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 ~~September~~June 30, ~~2021~~2022

☐ 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 GAS COMPANY~~

~~(Exact name of registrant as specified in its charter)~~

~~Commission file number~~

~~1-38681~~

~~Commission file number~~

~~1-15973~~

~~Oregon~~

~~82-4710680~~

~~Oregon~~

~~93-0256722~~

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

~~250 SW Taylor Street~~

~~Portland~~

~~Oregon~~

~~97204~~

~~Portland~~

~~Oregon~~

~~97204~~

~~(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~~

~~Securities registered pursuant to Section 12(b) of the Act:~~

~~Registrant~~

~~Title of each class~~

~~Trading Symbol~~

~~Name of each exchange~~

~~on which registered~~

~~NORTHWEST NATURAL HOLDING COMPANY~~

~~Common Stock~~

~~NWN~~

~~New York Stock Exchange~~

~~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.

~~NORTHWEST NATURAL HOLDING COMPANY~~

~~Yes~~

☒

☐

~~NORTHWEST NATURAL GAS COMPANY~~

~~Yes~~

☒

☐

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~~

~~Yes~~

☒

☐

~~NORTHWEST NATURAL GAS COMPANY~~

~~Yes~~

☒

☐

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 GAS COMPANY~~

~~Large Accelerated Filer~~

☒

~~Large Accelerated Filer~~

☐

~~Accelerated Filer~~

☐

~~Accelerated Filer~~

☐

~~Non-accelerated Filer~~

☐

~~Non-accelerated Filer~~

☒

~~Smaller Reporting Company~~

☐

~~Smaller Reporting Company~~

☐

~~Emerging Growth Company~~

☐

~~Emerging Growth Company~~

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

~~Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).~~

~~NORTHWEST NATURAL HOLDING COMPANY~~

~~Yes~~

☐

☒

~~NORTHWEST NATURAL GAS COMPANY~~

~~Yes~~

☐

☒

NORTHWEST NATURAL HOLDING COMPANY

NORTHWEST NATURAL GAS COMPANY

(Exact name of registrant as specified in its charter)

Commission file number

1-38681

Commission file number

1-15973

Oregon

82-4710680

Oregon

93-0256722

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

250 SW Taylor Street

Portland

Oregon

97204

Portland

Oregon

97204

(Address of principal executive offices)

(Zip Code)

(Address of principal executive offices)

(Zip 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:

Registrant

Title of each class

Trading Symbol

Name of each exchange

on which registered

NORTHWEST NATURAL HOLDING COMPANY

Common Stock

NWN

New York Stock Exchange

NORTHWEST NATURAL GAS COMPANY

None

NORTHWEST NATURAL HOLDING COMPANY

Yes

☒

☐

NORTHWEST NATURAL GAS COMPANY

Yes

☒

☐

NORTHWEST NATURAL HOLDING COMPANY

Yes

☒

☐

NORTHWEST NATURAL GAS COMPANY

Yes

☒

☐

NORTHWEST NATURAL HOLDING COMPANY

NORTHWEST NATURAL GAS COMPANY

Large Accelerated Filer

☒

Large Accelerated Filer

☐

Accelerated Filer

☐

Accelerated Filer

☐

Non-accelerated Filer

☐

Non-accelerated Filer

☒

Smaller Reporting Company

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

Emerging Growth Company

☐

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

Yes

☐

☒

NORTHWEST NATURAL GAS COMPANY

Yes

☐

☒

At ~~October 27, 2021, 30,730,274~~ July 28, 2022, 34,817,043 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 ~~September~~June 30, ~~2021~~2022

TABLE OF CONTENTS


PART 1.	FINANCIAL INFORMATION	Page

	Forward-Looking Statements	43

Item 1.	Unaudited Financial Statements:
	Consolidated Statements of Comprehensive Income of Northwest Natural Holding Company for the three and ~~nine~~s i x months ended ~~September~~June 30 ~~30,~~, 2022 and 2021 ~~and 2020~~	65
	Consolidated Balance Sheets of Northwest Natural Holding Company at SeJune 30 ~~ptember~~ ~~30,~~, 2022 and 2021 ~~and 2020~~ and December 31, ~~2020~~2021	76
	Consolidated Statements of Shareholders' Equity of Northwest Natural Holding Company for the three and ~~nine~~six months ended ~~September~~June 30 ~~30,~~, 2022 and 2021 ~~and 2020~~	98
	Consolidated Statements of Cash Flows of Northwest Natural Holding Company for the ~~nine~~six months ended ~~September~~June 30 ~~30,~~, 2022 and 2021 ~~and 2020~~	109
	Consolidated Statements of Comprehensive Income of Northwest Natural Gas Company for the three and ~~nine~~six months ended ~~September~~June 30 ~~30,~~, 2022 and 2021 ~~and 2020~~	1110
	Consolidated Balance Sheets of Northwest Natural Gas Company at ~~September~~June 30 , 2022 and 2021 ~~and 2020~~ and December 31, ~~2020~~2021	1211
	Consolidated Statements of Shareholder's Equity of Northwest Natural Gas Company for the three and ~~nine~~ six months ended ~~September 30,~~ June 3 0 , 2022 and 2021 ~~and 2020~~	1413
	Consolidated Statements of Cash Flows of Northwest Natural Gas Company for the ~~nine~~ six months ended ~~September~~June 30 , 2022 and 2021 ~~and 2020~~	1514
	Notes to Unaudited Consolidated Financial Statements	1615

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4239

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6664

Item 4.	Controls and Procedures	6664

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	6764

Item 1A.	Risk Factors	6764

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6764

Item 5.	Other Information	6765

Item 6.	Exhibits	6865

	Signature	7167

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. ~~All statements in this report other than statements of historical facts could be forward looking statements.~~ Forward-looking statements ~~may~~can be identified by words such as anticipates, assumes, may, intends, ~~may,~~ plans, projects, seeks, believes, estimates, expects, will, could, and similar references (including the negatives thereof) to future periods, although not all forward-looking statements contain these ~~identifying~~ 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, and general economic uncertainty;

•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 shareholders, investors, stakeholders and communities;

•the policies and priorities of the current presidential administration and U.S. Congress;

•growth;

•customer rates;

•pandemic and related illness or ~~quarantine;~~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;

•~~accuracy~~international, 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 the Delta variant, and the economic conditions resulting therefrom, the timing of our return to normal business practices, potential future shutdowns 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;

~~Table of Contents~~

•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 ~~2020~~2021 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.

~~Table of Contents~~

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

NORTHWEST NATURAL HOLDING COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In thousands, except per share data	In thousands, except per share data	2021		2020		2021		2020		In thousands, except per share data	2022		2021		2022		2021

Operating revenues	Operating revenues	$	101,447	$	93,284	$	566,310	$	513,406	Operating revenues	$	194,960	$	148,917	$	545,261	$	464,863

Operating expenses:	Operating expenses:									Operating expenses:
Cost of gas	Cost of gas	25,266		23,741		178,669		173,489		Cost of gas	79,720		41,193		225,308		153,403
Operations and maintenance	Operations and maintenance	47,329		41,352		149,567		134,256		Operations and maintenance	53,175		50,047		110,660		102,238
Environmental remediation	Environmental remediation	806		867		6,092		6,494		Environmental remediation	2,267		1,509		6,970		5,286
General taxes	General taxes	9,061		8,656		29,344		26,924		General taxes	8,989		8,914		21,093		20,283
Revenue taxes	Revenue taxes	3,891		3,555		22,226		19,752		Revenue taxes	8,240		5,671		21,600		18,335
Depreciation and amortization		28,438		25,934		84,679		76,445
Depreciation										Depreciation	28,110		28,144		56,539		56,241
Other operating expenses	Other operating expenses	1,047		767		2,794		2,246		Other operating expenses	920		815		1,914		1,747
Total operating expenses	Total operating expenses	115,838		104,872		473,371		439,606		Total operating expenses	181,421		136,293		444,084		357,533
Income (loss) from operations		(14,391)		(11,588)		92,939		73,800
Income from operations										Income from operations	13,539		12,624		101,177		107,330
Other income (expense), net	Other income (expense), net	(2,216)		(3,287)		(8,355)		(9,902)		Other income (expense), net	226		(2,597)		(728)		(6,139)
Interest expense, net	Interest expense, net	11,175		9,165		33,329		32,339		Interest expense, net	11,580		11,028		23,102		22,154
Income (loss) before income taxes	Income (loss) before income taxes	(27,782)		(24,040)		51,255		31,559		Income (loss) before income taxes	2,185		(1,001)		77,347		79,037
Income tax expense (benefit)	Income tax expense (benefit)	(7,127)		(5,363)		13,117		7,092		Income tax expense (benefit)	470		(277)		19,393		20,244
Net income (loss) from continuing operations		(20,655)		(18,677)		38,138		24,467
Income from discontinued operations, net of tax		—		765		—		267

Net income (loss)	Net income (loss)	(20,655)		(17,912)		38,138		24,734		Net income (loss)	1,715		(724)		57,954		58,793
Other comprehensive income:	Other comprehensive income:									Other comprehensive income:
Amortization of non-qualified employee benefit plan liability, net of taxes of $80 and $66 for the three months ended and $240 and $182 for the nine months ended September 30, 2021 and 2020, respectively		234		186		676		506
Amortization of non-qualified employee benefit plan liability, net of taxes of $71 and $80 for the three months ended and $142 and $160 for the six months ended June 30, 2022 and 2021, respectively										Amortization of non-qualified employee benefit plan liability, net of taxes of $71 and $80 for the three months ended and $142 and $160 for the six months ended June 30, 2022 and 2021, respectively	197		221		394		442

Comprehensive income (loss)	Comprehensive income (loss)	$	(20,421)	$	(17,726)	$	38,814	$	25,240	Comprehensive income (loss)	$	1,912	$	(503)	$	58,348	$	59,235
Average common shares outstanding:	Average common shares outstanding:									Average common shares outstanding:
Basic	Basic	30,696		30,555		30,659		30,528		Basic	34,307		30,664		32,756		30,639
Diluted	Diluted	30,696		30,555		30,708		30,575		Diluted	34,352		30,664		32,805		30,671
Earnings (loss) from continuing operations per share of common stock:
Basic		$	(0.67)	$	(0.61)	$	1.24	$	0.80
Diluted		(0.67)		(0.61)		1.24		0.80
Earnings from discontinued operations per share of common stock:
Basic		$	—	$	0.02	$	—	$	0.01
Diluted		—		0.02		—		0.01

Earnings (loss) per share of common stock:	Earnings (loss) per share of common stock:									Earnings (loss) per share of common stock:
Basic	Basic	$	(0.67)	$	(0.59)	$	1.24	$	0.81	Basic	$	0.05	$	(0.02)	$	1.77	$	1.92
Diluted	Diluted	(0.67)		(0.59)		1.24		0.81		Diluted	0.05		(0.02)		1.77		1.92

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

NORTHWEST NATURAL HOLDING COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


		September 30,		September 30,		December 31,			June 30,		June 30,		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	$	19,502	$	35,926	$	30,168	Cash and cash equivalents	$	17,209	$	20,084	$	18,559

Accounts receivable	Accounts receivable	39,209		40,278		88,083		Accounts receivable	68,583		60,713		101,495
Accrued unbilled revenue	Accrued unbilled revenue	16,809		14,787		57,949		Accrued unbilled revenue	18,060		13,592		82,169
Allowance for uncollectible accounts	Allowance for uncollectible accounts	(2,702)		(1,786)		(3,219)		Allowance for uncollectible accounts	(1,356)		(3,283)		(2,018)
Regulatory assets	Regulatory assets	80,638		29,740		31,745		Regulatory assets	92,803		60,672		72,391
Derivative instruments	Derivative instruments	105,175		24,094		13,678		Derivative instruments	60,652		46,168		48,130
Inventories	Inventories	59,997		45,082		42,691		Inventories	65,983		39,024		57,262
Gas reserves		6,266		12,265		11,409
Income taxes receivable	Income taxes receivable	—		—		6,000		Income taxes receivable	—		6,000		—

Other current assets	Other current assets	33,285		25,534		44,741		Other current assets	36,060		30,871		59,288
Discontinued operations - current assets (Note 18)		—		16,928		—

