreased $4.2 million to Oregon customers, which at NW Natural and $4.7 million at NW Holdings. The decrease at NW Natural was primarily reflecteddue to $5.9 million of lower asset management revenue mainly related to the 2021 cold weather event, partially offset by $1.6 million lower income tax expense associated with the lower revenue that did not recur in Oregon customers' February bills. Bill creditsthe current year. The decrease at NW Holdings was driven by the decrease at NW Natural and higher business development costs at the holding company related to Oregonwater and Washington customerswastewater utilities.
Consolidated Operations
Operations and Maintenance
Operations and maintenance highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD |
| In thousands | | | | | | 2022 | | 2021 | | | | Change |
| NW Natural | | | | | | $ | 53,877 | | | $ | 49,187 | | | | | $ | 4,690 | |
| Other NW Holdings operations and maintenance | | | | | | 3,608 | | | 3,004 | | | | | 604 | |
| NW Holdings | | | | | | $ | 57,485 | | | $ | 52,191 | | | | | $ | 5,294 | |
THREE MONTHS ENDEDMARCH 31, 2022 COMPARED TO MARCH 31, 2021.Operations and maintenance expense increased$5.3 million at NW Holdings and $4.7 million at NW Natural. The increase at NW Natural was driven by the following:
•$2.2 million increase in 2020 were approximately $17.0contract labor for safety and reliability and contracted support for information technology and corporate projects;
•$0.9 million increase in compensation costs due to higher headcount and $0.7wage increases;
•$0.7 million respectively.increase in information technology maintenance and support; and
•$0.7 million increase in amortization expense related to cloud computing arrangements.
Regulatory Proceeding Updates
The $0.6 million increase in other NW Holdings operations and maintenance expense primarily reflects higher business development costs at the holding company and higher operating expenses at our water and wastewater subsidiaries.
Depreciation
Depreciation highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD |
| In thousands | | | | | | 2022 | | 2021 | | | | Change |
| NW Natural | | | | | | $ | 27,637 | | | $ | 27,169 | | | | | $ | 468 | |
| Other NW Holdings depreciation | | | | | | 792 | | | 928 | | | | | (136) | |
| NW Holdings | | | | | | $ | 28,429 | | | $ | 28,097 | | | | | $ | 332 | |
THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO MARCH 31, 2021. Depreciation expense increased $0.3 million and $0.5 million at NW Holdings and NW Natural, was involvedrespectively, primarily due to additional capital investments in the regulatory activities discussed below. distribution system, Mist storage, and information technology systems, as well as renovation and construction of resource and operations service centers.
Other Income (Expense), Net
Other income (expense), net highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD |
| In thousands | | | | | | 2022 | | 2021 | | | | Change |
| NW Natural other income (expense), net | | | | | | $ | (981) | | | $ | (3,665) | | | | | $ | 2,684 | |
| Other NW Holdings activity | | | | | | 27 | | | 123 | | | | | (96) | |
| NW Holdings other income (expense), net | | | | | | $ | (954) | | | $ | (3,542) | | | | | $ | 2,588 | |
THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO MARCH 31, 2021.Other income (expense), net changed $2.6 million and $2.7 million at NW Holdings and NW Natural, respectively, primarily due to lower 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 gains on plan assets. The change at other NW Holdings was driven by the change at NW Natural.
Interest Expense, Net
Interest expense, net highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD |
| In thousands | | | | | | 2022 | | 2021 | | | | Change |
| NW Natural | | | | | | $ | 10,831 | | | $ | 10,790 | | | | | $ | 41 | |
| Other NW Holdings interest expense, net | | | | | | 691 | | | 336 | | | | | 355 | |
| NW Holdings | | | | | | $ | 11,522 | | | $ | 11,126 | | | | | $ | 396 | |
THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO MARCH 31, 2021. Interest expense, net was relatively flat at NW Natural and increased $0.4 million at NW Holdings. Interest expense, net at NW Natural decreased $0.4 million due to higher Allowance for Funds Used During Construction or AFUDC debt interest income, offset by $0.4 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 credit facility at NW Holdings.
Income Tax Expense
Income tax expense highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD |
| In thousands | | | | | | 2022 | | 2021 | | | | Change |
| NW Natural income tax expense | | | | | | $ | 19,323 | | | $ | 20,552 | | | | | $ | (1,229) | |
| NW Holdings income tax expense | | | | | | $ | 18,923 | | | $ | 20,521 | | | | | $ | (1,598) | |
THREE MONTHS ENDED MARCH 31, 2022 COMPARED TO MARCH 31, 2021. Income tax expense decreased $1.2 million at NW Natural and $1.6 million at NW Holdings. The decrease in income tax expense is primarily due to a decrease in pre-tax income.
Regulatory Matters
For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the 20202021 Form 10-K.
Regulation and Rates
NATURAL GAS DISTRIBUTION.NW Natural's natural gas distribution business is subject to regulation by the OPUC and WUTC with respect to, among other matters, rates and terms of service, systems of accounts, and issuances of securities by NW Natural. At March 31, 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 General Rate Cases" below.
COVID-19 PROCESS AND DEFERRAL DOCKETS.MIST INTERSTATE GAS STORAGE. NW Natural's interstate storage activity at Mist is subject to regulation by the OPUC, WUTC, and the Federal Energy Regulatory Commission (FERC) with respect to, among other matters, rates and terms of service. The OPUC also regulates the intrastate storage services at Mist, while FERC regulates the interstate storage services at Mist. The FERC uses a maximum cost of service model which allows for gas storage prices to be set at or below the cost of service as approved by each agency in their last regulatory filing. The OPUC Schedule 80 rates are tied to the FERC rates, and are updated whenever NW Natural modifies FERC maximum rates.
OTHER. The wholly owned regulated water businesses of NWN Water, a wholly owned subsidiary of NW Holdings, are subject to regulation by the utility commissions in the states in which they are located, which currently includes Oregon, Washington, Idaho, and Texas.
Most Recent Completed General Rate Cases
OREGON. During 2020, our regulated utilities, other utilities, stakeholders, and public utility commissions worked together to determine the best way to continue protecting utility customers during and after the pandemic. In SeptemberOn October 16, 2020, the OPUC issued an order authorizingconcluding NW Natural's general rate case filed in December 2019 (OPUC Order). The OPUC staff to execute a term sheet with NW Natural and other parties to the proceeding, which includes provisions for lifting moratoriums on disconnections for nonpayment and late fees; extending timeframes for repayments and deferred payment plans; establishing timelines for reinstitution of service disconnection and reconnection fees; and allowing for deferred accounting of COVID-19 related costs. The term sheet also directed NW Natural to work with the parties to provide bill payment assistance, petition the Oregon legislature for bill payment assistance funding, explore the applicability of decoupling chargesOrder provides for a periodtotal revenue requirement increase of time, and participate in an investigation and discussion surrounding low income customers and social and environmental justice.approximately $45 million over revenues from existing rates. The stipulation incorporatingrevenue requirement is based on the term sheet was approved by the OPUC in November 2020. A term sheet was approved by the WUTC in October 2020 that provides similar guidance on key items such as the timing of lifting moratoriums on disconnections, resuming the collection process, and bill assistance and payment plans.following assumptions:
Additionally, both OregonCapital structure of 50% common equity and Washington approved our applications in 2020 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, 2021, we estimate that approximately $8.1 million of the financial effects related to COVID-19 could be recoverable and deferred to a regulatory asset approximately $5.8 million for incurred costs. In addition, we expect to recognize revenue in a future period for an additional $2.3 million related to forgone late fee revenue.
The financial effects of COVID-19 in the the prior year were recorded as an expense in the consolidated statements of comprehensive income until the third quarter, when they were deferred to a regulatory asset. Therefore, the consolidated statements of comprehensive income for the first six months of 2020 includes $1.1 million of operations and maintenance expenses and $1.3 million of interest expense, net that did not recur in the current year.
The following table outlines some of the key items approved by the respective Commissions:
| | | | | | | | | | | |
| Oregon | | Washington |
Reinstituting Disconnections for Nonpayment: | | | |
Residential | June 30, 2021 | | September 30, 2021 |
Small Commercial | December 1, 2020 | | September 30, 2021 |
Large Commercial/Industrial | November 3, 2020 | | October 20, 2020 |
Resuming Residential Reconnection Fee Charges | October 1, 2022 | * | March 29, 2022 |
Reinstituting Late Fees for Nonpayment: | | | |
Residential | October 1, 2022 | * | March 29, 2022 |
Small Commercial | December 1, 2020 | | March 29, 2022 |
Large Commercial/Industrial | November 3, 2020 | | October 20, 2020 |
Extended Time Payment Arrangements: | | | |
Residential | Up to 24 months | | Up to 18 months |
Small Commercial | Up to 6 months | | Up to 12 months |
Arrearage Forgiveness Program | 1% of Retail Revenues | | 1% of Retail Revenues |
* Jurisdiction retains discretion to re-evaluate date based on ongoing pandemic and economic conditions.
48•Cost of capital of 6.965%; and
RENEWABLE NATURAL GAS.On June 19, 2019, the Oregon legislature passed Senate Bill 98 (SB98), which enables natural gas utilities to procure or develop renewable natural gas (RNG) on behalf of their Oregon customers. RNG is produced from organic materials like food, agricultural and forestry waste, wastewater, or landfills. Methane 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, reducing net greenhouse gas emissions. 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.
SB98 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 investments in renewable natural gas infrastructure.
Further, the new law supports all forms of renewable natural gas including renewable hydrogen, which is made from excess wind, solar and hydro power. Renewable hydrogen can be used for industrial use or blended into the natural gas pipeline system.
In its first RNG project under SB98, NW Natural began a partnership with BioCarbN, a developer and operator of sustainable infrastructure projects, to convert methane into RNG. Under this partnership, NW Natural has the ability 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. In December 2020, NW Natural exercised its option for the first development project in Nebraska, initiating investment in an estimated $8 million project, which is expected to begin producing RNG in early 2022.
CORPORATE ACTIVITY TAX.In 2019, the State of Oregon enacted a Corporate Activity Tax (CAT) that is applicable to all businesses with annual Oregon gross revenue in excess of $1 million. The CAT is in addition to the state's corporate income tax and imposes a 0.57% tax on certain Oregon gross receipts less a reduction for a portion of cost of goods sold or labor. The CAT legislation became effective September 29, 2019 and applies to calendar years beginning January 1, 2020. Under the terms of the OPUC Order, in NW Natural's 2020 Oregon general rate case, NW Natural iswas authorized to begin to recover the expense associated with the CATOregon Corporate Activity Tax (CAT) as a component of base rates. See "Corporate Activity Tax" below.
In NW Natural's previous Oregon rate case in March 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 most recent Oregon rate case directs NW Natural is also directed to adjustinclude a true-up credit to customers of approximately $1.0 million as a temporary rate adjustment to be amortized over the amount recovered2020-21 PGA year.