Total current assets	Total current assets	358,179		242,848		323,245		Total current assets	357,994		273,841		437,276
Non-current assets:	Non-current assets:							Non-current assets:
Property, plant, and equipment	Property, plant, and equipment	3,919,096		3,680,872		3,734,039		Property, plant, and equipment	4,129,236		3,849,792		3,997,243
Less: Accumulated depreciation	Less: Accumulated depreciation	1,112,734		1,073,623		1,079,269		Less: Accumulated depreciation	1,150,555		1,093,863		1,125,873
Total property, plant, and equipment, net	Total property, plant, and equipment, net	2,806,362		2,607,249		2,654,770		Total property, plant, and equipment, net	2,978,681		2,755,929		2,871,370
Gas reserves		28,021		37,696		34,484
Regulatory assets	Regulatory assets	325,071		324,176		348,927		Regulatory assets	301,855		330,710		314,579
Derivative instruments	Derivative instruments	24,555		12,921		6,135		Derivative instruments	9,121		7,912		10,730
Other investments	Other investments	48,006		48,963		49,259		Other investments	96,027		77,577		89,278
Operating lease right of use asset, net	Operating lease right of use asset, net	75,634		78,036		77,446		Operating lease right of use asset, net	73,754		76,294		75,049
Assets under sales-type leases	Assets under sales-type leases	140,189		144,971		143,759		Assets under sales-type leases	136,673		141,408		138,995
Goodwill	Goodwill	69,789		70,292		69,225		Goodwill	70,714		69,313		70,570
Other non-current assets	Other non-current assets	53,419		50,945		49,129		Other non-current assets	75,699		50,516		56,757

Total non-current assets	Total non-current assets	3,571,046		3,375,249		3,433,134		Total non-current assets	3,742,524		3,509,659		3,627,328
Total assets	Total assets	$	3,929,225	$	3,618,097	$	3,756,379	Total assets	$	4,100,518	$	3,783,500	$	4,064,604

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

NORTHWEST NATURAL HOLDING COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


		September 30,		September 30,		December 31,			June 30,		June 30,		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	$	399,500	$	223,000	$	304,525	Short-term debt	$	222,700	$	240,000	$	389,500
Current maturities of long-term debt	Current maturities of long-term debt	278		95,173		95,344		Current maturities of long-term debt	351		60,274		345
Accounts payable	Accounts payable	94,897		83,813		97,966		Accounts payable	135,364		97,854		133,486
Taxes accrued	Taxes accrued	16,558		13,772		13,812		Taxes accrued	11,324		15,143		15,520
Interest accrued	Interest accrued	9,315		9,645		7,441		Interest accrued	7,425		7,425		7,503
Regulatory liabilities	Regulatory liabilities	164,168		59,236		50,362		Regulatory liabilities	97,277		103,210		112,281
Derivative instruments	Derivative instruments	9,818		1,784		4,198		Derivative instruments	15,918		3,393		10,402
Operating lease liabilities	Operating lease liabilities	1,213		1,081		1,105		Operating lease liabilities	1,315		1,228		1,296
Other current liabilities	Other current liabilities	39,218		49,870		52,330		Other current liabilities	47,624		43,946		54,432
Discontinued operations - current liabilities (Note 18)		—		13,922		—

Total current liabilities	Total current liabilities	734,965		551,296		627,083		Total current liabilities	539,298		572,473		724,765
Long-term debt	Long-term debt	916,026		860,235		860,081		Long-term debt	1,045,530		915,501		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	323,925		296,516		319,292		Deferred tax liabilities	355,470		325,600		340,231
Regulatory liabilities	Regulatory liabilities	665,390		649,521		639,663		Regulatory liabilities	658,925		645,046		658,332
Pension and other postretirement benefit liabilities	Pension and other postretirement benefit liabilities	202,287		202,938		217,287		Pension and other postretirement benefit liabilities	162,511		203,854		166,684
Derivative instruments	Derivative instruments	268		921		2,852		Derivative instruments	9,475		453		412
Operating lease liabilities	Operating lease liabilities	79,789		80,854		80,621		Operating lease liabilities	78,826		80,088		79,468
Other non-current liabilities	Other non-current liabilities	115,114		123,041		120,767		Other non-current liabilities	111,704		117,659		114,979

Total deferred credits and other non-current liabilities	Total deferred credits and other non-current liabilities	1,386,773		1,353,791		1,380,482		Total deferred credits and other non-current liabilities	1,376,911		1,372,700		1,360,106
Commitments and contingencies (Note 17)		0		0		0
Commitments and contingencies (Note 16)								Commitments and contingencies (Note 16)	0		0		0
Equity:	Equity:							Equity:
Common stock - no par value; authorized 100,000 shares; issued and outstanding 30,730, 30,565, and 30,589 at September 30, 2021 and 2020, and December 31, 2020, respectively		573,578		563,852		565,112
Common stock - no par value; authorized 100,000 shares; issued and outstanding 34,754, 30,672, and 31,129 at June 30, 2022 and 2021, and December 31, 2021, respectively								Common stock - no par value; authorized 100,000 shares; issued and outstanding 34,754, 30,672, and 31,129 at June 30, 2022 and 2021, and December 31, 2021, respectively	767,826		569,785		590,771
Retained earnings	Retained earnings	330,109		299,150		336,523		Retained earnings	381,963		365,501		355,779
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(12,226)		(10,227)		(12,902)		Accumulated other comprehensive loss	(11,010)		(12,460)		(11,404)
Total equity	Total equity	891,461		852,775		888,733		Total equity	1,138,779		922,826		935,146
Total liabilities and equity	Total liabilities and equity	$	3,929,225	$	3,618,097	$	3,756,379	Total liabilities and equity	$	4,100,518	$	3,783,500	$	4,064,604

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

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 September 30,				Nine Months Ended September 30,				In thousands, except per share amounts	Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Total shareholders' equity, beginning balances	Total shareholders' equity, beginning balances	$	922,826	$	884,001	$	888,733	$	865,999	Total shareholders' equity, beginning balances	$	987,944	$	936,324	$	935,146	$	888,733

Common stock:	Common stock:									Common stock:
Beginning balances	Beginning balances	569,785		562,766		565,112		558,282		Beginning balances	602,382		568,066		590,771		565,112
Stock-based compensation	Stock-based compensation	527		459		2,973		4,085		Stock-based compensation	458		416		2,232		2,446
Shares issued pursuant to equity-based plans, net of shares withheld for taxes		1,159		627		3,386		1,485
Issuances of common stock, net of issuance costs		2,107		—		2,107		—
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	1,080		1,303		1,004		2,227
Issuance of common stock, net of issuance costs										Issuance of common stock, net of issuance costs	163,906		—		173,819		—

Ending balances	Ending balances	573,578		563,852		573,578		563,852		Ending balances	767,826		569,785		767,826		569,785

Retained earnings:	Retained earnings:									Retained earnings:
Beginning balances	Beginning balances	365,501		331,648		336,523		318,450		Beginning balances	396,769		380,939		355,779		336,523
Net income (loss)	Net income (loss)	(20,655)		(17,912)		38,138		24,734		Net income (loss)	1,715		(724)		57,954		58,793
Dividends on common stock	Dividends on common stock	(14,737)		(14,586)		(44,552)		(44,034)		Dividends on common stock	(16,521)		(14,714)		(31,770)		(29,815)

Ending balances	Ending balances	330,109		299,150		330,109		299,150		Ending balances	381,963		365,501		381,963		365,501

Accumulated other comprehensive income (loss):	Accumulated other comprehensive income (loss):									Accumulated other comprehensive income (loss):
Beginning balances	Beginning balances	(12,460)		(10,413)		(12,902)		(10,733)		Beginning balances	(11,207)		(12,681)		(11,404)		(12,902)
Other comprehensive income	Other comprehensive income	234		186		676		506		Other comprehensive income	197		221		394		442

Ending balances	Ending balances	(12,226)		(10,227)		(12,226)		(10,227)		Ending balances	(11,010)		(12,460)		(11,010)		(12,460)

Total shareholders' equity, ending balances	Total shareholders' equity, ending balances	$	891,461	$	852,775	$	891,461	$	852,775	Total shareholders' equity, ending balances	$	1,138,779	$	922,826	$	1,138,779	$	922,826

Dividends per share of common stock	Dividends per share of common stock	$	0.4800	$	0.4775	$	1.4400	$	1.4325	Dividends per share of common stock	$	0.4825	$	0.4800	$	0.9650	$	0.9600

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

NORTHWEST NATURAL HOLDING COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


		Nine Months Ended September 30,					Six Months Ended June 30,
In thousands	In thousands	2021		2020		In thousands	2022		2021
Operating activities:	Operating activities:					Operating activities:
Net income	Net income	$	38,138	$	24,734	Net income	$	57,954	$	58,793
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		84,679		76,445
Depreciation						Depreciation	56,539		56,241
Regulatory amortization of gas reserves	Regulatory amortization of gas reserves	11,606		13,711		Regulatory amortization of gas reserves	2,984		7,597
Deferred income taxes	Deferred income taxes	2,748		(390)		Deferred income taxes	10,659		1,048
Qualified defined benefit pension plan expense	Qualified defined benefit pension plan expense	12,075		13,800		Qualified defined benefit pension plan expense	2,882		7,874
Contributions to qualified defined benefit pension plans	Contributions to qualified defined benefit pension plans	(9,590)		(23,670)		Contributions to qualified defined benefit pension plans	—		(9,590)
Deferred environmental expenditures, net	Deferred environmental expenditures, net	(14,952)		(16,469)		Deferred environmental expenditures, net	(9,608)		(9,625)
Amortization of environmental remediation		6,092		6,494
Environmental remediation expense						Environmental remediation expense	6,970		5,286

Asset optimization revenue sharing bill credits						Asset optimization revenue sharing bill credits	(41,102)		(9,053)
Other	Other	5,815		(4,483)		Other	9,961		10,663
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Receivables, net	Receivables, net	83,826		77,236		Receivables, net	96,453		73,133
Inventories	Inventories	(17,307)		(1,126)		Inventories	(8,721)		3,666
Income and other taxes	Income and other taxes	19,620		12,038		Income and other taxes	17,241		21,467
Accounts payable	Accounts payable	(18,057)		(20,311)		Accounts payable	(13,728)		(17,239)
Deferred gas costs	Deferred gas costs	(33,379)		(2,472)		Deferred gas costs	2,607		(26,962)
Asset optimization revenue sharing	Asset optimization revenue sharing	41,407		(9,695)		Asset optimization revenue sharing	3,929		36,872
Decoupling mechanism	Decoupling mechanism	(9,172)		4,175		Decoupling mechanism	9,669		(6,860)
Other, net	Other, net	(21,825)		74		Other, net	(8,125)		(9,030)
Discontinued operations		—		706
Cash provided by operating activities	Cash provided by operating activities	181,724		150,797		Cash provided by operating activities	196,564		194,281
Investing activities:	Investing activities:					Investing activities:
Capital expenditures	Capital expenditures	(212,376)		(193,336)		Capital expenditures	(167,696)		(130,108)
Acquisitions, net of cash acquired	Acquisitions, net of cash acquired	(375)		(38,078)		Acquisitions, net of cash acquired	—		(55)
Leasehold improvement expenditures		(570)		(7,827)

Proceeds from the sale of assets	Proceeds from the sale of assets	2,712		8,003		Proceeds from the sale of assets	345		2,234
Proceeds from sale of equity method investment		7,000		7,000

Other	Other	88		(240)		Other	(2,336)		46
Discontinued operations		—		(2,287)
Cash used in investing activities	Cash used in investing activities	(203,521)		(226,765)		Cash used in investing activities	(169,687)		(127,883)
Financing activities:	Financing activities:					Financing activities:

Proceeds from common stock issued, net	Proceeds from common stock issued, net	2,107		68		Proceeds from common stock issued, net	174,053		—
Long-term debt issued	Long-term debt issued	55,000		150,000		Long-term debt issued	692		55,000
Long-term debt retired	Long-term debt retired	(95,000)		(75,000)		Long-term debt retired	—		(35,000)
Proceeds from term loan due within one year	Proceeds from term loan due within one year	100,000		150,000		Proceeds from term loan due within one year	—		100,000
Repayments of commercial paper, maturities greater than three months		(195,025)		—
Change in other short-term debt, net		190,000		(76,100)
Repayment of commercial paper, maturities greater than three months						Repayment of commercial paper, maturities greater than three months	—		(195,025)
Changes in other short-term debt, net						Changes in other short-term debt, net	(166,800)		30,500
Cash dividend payments on common stock	Cash dividend payments on common stock	(41,827)		(41,508)		Cash dividend payments on common stock	(30,311)		(27,842)

Other	Other	(1,240)		(2,957)		Other	(1,596)		(1,175)
Cash provided by financing activities		14,015		104,503
Cash used in financing activities						Cash used in financing activities	(23,962)		(73,542)
Increase (decrease) in cash, cash equivalents and restricted cash	Increase (decrease) in cash, cash equivalents and restricted cash	(7,782)		28,535		Increase (decrease) in cash, cash equivalents and restricted cash	2,915		(7,144)
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	$	27,672	$	41,171	Cash, cash equivalents and restricted cash, end of period	$	30,035	$	28,310

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	$	30,910	$	29,829	Interest paid, net of capitalization	$	22,867	$	21,971
Income taxes paid, net of refunds	Income taxes paid, net of refunds	6,980		9,344		Income taxes paid, net of refunds	1,086		7,405