In addition, the OPUC Order approved the application of NW Natural’s decoupling calculation for the CATmonths of November and May to the month of April. The decoupling mechanism is intended to encourage customers to conserve energy without adversely affecting earnings due to reductions in eachsales 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 PGArevenue requirement increase over two years, consisting of a 6.4% or $5.0 million increase in the first year beginning November 1, 2021 (Year One), and up to reflect changesa 3.5% or $3.0 million increase in gross revenuethe second year beginning November 1, 2022 (Year Two). The increase is based on the following assumptions:
•Cost of capital of 6.814%; and cost
•Average rate base of goods sold that occur as a result$194.7 million, an increase of $20.9 million since the PGA.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 also provides for certain adjustments if there are legislative, rulemaking, judicial, or policy decisions that would causedoes not specify the calculation methodology usedunderlying inputs to the cost of capital, including capital structure and return on equity. New rates authorized by NW Natural for the CAT to vary in a fundamental way. Additionally, the CAT deferred from January 2020 through June 2020 will be added to and amortized over the 2020-21 PGA gas year, and the CAT amounts deferred from July 2020 through theWUTC Order were effective date of the rate case will be amortized over the 2021-22 PGA year.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
through an Environmental Cost Recovery Mechanism (ECRM) and directed NW Natural to provide federal tax reform benefits to customers. See "Rate Mechanisms - Environmental Cost Deferral and Recovery - Washington ECRMIn the first six months of 2021, NW Holdings, through its water subsidiaries, continued to acquire water utilities. While COVID-19 has restricted certain activities, we continue to pursue water acquisitions and expect to return to normal business development activities as the pandemic eases and travel and commerce return to previous levels. For our acquired water utilities, we continue to assess the need for general rate cases, and in 2021, we filed a general rate case for one of our water utilities to support infrastructure investments for safety and reliability." below.
OREGON EXECUTIVE ORDER. FERC.NW Natural is required under its Mist interstate storage certificate authority and rate approval orders to file every five years either a petition for rate approval or a cost and revenue study to change or justify maintaining the existing rates for its interstate storage services. On March 10, 2020,October 12, 2018, NW Natural filed a rate petition with FERC for revised cost-based maximum rates, which incorporated 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 energy burden experienced by utility customers and ensure system reliability and resource adequacy.new federal corporate income tax rate. The EO also directs other agencies 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.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 increase with the OPUC. The filing includes a requested $73.5 million annual revenue requirement increase based upon the following assumptions or requests:
•Capital structure of 50% long-term debt and 50% equity;
•Return on equity of 9.5%;
•Cost of capital of 6.886%; and
•Average rate base of $1.73 billion.
The filing includes an increase in average rate base of $294 million compared to the last rate case due to several long-planned investments by NW Natural including the following:
•Upgrading technology including our enterprise resource planning system, cybersecurity and other critical technology systems;
•Supporting distribution system reinforcement and expansion as well as enhancing the resilience of our operating facilities and systems; and
•Investing in components of our Mist storage facility, which provides service during peak winter heating months.
The filing requests an additional incremental revenue amount of $8.4 million primarily related to a renewable natural gas investment and technology upgrades and expenses, including cybersecurity items, that are not considered in NW Natural's annual revenue requirement.
NW Natural’s filing will be reviewed by the OPUC and other stakeholders. The process is actively engagedanticipated to take up to 10 months with new rates expected 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:
| | | | | | | | | | | | | | | | | |
| Oregon | | Washington |
| 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 Equity | 9.4% | | 9.4% | | ** |
| Rate of Return | 7.0% | | 7.2% | | 6.8% |
| Debt/Equity Ratio | 50%/50% | | 51%/49% | | ** |
| | | | | |
| Key Regulatory Mechanisms: | | | | | |
| Purchased Gas Adjustment (PGA) | X | | X | | X |
| Gas Cost Incentive Sharing | X | | | | |
| Decoupling | X | | | | |
| Weather Normalization (WARM) | X | | | | |
| Environmental Cost Recovery | X | | X | | X |
| Interstate Storage and Asset Management Sharing | X | | X | | X |
** The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity.
PURCHASED GAS ADJUSTMENT. Rate changes are established for NW Natural each year under PGA mechanisms in Oregon stateand Washington to reflect changes in the expected cost of natural gas commodity purchases. The PGA filings include gas costs under spot purchases as well as contract supplies, gas cost hedges, gas costs from the withdrawal of storage inventories, the production of gas reserves, interstate pipeline demand costs, temporary rate adjustments, which amortize balances of deferred regulatory entitiesaccounts, and holds a seat on the Oregon Departmentremoval of Environmental Quality (ODEQ) rules advisory committee, which was considering the cap and reduce rules known as the Climate Protection Program (CPP). As of July 2021, the rules advisory committee meetingstemporary rate adjustments effective for the CPP have concluded.previous year.
Each year, NW Natural is anticipating thathedges gas prices on a draftportion of NW Natural's annual sales requirement based on normal weather, including both physical and financial hedges. NW Natural entered the CPP rules will be released2021-22 gas year with its forecasted sales volumes hedged at approximately79% in total. The total hedged for public commentOregon was approximately 82%, including 62% in August 2021. Final rules are expectedfinancial 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 consideredhigher than normal volatility in forward gas markets in 2021, NW Natural increased its hedging level for adoption by the Environmental Quality Commission2021-22 PGA year in December 2021 and become effectiveOregon to 82% compared to 74% in 2022.the 2020-2021 PGA year.
NW Natural is also engagedhedged between 3% and 30% for annual requirements over the subsequent three gas years, which consists of between 4% and 27% in an OPUC Fact-Finding (“Fact-Finding Docket”),Oregon and between 0% and 50% in Washington. Hedge levels are subject to change based on actual load volumes, which was openeddepend 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 response tostorage contracts with third parties, variations in the EO. The OPUC’s purposeheat content of the Fact-Finding Docket isgas, 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 forward gas prices increasing substantially in April 2022. We will continue to analyzemonitor gas prices as we begin to fill storage and look at hedging plans for future gas years. Gas purchases and hedges entered into for the potential natural gas utility bill impacts that may result from limiting GHG emissions of regulated natural gas utilities undercoming winter are included in the ODEQ’s CPPCompany’s PGA filings in OR and to identify appropriate regulatory tools to mitigate potential customer impacts. Per OPUC Staff’s statement, the ultimate goal of the Fact-Finding Docket will be to inform future policy decisions and other key analyses to be consideredWA which we anticipate filing later this year in 2022, after the CPP is in place. In December, OPUC Staff will present a fact-finding report to the OPUC with recommendations for further OPUC engagement inSeptember 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 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 Contentseach 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 March 31, 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.
INTEGRATED RESOURCE PLAN (IRP).INDUSTRIAL TARIFFS. NW Natural generally files a full IRP biennially for Oregon and Washington with theThe OPUC and WUTC respectively.have approved tariffs covering NGD service to major industrial customers, which are intended to give 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.
The development of an 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 requirements for reliable and low cost natural gas service. The IRP examines and analyzes uncertaintiescertainty in the planning process, including potentiallevel 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, in governmental and regulatory policies. As a resultrequirement that industrial customers complete the term of the EO issued by the governor of Oregon, new regulations and requirements are currently being developed in the state of Oregon, which have the potential to impact long-term resource decisions. In order to reflect the outcomes of the EO proceedings, the time to filetheir service election under NW Natural's next full IRP was extended to July 2022 as approved by the OPUC and WUTC.
Business Segment - Natural Gas Distribution (NGD)
NGD margin results are primarily affected by customer growth, revenues from rate-base additions, and, to a certain extent, by changes in delivered volumes due to weather and customers’ gas usage patterns. In Oregon, NW Natural has a conservation tariff (also called the decoupling mechanism), which adjusts 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 offset changes in 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 natural gas distribution earnings. For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters—Rate Mechanisms" in NW Natural's 2020 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.
The NGD business is primarily seasonal in nature due to higher gas usage by residential and commercial customers during the cold winter heating months. Other categories of customers experience seasonality in their usage but to a lesser extent. Seasonality affects the comparability of the results of operations of the NGD business across quarters but not across years.
NGD segment highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | QTD Change | | YTD Change |
| In thousands, except EPS data | | 2021 | | 2020 | | 2021 | | 2020 | | |
| NGD net income (loss) | | $ | (1,381) | | | $ | (6,347) | | | $ | 52,544 | | | $ | 41,596 | | | $ | 4,966 | | | $ | 10,948 | |
| Diluted EPS - NGD segment | | $ | (0.05) | | | $ | (0.21) | | | $ | 1.71 | | | $ | 1.36 | | | $ | 0.16 | | | $ | 0.35 | |
| Gas sold and delivered (in therms) | | 213,714 | | | 207,213 | | | 644,834 | | | 628,130 | | | 6,501 | | | 16,704 | |
NGD margin(1) | | $ | 91,206 | | | $ | 79,651 | | | $ | 263,846 | | | $ | 233,795 | | | $ | 11,555 | | | $ | 30,051 | |
(1) See Natural Gas Distribution Margin Table below for additional detail.
THREE MONTHS ENDEDJUNE 30, 2021 COMPARED TO JUNE 30, 2020. The primary factors contributing to the $5.0 million, or $0.16 per share, increase in NGD net income were as follows:
•$11.6 millionincrease in NGD margin due to:
•$9.5 million increase due to new customer rates, primarily from the 2020 Oregon rate case that went into effect on November 1, 2020, and customer growth;
•$1.8 million increase driven by the effects of applying the Oregon decoupling calculation to April 2021 as approved in our 2020 general rate case, and the recovery of commercial customer activity as compared to the prior year; and
•$0.3 million increase in late fees, primarily due to the resumption of late fees and reconnect fees for certain commercial and industrial customers during the second quarter of 2021.
In addition to the increase in margin, NGD net income for 2021 reflects:
•$3.6 million increase in other NGD operating and maintenance expenses due primarily to higher lease and professional service expenses;
•$2.5 million increase in depreciation expense due to NGD plant additions as we continued to invest in our gas utility system; and
•$1.5 million higher income tax expense reflecting higher pretax income; partially offset by
•$1.1 million decrease in interest expense driven by lower interest on commercial paper borrowings.
For the three months ended June 30, 2021, total NGD volumes sold and delivered increased 3% over the same period in 2020 primarily due to the recovery of commercial customer activity as compared to the prior year.
SIX MONTHS ENDEDENVIRONMENTAL COST DEFERRAL AND RECOVERY. JUNE 30, 2021 COMPARED TO JUNE 30, 2020. The primary factors contributingNW Natural has authorizations in Oregon and Washington to the $10.9 million,defer costs related to remediation of properties that are owned or $0.35 per share, increasewere previously owned by NW Natural. In Oregon, a Site Remediation and Recovery Mechanism (SRRM) is currently in NGD net income were as follows:
•$30.1 millionincrease in NGD margin due to:
•$30.8 million increase dueplace to new customer rates, primarily from the 2020recover prudently incurred costs allocable to Oregon rate case that went into effect oncustomers, subject to an earnings test. Effective beginning November 1, 2020, and customer growth; and
•$2.6 million increase due in part to colder weather,2019, the effects of applying the Oregon decoupling calculation to April 2021 as approved in our 2020 general rate case, and theWUTC authorized an Environmental Cost Recovery Mechanism (ECRM) for recovery of commercial customer activity as comparedprudently incurred costs allocable to the prior year; partially offset by
•$2.8 million decrease driven by additional market gas purchases and other expenses during the 2021 cold weather event. The event resulted in approximately $29 million of higher commodity costs in the first quarter of 2021, of which approximately $27 million was deferred to a regulatory asset for recovery in future rates.Washington customers.