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

NORTHWEST NATURAL GAS COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In thousands	In thousands	2021		2020		2021		2020		In thousands	2022		2021		2022		2021

Operating revenues	Operating revenues	$	96,036	$	88,367	$	552,965	$	502,053	Operating revenues	$	190,251	$	144,579	$	536,875	$	456,929

Operating expenses:	Operating expenses:									Operating expenses:
Cost of gas	Cost of gas	25,322		23,797		178,837		173,657		Cost of gas	79,776		41,249		225,420		153,515
Operations and maintenance	Operations and maintenance	43,768		38,657		137,894		126,111		Operations and maintenance	48,879		44,939		102,756		94,126
Environmental remediation	Environmental remediation	806		867		6,092		6,494		Environmental remediation	2,267		1,509		6,970		5,286
General taxes	General taxes	8,999		8,554		29,041		26,564		General taxes	8,872		8,783		20,861		20,042
Revenue taxes	Revenue taxes	3,838		3,555		22,143		19,752		Revenue taxes	8,208		5,650		21,532		18,305
Depreciation and amortization		27,719		25,681		82,418		74,857
Depreciation										Depreciation	27,328		27,530		54,965		54,699
Other operating expenses	Other operating expenses	669		725		2,368		2,167		Other operating expenses	796		780		1,695		1,699
Total operating expenses	Total operating expenses	111,121		101,836		458,793		429,602		Total operating expenses	176,126		130,440		434,199		347,672
Income (loss) from operations		(15,085)		(13,469)		94,172		72,451
Income from operations										Income from operations	14,125		14,139		102,676		109,257
Other income (expense), net	Other income (expense), net	(2,295)		(4,002)		(8,526)		(10,744)		Other income (expense), net	17		(2,566)		(964)		(6,231)
Interest expense, net	Interest expense, net	10,850		8,806		32,336		30,518		Interest expense, net	10,599		10,696		21,430		21,486
Income (loss) before income taxes		(28,230)		(26,277)		53,310		31,189
Income tax expense (benefit)		(7,212)		(6,057)		13,628		6,942
Income before income taxes										Income before income taxes	3,543		877		80,282		81,540
Income tax expense										Income tax expense	810		288		20,133		20,840

Net income (loss)		(21,018)		(20,220)		39,682		24,247
Net income										Net income	2,733		589		60,149		60,700
Other comprehensive income:	Other comprehensive income:									Other comprehensive income:
Amortization of non-qualified employee benefit plan liability, net of taxes of $80 and $66 for the three months ended and $240 and $182 for the nine months ended September 30, 2021 and 2020, respectively		234		186		676		506
Amortization of non-qualified employee benefit plan liability, net of taxes of $71 and $80 for the three months ended and $142 and $160 for the six months ended June 30, 2022 and 2021, respectively										Amortization of non-qualified employee benefit plan liability, net of taxes of $71 and $80 for the three months ended and $142 and $160 for the six months ended June 30, 2022 and 2021, respectively	197		221		394		442

Comprehensive income (loss)		$	(20,784)	$	(20,034)	$	40,358	$	24,753
Comprehensive income										Comprehensive income	$	2,930	$	810	$	60,543	$	61,142

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

NORTHWEST NATURAL GAS COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


		September 30,		September 30,		December 31,			June 30,		June 30,		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	$	9,697	$	27,133	$	10,453	Cash and cash equivalents	$	10,267	$	11,488	$	12,271

Accounts receivable	Accounts receivable	37,328		31,659		80,035		Accounts receivable	66,186		51,849		99,780
Accrued unbilled revenue	Accrued unbilled revenue	16,702		14,709		57,890		Accrued unbilled revenue	17,840		13,474		82,028
Receivables from affiliates	Receivables from affiliates	628		641		660		Receivables from affiliates	300		301		261
Allowance for uncollectible accounts	Allowance for uncollectible accounts	(2,658)		(1,784)		(3,107)		Allowance for uncollectible accounts	(1,299)		(3,239)		(1,962)
Regulatory assets	Regulatory assets	80,638		29,740		31,745		Regulatory assets	92,803		60,672		72,391
Derivative instruments	Derivative instruments	105,175		24,094		13,678		Derivative instruments	60,652		46,168		48,130
Inventories	Inventories	59,641		44,709		42,325		Inventories	64,726		38,549		56,752
Gas reserves		6,266		12,265		11,409

Other current assets	Other current assets	22,809		20,236		37,909		Other current assets	31,784		30,630		47,378

Total current assets	Total current assets	336,226		203,402		282,997		Total current assets	343,259		249,892		417,029
Non-current assets:	Non-current assets:							Non-current assets:
Property, plant, and equipment	Property, plant, and equipment	3,857,652		3,633,570		3,683,776		Property, plant, and equipment	4,052,467		3,794,870		3,931,640
Less: Accumulated depreciation	Less: Accumulated depreciation	1,106,901		1,070,405		1,075,446		Less: Accumulated depreciation	1,142,611		1,088,743		1,119,361
Total property, plant, and equipment, net	Total property, plant, and equipment, net	2,750,751		2,563,165		2,608,330		Total property, plant, and equipment, net	2,909,856		2,706,127		2,812,279
Gas reserves		28,021		37,696		34,484
Regulatory assets	Regulatory assets	325,031		324,136		348,887		Regulatory assets	301,790		330,670		314,539
Derivative instruments	Derivative instruments	24,555		12,921		6,135		Derivative instruments	9,121		7,912		10,730
Other investments	Other investments	47,970		48,929		49,242		Other investments	81,486		77,547		74,786
Operating lease right of use asset, net	Operating lease right of use asset, net	75,565		77,949		77,328		Operating lease right of use asset, net	73,706		76,211		74,987
Assets under sales-type leases	Assets under sales-type leases	140,189		144,972		143,759		Assets under sales-type leases	136,673		141,408		138,995
Other non-current assets	Other non-current assets	52,653		50,197		48,174		Other non-current assets	74,106		49,665		55,027

Total non-current assets	Total non-current assets	3,444,735		3,259,965		3,316,339		Total non-current assets	3,586,738		3,389,540		3,481,343
Total assets	Total assets	$	3,780,961	$	3,463,367	$	3,599,336	Total assets	$	3,929,997	$	3,639,432	$	3,898,372

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

NORTHWEST NATURAL GAS COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)


		September 30,		September 30,		December 31,			June 30,		June 30,		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	$	370,500	$	150,000	$	231,525	Short-term debt	$	78,700	$	198,000	$	245,500
Current maturities of long-term debt	Current maturities of long-term debt	—		59,940		59,955		Current maturities of long-term debt	—		59,987		—
Accounts payable	Accounts payable	91,947		82,582		95,170		Accounts payable	132,002		95,109		131,475
Payables to affiliates	Payables to affiliates	2,568		11,134		13,820		Payables to affiliates	7,259		22,869		1,248
Taxes accrued	Taxes accrued	16,472		13,604		13,724		Taxes accrued	11,289		10,072		15,476
Interest accrued	Interest accrued	9,258		9,552		7,338		Interest accrued	7,207		7,373		7,296
Regulatory liabilities	Regulatory liabilities	164,168		59,236		50,362		Regulatory liabilities	97,277		103,210		112,281
Derivative instruments	Derivative instruments	9,818		1,784		4,198		Derivative instruments	15,918		3,393		10,402
Operating lease liabilities	Operating lease liabilities	1,184		1,020		1,054		Operating lease liabilities	1,298		1,193		1,273
Other current liabilities	Other current liabilities	38,642		48,555		51,907		Other current liabilities	46,816		43,389		53,591

Total current liabilities	Total current liabilities	704,557		437,407		529,053		Total current liabilities	397,766		544,595		578,542
Long-term debt	Long-term debt	857,760		857,174		857,265		Long-term debt	986,762		857,422		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	321,636		307,257		318,034		Deferred tax liabilities	352,606		323,522		337,717
Regulatory liabilities	Regulatory liabilities	664,521		648,651		638,793		Regulatory liabilities	657,943		644,177		657,350
Pension and other postretirement benefit liabilities	Pension and other postretirement benefit liabilities	202,287		202,938		217,287		Pension and other postretirement benefit liabilities	162,511		203,854		166,684
Derivative instruments	Derivative instruments	268		921		2,852		Derivative instruments	9,475		453		412
Operating lease liabilities	Operating lease liabilities	79,752		80,830		80,559		Operating lease liabilities	78,789		80,043		79,431
Other non-current liabilities	Other non-current liabilities	114,438		122,684		120,309		Other non-current liabilities	110,469		116,975		113,934

Total deferred credits and other non-current liabilities	Total deferred credits and other non-current liabilities	1,382,902		1,363,281		1,377,834		Total deferred credits and other non-current liabilities	1,371,793		1,369,024		1,355,528
Commitments and contingencies (Note 17)
Commitments and contingencies (Note 16)								Commitments and contingencies (Note 16)	0		0		0
Equity:	Equity:							Equity:
Common stock	Common stock	321,641		319,557		319,506		Common stock	601,032		319,506		435,515
Retained earnings	Retained earnings	526,327		496,175		528,580		Retained earnings	583,654		561,345		553,696
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(12,226)		(10,227)		(12,902)		Accumulated other comprehensive loss	(11,010)		(12,460)		(11,404)
Total equity	Total equity	835,742		805,505		835,184		Total equity	1,173,676		868,391		977,807
Total liabilities and equity	Total liabilities and equity	$	3,780,961	$	3,463,367	$	3,599,336	Total liabilities and equity	$	3,929,997	$	3,639,432	$	3,898,372

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

NORTHWEST NATURAL GAS COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED)


In thousands	In thousands	Three Months Ended September 30,				Nine Months Ended September 30,				In thousands	Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020			2022		2021		2022		2021
Total shareholder's equity, beginning balances	Total shareholder's equity, beginning balances	$	868,391	$	839,369	$	835,184	$	822,196	Total shareholder's equity, beginning balances	$	1,021,609	$	881,565	$	977,807	$	835,184

Common stock:	Common stock:									Common stock:
Beginning balances	Beginning balances	319,506		319,557		319,506		319,557		Beginning balances	436,042		319,506		435,515		319,506

Capital contributions from parent	Capital contributions from parent	2,135		—		2,135		—		Capital contributions from parent	164,990		—		165,517		—

Common stock		321,641		319,557		321,641		319,557
Ending balances										Ending balances	601,032		319,506		601,032		319,506

Retained earnings:	Retained earnings:									Retained earnings:
Beginning balances	Beginning balances	561,345		530,225		528,580		513,372		Beginning balances	596,774		574,740		553,696		528,580
Net income (loss)		(21,018)		(20,220)		39,682		24,247
Net income										Net income	2,733		589		60,149		60,700
Dividends on common stock	Dividends on common stock	(14,000)		(13,830)		(41,935)		(41,444)		Dividends on common stock	(15,853)		(13,984)		(30,191)		(27,935)

Ending balances	Ending balances	526,327		496,175		526,327		496,175		Ending balances	583,654		561,345		583,654		561,345

Accumulated other comprehensive income (loss):	Accumulated other comprehensive income (loss):									Accumulated other comprehensive income (loss):
Beginning balances	Beginning balances	(12,460)		(10,413)		(12,902)		(10,733)		Beginning balances	(11,207)		(12,681)		(11,404)		(12,902)
Other comprehensive income	Other comprehensive income	234		186		676		506		Other comprehensive income	197		221		394		442

Ending balances	Ending balances	(12,226)		(10,227)		(12,226)		(10,227)		Ending balances	(11,010)		(12,460)		(11,010)		(12,460)

Total shareholder's equity, ending balances	Total shareholder's equity, ending balances	$	835,742	$	805,505	$	835,742	$	805,505	Total shareholder's equity, ending balances	$	1,173,676	$	868,391	$	1,173,676	$	868,391

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

NORTHWEST NATURAL GAS COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


		Nine Months Ended September 30,					Six Months Ended June 30,
In thousands	In thousands	2021		2020		In thousands	2022		2021

Operating activities:	Operating activities:					Operating activities:
Net income	Net income	$	39,682	$	24,247	Net income	$	60,149	$	60,700
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		82,418		74,857
Depreciation						Depreciation	54,965		54,699
Regulatory amortization of gas reserves	Regulatory amortization of gas reserves	11,606		13,711		Regulatory amortization of gas reserves	2,984		7,597
Deferred income taxes	Deferred income taxes	1,687		(2,407)		Deferred income taxes	10,308		201
Qualified defined benefit pension plan expense	Qualified defined benefit pension plan expense	12,075		13,800		Qualified defined benefit pension plan expense	2,882		7,874
Contributions to qualified defined benefit pension plans	Contributions to qualified defined benefit pension plans	(9,590)		(23,670)		Contributions to qualified defined benefit pension plans	—		(9,590)
Deferred environmental expenditures, net	Deferred environmental expenditures, net	(14,952)		(16,469)		Deferred environmental expenditures, net	(9,608)		(9,625)
Amortization of environmental remediation		6,092		6,494

Environmental remediation expense						Environmental remediation expense	6,970		5,286
Asset optimization revenue sharing bill credits						Asset optimization revenue sharing bill credits	(41,102)		(9,053)

Other	Other	4,675		(4,410)		Other	9,158		9,534
Changes in assets and liabilities:	Changes in assets and liabilities:					Changes in assets and liabilities:
Receivables, net	Receivables, net	84,726		78,217		Receivables, net	97,175		74,354
Inventories	Inventories	(17,317)		(842)		Inventories	(7,974)		3,775
Income and other taxes	Income and other taxes	5,175		22,104		Income and other taxes	16,069		19,440
Accounts payable	Accounts payable	(22,929)		(22,703)		Accounts payable	(16,341)		(19,936)
Deferred gas costs	Deferred gas costs	(33,379)		(2,472)		Deferred gas costs	2,607		(26,962)
Asset optimization revenue sharing	Asset optimization revenue sharing	41,407		(9,695)		Asset optimization revenue sharing	3,929		36,872
Decoupling mechanism	Decoupling mechanism	(9,172)		4,175		Decoupling mechanism	9,669		(6,860)
Other, net	Other, net	(20,376)		2,033		Other, net	(8,404)		(8,361)

Cash provided by operating activities	Cash provided by operating activities	161,828		156,970		Cash provided by operating activities	193,436		189,945
Investing activities:	Investing activities:					Investing activities:
Capital expenditures	Capital expenditures	(199,399)		(188,553)		Capital expenditures	(156,189)		(125,167)
Leasehold improvement expenditures		(570)		(7,827)

Proceeds from the sale of assets	Proceeds from the sale of assets	2,712		8,003		Proceeds from the sale of assets	345		2,234
Other	Other	88		(234)		Other	(2,336)		46

Cash used in investing activities	Cash used in investing activities	(197,169)		(188,611)		Cash used in investing activities	(158,180)		(122,887)
Financing activities:	Financing activities:					Financing activities:

Capital contributions from parent		2,135		—
Long-term debt issued		—		150,000
Long-term debt retired		(60,000)		(75,000)
Cash contributions received from parent						Cash contributions received from parent	165,517		—

Proceeds from term loan due within one year	Proceeds from term loan due within one year	100,000		150,000		Proceeds from term loan due within one year	—		100,000
Repayments of commercial paper, maturities greater than three months		(195,025)		—
Change in other short-term debt, net		234,000		(125,100)
Repayment of commercial paper, maturities greater than three months						Repayment of commercial paper, maturities greater than three months	—		(195,025)
Changes in other short-term debt, net						Changes in other short-term debt, net	(166,800)		61,500
Cash dividend payments on common stock	Cash dividend payments on common stock	(41,935)		(41,444)		Cash dividend payments on common stock	(30,191)		(27,935)
Other	Other	(1,706)		(3,344)		Other	(1,521)		(1,623)

Cash provided by financing activities		37,469		55,112
Cash used in financing activities						Cash used in financing activities	(32,995)		(63,083)
Increase in cash, cash equivalents and restricted cash	Increase in cash, cash equivalents and restricted cash	2,128		23,471		Increase in cash, cash equivalents and restricted cash	2,261		3,975
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	$	17,867	$	32,378	Cash, cash equivalents and restricted cash, end of period	$	23,093	$	19,714

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	$	29,920	$	28,139	Interest paid, net of capitalization	$	21,270	$	21,285
Income taxes paid, net of refunds	Income taxes paid, net of refunds	23,035		950		Income taxes paid, net of refunds	3,490		10,910

See Notes to Unaudited Consolidated Financial Statements

~~Table of Contents~~

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 Holdings~~Northwest 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's~~method. NW Natural RNG Holding Company, LLC holds an investment in ~~Trail West Holdings,~~Lexington Renewable Energy, LLC, ~~(TWH),~~ which ~~was~~is also accounted for under the equity ~~method through August 6, 2020.~~method. See Note 1413 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 ~~2020~~2021 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 were classified as discontinued operations assets and liabilities on the NW Holdings consolidated balance sheet. The sale closed on December 4, 2020. See Note 18 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 ~~2020~~2021 Form 10-K. There were no material changes to those accounting policies during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~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.

~~Table of Contents~~

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


		Regulatory Assets							Regulatory Assets
		September 30,				December 31,			June 30,				December 31,
In thousands	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)	$	9,818	$	1,459	$	4,198	Unrealized loss on derivatives(1)	$	15,918	$	3,393	$	10,402
Gas costs	Gas costs	39,622		5,207		1,979		Gas costs	48,218		29,486		35,641
Environmental costs(2)	Environmental costs(2)	7,068		4,440		4,992		Environmental costs(2)	6,975		5,688		6,694
Decoupling(3)	Decoupling(3)	1,628		155		361		Decoupling(3)	212		1,011		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	2,939		2,208		3,484		Income taxes	2,276		2,345		2,568
Other(5)	Other(5)	12,432		9,140		9,600		Other(5)	12,073		11,618		8,986
Total current	Total current	$	80,638	$	29,740	$	31,745	Total current	$	92,803	$	60,672	$	72,391
Non-current:	Non-current:							Non-current:
Unrealized loss on derivatives(1)	Unrealized loss on derivatives(1)	$	268	$	921	$	2,852	Unrealized loss on derivatives(1)	$	9,475	$	453	$	412
Pension balancing(4)	Pension balancing(4)	40,176		45,203		43,383		Pension balancing(4)	35,150		40,342		38,302
Income taxes	Income taxes	13,912		16,792		15,368		Income taxes	11,161		13,903		12,609
Pension and other postretirement benefit liabilities	Pension and other postretirement benefit liabilities	155,077		159,207		170,812		Pension and other postretirement benefit liabilities	110,548		160,385		116,440
Environmental costs(2)	Environmental costs(2)	83,969		84,567		90,623		Environmental costs(2)	86,411		85,423		94,636
Gas costs	Gas costs	2,858		110		3,925		Gas costs	7,975		5,742		15,477
Decoupling(3)	Decoupling(3)	118		6		1,031		Decoupling(3)	—		198		—
Other(5)	Other(5)	28,653		17,330		20,893		Other(5)	41,070		24,224		36,663
Total non-current	Total non-current	$	325,031	$	324,136	$	348,887	Total non-current	$	301,790	$	330,670	$	314,539
Other (NW Holdings)	Other (NW Holdings)	40		40		40		Other (NW Holdings)	65		40		40
Total non-current - NW Holdings	Total non-current - NW Holdings	$	325,071	$	324,176	$	348,927	Total non-current - NW Holdings	$	301,855	$	330,710	$	314,579


		Regulatory Liabilities							Regulatory Liabilities
		September 30,				December 31,			June 30,				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	$	847	$	1,625	$	1,118	Gas costs	$	1,898	$	1,519	$	70
Unrealized gain on derivatives(1)	Unrealized gain on derivatives(1)	105,175		23,738		13,674		Unrealized gain on derivatives(1)	60,652		46,168		48,130
Decoupling(3)	Decoupling(3)	4,484		12,702		11,793		Decoupling(3)	14,242		5,821		4,475
Income taxes	Income taxes	8,217		6,900		8,217		Income taxes	7,318		8,217		8,192
Asset optimization revenue sharing	Asset optimization revenue sharing	43,883		9,020		10,298		Asset optimization revenue sharing	9,761		39,348		45,124
Other(5)	Other(5)	1,562		5,251		5,262		Other(5)	3,406		2,137		6,290
Total current	Total current	$	164,168	$	59,236	$	50,362	Total current	$	97,277	$	103,210	$	112,281
Non-current:	Non-current:							Non-current:
Gas costs	Gas costs	$	—	$	69	$	314	Gas costs	$	353	$	101	$	250
Unrealized gain on derivatives(1)	Unrealized gain on derivatives(1)	24,555		12,921		6,135		Unrealized gain on derivatives(1)	9,121		7,912		10,730
Decoupling(3)	Decoupling(3)	214		874		1,723		Decoupling(3)	2,557		652		3,412
Income taxes(6)	Income taxes(6)	186,429		196,558		189,587		Income taxes(6)	176,358		182,977		181,404
Accrued asset removal costs(7)	Accrued asset removal costs(7)	440,410		421,353		427,960		Accrued asset removal costs(7)	455,794		439,685		445,952
Asset optimization revenue sharing	Asset optimization revenue sharing	—		58		1,231		Asset optimization revenue sharing	—		—		1,810
Other(5)	Other(5)	12,913		16,818		11,843		Other(5)	13,760		12,850		13,792
Total non-current - NW Natural	Total non-current - NW Natural	$	664,521	$	648,651	$	638,793	Total non-current - NW Natural	$	657,943	$	644,177	$	657,350
Other (NW Holdings)	Other (NW Holdings)	869		870		870		Other (NW Holdings)	982		869		982
Total non-current - NW Holdings	Total non-current - NW Holdings	$	665,390	$	649,521	$	639,663	Total non-current - NW Holdings	$	658,925	$	645,046	$	658,332

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

(2)Refer to ~~footnote (3) of~~ the ~~Deferred Regulatory Asset~~Environmental Cost Deferral and Recovery table in Note 1716 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.

~~Table of Contents~~

(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 ~~September~~June 30, ~~2021~~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 ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 and December 31, ~~2020:~~2021:


		September 30,				December 31,			June 30,				December 31,
In thousands	In thousands	2021		2020		2020		In thousands	2022		2021		2021
Cash and cash equivalents	Cash and cash equivalents	$	19,502	$	35,926	$	30,168	Cash and cash equivalents	$	17,209	$	20,084	$	18,559
Restricted cash included in other current assets	Restricted cash included in other current assets	8,170		5,245		5,286		Restricted cash included in other current assets	12,826		8,226		8,561
Cash, cash equivalents and restricted cash	Cash, cash equivalents and restricted cash	$	27,672	$	41,171	$	35,454	Cash, cash equivalents and restricted cash	$	30,035	$	28,310	$	27,120

The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Natural as of ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 and December 31, ~~2020:~~2021:


		September 30,				December 31,			June 30,				December 31,
In thousands	In thousands	2021		2020		2020		In thousands	2022		2021		2021
Cash and cash equivalents	Cash and cash equivalents	$	9,697	$	27,133	$	10,453	Cash and cash equivalents	$	10,267	$	11,488	$	12,271
Restricted cash included in other current assets	Restricted cash included in other current assets	8,170		5,245		5,286		Restricted cash included in other current assets	12,826		8,226		8,561
Cash, cash equivalents and restricted cash	Cash, cash equivalents and restricted cash	$	17,867	$	32,378	$	15,739	Cash, cash equivalents and restricted cash	$	23,093	$	19,714	$	20,832

Accounts Receivable and Allowance for Uncollectible Accounts

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

Allowance for Trade Receivables

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

~~After considering~~During 2020 and 2021, we considered the significant exposure to COVID-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 unemployment rate and comparing it to historic economic data during the 2007-2009 time period when the country experienced an economic recession. We ~~are~~ also ~~considering~~considered other qualitative information including recent customer interactions related to payment plans and credit issues, statistics from our website related to credit inquiries, and bill assistance programs including the arrearage management program. ~~Our provision calculation for residential accounts is estimated based on the factors noted above including a review of percentage of delinquent accounts.~~ For the residential allowance calculation, we continue to consider the funds applied or granted to customers through a variety of assistance programs including the ~~COVID~~COVID-19 arrearage management programs in Oregon and Washington. During the third quarter of 2021, the ~~normal~~ collection process for residential accounts ~~resumed~~resumed. For residential and ~~the percentage of accounts disconnected for non-payment was also considered in the provision. For~~ commercial accounts, ~~we have~~we've 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.

~~Table of Contents~~

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 Nine Months Ended September 30, 2021 September 30, 2021
In thousands Beginning Balance Provision recorded, net of adjustments Write-offs recognized, net of recoveries Ending Balance
Allowance for uncollectible accounts:
Residential $ 2,153 $ 1,322 $ (1,111) $ 2,364
Commercial 704 (337) (303) 64
Industrial 142 (106) 5 41
Accrued unbilled and other 220 96 (83) 233
Total $ 3,219 $ 975 $ (1,492) $ 2,702


	As of						As of
	December 31, 2021		Six Months Ended June 30, 2022				June 30, 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	$	(142)	$	(468)	$	850
Commercial	178		52		(110)		120
Industrial	67		110		(27)		150
Accrued unbilled and other	313		18		(95)		236
Total	$	2,018	$	38	$	(700)	$	1,356

Allowance for Net Investments in Sales-Type Leases

NW Natural currently holds 2 net investments in sales-type leases, with substantially all of the net investment balance related to the North Mist natural gas storage agreement with Portland General Electric (PGE) which is billed under an OPUC-approved rate schedule. See Note 7 for more information on the North Mist lease. Due to the nature of this service, PGE may recover the costs of the lease through general rate cases. Therefore, we expect the risk of loss due to the credit of this lessee to be remote. As such, no allowance for ~~uncollectability~~uncollectibility was recorded for our sales-type lease receivables. NW Natural will continue monitoring the credit health of the lessees and the overall economic environment, including the economic factors closely tied to the financial health of our current and future lessees.