In addition to the increase in margin, NGD net income for 2021 reflects:
•$6.4 million increase in other NGD operating and maintenance expenses due primarily to higher lease and professional service expenses;
•$6.1 million higher income tax expense reflecting higher pretax income and Oregon CAT;
•$5.5 million increase in depreciation expense due to NGD plant additions as we continued to invest in our gas utility system; and
•$2.0 million increase in general taxes due to higher assessed property values; partially offset by
•$1.3 million higher interest income on regulatory assets within other income (expense), net.
For the six months ended June 30, 2021, total NGD volumes sold and delivered increased 3% over the same period in 2020 primarily due to 12% warmer than average weather in the first six months of 2021 compared to 15% warmer than average weather in the prior period.
NATURAL GAS DISTRIBUTION MARGIN TABLE. The following table summarizes the composition of NGD gas volumes, revenues, and cost of sales:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Favorable/
(Unfavorable) |
| In thousands, except degree day and customer data | | 2021 | | 2020 | | 2021 | | 2020 | | QTD Change | | YTD Change |
| NGD volumes (therms) | | | | | | | | | | | | |
| Residential and commercial sales | | 102,469 | | | 99,815 | | | 400,291 | | | 386,687 | | | 2,654 | | | 13,604 | |
| Industrial sales and transportation | | 111,245 | | | 107,398 | | | 244,543 | | | 241,443 | | | 3,847 | | | 3,100 | |
| Total NGD volumes sold and delivered | | 213,714 | | | 207,213 | | | 644,834 | | | 628,130 | | | 6,501 | | | 16,704 | |
| Operating Revenues | | | | | | | | | | | | |
| Residential and commercial sales | | $ | 120,360 | | | $ | 109,399 | | | $ | 398,944 | | | $ | 364,803 | | | $ | 10,961 | | | $ | 34,141 | |
| Industrial sales and transportation | | 14,093 | | | 12,667 | | | 31,472 | | | 29,861 | | | 1,426 | | | 1,611 | |
| Other distribution revenues | | 396 | | | 5 | | | 986 | | | 968 | | | 391 | | | 18 | |
| Other regulated services | | 4,765 | | | 4,921 | | | 9,550 | | | 9,847 | | | (156) | | | (297) | |
| Total operating revenues | | 139,614 | | | 126,992 | | | 440,952 | | | 405,479 | | | 12,622 | | | 35,473 | |
| Less: Cost of gas | | 41,249 | | | 41,265 | | | 153,515 | | | 149,860 | | | 16 | | | (3,655) | |
| Less: Environmental remediation expense | | 1,509 | | | 1,622 | | | 5,286 | | | 5,627 | | | 113 | | | 341 | |
| Less: Revenue taxes | | 5,650 | | | 4,454 | | | 18,305 | | | 16,197 | | | (1,196) | | | (2,108) | |
| NGD margin | | $ | 91,206 | | | $ | 79,651 | | | $ | 263,846 | | | $ | 233,795 | | | $ | 11,555 | | | $ | 30,051 | |
| | | | | | | | | | | | |
Margin(1) | | | | | | | | | | | | |
| Residential and commercial sales | | $ | 78,900 | | | $ | 67,855 | | | $ | 239,672 | | | $ | 206,999 | | | $ | 11,045 | | | $ | 32,673 | |
| Industrial sales and transportation | | 7,407 | | | 7,021 | | | 16,161 | | | 15,603 | | | 386 | | | 558 | |
| | | | | | | | | | | | |
| Gain (loss) from gas cost incentive sharing | | (223) | | | (105) | | | (2,486) | | | 343 | | | (118) | | | (2,829) | |
| Other margin | | 357 | | | (38) | | | 952 | | | 1,006 | | | 395 | | | (54) | |
| Other regulated services | | 4,765 | | | 4,918 | | | 9,547 | | | 9,844 | | | (153) | | | (297) | |
| NGD Margin | | $ | 91,206 | | | $ | 79,651 | | | $ | 263,846 | | | $ | 233,795 | | | $ | 11,555 | | | $ | 30,051 | |
| | | | | | | | | | | | |
Degree days(2) | | | | | | | | | | | | |
Average(3) | | 305 | | | 308 | | | 1,631 | | | 1,650 | | | (3) | | | (19) | |
| Actual | | 182 | | | 189 | | | 1,443 | | | 1,404 | | | (4) | % | | 3 | % |
| Percent warmer than average weather | | (40) | % | | (39) | % | | (12) | % | | (15) | % | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of June 30, | | | | | | | | |
| | 2021 | | 2020 | | Change | | Growth | | | | |
| NGD Meters - end of period: | | | | | | | | | | | | |
| Residential meters | | 710,543 | | | 697,861 | | | 12,682 | | | 1.8% | | | | |
| Commercial meters | | 68,756 | | | 69,451 | | | (695) | | | (1.0)% | | | | |
| Industrial meters | | 980 | | | 992 | | | (12) | | | (1.2)% | | | | |
| Total number of meters | | 780,279 | | | 768,304 | | | 11,975 | | | 1.6% | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
(1) Amounts reported as margin for each category of meters are operating revenues, which are net of revenue taxes, less cost of gas and environmental remediation expense, 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. From November 1, 2018 through October 31, 2020, average weather was calculated over the period May 31, 1992 through May 30, 2017, as determined in NW Natural's 2018 Oregon general rate case.
Residential and Commercial Sales
Residential and commercial sales highlights include:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | QTD Change | | YTD Change | | | | Three Months Ended March 31, | | | YTD Change |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | | In thousands | | | 2022 | | 2021 | | |
| Volumes (therms) | Volumes (therms) | | Volumes (therms) | | | | |
| Residential sales | Residential sales | | 61,346 | | | 65,126 | | | 255,837 | | | 248,035 | | | (3,780) | | | 7,802 | | Residential sales | | | 186,329 | | | 194,491 | | | | (8,162) | |
| Commercial sales | Commercial sales | | 41,123 | | | 34,689 | | | 144,454 | | | 138,652 | | | 6,434 | | | 5,802 | | Commercial sales | | | 107,598 | | | 103,331 | | | | 4,267 | |
| Total volumes | Total volumes | | 102,469 | | | 99,815 | | | 400,291 | | | 386,687 | | | 2,654 | | | 13,604 | | Total volumes | | | 293,927 | | | 297,822 | | | | (3,895) | |
| Operating revenues | Operating revenues | | | | | | | | | | | | | Operating revenues | | | | | | | | |
| Residential sales | Residential sales | | $ | 82,310 | | | $ | 76,836 | | | $ | 278,112 | | | $ | 253,781 | | | $ | 5,474 | | | $ | 24,331 | | Residential sales | | | $ | 217,183 | | | $ | 195,802 | | | | $ | 21,381 | |
| Commercial sales | Commercial sales | | 38,050 | | | 32,563 | | | 120,832 | | | 111,022 | | | 5,487 | | | 9,810 | | Commercial sales | | | 97,424 | | | 82,782 | | | | 14,642 | |
| Total operating revenues | Total operating revenues | | $ | 120,360 | | | $ | 109,399 | | | $ | 398,944 | | | $ | 364,803 | | | $ | 10,961 | | | $ | 34,141 | | Total operating revenues | | | $ | 314,607 | | | $ | 278,584 | | | | $ | 36,023 | |
| NGD margin | NGD margin | | | | | | | | | | | | | NGD margin | | | | | | | | |
| Residential: | | |
| Sales | | $ | 48,558 | | | $ | 46,688 | | | $ | 166,163 | | | $ | 148,063 | | | $ | 1,870 | | | $ | 18,100 | | |
| Alternative revenue | | 8,368 | | | 2,682 | | | 8,646 | | | 3,225 | | | 5,686 | | | 5,421 | | |
| | Total residential NGD margin | | 56,926 | | | 49,370 | | | 174,809 | | | 151,288 | | | 7,556 | | | 23,521 | | |
| Commercial: | | | | | | | | | | | | | |
| Sales | | 19,259 | | | 15,802 | | | 61,973 | | | 54,043 | | | 3,457 | | | 7,930 | | |
| Alternative revenue | | 2,715 | | | 2,683 | | | 2,890 | | | 1,668 | | | 32 | | | 1,222 | | |
| | Total commercial NGD margin | | 21,974 | | | 18,485 | | | 64,863 | | | 55,711 | | | 3,489 | | | 9,152 | | |
| Residential NGD margin | | Residential NGD margin | | | $ | 119,832 | | | $ | 117,883 | | | | $ | 1,949 | |
| | Commercial NGD margin | | Commercial NGD margin | | | 43,296 | | | 42,889 | | | | 407 | |
| Total NGD margin | Total NGD margin | | $ | 78,900 | | | $ | 67,855 | | | $ | 239,672 | | | $ | 206,999 | | | $ | 11,045 | | | $ | 32,673 | | Total NGD margin | | | $ | 163,128 | | | $ | 160,772 | | | | $ | 2,356 | |
THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Residential and commercial margin increased $11.0$2.4 million compared to the prior period. The increase was primarily driven by new customer rates in OregonWashington that took effect on November 1, 20202021 and improvements1.5% growth in residential meters. Volumes decreased by 3.9 million therms due to lower usage from residential customers driven by warmer weather. The decrease was partially offset by higher usage from commercial usagecustomers as COVID-19 restrictions and closures began beingwere lifted.
SIX MONTHS ENDEDJUNE 30, 2021 COMPARED TO JUNE 30, 2020. Residential and commercial margin increased $32.7 million compared to the prior period. The increase was primarily driven by new customer rates in Oregon that took effect on November 1, 2020 and 1.8% growth in residential meters.