COVID-19 Impact

During 2020, our regulated utilities received approval in their respective jurisdictions to defer certain financial impacts associated with COVID-19 such as bad debt expense, financing costs to secure liquidity, lost revenues related to late fees and reconnection fees, and other COVID-19 related costs, net of offsetting direct expense reductions associated with COVID-19. As of ~~September~~June 30, 2022 and 2021, we ~~deferred to~~had a regulatory asset of approximately ~~$7.4~~$13.4 million and $5.8 million, respectively, for incurred costs associated with COVID-19 that we believe are recoverable.

Cloud Computing Arrangements (CCA)

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

New Accounting Standards

WeNW Natural and NW Holdings consider the applicability and impact of all accounting standards updates (ASUs) issued by the Financial Accounting Standards Board (FASB). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on ~~NW 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 Taxes~~2021-05, "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 related~~require lessors to ~~accounting~~account 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 ~~were~~are intended to eliminate the recognition of any day-one loss associated with certain sales-type and direct-financing lease transactions. The changes do not impact lessee accounting. The new guidance was effective ~~beginning~~on January 1, ~~2021. The amended presentation~~2022 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 London Inter-Bank Offered Rate (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.

~~Table of Contents~~

3. EARNINGS PER SHARE

Basic earnings or loss per share are computed using NW Holdings' net income or loss and the weighted average number of common shares outstanding for each period presented. Diluted earnings per share are computed in the same manner, except 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 or loss per common share.

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In thousands, except per share data	In thousands, except per share data	2021		2020		2021		2020		In thousands, except per share data	2022		2021		2022		2021
Net income (loss) from continuing operations		$	(20,655)	$	(18,677)	$	38,138	$	24,467
Income from discontinued operations, net of tax		—		765		—		267

Net income (loss)	Net income (loss)	$	(20,655)	$	(17,912)	$	38,138	$	24,734	Net income (loss)	1,715		(724)		57,954		58,793
Average common shares outstanding - basic	Average common shares outstanding - basic	30,696		30,555		30,659		30,528		Average common shares outstanding - basic	34,307		30,664		32,756		30,639
Additional shares for stock-based compensation plans (See Note 8)	Additional shares for stock-based compensation plans (See Note 8)	—		—		49		47		Additional shares for stock-based compensation plans (See Note 8)	45		—		49		32
Average common shares outstanding - diluted	Average common shares outstanding - diluted	30,696		30,555		30,708		30,575		Average common shares outstanding - diluted	34,352		30,664		32,805		30,671
Earnings (loss) from continuing operations per share of common stock:
Basic		$	(0.67)	$	(0.61)	$	1.24	$	0.80
Diluted		$	(0.67)	$	(0.61)	$	1.24	$	0.80
Earnings from discontinued operations per share of common stock:
Basic		$	—	$	0.02	$	—	$	0.01
Diluted		$	—	$	0.02	$	—	$	0.01

Earnings (loss) per share of common stock:	Earnings (loss) per share of common stock:									Earnings (loss) per share of common stock:
Basic	Basic	$	(0.67)	$	(0.59)	$	1.24	$	0.81	Basic	$	0.05	$	(0.02)	$	1.77	$	1.92
Diluted	Diluted	$	(0.67)	$	(0.59)	$	1.24	$	0.81	Diluted	$	0.05	$	(0.02)	$	1.77	$	1.92
Additional information:	Additional information:									Additional information:
Anti-dilutive shares	Anti-dilutive shares	51		47		6		1		Anti-dilutive shares	1		48		1		7

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 segment, 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 in Oregon, 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 regulated renewable natural ~~gas.~~gas for NW Natural.

NW Natural

NW Natural's activities in Other include Interstate Storage Services and third-party asset management ~~service~~services for ~~NW Natural’s contracted interstate pipeline and storage capacity,~~the Mist facility in Oregon, 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~~Interstate Storage Services assets are primarily related to firm storage capacity revenues. Earnings from the Mist facility also include revenue, net of amounts shared with NGD customers, from management of NGD assets at Mist and 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 into a deferred regulatory account for ~~prospective~~crediting back to NGD ~~customer billing credits.~~customers.

~~Table of Contents~~

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 14.~~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 18 for information regarding discontinued operations for NW Holdings.~~other.

Three Months Ended September 30,
In thousands NGD Other
(NW Natural) NW Natural Other
(NW Holdings) NW Holdings
2021
Operating revenues $ 91,042 $ 4,994 $ 96,036 $ 5,411 $ 101,447
Depreciation and amortization 27,462 257 27,719 719 28,438
Income (loss) from operations (18,288) 3,203 (15,085) 694 (14,391)
Net income (loss) from continuing operations (23,297) 2,279 (21,018) 363 (20,655)
Capital expenditures 72,822 1,410 74,232 8,036 82,268
2020
Operating revenues $ 83,761 $ 4,606 $ 88,367 $ 4,917 $ 93,284
Depreciation and amortization 25,433 248 25,681 253 25,934
Income (loss) from operations (16,196) 2,727 (13,469) 1,881 (11,588)
Net income (loss) from continuing operations (22,120) 1,900 (20,220) 1,543 (18,677)
Capital expenditures 69,213 1,113 70,326 728 71,054


		Nine Months Ended September 30,								Three Months Ended June 30,
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
Operating revenues													Operating revenues	$	184,634	$	5,617	$	190,251	$	4,709	$	194,960
Depreciation													Depreciation	27,062		266		27,328		782		28,110
Income (loss) from operations													Income (loss) from operations	10,575		3,550		14,125		(586)		13,539
Net income (loss)													Net income (loss)	157		2,576		2,733		(1,018)		1,715
Capital expenditures													Capital expenditures	91,122		750		91,872		7,310		99,182
2021	2021												2021
Operating revenues	Operating revenues	$	531,994	$	20,971	$	552,965	$	13,345		$	566,310	Operating revenues	$	139,614	$	4,965	$	144,579	$	4,338	$	148,917
Depreciation and amortization		81,648		770		82,418		2,261			84,679
Depreciation													Depreciation	27,273		257		27,530		614		28,144
Income (loss) from operations	Income (loss) from operations	79,530		14,642		94,172		(1,233)			92,939		Income (loss) from operations	11,331		2,808		14,139		(1,515)		12,624
Net income (loss) from continuing operations		29,247		10,435		39,682		(1,544)			38,138
Net income (loss)													Net income (loss)	(1,381)		1,970		589		(1,313)		(724)
Capital expenditures	Capital expenditures	197,190		2,209		199,399		12,977			212,376		Capital expenditures	60,376		693		61,069		3,337		64,406
Total assets at September 30, 2021		3,730,595		50,366		3,780,961		148,264			3,929,225
2020
Operating revenues		$	489,240	$	12,813	$	502,053	$	11,353		$	513,406
Depreciation and amortization		74,117		740		74,857		1,588			76,445
Income (loss) from operations		65,496		6,955		72,451		1,349			73,800
Net income (loss) from continuing operations		19,476		4,771		24,247		220			24,467
Capital expenditures		186,842		1,711		188,553		4,783			193,336
Total assets at September 30, 2020(1)		3,451,771		11,596		3,463,367		137,802			3,601,169
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 $16.9 million as of September 30, 2020.~~


	Six Months Ended June 30,
In thousands	NGD		Other (NW Natural)		NW Natural		Other (NW Holdings)		NW Holdings
2022
Operating revenues	$	526,032	$	10,843	$	536,875	$	8,386	$	545,261
Depreciation	54,435		530		54,965		1,574		56,539
Income (loss) from operations	96,238		6,438		102,676		(1,499)		101,177
Net income (loss)	55,547		4,602		60,149		(2,195)		57,954
Capital expenditures	155,402		787		156,189		11,507		167,696
Total assets at June 30, 2022	3,875,237		54,760		3,929,997		170,521		4,100,518
2021
Operating revenues	$	440,952	$	15,977	$	456,929	$	7,934	$	464,863
Depreciation	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)	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
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~~mechanisms in Oregon and Washington as well as adjustments for the Oregon environmental earnings test when applicable. This is offset by environmental remediation expense presented in operating expenses. Revenue taxes are collected from NGD customers and remitted to taxing authorities. The collections from customers are offset by the 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.

~~Table of Contents~~

The following table presents additional segment information concerning NGD margin:


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In thousands	In thousands	2021		2020		2021		2020		In thousands	2022		2021		2022		2021
NGD margin calculation:	NGD margin calculation:									NGD margin calculation:
NGD distribution revenues	NGD distribution revenues	$	86,271	$	79,357	$	517,673	$	474,989	NGD distribution revenues	$	179,727	$	134,849	$	516,214	$	431,402
Other regulated services	Other regulated services	4,771		4,404		14,321		14,251		Other regulated services	4,907		4,765		9,818		9,550
Total NGD operating revenues	Total NGD operating revenues	91,042		83,761		531,994		489,240		Total NGD operating revenues	184,634		139,614		526,032		440,952
Less: NGD cost of gas	Less: NGD cost of gas	25,322		23,797		178,837		173,657		Less: NGD cost of gas	79,776		41,249		225,420		153,515
Environmental remediation	Environmental remediation	806		867		6,092		6,494		Environmental remediation	2,272		1,509		6,970		5,286
Revenue taxes	Revenue taxes	3,838		3,555		22,143		19,752		Revenue taxes	8,208		5,650		21,532		18,305
NGD margin	NGD margin	$	61,076	$	55,542	$	324,922	$	289,337	NGD margin	$	94,378	$	91,206	$	272,110	$	263,846

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~~three months ended ~~September~~June 30, ~~2021,~~2022, NW Holdings issued and sold ~~41,421~~482,200 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of ~~$2.1~~$25.1 million, net of fees and commissions paid to agents of ~~$22 thousand. As of September~~$0.4 million. During the six months ended June 30, ~~2021,~~2022, NW Holdings ~~had~~ issued and sold ~~41,421~~678,101 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of ~~$2.1~~$35.2 million, net of fees and commissions paid to agents of ~~$22 thousand.~~$0.7 million. As of June 30, 2022, NW Holdings had $146.2 million of equity available for issuance under the program. The ATM equity program was initiated to raise funds for general corporate purposes, including ~~for~~equity contributions to NW Holdings’ subsidiaries, ~~that~~NW Natural and NW Natural Water. Contributions to NW Natural and NW Natural Water will be used for general corporate purposes.

On April 1, 2022, NW Holdings issued and sold 2,875,000 shares of its common stock pursuant to a registration statement on Form S-3 and related prospectus settlement. NW Holdings received net offering proceeds, after deducting the underwriter's discounts and commissions and expenses payable by NW Holdings, of approximately $138.6 million. The proceeds are ~~reflected as~~to be used for general corporate purposes, including repayment of its short-term indebtedness and/or making equity ~~transfers on occurrence.~~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, ~~may also be~~$130.0 million was used ~~in part,~~ to repay its short-term indebtedness.

6. REVENUE

The following tables present disaggregated ~~revenue from continuing operations:~~revenue:


		Three Months Ended September 30,											Three Months Ended June 30,
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	$	190,041	$	—	$	190,041	$	—	$	190,041
Gas storage revenue, net												Gas storage revenue, net	—		3,039		3,039		—		3,039
Asset management revenue, net												Asset management revenue, net	—		1,142		1,142		—		1,142
Appliance retail center revenue												Appliance retail center revenue	—		1,436		1,436		—		1,436
Other revenue												Other revenue	628		—		628		4,709		5,337
Revenue from contracts with customers												Revenue from contracts with customers	190,669		5,617		196,286		4,709		200,995

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

2021	2021											2021
Natural gas sales	Natural gas sales	$	83,947	$	—	$	83,947	$	—	$	83,947	Natural gas sales	$	123,739	$	—	$	123,739	$	—	$	123,739
Gas storage revenue, net	Gas storage revenue, net	—		2,794		2,794		—		2,794		Gas storage revenue, net	—		2,805		2,805		—		2,805
Asset management revenue, net	Asset management revenue, net	—		1,012		1,012		—		1,012		Asset management revenue, net	—		817		817		—		817
Appliance retail center revenue	Appliance retail center revenue	—		1,188		1,188		—		1,188		Appliance retail center revenue	—		1,343		1,343		—		1,343
Other revenue	Other revenue	403		—		403		5,411		5,814		Other revenue	399		—		399		4,338		4,737
Revenue from contracts with customers	Revenue from contracts with customers	84,350		4,994		89,344		5,411		94,755		Revenue from contracts with customers	124,138		4,965		129,103		4,338		133,441

Alternative revenue	Alternative revenue	2,307		—		2,307		—		2,307		Alternative revenue	11,083		—		11,083		—		11,083
Leasing revenue	Leasing revenue	4,385		—		4,385		—		4,385		Leasing revenue	4,393		—		4,393		—		4,393
Total operating revenues	Total operating revenues	$	91,042	$	4,994	$	96,036	$	5,411	$	101,447	Total operating revenues	$	139,614	$	4,965	$	144,579	$	4,338	$	148,917

2020
Natural gas sales		$	78,427	$	—	$	78,427	$	—	$	78,427
Gas storage revenue, net		—		2,482		2,482		—		2,482
Asset management revenue, net		—		939		939		—		939
Appliance retail center revenue		—		1,185		1,185		—		1,185
Other revenue		333		—		333		4,917		5,250
Revenue from contracts with customers		78,760		4,606		83,366		4,917		88,283

Alternative revenue		395		—		395		—		395
Leasing revenue		4,606		—		4,606		—		4,606
Total operating revenues		$	83,761	$	4,606	$	88,367	$	4,917	$	93,284


	Six Months Ended June 30,
In thousands	NGD		Other (NW Natural)		NW Natural		Other (NW Holdings)		NW Holdings
2022
Natural gas sales	$	527,337	$	—	$	527,337	$	—	$	527,337
Gas storage revenue, net	—		5,796		5,796		—		5,796
Asset management revenue, net	—		1,894		1,894		—		1,894
Appliance retail center revenue	—		3,153		3,153		—		3,153
Other revenue	1,258		—		1,258		8,386		9,644
Revenue from contracts with customers	528,595		10,843		539,438		8,386		547,824

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

2021
Natural gas sales	$	419,822	$	—	$	419,822	$	—	$	419,822
Gas storage revenue, net	—		5,300		5,300		—		5,300
Asset management revenue, net	—		7,745		7,745		—		7,745
Appliance retail center revenue	—		2,932		2,932		—		2,932
Other revenue	814		—		814		7,934		8,748
Revenue from contracts with customers	420,636		15,977		436,613		7,934		444,547

Alternative revenue	11,536		—		11,536		—		11,536
Leasing revenue	8,780		—		8,780		—		8,780
Total operating revenues	$	440,952	$	15,977	$	456,929	$	7,934	$	464,863

2122

~~Table of Contents~~

Nine Months Ended September 30,
In thousands NGD Other
(NW Natural) NW Natural Other
(NW Holdings) NW Holdings
2021
Natural gas sales $ 503,769 $ — $ 503,769 $ — $ 503,769
Gas storage revenue, net — 8,094 8,094 — 8,094
Asset management revenue, net — 8,757 8,757 — 8,757
Appliance retail center revenue — 4,120 4,120 — 4,120
Other revenue 1,217 — 1,217 13,345 14,562
    Revenue from contracts with customers 504,986 20,971 525,957 13,345 539,302
Alternative revenue 13,843 — 13,843 — 13,843
Leasing revenue 13,165 — 13,165 — 13,165
    Total operating revenues $ 531,994 $ 20,971 $ 552,965 $ 13,345 $ 566,310
2020
Natural gas sales $ 469,113 $ — $ 469,113 $ — $ 469,113
Gas storage revenue, net — 7,267 7,267 — 7,267
Asset management revenue, net — 1,999 1,999 — 1,999
Appliance retail center revenue — 3,547 3,547 — 3,547
Other revenue 1,002 — 1,002 11,353 12,355
    Revenue from contracts with customers 470,115 12,813 482,928 11,353 494,281
Alternative revenue 5,288 — 5,288 — 5,288
Leasing revenue 13,837 — 13,837 — 13,837
    Total operating revenues $ 489,240 $ 12,813 $ 502,053 $ 11,353 $ 513,406

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 ~~expense~~expenses in the consolidated statements of comprehensive income. Revenue-based taxes are primarily franchise taxes, which are collected from NGD customers and remitted to taxing authorities.

Natural Gas Distribution

Natural Gas Sales

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

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

~~Table of Contents~~

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 7 for additional information.

NW Natural Other

Gas Storage Revenue

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

Asset Management Revenue

Revenues include the optimization of 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 ~~September~~June 30, ~~2021,~~2022, unrecognized revenue for the fixed component of the transaction price related to gas storage and asset management revenue was ~~approximately $103.3~~approximately $89.6 million. Of this amount, approximately ~~$4.9~~$10.5 million will be recognized during the remainder of ~~2021, $19.7 million in~~ 2022, ~~$18.1~~$18.6 million in 2023, ~~$15.7~~$15.6 million in 2024, $13.5 million in 2025, $9.4 million in 2026 and ~~$31.4~~$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~~states we operate. Customer accounts are to be paid in full each month or bi-monthly, and there is no right of return or warranty for services provided.

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

7. LEASES

Lease Revenue

Leasing revenue primarily consists of NW Natural's North Mist natural gas storage agreement with Portland General Electric (PGE), which is billed under an OPUC-approved rate schedule and includes an initial 30-year term beginning May 2019 with options to extend, totaling up to an additional 50 years upon mutual agreement of the parties. Under U.S. GAAP, this agreement is classified as a sales-type lease and qualifies for regulatory accounting deferral treatment. The investment in the storage facility is included in rate base under a separately established cost-of-service tariff, with revenues recognized according to the tariff schedule. As such, the selling profit that was calculated upon commencement as part of the sale-type lease recognition was deferred and will

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be amortized over the lease term. Billing rates under the cost-of-service tariff will be updated annually to reflect current information including depreciable asset levels, forecasted operating expenses, and the results of regulatory proceedings, as applicable, and revenue received under this agreement is recognized as operating revenue on the consolidated statements of comprehensive income. There are no variable payments or residual value guarantees. The lease does not contain an option to purchase the underlying assets.

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

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

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


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In thousands	In thousands	2021		2020		2021		2020		In thousands	2022		2021		2022		2021
Lease revenue	Lease revenue									Lease revenue
Operating leases	Operating leases	$	18	$	18	$	61	$	71	Operating leases	$	19	$	25	$	37	$	43
Sales-type leases	Sales-type leases	4,367		4,588		13,104		13,766		Sales-type leases	4,279		4,368		8,560		8,737
Total lease revenue	Total lease revenue	$	4,385	$	4,606	$	13,165	$	13,837	Total lease revenue	$	4,298	$	4,393	$	8,597	$	8,780

Additionally, lease revenue of $0.1 million was recognized for the three months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 and lease revenue of ~~$0.4~~$0.3 million was recognized for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~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 September 30, 2021 are as follows:~~

In thousands Operating Sales-Type Total
NW Natural:
Remainder of 2021 $ 138 $ 4,338 $ 4,476
2022 551 17,026 17,577
2023 74 16,557 16,631
2024 74 15,867 15,941
2025 66 15,306 15,372
Thereafter 58 251,721 251,779
Total minimum lease payments $ 961 $ 320,815 $ 321,776
Less: imputed interest 180,198
Total leases receivable $ 140,617
Other (NW Holdings):
Remainder of 2021 $ 12 $ — $ 12
2022 50 — 50
2023 51 — 51
2024 52 — 52
2025 53 — 53
Thereafter 970 — 970
Total minimum lease payments $ 1,188 $ — $ 1,188
NW Holdings:
Remainder of 2021 $ 150 $ 4,338 $ 4,488
2022 601 17,026 17,627
2023 125 16,557 16,682
2024 126 15,867 15,993
2025 119 15,306 15,425
Thereafter 1,028 251,721 252,749
Total minimum lease payments $ 2,149 $ 320,815 $ 322,964
Less: imputed interest 180,198
Total leases receivable $ 140,617

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Total future minimum lease payments to be received under non-cancelable leases at June 30, 2022 are as follows:


In thousands	Operating		Sales-Type		Total
NW Natural:
Remainder of 2022	$	289	$	8,460	$	8,749
2023	76		16,557		16,633
2024	76		15,867		15,943
2025	67		15,306		15,373
2026	36		14,901		14,937
Thereafter	22		236,820		236,842
Total minimum lease payments	$	566	$	307,911	$	308,477
Less: imputed interest			171,122
Total leases receivable			$	136,789

Other (NW Holdings):
Remainder of 2022	$	25	$	—	$	25
2023	51		—		51
2024	52		—		52
2025	53		—		53
2026	56		—		56
Thereafter	914		—		914
Total minimum lease payments	$	1,151	$	—	$	1,151

NW Holdings:
Remainder of 2022	$	314	$	8,460	$	8,774
2023	127		16,557		16,684
2024	128		15,867		15,995
2025	120		15,306		15,426
2026	92		14,901		14,993
Thereafter	936		236,820		237,756
Total minimum lease payments	$	1,717	$	307,911	$	309,628
Less: imputed interest			171,122
Total leases receivable			$	136,789

The total leases receivable above is reported under the NGD segment and the short- and long-term portions are included within other current assets and assets under sales-type leases on the consolidated balance sheets, respectively. The total amount of unguaranteed residual assets was ~~$4.6~~$4.9 million, ~~$4.2~~$4.5 million and ~~$4.3~~$4.7 million at ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 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~~headquarters and operations center. Our leases have remaining lease terms of three 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 September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In thousands	In thousands	2021		2020		2021		2020		In thousands	2022		2021		2022		2021
NW Natural:	NW Natural:									NW Natural:
Operating lease expense	Operating lease expense	$	1,735	$	746	$	5,123	$	2,862	Operating lease expense	$	1,741	$	1,710	$	3,468	$	3,388
Short-term lease expense	Short-term lease expense	$	499	$	300	$	1,068	$	783	Short-term lease expense	$	416	$	349	$	579	$	569

Other (NW Holdings):	Other (NW Holdings):									Other (NW Holdings):
Operating lease expense	Operating lease expense	$	14	$	17	$	50	$	109	Operating lease expense	$	8	$	18	$	15	$	36

NW Holdings:	NW Holdings:									NW Holdings:
Operating lease expense	Operating lease expense	$	1,749	$	763	$	5,173	$	2,971	Operating lease expense	$	1,749	$	1,728	$	3,483	$	3,424
Short-term lease expense	Short-term lease expense	$	499	$	300	$	1,068	$	783	Short-term lease expense	$	416	$	349	$	579	$	569

Supplemental balance sheet information related to operating leases as of ~~September~~June 30, 2022 and 2021 and December 31, 2021 is as follows:


In thousands	In thousands	September 30,				December 31,		In thousands	June 30,				December 31,
		2021		2020		2020			2022		2021		2021
NW Natural:	NW Natural:							NW Natural:
Operating lease right of use asset	Operating lease right of use asset	$	75,565	$	77,949	$	77,328	Operating lease right of use asset	$	73,706	$	76,211	$	74,987

Operating lease liabilities - current liabilities	Operating lease liabilities - current liabilities	$	1,184	$	1,020	$	1,054	Operating lease liabilities - current liabilities	$	1,298	$	1,193	$	1,273
Operating lease liabilities - non-current liabilities	Operating lease liabilities - non-current liabilities	79,752		80,830		80,559		Operating lease liabilities - non-current liabilities	78,789		80,043		79,431
Total operating lease liabilities	Total operating lease liabilities	$	80,936	$	81,850	$	81,613	Total operating lease liabilities	$	80,087	$	81,236	$	80,704

Other (NW Holdings):	Other (NW Holdings):							Other (NW Holdings):
Operating lease right of use asset	Operating lease right of use asset	$	69	$	87	$	118	Operating lease right of use asset	$	48	$	83	$	62

Operating lease liabilities - non-current liabilities								Operating lease liabilities - non-current liabilities	37		45		37
Operating lease liabilities - current liabilities	Operating lease liabilities - current liabilities	$	29	$	61	$	51	Operating lease liabilities - current liabilities	$	17	$	35	$	23
Operating lease liabilities - non-current liabilities		37		24		62
Total operating lease liabilities	Total operating lease liabilities	$	66	$	85	$	113	Total operating lease liabilities	$	54	$	80	$	60

NW Holdings:	NW Holdings:							NW Holdings:
Operating lease right of use asset	Operating lease right of use asset	$	75,634	$	78,036	$	77,446	Operating lease right of use asset	$	73,754	$	76,294	$	75,049

Operating lease liabilities - current liabilities	Operating lease liabilities - current liabilities	$	1,213	$	1,081	$	1,105	Operating lease liabilities - current liabilities	$	1,315	$	1,228	$	1,296
Operating lease liabilities - non-current liabilities	Operating lease liabilities - non-current liabilities	79,789		80,854		80,621		Operating lease liabilities - non-current liabilities	78,826		80,088		79,468
Total operating lease liabilities	Total operating lease liabilities	$	81,002	$	81,935	$	81,726	Total operating lease liabilities	$	80,141	$	81,316	$	80,764

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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	September 30,				December 31,		In thousands	June 30,				December 31,
		2021		2020		2020			2022		2021		2021
Weighted-average remaining lease term (years)	Weighted-average remaining lease term (years)	18.4		19.4		19.2		Weighted-average remaining lease term (years)	17.7		18.7		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	%

~~Corporate~~Headquarters and Operations Center Lease

NW Natural commenced a 20-year operating lease agreement in March 2020 for a new ~~corporate~~headquarters 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 ~~$5.3~~$6.3 million, ~~$3.7~~$5.0 million and ~~$4.2~~$5.7 million as of ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 and December 31, ~~2020,~~2021, respectively.