Industrial Sales and Transportation
Industrial sales and transportation highlights include:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | QTD Change | | YTD Change | | | | Three Months Ended March 31, | | | YTD Change |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | | In thousands | | | 2022 | | 2021 | | |
| Volumes (therms) | Volumes (therms) | | Volumes (therms) | | | | |
| Firm and interruptible sales | Firm and interruptible sales | | 20,002 | | | 17,638 | | | 46,245 | | | 42,440 | | | 2,364 | | | 3,805 | | Firm and interruptible sales | | | 28,860 | | | 26,243 | | | | 2,617 | |
| Firm and interruptible transportation | Firm and interruptible transportation | | 91,243 | | | 89,760 | | | 198,298 | | | 199,003 | | | 1,483 | | | (705) | | Firm and interruptible transportation | | | 105,599 | | | 107,055 | | | | (1,456) | |
| | Total volumes - sales and transportation | Total volumes - sales and transportation | | 111,245 | | | 107,398 | | | 244,543 | | | 241,443 | | | 3,847 | | | 3,100 | | Total volumes - sales and transportation | | | 134,459 | | | 133,298 | | | | 1,161 | |
| NGD margin | NGD margin | | | | | | | | | | | | | NGD margin | | | | | | | | |
| Firm and interruptible sales | Firm and interruptible sales | | $ | 2,741 | | | $ | 2,506 | | | $ | 6,298 | | | $ | 5,823 | | | $ | 235 | | | $ | 475 | | Firm and interruptible sales | | | $ | 3,699 | | | $ | 3,557 | | | | $ | 142 | |
| Firm and interruptible transportation | Firm and interruptible transportation | | 4,666 | | | 4,515 | | | 9,863 | | | 9,780 | | | 151 | | | 83 | | Firm and interruptible transportation | | | 5,227 | | | 5,197 | | | | 30 | |
| Total margin - sales and transportation | Total margin - sales and transportation | | $ | 7,407 | | | $ | 7,021 | | | $ | 16,161 | | | $ | 15,603 | | | $ | 386 | | | $ | 558 | | Total margin - sales and transportation | | | $ | 8,926 | | | $ | 8,754 | | | | $ | 172 | |
THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Industrial sales and transportation margin increased by $0.4$0.2 million compared to the prior period primarily driven by new rates in Oregon that took effect on November 1, 2020.period. Volumes increased by 3.81.2 million therms or 4%,primarily due primarily to higher usage from multiple industrial customers.customers, most notably in the high-tech and electric manufacturing industries, partially offset by lower usage from customers in the pulp and paper industries.
SIX MONTHS ENDEDJUNE 30, 2021 COMPARED TO JUNE 30, 2020.Industrial sales and transportation margin increased by $0.6 million compared to the prior period primarily driven by new rates in Oregon that took effect on November 1, 2020. Volumes increased by 3.1 million therms, or 1%, due primarily to higher usage from multiple industrial customers.
Cost of Gas
Cost of gas highlights include:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | QTD Change | | YTD Change | | | | Three Months Ended March 31, | | | YTD Change |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | | In thousands | | | 2022 | | 2021 | | |
| Cost of gas | Cost of gas | | $ | 41,249 | | | $ | 41,265 | | | $ | 153,515 | | | $ | 149,860 | | | $ | (16) | | | $ | 3,655 | | Cost of gas | | | $ | 145,644 | | | $ | 112,266 | | | | $ | 33,378 | |
Volumes sold (therms)(1) | Volumes sold (therms)(1) | | 122,471 | | | 117,453 | | | 446,536 | | | 429,127 | | | 5,018 | | | 17,409 | | Volumes sold (therms)(1) | | | 322,787 | | | 324,065 | | | | (1,278) | |
| Average cost of gas (cents per therm) | Average cost of gas (cents per therm) | | $ | 0.34 | | | $ | 0.35 | | | $ | 0.34 | | | $ | 0.35 | | | $ | (0.01) | | | $ | (0.01) | | Average cost of gas (cents per therm) | | | $ | 0.45 | | | $ | 0.35 | | | | $ | 0.10 | |
Gain (loss) from gas cost incentive sharing(2) | Gain (loss) from gas cost incentive sharing(2) | | $ | (223) | | | $ | (105) | | | $ | (2,486) | | | $ | 343 | | | $ | (118) | | | $ | (2,829) | | Gain (loss) from gas cost incentive sharing(2) | | | $ | 70 | | | $ | (2,263) | | | | $ | 2,333 | |
(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 20202021 Form 10-K.
THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020. Cost of gas was flat compared to the prior period, primarily due to a slight decrease in the average cost of gas offset by an increase in volumes sold.
SIX MONTHS ENDEDJUNE 30, 2021 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Cost of gas increased $3.7$33.4 million, or 2%30%, primarily due to a $2.8 million higher loss from29% increase in average cost of gas incentive sharing,with the majority of these higher gas costs embedded in the PGA and customer growth. Volumes sold decreased 1.3 million therms driven by costs related to the 2021 cold weather event that were not deferred for future recovery. The event resulted in approximately $29 million of higher commodity costs, of which approximately $27 million was deferred to a regulatory asset. The remaining increase in cost of gas is primarily the result of a 4% increase in volumes sold driven by customer growth and by comparatively cooler weather in 2021 as compared to 2020.8% warmer than average weather.
Other Regulated Services Margin
Other regulated services margin highlights include:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | QTD Change | | YTD Change | | | | Three Months Ended March 31, | | | YTD Change |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | | In thousands | | | 2022 | | 2021 | | |
| North Mist storage services | North Mist storage services | | $ | 4,715 | | | $ | 4,867 | | | $ | 9,431 | | | $ | 9,733 | | | $ | (152) | | | $ | (302) | | North Mist storage services | | | $ | 4,858 | | | $ | 4,716 | | | | $ | 142 | |
| Other services | Other services | | 50 | | | 51 | | | 116 | | | 111 | | | (1) | | | 5 | | Other services | | | 52 | | | 66 | | | | (14) | |
| Total other regulated services | Total other regulated services | | $ | 4,765 | | | $ | 4,918 | | | $ | 9,547 | | | $ | 9,844 | | | $ | (153) | | | $ | (297) | | Total other regulated services | | | $ | 4,910 | | | $ | 4,782 | | | | $ | 128 | |
THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Other regulated services margin decreased $0.2 millionwas relatively flat when compared to the prior period as the North Mist expansion facility did not experience any significant fluctuations in storage service revenue. See Note 6 for information regarding North Mist expansion lease accounting.
SIX MONTHS ENDEDJUNE 30, 2021 COMPARED TO JUNE 30, 2020. Other regulated services margin decreased $0.3 million compared to the prior period as theperiod. The North Mist expansion facility did not experience any significant fluctuations in storage service revenue.
Other
Other activities aggregated and reported as other 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 NWN Energy's equity investment in Trail West Holding, LLC (TWH) through August 6, 2020; NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities; NWN Water, which owns and continues to pursue investments in the water sector.sector; and NWN Water's investment in Avion Water Company, Inc. (Avion Water). 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 TWHAvion Water investment.
The following table presents the results of activities aggregated and reported as other for both NW Holdings and NW Natural:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | QTD Change | | YTD Change | | | | Three Months Ended March 31, | | | YTD Change |
| In thousands, except EPS data | In thousands, except EPS data | | 2021 | | 2020 | | 2021 | | 2020 | | In thousands, except EPS data | | | 2022 | | 2021 | | |
| NW Natural other - net income | NW Natural other - net income | | $ | 1,970 | | | $ | 1,635 | | | $ | 8,156 | | | $ | 2,871 | | | $ | 335 | | | $ | 5,285 | | NW Natural other - net income | | | $ | 2,026 | | | $ | 6,186 | | | | $ | (4,160) | |
| Other NW Holdings activity | Other NW Holdings activity | | (1,313) | | | (420) | | | (1,907) | | | (1,323) | | | (893) | | | (584) | | Other NW Holdings activity | | | (1,177) | | | (594) | | | | (583) | |
| NW Holdings other - net income | NW Holdings other - net income | | $ | 657 | | | $ | 1,215 | | | $ | 6,249 | | | $ | 1,548 | | | $ | (558) | | | $ | 4,701 | | NW Holdings other - net income | | | $ | 849 | | | $ | 5,592 | | | | $ | (4,743) | |
| Diluted EPS - NW Holdings - other | Diluted EPS - NW Holdings - other | | $ | 0.03 | | | $ | 0.04 | | | $ | 0.21 | | | $ | 0.05 | | | $ | (0.01) | | | $ | 0.16 | | Diluted EPS - NW Holdings - other | | | $ | 0.03 | | | $ | 0.18 | | | | $ | (0.15) | |
THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Other net income decreased $0.6$4.2 million at NW Natural and $4.7 million at NW Holdings and increased $0.3 million at NW Natural.. The increasedecrease at NW Natural was primarily due to an increase in appliance center net income. The decrease at NW Holdings was driven by higher expenses at the holding company, partially offset by higher net income at NW Natural.
SIX MONTHS ENDEDJUNE 30, 2021 COMPARED TO JUNE 30, 2020.Other net income increased $4.7 million at NW Holdings and $5.3 million at NW Natural. The increase at NW Natural was primarily due to $6.7$5.9 million of higherlower asset management revenue mainly related to the 2021 cold weather event, partially offset by $1.8$1.6 million oflower income tax expense associated with the higher revenue.lower revenue that did not recur in the current year. The increasedecrease at NW Holdings was driven by the increasedecrease at NW Natural partially offset byand higher expensesbusiness development costs at the holding company.company related to water and wastewater utilities.
Consolidated Operations
Operations and Maintenance
Operations and maintenance highlights include:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | QTD | | YTD | | | | Three Months Ended March 31, | | | YTD |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | | Change | | Change | In thousands | | | 2022 | | 2021 | | | Change |
| NW Natural | NW Natural | | $ | 44,939 | | | $ | 41,198 | | | $ | 94,126 | | | $ | 87,454 | | | $ | 3,741 | | | $ | 6,672 | | NW Natural | | | $ | 53,877 | | | $ | 49,187 | | | | $ | 4,690 | |
| Other NW Holdings operations and maintenance | Other NW Holdings operations and maintenance | | 5,108 | | | 2,785 | | | 8,112 | | | 5,450 | | | 2,323 | | | 2,662 | | Other NW Holdings operations and maintenance | | | 3,608 | | | 3,004 | | | | 604 | |
| NW Holdings | NW Holdings | | $ | 50,047 | | | $ | 43,983 | | | $ | 102,238 | | | $ | 92,904 | | | $ | 6,064 | | | $ | 9,334 | | NW Holdings | | | $ | 57,485 | | | $ | 52,191 | | | | $ | 5,294 | |
THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Operations and maintenance expense increased $6.15.3 million at NW Holdings and $3.7$4.7 million at NW Natural. The increase at NW Natural was driven by the following:
•$1.32.2 million increase in professional servicecontract labor for safety and reliability and contracted support for information technology expenses;and corporate projects;
•$1.20.9 million increase in lease expense relatedcompensation costs due to a new headquartershigher headcount and operations center;wage increases;
•$0.7 million increase in information technology maintenance and support; and
•$0.60.7 million increase in amortization expense related to higher compensation and benefit costs.cloud computing arrangements.
The $2.3$0.6 million increase in other NW Holdings operations and maintenance expense primarily reflects higher business development costs at the holding company expenses and higher operating expenses from water and wastewater subsidiaries.
SIX MONTHS ENDEDJUNE 30, 2021 COMPARED TO JUNE 30, 2020.Operations and maintenance expense increased$9.3 million at NW Holdings and $6.7 million at NW Natural. The increase at NW Natural was driven by the following:
•$2.4 million increase in professional service and information technology expenses;
•$2.2 million increase in lease expense related to a new headquarters and operations center; and
•$2.1 million increase related to higher compensation and benefit costs.
The $2.7 million increase in other NW Holdings operations and maintenance expense primarily reflects higher holding company expenses and operating expenses fromour water and wastewater subsidiaries.