Maturities of operating lease liabilities at ~~September~~June 30, ~~2021~~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		$	1,727	$	6	$	1,733
2022		6,968		24		6,992
Remainder of 2022								Remainder of 2022	$	3,502	$	12	$	3,514
2023	2023	7,013		6		7,019		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	116,431		23		116,454
Total lease payments	Total lease payments	153,827		72		153,899		Total lease payments	148,634		59		148,693
Less: imputed interest	Less: imputed interest	72,891		6		72,897		Less: imputed interest	68,547		5		68,552
Total lease obligations	Total lease obligations	80,936		66		81,002		Total lease obligations	80,087		54		80,141
Less: current obligations	Less: current obligations	1,184		29		1,213		Less: current obligations	1,298		17		1,315
Long-term lease obligations	Long-term lease obligations	$	79,752	$	37	$	79,789	Long-term lease obligations	$	78,789	$	37	$	78,826

As of ~~September~~June 30, ~~2021,~~2022, finance lease liabilities with maturities of less than one year were $0.1 million at NW Natural.

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Supplemental cash flow information related to leases was as follows:

Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2021 2020 2021 2020
NW Natural:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 1,727 $ 673 $ 5,113 $ 2,800
Finance cash flows from finance leases $ 123 $ 215 $ 801 $ 672
Right of use assets obtained in exchange for lease obligations
Operating leases $ — $ 106 $ 154 $ 78,539
Finance leases $ 75 $ 676 $ 169 $ 1,386
Other (NW Holdings):
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 18 $ 18 $ 51 $ 109
NW Holdings:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 1,745 $ 691 $ 5,164 $ 2,909
Finance cash flows from finance leases $ 123 $ 215 $ 801 $ 672
Right of use assets obtained in exchange for lease obligations
Operating leases $ — $ 106 $ 154 $ 78,539
Finance leases $ 75 $ 676 $ 169 $ 1,386



































	Three Months Ended June 30,				Six Months Ended June 30,
In thousands	2022		2021		2022		2021
NW Natural:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,733	$	1,717	$	3,466	$	3,386
Finance cash flows from finance leases	$	307	$	134	$	382	$	678
Right of use assets obtained in exchange for lease obligations
Operating leases	$	(14)	$	—	$	—	$	154
Finance leases	$	120	$	20	$	220	$	94



Other (NW Holdings):
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	6	$	17	$	12	$	33







NW Holdings:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,739	$	1,734	$	3,478	$	3,419
Finance cash flows from finance leases	$	307	$	134	$	382	$	678
Right of use assets obtained in exchange for lease obligations
Operating leases	$	(14)	$	—	$	—	$	154
Finance leases	$	120	$	20	$	220	$	94

Finance Leases

NW Natural also leases building storage spaces for use as a gas meter room in order to provide natural gas to multifamily or mixed use developments. These contracts are accounted for as finance leases and typically involve a one-time upfront payment with no remaining liability. The right of use assets for finance leases were $2.3 million, $1.9 million ~~$1.8 million~~ and ~~$1.8~~$2.1 million at ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 and at December 31, ~~2020,~~2021, respectively.

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 ~~2020~~2021 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 ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the final performance factor under the ~~2019~~2020 LTIP was approved and ~~29,492~~31,830 performance-based shares were granted under the ~~2019~~2020 LTIP for accounting purposes. As such, NW Natural and other subsidiaries began recognizing compensation expense. In February ~~2020~~2021 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 ~~2022~~2023 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 ~~September~~June 30, ~~2021,~~2022, and therefore, no expense was recognized for the ~~2020~~2021 and ~~2021~~2022 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 ~~2020~~2021 and ~~2021~~2022 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 ~~2020~~2021 and ~~2021~~2022 performance shares consists of a three-year Return on Invested Capital (ROIC) threshold that must be satisfied and a cumulative EPS factor, which can be modified by a total shareholder return factor (TSR modifier) relative to the performance of peer group companies over the performance period of

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three years for each respective award. If the targets were achieved for the ~~2020~~2021 and ~~2021~~2022 awards, NW Holdings would grant for accounting purposes ~~31,830~~56,335 and ~~56,335~~56,885 shares in the first quarters of ~~2022~~2023 and ~~2023,~~2024, respectively.

As of ~~September~~June 30, ~~2021,~~2022, there ~~was $0.1~~was $0.2 million of unrecognized compensation cost associated with the ~~2019~~2020 LTIP grants, which is expected to be recognized through ~~2021.~~2022.

Restricted Stock Units

During the ~~nine~~six months ended ~~September~~June 30, ~~2021, 37,576~~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 NW Holdings' common stock on the grant date. As of ~~September~~June 30, ~~2021,~~2022, there was ~~$3.8~~$4.2 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 September 30, 2021 there were no options exercisable or outstanding.

9. DEBT

Short-Term Debt

At June 30, 2022, NW Holdings and NW Natural had short-term debt outstanding of $222.7 million and $78.7 million, respectively. NW Holdings' short-term debt consisted of $144.0 million of balances outstanding under the credit agreement at NW Holdings and $78.7 million of commercial paper outstanding at NW Natural. The weighted average interest rate on the credit agreement at June 30, 2022 was 2.7% at NW Holdings. The weighted average interest rate of commercial paper at June 30, 2022 was 2.0% at NW Natural. At June 30, 2022, NW Natural's commercial paper had a maximum remaining maturity of 22 days and an average remaining maturity of 13 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 payable~~was 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 September 30, 2021, with a consolidated indebtedness to total capitalization ratio of 59.5%.

At September 30, 2021, NW Holdings and NW Natural had short-term debt outstanding of $399.5 million and $370.5 million, respectively. NW Holdings' short-term debt consisted of $29.0 million in revolving credit agreement loans at NW Holdings, $270.5 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 September 30, 2021 was 1.1% at NW Holdings. The weighted average interest rate of commercial paper and the Term Loan outstanding at September 30, 2021 was 0.2% and 0.7%, respectively, at NW Natural. At September 30, 2021, NW Natural's commercial paper had a maximum remaining maturity of 63 days and an average remaining maturity of 34 days.December 2021.

Long-Term Debt

At ~~September~~June 30, ~~2021,~~2022, NW Holdings and NW Natural had long-term debt outstanding of ~~$916.3~~$1,045.9 million and ~~$857.8~~$986.8 million, respectively, which included ~~$7.1~~$8.0 million and ~~$6.9~~$7.9 million of unamortized debt issuance costs at NW Holdings and NW Natural, respectively. NW Natural's long-term debt consists of first mortgage bonds (FMBs) with maturity dates ranging from 2023 through ~~2050,~~2051, interest rates ranging from 2.8% to 7.9%, and a weighted average interest rate of ~~4.5%~~4.4%.

~~In August 2021, NW Natural retired $10.0 million of FMBs with an interest rate of 9.1%. In September 2021, NW Natural retired $50.0 million of FMBs with an interest rate of 3.2%.~~ No ~~other~~ long-term debt is scheduled to mature over the next twelve months following ~~September~~June 30, ~~2021~~.2022 at NW Natural.

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

In June 2021, NW Natural Water entered into a ~~five-year~~five-year term loan credit agreement for $55.0 million and borrowed the full amount. The loan carried an interest rate of ~~0.9%~~2.3% at ~~September~~June 30, ~~2021,~~2022, which is based upon the one-month LIBOR ra~~te plus a spread. Th~~erate. 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 ~~September~~June 30, ~~2021,~~2022, with a consolidated indebtedness to total capitalization ratio of ~~59.6%~~52.7%.

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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 ~~2020~~2021 Form 10-K for a description of the fair value hierarchy.

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


		September 30,				December 31,			June 30,				December 31,
In thousands	In thousands	2021		2020		2020		In thousands	2022		2021		2021
NW Natural:	NW Natural:							NW Natural:
Gross long-term debt	Gross long-term debt	$	864,700	$	924,700	$	924,700	Gross long-term debt	$	994,700	$	924,700	$	994,700
Unamortized debt issuance costs	Unamortized debt issuance costs	(6,940)		(7,586)		(7,480)		Unamortized debt issuance costs	(7,938)		(7,291)		(8,205)
Carrying amount	Carrying amount	$	857,760	$	917,114	$	917,220	Carrying amount	$	986,762	$	917,409	$	986,495
Estimated fair value(1)	Estimated fair value(1)	$	978,613	$	1,080,663	$	1,097,348	Estimated fair value(1)	$	891,064	$	1,043,696	$	1,110,741

NW Holdings:	NW Holdings:							NW Holdings:
Gross long-term debt	Gross long-term debt	$	923,355	$	962,994	$	962,905	Gross long-term debt	$	1,053,912	$	983,221	$	1,053,241
Unamortized debt issuance costs	Unamortized debt issuance costs	(7,051)		(7,586)		(7,480)		Unamortized debt issuance costs	(8,031)		(7,446)		(8,309)
Carrying amount	Carrying amount	$	916,304	$	955,408	$	955,425	Carrying amount	$	1,045,881	$	975,775	$	1,044,932
Estimated fair value(1)	Estimated fair value(1)	$	1,042,705	$	1,118,565	$	1,136,311	Estimated fair value(1)	$	950,597	$	1,104,230	$	1,174,500

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

10. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS

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

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

The following table provides the components of net periodic benefit cost for the pension and other postretirement benefit plans:


		Three Months Ended September 30,								Nine Months Ended September 30,									Three Months Ended June 30,								Six Months Ended June 30,
		Pension Benefits				Other Postretirement Benefits				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		2022		2021		2022		2021
Service cost	Service cost	$	1,717	$	1,673	$	69	$	67	$	5,145	$	4,988	$	180	$	195	Service cost	$	1,529	$	1,714	$	47	$	56	$	3,059	$	3,428	$	94	$	111
Interest cost	Interest cost	3,316		4,071		180		229		10,001		12,093		510		675		Interest cost	3,659		3,342		179		165		7,318		6,685		359		330
Expected return on plan assets	Expected return on plan assets	(5,802)		(5,358)		—		—		(18,000)		(16,350)		—		—		Expected return on plan assets	(6,427)		(6,099)		—		—		(12,854)		(12,198)		—		—
Amortization of prior service credit	Amortization of prior service credit	—		—		(119)		(119)		—		—		(353)		(353)		Amortization of prior service credit	—		—		(84)		(117)		—		—		(167)		(234)
Amortization of net actuarial loss	Amortization of net actuarial loss	5,515		5,082		226		173		16,516		14,638		488		458		Amortization of net actuarial loss	3,199		5,500		99		131		6,397		11,001		198		262

Net periodic benefit cost	Net periodic benefit cost	4,746		5,468		356		350		13,662		15,369		825		975		Net periodic benefit cost	1,960		4,457		241		235		3,920		8,916		484		469
Amount allocated to construction	Amount allocated to construction	(759)		(695)		(27)		(25)		(2,228)		(2,043)		(70)		(71)		Amount allocated to construction	(616)		(743)		(17)		(22)		(1,280)		(1,469)		(35)		(43)

Net periodic benefit cost charged to expense	Net periodic benefit cost charged to expense	3,987		4,773		329		325		11,434		13,326		755		904		Net periodic benefit cost charged to expense	1,344		3,714		224		213		2,640		7,447		449		426

Amortization of regulatory balancing account	Amortization of regulatory balancing account	675		675		—		—		4,757		4,757		—		—		Amortization of regulatory balancing account	1,281		1,281		—		—		4,082		4,082		—		—
Net amount charged to expense	Net amount charged to expense	$	4,662	$	5,448	$	329	$	325	$	16,191	$	18,083	$	755	$	904	Net amount charged to expense	$	2,625	$	4,995	$	224	$	213	$	6,722	$	11,529	$	449	$	426

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.