Depreciation and Amortization
Depreciation and amortization highlights include:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | QTD | | YTD | | | | Three Months Ended March 31, | | | YTD |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | | Change | | Change | In thousands | | | 2022 | | 2021 | | | Change |
| NW Natural | NW Natural | | $ | 27,530 | | | $ | 24,986 | | | $ | 54,699 | | | $ | 49,176 | | | $ | 2,544 | | | $ | 5,523 | | NW Natural | | | $ | 27,637 | | | $ | 27,169 | | | | $ | 468 | |
| Other NW Holdings depreciation and amortization | | 614 | | | 850 | | | 1,542 | | | 1,335 | | | (236) | | | 207 | | |
| Other NW Holdings depreciation | | Other NW Holdings depreciation | | | 792 | | | 928 | | | | (136) | |
| NW Holdings | NW Holdings | | $ | 28,144 | | | $ | 25,836 | | | $ | 56,241 | | | $ | 50,511 | | | $ | 2,308 | | | $ | 5,730 | | NW Holdings | | | $ | 28,429 | | | $ | 28,097 | | | | $ | 332 | |
THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Depreciation and amortization expense increased $2.3$0.3 million and $2.5$0.5 million at NW Holdings and NW Natural, respectively, primarily due to additional capital investments in the distribution system, Mist storage, various operations and facilities, and information technology systems. We continue to invest in our natural gassystems, as well as renovation and water utility systems.construction of resource and operations service centers.
SIX MONTHS ENDED JUNE 30, 2021 COMPARED TO JUNE 30, 2020. Depreciation and amortization expense increased $5.7 million and $5.5 million at NW Holdings and NW Natural, respectively, primarily due to additional capital investments in the distribution system, Mist storage, various operations and facilities, and information technology systems. We continue to invest in our natural gas and water utility systems.
Other Income (Expense), Net
Other income (expense), net highlights include:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | QTD | | YTD | | | | Three Months Ended March 31, | | | YTD |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | | Change | | Change | In thousands | | | 2022 | | 2021 | | | Change |
| NW Natural other income (expense), net | NW Natural other income (expense), net | | $ | (2,566) | | | $ | (3,179) | | | $ | (6,231) | | | $ | (6,742) | | | $ | 613 | | | $ | 511 | | NW Natural other income (expense), net | | | $ | (981) | | | $ | (3,665) | | | | $ | 2,684 | |
| Other NW Holdings activity | Other NW Holdings activity | | (31) | | | 139 | | | 92 | | | 127 | | | (170) | | | (35) | | Other NW Holdings activity | | | 27 | | | 123 | | | | (96) | |
| NW Holdings other income (expense), net | NW Holdings other income (expense), net | | $ | (2,597) | | | $ | (3,040) | | | $ | (6,139) | | | $ | (6,615) | | | $ | 443 | | | $ | 476 | | NW Holdings other income (expense), net | | | $ | (954) | | | $ | (3,542) | | | | $ | 2,588 | |
THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Other income (expense), net increased $0.4changed $2.6 million and $0.6$2.7 million at NW Holdings and NW Natural, respectively, as it includes higher interest income on regulatory assets in the current quarter. Other income (expense), net primarily consists of regulatory interest, pension and other postretirement non-service costs, gains from company-owned life insurance, and donations.
SIX MONTHS ENDED JUNE 30, 2021 COMPARED TO JUNE 30, 2020.Other income (expense), net increased $0.5 million at both NW Holdings and NW Natural, primarily due to higher interest incomelower 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 gains on regulatoryplan assets. The change at other NW Holdings was driven by the change at NW Natural.
Interest Expense, Net
Interest expense, net highlights include:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | QTD | | YTD | | | | Three Months Ended March 31, | | | YTD |
| In thousands | In thousands | | 2021 | | 2020 | | 2021 | | 2020 | | Change | | Change | In thousands | | | 2022 | | 2021 | | | Change |
| NW Natural | NW Natural | | $ | 10,696 | | | $ | 11,851 | | | $ | 21,486 | | | $ | 21,712 | | | $ | (1,155) | | | $ | (226) | | NW Natural | | | $ | 10,831 | | | $ | 10,790 | | | | $ | 41 | |
| Other NW Holdings interest expense, net | Other NW Holdings interest expense, net | | 332 | | | 855 | | | 668 | | | 1,462 | | | (523) | | | (794) | | Other NW Holdings interest expense, net | | | 691 | | | 336 | | | | 355 | |
| NW Holdings | NW Holdings | | $ | 11,028 | | | $ | 12,706 | | | $ | 22,154 | | | $ | 23,174 | | | $ | (1,678) | | | $ | (1,020) | | NW Holdings | | | $ | 11,522 | | | $ | 11,126 | | | | $ | 396 | |
THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Interest expense, net decreased $1.7 millionwas relatively flat at NW Natural and $1.2increased $0.4 million at NW Holdings andHoldings. Interest expense, net at NW Natural respectively.decreased $0.4 million due to higher Allowance for Funds Used During Construction or AFUDC debt interest income, offset by $0.4 million of higher interest expense on short and long-term debt. The decreaseincrease at NW NaturalHoldings is primarily due to $1.5 million of lowerhigher interest on commercial paper borrowings partially offset by $0.4 million lower AFUDC debt interest income. The decrease at NW Holdings includes the decrease at NW Natural and lower interestexpense on the credit agreement at NW Holdings.
SIX MONTHS ENDED JUNE 30, 2021 COMPARED TO JUNE 30, 2020. Interest expense, net decreased $1.0 million and $0.2 million at NW Holdings and NW Natural, respectively. The decrease at NW Natural is primarily due to $2.0 million of lower interest on commercial paper borrowings, partially offset by $0.9 million of higher interest on long-term debt and $1.0 million lower AFUDC debt interest income. The decrease at NW Holdings includes the decrease at NW Natural and lower interest on the credit agreementfacility at NW Holdings.
Income Tax Expense
Income tax expense highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | QTD | | YTD |
| In thousands | | 2021 | | 2020 | | 2021 | | 2020 | | Change | | Change |
| NW Natural income tax expense (benefit) | | $ | 288 | | | $ | (1,419) | | | $ | 20,840 | | | $ | 12,999 | | | $ | 1,707 | | | $ | 7,841 | |
| NW Holdings income tax expense (benefit) | | $ | (277) | | | $ | (1,672) | | | $ | 20,244 | | | $ | 12,455 | | | $ | 1,395 | | | $ | 7,789 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | | | YTD |
| In thousands | | | | | | 2022 | | 2021 | | | | Change |
| NW Natural income tax expense | | | | | | $ | 19,323 | | | $ | 20,552 | | | | | $ | (1,229) | |
| NW Holdings income tax expense | | | | | | $ | 18,923 | | | $ | 20,521 | | | | | $ | (1,598) | |
THREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Income tax expense increased $1.7decreased $1.2 million at NW Natural and $1.4$1.6 million at NW Holdings, respectively.Holdings. The increasedecrease in income tax expense is primarily due to an increasea decrease in pre-tax income.
SIX MONTHS ENDED JUNE 30,
Regulatory Matters
For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the 2021 COMPARED TO JUNE 30, 2020. Form 10-KIncome tax expense increased $7.8 million at both .
Regulation and Rates
NATURAL GAS DISTRIBUTION.NW NaturalNatural's natural gas distribution business is subject to regulation by the OPUC and WUTC with respect to, among other matters, rates and terms of service, systems of accounts, and issuances of securities by NW Natural. At March 31, 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 Holdings. The increaseNatural'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 income tax expense is primarily due to an increase in pre-tax incomeplant and Oregon Corporate Activity Tax, partially offset by the ongoing amortization of TCJA benefits.other regulatory assets. See "Most Recent Completed General Rate Cases" below.
MIST INTERSTATE GAS STORAGE. NW Natural's interstate storage activity at Mist is subject to regulation by the OPUC, WUTC, and the Federal Energy Regulatory Commission (FERC) with respect to, among other matters, rates and terms of service. The OPUC also regulates the intrastate storage services at Mist, while FERC regulates the interstate storage services at Mist. The FERC uses a maximum cost of service model which allows for gas storage prices to be set at or below the cost of service as approved by each agency in their last regulatory filing. The OPUC Schedule 80 rates are tied to the FERC rates, and are updated whenever NW Natural modifies FERC maximum rates.
Discontinued Operations
On June 20, 2018,OTHER. The wholly owned regulated water businesses of NWN Gas Storage,Water, a wholly owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement (the Agreement) that provides forare subject to regulation by the sale by NWN Gas Storage of all of its membership interests in Gill Ranch. Gill Ranch owns a 75% interestutility commissions in the natural gas storage facilitystates in which they are located, near Fresno, California known as the Gill Ranch Gas Storage Facility.which currently includes Oregon, Washington, Idaho, and Texas.
Most Recent Completed General Rate Cases
OREGON.On October 16, 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 following assumptions:
•Capital structure of 50% 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 OPUC 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 March 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 most 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 2020-21 PGA year.
In addition, the OPUC Order approved the application of NW Natural’s decoupling calculation for the months of November and May to the month 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 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
through an Environmental Cost Recovery Mechanism (ECRM) and directed NW Natural 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 existing rates for its interstate storage services. On October 12, 2018, NW Natural filed a rate petition with FERC for revised cost-based maximum rates, which incorporated the 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 increase with the OPUC. The filing includes a requested $73.5 million annual revenue requirement increase based upon the following assumptions or requests:
•Capital structure of Contents50% long-term debt and 50% equity;
•Return on equity of 9.5%;
•Cost of capital of 6.886%; and
•Average rate base of $1.73 billion.
The filing includes an increase in average rate base of $294 million compared to the last rate case due to several long-planned investments by NW Natural including the following:
•Upgrading technology including our enterprise resource planning system, cybersecurity and other critical technology systems;
•Supporting distribution system reinforcement and expansion as well as enhancing the resilience of our operating facilities and systems; and
•Investing in components of our Mist storage facility, which provides service during peak winter heating months.
The filing requests an additional incremental revenue amount of $8.4 million primarily related to a renewable natural gas investment and technology upgrades and expenses, including cybersecurity items, that are not considered in NW Natural's annual revenue requirement.
NW Natural’s filing will be reviewed by the OPUC and other stakeholders. The process is anticipated to take up to 10 months with new rates expected 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:
| | | | | | | | | | | | | | | | | |
| Oregon | | Washington |
| 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 Equity | 9.4% | | 9.4% | | ** |
| Rate of Return | 7.0% | | 7.2% | | 6.8% |
| Debt/Equity Ratio | 50%/50% | | 51%/49% | | ** |
| | | | | |
| Key Regulatory Mechanisms: | | | | | |
| Purchased Gas Adjustment (PGA) | X | | X | | X |
| Gas Cost Incentive Sharing | X | | | | |
| Decoupling | X | | | | |
| Weather Normalization (WARM) | X | | | | |
| Environmental Cost Recovery | X | | X | | X |
| Interstate Storage and Asset Management Sharing | X | | X | | X |
** The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity.
PURCHASED GAS ADJUSTMENT. Rate changes are established for NW Natural each year under PGA mechanisms in Oregon and Washington to reflect changes in the expected cost of natural gas commodity purchases. The PGA filings include gas costs under spot purchases as well as contract supplies, gas cost hedges, gas costs from the 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 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 2021-22 gas year with its forecasted sales volumes hedged at approximately79% 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 higher than normal volatility in forward gas markets in 2021, NW Natural increased its hedging level for the 2021-22 PGA year in Oregon to 82% compared to 74% in the 2020-2021 PGA year.
NW Natural is also hedged between 3% and 30% for annual requirements over the subsequent three gas years, which consists of between 4% and 27% in Oregon and between 0% and 50% in Washington. Hedge levels are subject to change based on actual load volumes, which depend to a certain extent on weather, economic conditions, and estimated gas reserve production. Also, gas storage inventory levels may increase or decrease with storage expansion, changes in storage contracts with third parties, variations in the heat content of the gas, and/or storage recall by NW Natural. As the Company plans for the 2022-23 gas year, gas price volatility has remained high with current and forward gas prices increasing substantially in April 2022. We will continue to monitor gas prices as we begin to fill storage and look 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 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 March 31, 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.
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.
47
On December 4, 2020, NWN Gas Storage closed the sale of all the memberships interests in Gill Ranch and received payment of the initial cash purchase price of $13.5 million less the $1.0 million deposit previously paid. Furthermore, additional payments to NWN Gas Storage may be made subject to a maximum amount of $15.0 million in the aggregate (subject to a working capital adjustment)
NW Natural concluded there was no earnings test adjustment for 2021 based on the economic performanceenvironmental 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 Gill Ranch each fullenvironmental 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 are to be 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 year (April 1and 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 one year2022, 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 March 31, 2022, we believe that approximately $14.3 million of the financial effects related to COVID-19 are recoverable and deferred to a regulatory asset approximately $11.2 million for incurred costs. In addition, we expect to recognize revenue in a future period for an additional $3.1 million related to forgone late fee revenue.
The following year) occurring after the closing and the remaining portiontable outlines some of the 2020-2021 gas storage year and will continue until such time askey items approved by the maximum amount has been paid. respective Commissions:
The fair value of this arrangement at the closing
| | | | | | | | | | | |
| Oregon | | Washington |
| Reinstituting Disconnections for Nonpayment: | | | |
| Residential | August 1, 2021 | | September 30, 2021 |
| Small Commercial | December 1, 2020 | | September 30, 2021 |
| Large Commercial/Industrial | November 3, 2020 | | October 20, 2020 |
| Resuming Residential Reconnection Fee Charges | October 1, 2022 | * | ** |
| Reinstituting Late Fees for Nonpayment: | | | |
| Residential | October 1, 2022 | * | ** |
| Small Commercial | December 1, 2020 | | ** |
| Large Commercial/Industrial | November 3, 2020 | | October 20, 2020 |
| Extended Time Payment Arrangements: | | | |
| Residential | Up to 24 months | | Up to 18 months |
| Small Commercial | Up to 6 months | | Up to 12 months |
| Arrearage Management Program | 1.5% of Retail Revenues | | 1% of Retail Revenues |
* Jurisdiction retains discretion to re-evaluate date was zero based on ongoing pandemic and economic conditions.
** Date is pending a discounted cash flow forecast. Subsequent changes inCommission review of its existing credit and collection practices that is expected to be completed over the fair value will be recorded in earnings. next year.
ARREARAGE MANAGEMENT PROGRAMS.The completionAs part of the sale resultedapproved term sheets, NW Natural established programs in an after-tax gainOregon 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 $5.9up to $1,600 per eligible residential customer. AMP is funded by NW Natural with recovery facilitated through the COVID deferral dockets. As of March 31, 2022, the amount granted and deferred to a regulatory asset related to the AMP was $6.1 million of the total funds available of $9.9 million.
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 year ended December 31,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 law supports all forms of renewable natural gas including renewable hydrogen, which is made from excess wind, solar and hydro power. Renewable hydrogen can be used for the transportation system, industrial use or blended into the natural gas pipeline system.
CORPORATE ACTIVITY TAX.In 2019, the State of Oregon enacted a Corporate Activity Tax (CAT) that is applicable to all businesses with annual Oregon gross revenue in excess of $1 million. The resultsCAT is in addition to the state's corporate income tax and imposes a 0.57% tax on certain Oregon gross receipts less a reduction for a portion of Gill Ranch Storagecost of goods sold or labor. The CAT legislation became effective September 29, 2019 and applied to calendar years beginning January 1, 2020. Under the terms of the Order in NW Natural's 2020 Oregon general rate case, NW Natural is authorized to begin to recover the expense associated with the CAT as a component of base rates. NW Natural is also directed to adjust the amount recovered for the CAT in each annual PGA to reflect changes in gross revenue and cost of goods sold that occur as a result of the PGA.
The Order also provides for certain adjustments if there are legislative, rulemaking, judicial, or policy decisions that would cause the calculation methodology used by NW Natural for the CAT to vary in a fundamental way. Additionally, the CAT deferred from January 2020 through June 2020 was added to and amortized over the 2020-21 PGA gas year, and the CAT amounts deferred from July 2020 through the effective date of the rate case will be amortized over the 2021-22 PGA year.
WATER UTILITIES.In the first three months of 2022, NWN Water signed two purchase agreements for water utilities in Texas, representing approximately 900 connections. The acquisitions are subject to customary closing conditions, including approval by the Public Utility Commission of Texas, and are expected to close in 2022. 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 and a decision is expected toward the end 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 has 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.
The development of an 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. In order to reflect the outcomes of the EO proceedings, the time to file NW Natural's next full IRP was extended to July 2022 as approved by the OPUC and WUTC.
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 discontinuedcritical. 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. 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 March 31, 2022, NW Natural has deferred to a regulatory asset $1.6 million of costs incurred and $18.6 million was invested in information technology to date. NW Natural continues to evaluate the potential effect of these directives on our operations untiland facilities, as well as the datepotential total cost of saleimplementation, and are presented separately, netwill continue to monitor for any clarifications or amendments to these directives.
ERP UPGRADE DEFERRALS. In the fourth quarter of tax,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 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 March 31, 2022, NW Natural deferred to a regulatory asset $7.3 million of expenses incurred to date. Approval of the resultsWashington deferral was resolved as part of continuing operations of NW Holdings for all periods presented. See Note 17 for more information on the Agreement and the results of our discontinued operations.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, 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 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. Additionally, 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 costs as well as external costs such as the cost of independent experts to provide attestation reports on our GHG emissions data and increased audit costs.
Washington State
In 2021, Washington comprised approximately 11% of NW Natural’s revenues, as well as 1.5% and 25.5% of new meters from commercial and residential customers, respectively. Effective February 1, 2021, building codes in Washington state require new residential homes to achieve higher levels of energy efficiency based on specified carbon emissions assumptions, which calculate electric appliances to have lower on-site GHG emissions than comparable gas appliances. This increases the cost of new home construction incorporating natural gas depending on a number of factors including home size, equipment configurations, and building envelope measures. Additionally, the Washington State Building Code Council (SBCC) voted in April 2022 to include updates in the state commercial building energy code that, 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, and 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, and transportation and other fuel providers, which are subject to the CCA must either reduce their emissions or obtain allowances 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) and OPUC, 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.
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.
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. NW Natural is actively engaged with such cities, local governments, and other advocates, including, among others the
city of Eugene, 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 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. Both 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.
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 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
NW Holdings' long-term goal is to maintain a strong and balanced consolidated capital structure. NW Natural targets a regulatory capital structure of 50% common equity and 50% long-term debt, which is consistent with approved regulatory allocations in Oregon, which has an allocation of 50% common equity and 50% long-term debt without recognition of short-term debt, and Washington, which has an allocation of 50% long-term debt, 1% short-term debt, and 49% common equity.
When additional capital is required, debt or equity securities are issued depending on both the target capital structure and market conditions. These sources of capital are also used to fund long-term debt retirements and short-term commercial paper maturities. See "Liquidity and Capital Resources" below and Note 8.9. Achieving our target capital structure and maintaining sufficient liquidity to meet operating requirements is 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, | | March 31, | | December 31, |
| | 2021 | | 2020 | | 2020 | | 2022 | | 2021 | | 2021 |
| Common equity | Common equity | | 48.6 | % | | 48.1 | % | | 48.2 | % | Common equity | | 48.6 | % | | 49.5 | % | | 47.2 | % |
| Long-term debt (including current maturities) | Long-term debt (including current maturities) | | 51.4 | | | 51.9 | | | 51.8 | | Long-term debt (including current maturities) | | 51.4 | | | 50.5 | | | 52.8 | |
| Total | Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | Total | | 100.0 | % | | 100.0 | % | | 100.0 | % |
NW Natural's consolidated capital structure, excluding short-term debt, was as follows:
| | | June 30, | | December 31, | | March 31, | | December 31, |
| | 2021 | | 2020 | | 2020 | | 2022 | | 2021 | | 2021 |
| Common equity | Common equity | | 48.6 | % | | 47.8 | % | | 47.7 | % | Common equity | | 50.9 | % | | 49.0 | % | | 49.8 | % |
| Long-term debt (including current maturities) | Long-term debt (including current maturities) | | 51.4 | | | 52.2 | | | 52.3 | | Long-term debt (including current maturities) | | 49.1 | | | 51.0 | | | 50.2 | |
| Total | Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | Total | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Including short-term debt balances, as of June 30,March 31, 2022 and 2021, and 2020, and December 31, 2020,2021, NW Holdings' consolidated capital structure included common equity of 43.2%41.8%, 42.7%44.0% and 41.4%39.5%; long-term debt of 42.8%44.1%, 44.3%40.4% and 40.0%44.0%; and short-term debt including current maturities of long-term debt of 14.0%14.1%, 13.0%15.6% and 18.6%16.5%, respectively. As of June 30,March 31, 2022 and 2021, and 2020, and December 31, 2020,2021, NW Natural's consolidated capital structure included common equity of 43.8%46.5%, 44.0%44.7%, and 42.1%44.2%; long-term debt of 43.2%44.9%, 48.0%43.4% and 43.2%44.7%; and short-term debt including current maturities of long-term debt of 13.0%8.6%, 8.0%11.9%, and 14.7%11.1%, respectively.
Liquidity and Capital Resources
At June 30,March 31, 2022 and 2021, and 2020, NW Holdings had approximately $20.1$24.3 million and $137.1$17.9 million, and NW Natural had approximately $11.5$10.2 million and $120.3$10.4 million of cash and cash equivalents, respectively. As the COVID-19 pandemic developed in March 2020, markets displayed significant volatility. In response to that volatility and possible implications for the availability of access to the capital markets, NW Natural and NW Holdings undertook a number of measures to increase cash on hand to ensure ample liquidity. 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. NW Holdings and NW Natural may also pre-fund their respective capital expenditures when long-term fixed rate environments are attractive. NW Holdings and NW Natural expect to have ample liquidity in the form of cash on hand and from operations and available credit capacity under credit facilities to support funding needs.
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 Contentsits 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 estimated 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 quarter ended March 31, 2022, NW Holdings issued and sold 195,901 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $10.1 million, net of fees and commissions paid to agents of $0.3 million. As of March 31, 2022, NW Holdings had issued and sold 571,621 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $27.6 million, net of fees and commissions paid to agents of $0.7 million.
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 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 Holding'sHoldings 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. Over the next three years,From 2022 through 2024, we estimate NW Holdings'Holdings’ and NW Natural's combined incremental capital needs to be in the range of $400$600 million to $500$700 million. Through April 2022, NW Holdings issued approximately $150 million of equity. NW Holdings intends to use raised capital to support NW Natural, NW Natural Water, and NW Natural Water'sRenewables operating and capital expenditure programs. NW Holdings' issuance of securities is not subject to regulation by state public utility commissions, but the dividends from NW Natural to NW Holdings are subject to regulatory ring-fencing provisions. NW Holdings guarantees the debt of its wholly-owned subsidiary, NWN Water. See "Long-Term Debt""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 may not pay dividends or make distributions to NW Holdings if NW Natural’s credit ratings and common equity ratio, defined as the ratio of equity to long-term debt, fall below specified levels. If NW Natural’s long-term secured credit ratings are below A- for S&P and A3 for Moody’s, dividends may be issued so long as NW Natural’s common equity ratio is 45% or more. If NW Natural’s long term secured credit ratings are below BBB for S&P and Baa2 for Moody’s, dividends may be issued so long as NW Natural’s common equity ratio is 46% or more. Dividends may not be issued if NW Natural’s long-term secured credit ratings are BB+ or below for S&P or Ba1 or below for Moody’s, or if NW Natural’s common equity ratio is below 44%, where the ratio is measured using common equity and long-term debt excluding imputed debt or debt-like lease obligations. In each case, common equity ratios are determined based on a preceding or projected 13-month average. In addition, there are certain OPUC notice requirements for dividends in excess of 5% of NW Natural’s retained earnings.
Additionally, if NW Natural’s common equity (excluding goodwill and equity associated with non-regulated assets), on a preceding or projected 13-month average basis, is less than 46% of NW Natural’s capital structure, not including short-term debt, NW Natural is required to notify the OPUC, and if the common equity ratio falls below 44%, file a plan with the OPUC to restore its equity ratio to 44%. This condition is designed to ensure NW Natural continues to be adequately capitalized under the holding company structure. Under the WUTC order, the average common equity ratio must not exceed 56%.
At March 31, 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.
At June 30, 2021, NW Natural satisfied the ring-fencing provisions described above.
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 Gas Distribution Segment
For the NGD business segment, short-term borrowing requirements typically peak during colder winter months when the NGD business borrows money to cover the lag between natural gas purchases and bill collections from customers. Short-term liquidity for the NGD business is primarily provided by cash balances, internal cash flow from operations, proceeds from the sale of commercial paper notes, as well as available cash from multi-year credit facilities, short-term credit facilities, company-owned life insurance policies, the sale of long-term debt, and equity contributions from NW Holdings. NW Natural's long-term debt and contributions from NW Holdings are primarily used to finance NGD capital expenditures, refinance maturing debt, and provide temporary funding for other general corporate purposes of the 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 generally has not needed to borrow or issue letters of credit from its back-up credit facility.rates. In the event NW Natural is not able to issue new long-term debt due to adverse market conditions or other reasons, NW Natural expects that near-term liquidity needs can be met using internal cash flows, issuing commercial paper, receiving equity contributions from NW Holdings, or for the NGD segment, drawing upon a committed credit facility. NW Natural also has a universal shelf registration statement filed with the SEC for the issuance of secured and unsecured debt securities.
In the event senior unsecured long-term debt ratings are downgraded, or outstanding derivative positions 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 expose 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 June 30, 2021.March 31, 2022. If the credit risk-related contingent features underlying these contracts were triggered on June 30, 2021,March 31, 2022, assuming NW Natural's long-term debt ratings dropped to non-investment grade levels, we would not be required to post collateral with counterparties, including estimates for adequate assurance. See "Credit Ratings" below and Note 15.
Other items that may have a significant impact on NW Natural's liquidity and capital resources include NW Natural's pension contribution requirements and environmental expenditures. For additional information, see Part II, Item 7 "Financial Condition" in the 20202021 Form 10-K.
SHORT-TERM DEBT. Short-Term Debt
The primary source of short-term liquidity for NW Holdings is cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a multi-year credit facility, and short-term credit facilities it may enter into from time to time.
The primary source of short-term liquidity for NW Natural is from the sale of commercial paper, available cash from a multi-year credit facility, and short-term credit facilities. NW Holdings and NW Natural have separate bank facilities, and NW Natural has a commercial paper program. In addition to issuing commercial paper or 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 capital requirements. For NW Natural, commercial paper and bank loans are periodically refinanced through the sale of long-term debt or equity contributions from NW Holdings. Commercial paper, when outstanding, is sold through two commercial banks under an issuing and paying agency agreement and 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 unpaid interest under the Term Loan is due and payablewas repaid in June 2022. The Term Loan 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, 2021, with a consolidated indebtedness to total capitalization ratio of 56.2%.December 2021.
At June 30,March 31, 2022 and 2021, and 2020, NW Holdings had short-term debt outstanding of $240.0$332.5 million and $233.0$236.2 million, respectively. At June 30,March 31, 2022 and 2021, and 2020, NW Natural had short-term debt outstanding of $198.0$188.5 million and $153.0$175.2 million, respectively. NW Holdings' short-term debt at June 30, 2021March 31, 2022 consisted of $42.0$144.0 million in revolving credit agreement loans at NW Holdings and $98.0$188.5 million of commercial paper outstanding at NW Natural and the aforementioned $100.0 million Term Loan.. The weighted average interest rate on the revolving credit agreement at June 30, 2021March 31, 2022 was 1.1%1.5% at NW Holdings. The weighted average interest rate of commercial paper and the Term Loan outstanding at June 30, 2021March 31, 2022 was 0.2% and 0.6%, respectively,0.8% at NW Natural.
Credit Agreements
NW Holdings
At March 31, 2022, NW Holdings hashad a $100$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$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, 2021March 31, 2022 as follows:
| | | | | |
| In millions | |
| Lender rating, by category | Loan Commitment |
| AA/Aa | $ | 100200 | |
| |
| Total | $ | 100200 | |
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,March 31, 2022, March 31, 2021 June 30, 2020 and December 31, 2020, $42.02021, $144.0 million, $80.0$61.0 million and $73.0$144.0 million were drawn under this credit facility,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 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,March 31, 2022 and 2021, and 2020, with consolidated indebtedness to total capitalization ratios of 56.8%58.2% and 57.3%56.0%, 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 March 31, 2022 and 2021.
NW Natural
At March 31, 2022, NW Natural hashad a $300 millionsustainability-linked multi-year credit agreement for unsecured revolving loans totaling $400 million, with a feature that allows itNW Natural to request increases in the total commitment amount, up to a maximum of $450$600 million. The maturity date of the agreement is October 2, 2023,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, 2021March 31, 2022 as follows:
| | | | | |
| In millions | |
| Lender rating, by category | Loan Commitment |
| AA/Aa | $ | 300400 | |
| |
| Total | $ | 300400 | |
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,March 31, 2022, March 31, 2021 June 30, 2020 and December 31, 2020.2021.
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 March 31, 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,March 31, 2022 and 2021, and 2020, with consolidated indebtedness to total capitalization ratios of 56.2%53.5% and 56.0%55.3%, 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 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&P | | Moody's |
| Commercial paper (short-term debt) | | A-1 | | P-2 |
| Senior secured (long-term debt) | | AA- | | A2 |
| Senior unsecured (long-term debt) | | n/a | | Baa1 |
| Corporate credit rating | | A+ | | n/a |
| Ratings outlook | | Stable | | Stable |
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
In June 2019,November 2021, NW Natural Water,issued $130.0 million of First Mortgage Bonds (FMBs) with an interest rate of 3.08% due in 2051. Issued as a wholly-owned subsidiarysustainability bond, net proceeds from the sale of the FMBs were added to the general funds of NW Holdings, entered into a two-year term loan agreementNatural and used for $35.0 million. The loangeneral corporate purposes, while an amount equivalent to the net proceeds from the sale of the bonds was repaidor will be allocated to finance and/or refinance, in June 2021 upon its maturity date.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 credit agreement for $55.0 million and borrowed the full amount. The loan carried an interest rate of 0.9%1.2% at June 30, 2021,March 31, 2022, which is based upon the one-month LIBOR rate plus a spread.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, 2021,March 31, 2022, with a consolidated indebtedness to total capitalization ratio of 56.8%58.2%.
At June 30, 2021,March 31, 2022, NW Holdings and NW Natural had long-term debt outstanding of $975.8$1,045.0 million and $917.4$986.6 million, respectively, which included $7.4$8.2 million and $7.3$8.1 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 20212023 through 2050,2051, interest rates ranging from 2.8% to 9.1%7.9%, and a weighted average interest rate of 4.6%4.4%.
NW Natural did not retireNo long-term debt during the six months ended June 30, 2021. Overis scheduled to mature over the next twelve months $10.0 millionas of FMBs with an interest rate of 9.1% will mature in August 2021 and $50.0 million of FMBs with an interest rate of 3.2% will mature in September 2021.March 31, 2022 at NW Natural.
See Part II, Item 7, "Financial Condition—Contractual ObligationsLong-Term Debt" in the 20202021 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 in connection with the holding company reorganization, 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, 2021.March 31, 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, changes in working capital requirements, and other cash and non-cash adjustments to operating results.
Operating activity highlights include:
| | | Six Months Ended June 30, | | | | Three Months Ended March 31, | | |
| In thousands | In thousands | | 2021 | | 2020 | | YTD Change | | In thousands | | 2022 | | 2021 | | YTD Change | |
| NW Natural cash provided by operating activities | NW Natural cash provided by operating activities | | $ | 189,945 | | | $ | 162,294 | | | $ | 27,651 | | | NW Natural cash provided by operating activities | | $ | 138,230 | | | $ | 136,273 | | | $ | 1,957 | | |
| NW Holdings cash provided by operating activities | NW Holdings cash provided by operating activities | | $ | 194,281 | | | $ | 162,049 | | | $ | 32,232 | | | NW Holdings cash provided by operating activities | | $ | 141,037 | | | $ | 137,065 | | | $ | 3,972 | | |
SIXTHREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Cash provided by operating activities increased $4.0 million at NW Holdings and increased $2.0 million at NW Natural. The significant factors contributing to the $32.2 million increase in cash flows provided by operating activities at NW Holdings were as follows:
•$48.540.6 million increasedecrease in net deferred gas costs as the actual costs for the three months ended March 31, 2022 were 5% above the PGA estimates as opposed to gas costs for the three months ended March 31, 2021 that were 33% above the PGA estimates primarily due to the 2021 cold weather event; and
•$37.6 million decrease in accounts receivable and accrued unbilled revenue resulting from higher balances at March 31, 2022 compared to March 31, 2021; and
•$7.4 million decrease in inventories; partially offset by
•$35.3 million decrease in the regulatory incentive sharing mechanism related to revenues earned from Mist gas storage and asset management activities primarily related to the 2021 cold weather event;
•$32.0 million increase in asset optimization revenue sharing bill credits to customers; and
•$16.114.2 million increasedecrease in net income; partially offset by
•$27.1 million increase in net deferred gas costs as the actual costs during the 2020-2021 winter season were 27% above the PGA estimates due to the 2021 cold weather event as opposed to gas costs in the 2019-2020 winter season that were 4% below estimates embedded in the PGA.accounts payable.
During the six months ended June 30, 2021, NW Natural contributed $9.6 milliondid not make any cash contributions to the NGD segment'sits qualified defined benefit pension planplans during the three months ended March 31, 2022 compared to $8.5$4.5 million for the same period in 2020. The American Rescue Plan, which was signed into law on March 11, 2021, includes a provision for pension relief that extends the amortization period for required contributions from 7 to 15 years and provides for the stabilization of interest rates used to calculate future required contributions. As a result,2021. NW Natural does not expect to make any further plan contributions during the remainder of 2021. 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 9.10.
The increase in cash provided by operating activities at NW Natural was primarily driven by the increase discussed above.
NW Holdings and NW Natural have lease and purchase commitments relating to their 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 1716 in the 20202021 Form 10-K.
Table of Contents | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| In thousands | | 2022 | | 2021 | | YTD Change |
| NW Natural cash used in investing activities | | $ | (65,553) | | | $ | (62,229) | | | $ | (3,324) | |
| NW Holdings cash used in investing activities | | $ | (69,750) | | | $ | (63,875) | | | $ | (5,875) | |
| | | | | | |
| | | | | | |
Investing Activities
Investing activity highlights include:
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
| In thousands | | 2021 | | 2020 | | YTD Change |
| NW Natural cash used in investing activities | | $ | (122,887) | | | $ | (117,572) | | | $ | (5,315) | |
| NW Holdings cash used in investing activities | | $ | (127,883) | | | $ | (160,419) | | | $ | 32,536 | |
| | | | | | |
| | | | | | |
SIXTHREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Cash used in investing activities decreased $32.5increased $5.9 million at NW Holdings and increased $5.3$3.3 million at NW Natural. The increase at NW Natural is primarily due to a decrease of $1.8 million in proceeds from the sale of assets. NW Holdings' decreaseincrease in cash used in investing activities was primarily due to $37.9an increase of $2.8 million of cash used for water and waste water acquisitions, net of cash acquired, during the six months ended June 30, 2020. The increasecapital expenditures at NW Natural is primarily due to an increase in capital expenditures of $6.9 million.Water.
NW Natural capital expenditures in 20212022 (including cloud-based software classified as other assets) are anticipated to be in the range of $280$310 million to $320$350 million and for the five-year period from 20212022 to 20252026 are expected to range from $1.0$1.3 billion to $1.2$1.5 billion. NW Natural Water is expected to invest approximately $15 million in 20212022 related to maintenance capital expenditures for water and wastewater utilities currently owned or under a purchase and sale agreement,as of December 31, 2021, and for the five-year period from 20212022 to 2025,2026, capital expenditures are expected to be approximately $40$60 million to $50$70 million. Investments in our infrastructure during
and after 20212022 will depend largely on additional regulations, growth, and expansion opportunities. Required funds for the investments are expected to be internally generated and/or financed with long-term debt or equity, as appropriate.
Financing Activities
Financing activity highlights include:
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
| In thousands | | 2021 | | 2020 | | YTD Change |
| NW Natural cash (used in) provided by financing activities | | $ | (63,083) | | | $ | 72,146 | | | $ | (135,229) | |
| Repayments of commercial paper, maturities greater than 90 days | | (195,025) | | | — | | | (195,025) | |
| NW Natural change in short-term debt & proceeds from term loan | | 161,500 | | | 27,900 | | | 133,600 | |
| NW Natural change in long-term debt | | — | | | 75,000 | | | (75,000) | |
| NW Holdings cash (used in) provided by financing activities | | $ | (73,542) | | | $ | 128,282 | | | $ | (201,824) | |
| | | | | | |
| Repayments of commercial paper, maturities greater than 90 days | | (195,025) | | | — | | | $ | (195,025) | |
| NW Holdings change in short-term debt & proceeds from term loan | | 130,500 | | | 83,900 | | | 46,600 | |
| NW Holdings change in long-term debt | | 20,000 | | | 75,000 | | | (55,000) | |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| In thousands | | 2022 | | 2021 | | YTD Change |
| NW Natural cash used in financing activities | | $ | (72,026) | | | $ | (71,760) | | | $ | (266) | |
| | | | | | |
| | | | | | |
| | | | | | |
| NW Holdings cash used in financing activities | | $ | (62,764) | | | $ | (83,132) | | | $ | 20,368 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
SIXTHREE MONTHS ENDED JUNE 30, 2021MARCH 31, 2022 COMPARED TO JUNE 30, 2020.MARCH 31, 2021. Cash provided byused in financing activities decreased $201.8$20.4 million and $135.2increased $0.3 million at NW Holdings and NW Natural, respectively. The decreasecash used in cash provided by financing activities at NW Natural was driven by $61.4 million in lower borrowings of short-term debt instruments to increase liquidity as a precaution in response to the unfolding of the COVID-19 pandemic during March 2020 and an increase of $75.0 million in long-term debt during the six months ended June 30, 2020.
In addition to the decrease at NW Natural, the decrease in cash provided by financing activitiesdecreased at NW Holdings was primarily due to the repaymentlower repayments of the $35.0 million two-year loan agreement at NW Natural Watershort-term debt and lower borrowings on NW Holdings' credit facility during the six months ended June 30, 2021, partially offset by thecash proceeds from the $55.0 million five-year term loan credit agreement at NW Natural Water.ATM equity program.
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 the 20202021 Form 10-K. At June 30, 2021,March 31, 2022, NW Natural's total estimated liability related to environmental sites is $110.3$109.1 million. See "Results of Operations—Regulatory Matters—Rate Mechanisms—Environmental Costs" in the 20202021 Form 10-K and Note 16.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing 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 reported under different conditions or if they used different assumptions. Our most critical estimates and judgments for both NW Holdings and NW Natural include accounting for:
•regulatory accounting;
•revenue recognition;
•derivative instruments and hedging activities;
•pensions and postretirement benefits;
•income taxes;
•environmental contingencies; and
•impairment of long-lived assets and goodwill.
There have been no material changes to the information provided in the 20202021 Form 10-K with respect to the application of critical accounting policies and estimates. See Part II, Item 7, "Application of Critical Accounting Policies and Estimates," in the 20202021 Form 10-K.
Management has discussed its current estimates and judgments used in the application of critical accounting policies with the Audit Committees of the 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 are 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 NW Holdings' and NW Natural's overall risk management program. No material changes have occurred related to disclosures about market risk for the sixthree months ended June 30, 2021.March 31, 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 20202021 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
NW Holdings and NW Natural management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, completed an evaluation of the effectiveness of the design and operation of 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 each registrant have concluded that, as of the end of the period covered by this report, disclosure controls and procedures were effective to ensure that information required to be disclosed by each such registrant and included in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission (SEC)SEC rules and forms and that such information is accumulated and communicated to management of each registrant, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
NW Holdings and NW Natural management 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 June 30, 2021March 31, 2022 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting for NW Holdings and NW Natural. The statements contained in Exhibit 31.1, Exhibit 31.2, Exhibit 31.3, and Exhibit 31.4 should be considered in light of, and read together with, the information set forth in this Item 4(b).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than the proceedings disclosed in Note 16 and those proceedings disclosed and incorporated by reference in Part I, Item 3, “Legal Proceedings” in the 20202021 Form 10-K, we have only 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” in the 20202021 Form 10-K. In addition to the other information set forth in this report, you should carefully consider those risk factors, which could materially affect our business, financial condition, or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about purchases of NW Holdings' equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the quarter ended June 30, 2021:March 31, 2022:
| | Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities | Issuer Purchases of Equity Securities |
| Period | 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) | 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 | Balance forward | | | | | | 2,124,528 | | | $ | 16,732,648 | | Balance forward | | | | | | 2,124,528 | | | $ | 16,732,648 | |
| 04/01/21-04/30/21 | | — | | | $ | — | | | — | | | — | | |
| 05/01/21-05/31/21 | | 1,732 | | | 53.70 | | | — | | | — | | |
| 06/01/21-06/30/21 | | — | | | — | | | — | | | — | | |
| 01/01/22-01/31/22 | | 01/01/22-01/31/22 | | — | | | — | | | — | | | — | |
| 02/01/22-02/28/22 | | 02/01/22-02/28/22 | | — | | | — | | | — | | | — | |
| 03/01/22-03/31/22 | | 03/01/22-03/31/22 | | 9,963 | | | $ | 55.76 | | | — | | | — | |
| Total | Total | | 1,732 | | | $ | 53.70 | | | 2,124,528 | | | $ | 16,732,648 | | Total | | 9,963 | | | $ | 55.76 | | | 2,124,528 | | | $ | 16,732,648 | |
(1)During the quarter ended June 30, 2021,March 31, 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, 1,7329,963 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, 2021,March 31, 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, 2021,March 31, 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. For more information on this program, refer to Note 5 in the 20202021 Form 10-K.
ITEM 6. EXHIBITS
See the Exhibit Index below, which is incorporated by reference herein.
NORTHWEST NATURAL GAS COMPANY
NORTHWEST NATURAL HOLDING COMPANY
Exhibit Index to Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2021March 31, 2022
| | | | | |
| Exhibit Index |
Exhibit Number | Document |
| |
| |
| |
| |
| |
| |
| Credit Agreement, dated as of June 10, 2021, among NW Natural Water Company, LLC, Northwest Natural Holding Company, and the lenders party thereto, with Bank of America, N.A., as administrative agent. (incorporated by reference to Exhibit 4.2 to the Form 8-K dated June 14, 2021, File No. 1-38681).year ended December 31, 2021) |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| 101 | The following materials formatted in Inline Extensible Business Reporting Language (Inline XBRL):
(i) Consolidated Statements of Income;
(ii) Consolidated Balance Sheets;
(iii) Consolidated Statements of Cash Flows; and
(iv) Related notes.
The instance document does not appear in the interactive data file because XBRL tags are embedded within the Inline XBRL document. |
| |
| 104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021,March 31, 2022, formatted in Inline XBRL. |
* Incorporated by reference as indicated.indicated
** 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.
SIGNATURES
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 5, 2021May 4, 2022 | | |
| | | /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 5, 2021May 4, 2022 | | |
| | | /s/ Brody J. Wilson |
| | | Brody J. Wilson |
| | | Principal Accounting Officer
Vice President, Treasurer, Chief Accounting Officer and Controller |
| | | |