~~Table of Contents~~

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 September 30,				Nine Months Ended September 30,					Three Months Ended June 30,				Six Months Ended June 30,
In thousands	In thousands	2021		2020		2021		2020		In thousands	2022		2021		2022		2021
Beginning balance	Beginning balance	$	(12,460)	$	(10,413)	$	(12,902)	$	(10,733)	Beginning balance	$	(11,207)	$	(12,681)	$	(11,404)	$	(12,902)

Amounts reclassified from AOCL:	Amounts reclassified from AOCL:									Amounts reclassified from AOCL:
Amortization of actuarial losses	Amortization of actuarial losses	314		252		916		688		Amortization of actuarial losses	268		301		536		602

Total reclassifications before tax	Total reclassifications before tax	314		252		916		688		Total reclassifications before tax	268		301		536		602
Tax benefit	Tax benefit	(80)		(66)		(240)		(182)		Tax benefit	(71)		(80)		(142)		(160)
Total reclassifications for the period	Total reclassifications for the period	234		186		676		506		Total reclassifications for the period	197		221		394		442
Ending balance	Ending balance	$	(12,226)	$	(10,227)	$	(12,226)	$	(10,227)	Ending balance	$	(11,010)	$	(12,460)	$	(11,010)	$	(12,460)

Employer Contributions to Company-Sponsored Defined Benefit Pension Plans

~~For the nine months ended September 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 on March 11, 2021, includes a provision for pension relief that extends~~plans during the ~~amortization period for required contributions from 7~~six months ended June 30, 2022 compared to ~~15 years and provides~~$9.6 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 as a result of adopting the American Rescue Plan Act.

Defined Contribution Plan

~~The~~NW Natural's Retirement K Savings Plan is a qualified defined contribution plan under Internal Revenue Code Sections 401(a) and 401(k). ~~Employer~~NW Natural contributions totaled ~~$6.7~~$5.2 million and ~~$6.2~~$4.7 million for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021, ~~and 2020,~~ respectively.

See Note 10 in the ~~2020~~2021 Form 10-K for more information concerning these retirement and other postretirement benefit plans.

11. INCOME TAX

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

The effective income tax rate varied from the federal statutory rate due to the following:

Three Months Ended September 30,
NW Holdings NW Natural
In thousands 2021 2020 2021 2020
Income tax at statutory rate (federal) $ (5,834) $ (5,048) $ (5,928) $ (5,518)
State income tax (2,599) (1,452) (2,618) (1,595)
Increase (decrease):
Differences required to be flowed-through by regulatory commissions 1,318 1,051 1,318 1,051
Other, net (12) 86 16 5
Total benefit for income taxes on continuing operations $ (7,127) $ (5,363) $ (7,212) $ (6,057)
Effective income tax rate for continuing operations 25.7 % 22.3 % 25.5 % 23.1 %


	Three Months Ended June 30,
	NW Holdings						NW Natural
In thousands	2022			2021			2022			2021
Income tax at statutory rate (federal)	$	460		$	(210)		$	744		$	184
State income tax	161			(48)			219			41
Increase (decrease):
Differences required to be flowed-through by regulatory commissions	(62)			21			(62)			21
Other, net	(89)			(40)			(91)			42
Total provision for income taxes	$	470		$	(277)		$	810		$	288
Effective income tax rate	21.5		%	27.7		%	22.9		%	32.8		%

~~Table of Contents~~


		Nine Months Ended September 30,													Six Months Ended June 30,
		NW Holdings						NW Natural							NW Holdings						NW Natural
In thousands	In thousands	2021			2020			2021			2020			In thousands	2022			2021			2022			2021
Income tax at statutory rate (federal)	Income tax at statutory rate (federal)	$	10,764		$	6,628		$	11,195		$	6,550		Income tax at statutory rate (federal)	$	16,243		$	16,598		$	16,859		$	17,123
State income tax	State income tax	4,660			1,892			4,748			1,861			State income tax	6,674			7,260			6,803			7,366
Increase (decrease):	Increase (decrease):													Increase (decrease):
Differences required to be flowed-through by regulatory commissions	Differences required to be flowed-through by regulatory commissions	(2,266)			(1,301)			(2,266)			(1,301)			Differences required to be flowed-through by regulatory commissions	(3,235)			(3,584)			(3,235)			(3,584)
Other, net	Other, net	(41)			(127)			(49)			(168)			Other, net	(289)			(30)			(294)			(65)
Total provision for income taxes on continuing operations		$	13,117		$	7,092		$	13,628		$	6,942
Effective income tax rate for continuing operations		25.6		%	22.5		%	25.6		%	22.3		%
Total provision for income taxes														Total provision for income taxes	$	19,393		$	20,244		$	20,133		$	20,840
Effective income tax rate														Effective income tax rate	25.1		%	25.6		%	25.1		%	25.6		%

The NW Holdings and NW Natural effective income tax rates for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 compared to the same period in ~~2020~~2021 changed primarily as a result of changes in pre-tax ~~income, Oregon's Corporate Activity Tax (CAT), and regulatory amortization of deferred Tax Cuts and Jobs Act (TCJA) benefits.~~income. See Note 11 in the ~~2020~~2021 Form 10-K for more detail on income taxes and effective tax rates.

The IRS Compliance Assurance Process (CAP) examination of the ~~2019~~2020 tax year was completed during the first quarter of ~~2021.~~2022. There were no material changes to the return as filed. The ~~2020~~2021 and ~~2021~~2022 tax years are subject to examination under CAP.

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:

September 30, December 31,
In thousands 2021 2020 2020
NW Natural:
NGD plant in service $ 3,663,699 $ 3,441,301 $ 3,548,543
NGD work in progress 120,412 120,722 63,901
Less: Accumulated depreciation 1,086,510 1,051,018 1,055,809
NGD plant, net 2,697,601 2,511,005 2,556,635
Other plant in service 66,314 65,103 66,300
Other construction work in progress 7,228 6,444 5,032
Less: Accumulated depreciation 20,392 19,387 19,637
Other plant, net 53,150 52,160 51,695
Total property, plant, and equipment, net $ 2,750,751 $ 2,563,165 $ 2,608,330
Other (NW Holdings):
Other plant in service $ 61,443 $ 47,302 $ 50,263
Less: Accumulated depreciation 5,832 3,218 3,823
Other plant, net $ 55,611 $ 44,084 $ 46,440
NW Holdings:
Total property, plant, and equipment, net $ 2,806,362 $ 2,607,249 $ 2,654,770
NW Natural:
Capital expenditures in accrued liabilities $ 33,968 $ 37,236 $ 25,129
NW Holdings:
Capital expenditures in accrued liabilities $ 35,955 $ 37,236 $ 25,129

~~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.~~


	June 30,				December 31,
In thousands	2022		2021		2021
NW Natural:
NGD plant in service	$	3,782,197	$	3,623,092	$	3,721,939
NGD construction work in progress	195,118		99,646		135,398
Less: Accumulated depreciation	1,121,444		1,068,603		1,098,715
NGD plant, net	2,855,871		2,654,135		2,758,622
Other plant in service	69,623		66,315		69,332
Other construction work in progress	5,529		5,817		4,971
Less: Accumulated depreciation	21,167		20,140		20,646
Other plant, net	53,985		51,992		53,657
Total property, plant, and equipment, net	$	2,909,856	$	2,706,127	$	2,812,279

Other (NW Holdings):
Other plant in service	$	59,718	$	50,148	$	57,184
Other construction work in progress	17,051		4,774		8,419
Less: Accumulated depreciation	7,944		5,120		6,512
Other plant, net	$	68,825	$	49,802	$	59,091

NW Holdings:
Total property, plant, and equipment, net	$	2,978,681	$	2,755,929	$	2,871,370

NW Natural:
Capital expenditures in accrued liabilities	$	44,052	$	37,968	$	37,537

NW Holdings:
Capital expenditures in accrued liabilities	$	45,079	$	38,395	$	38,333

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.

NW Holdings

Other plant balances include long-lived assets associated with water and wastewater operations and non-regulated activities not held by NW Natural or its subsidiaries.

~~Table of Contents~~

13. ~~GAS RESERVES~~INVESTMENTS

~~NW Natural has invested $188 million through the~~Investments include gas reserves, ~~program~~financial investments in the Jonah Field located in Wyoming as of September 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.life insurance policies, and equity method investments. 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.following table summarizes other investments:

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.


	NW Holdings						NW Natural
	June 30,				December 31,		June 30,				December 31,
In thousands	2022		2021		2021		2022		2021		2021
Investments in life insurance policies	$	48,735	$	47,695	$	48,178	$	48,735	$	47,695	$	48,178
Investments in gas reserves, non-current	24,695		29,852		26,608		24,695		29,852		26,608
Investment in unconsolidated affiliates	22,597		30		14,492		8,056		—		—
Total other investments	$	96,027	$	77,577	$	89,278	$	81,486	$	77,547	$	74,786

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:~~

September 30, December 31,
In thousands 2021 2020 2020
Gas reserves, current $ 6,266 $ 12,265 $ 11,409
Gas reserves, non-current 181,041 175,042 175,898
Less: Accumulated amortization 153,020 137,346 141,414
Total gas reserves(1)
34,287 49,961 45,893
Less: Deferred taxes on gas reserves 7,768 11,972 10,572
Net investment in gas reserves $ 26,519 $ 37,989 $ 35,321

~~(1)~~ ~~The net investment in additional wells included in total gas reserves was $2.5 million, $3.2 million and $3.0 million at September 30, 2021 and 2020 and December 31, 2020, respectively.~~

~~NW Natural's investment is included in NW Holdings' and NW Natural's consolidated balance sheets under gas reserves with the maximum loss exposure limited to the investment balance.~~

~~14. INVESTMENTS~~

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 ~~2020~~2021 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 June 30, 2022. Gas reserves are stated at cost, net of regulatory amortization, with the associated deferred tax benefits of $5.3 million, $8.8 million, and $6.9 million, which are recorded as liabilities in the June 30, 2022, June 30, 2021, and December 31, 2021 consolidated balance sheets, respectively. NW Natural's investment is included in NW Holdings' and NW Natural's consolidated balance sheets under other current assets and other investments (non-current portion) with the maximum loss exposure limited to the investment balance. The amount of gas reserves included in other current assets was $4.3 million, $8.4 million, and $5.4 million as of June 30, 2022, June 30, 2021, and December 31, 2021, respectively. See Note 13 in the 2021 Form 10-K.

Investments in ~~Gas Pipeline~~Unconsolidated Affiliates

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

~~On August 6,~~

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

In 2022, commissioning of the first project, Lexington Renewable Energy LLC (Lexington), was completed and NW Natural determined it was no longer the ~~sale of 100% of~~primary beneficiary and deconsolidated the variable interest entity and recorded the investment in Lexington as an equity method investment. NW Natural accounts for its interest in ~~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 price~~exercise significant influence over Lexington's operations after commissioning. There was no gain or loss recognized upon deconsolidation. NW Natural determined the fair value of ~~$14.0 million, $7.0 million of~~the investment approximated the carrying value which was ~~paid upon closing the transaction,~~primarily comprised of cash and ~~$7.0 million which was paid upon the one-year anniversary~~property, plant and equipment. As of ~~the close date. The completion~~June 30, 2022, NW Natural had an investment balance in Lexington of ~~the sale resulted~~$8.1 million. Equity in ~~an after-tax gain~~earnings (loss) of ~~approximately $0.5 million~~ ~~for the year ended December 31, 2020.~~

~~TWH was a variable interest entity reported under equity method accounting through its sale. The investment~~Lexington is included in ~~TWH did not meet the criteria to be classified as held for sale or discontinued operations. See Note 14 in the 2020 Form 10-K.~~cost of gas.

~~15.~~14. BUSINESS COMBINATIONS

2022 Business Combinations

During the six months ended June 30, 2022, NWN Water and its subsidiaries completed 1 acquisition qualifying as a business combination. The fair value of the preliminary consideration transferred was not material and is not significant to NW Holdings' results of operations.

2021 Business Combinations

During ~~the nine months ended September 30,~~ 2021, NWN Water and its subsidiaries completed 34 acquisitions qualifying as business combinations. The aggregate fair value of the preliminary consideration transferred for these acquisitions were not material and are not significant to NW Holdings' results of operations.

~~2020 Business Combinations~~

During 2020, NWN Water and its subsidiaries completed 2 significant 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,

~~Table of Contents~~

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. No 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 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 ~~$69.8~~$70.7 million, ~~$70.3~~$69.3 million, and ~~$69.2~~$70.6 million as of ~~September~~June 30, ~~2021, September~~2022, June 30, ~~2020~~2021, and December 31, ~~2020,~~2021, respectively. The decrease in the goodwill balance from the third 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 no impairments recognized to date.

~~16.~~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 ~~exchange~~forward contracts.

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

In the normal course of business, NW Natural also enters into indexed-price physical forward natural gas commodity purchase contracts and options to meet the requirements of 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:


		September 30,				December 31,			June 30,				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	749,595		860,400		784,400		Financial	718,965		680,335		618,815
Physical	Physical	613,524		706,592		457,593		Physical	516,590		419,148		431,628
Foreign exchange	Foreign exchange	$	6,299	$	6,754	$	5,896	Foreign exchange	$	7,659	$	6,477	$	6,268

~~Table of Contents~~

Purchased Gas Adjustment (PGA)

~~Derivatives~~Under 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 due~~Hedge 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 2021-22 ~~and 2020-21~~ gas ~~years~~year with its forecasted sales volumes hedged at ~~53% and 51%~~approximately 79% in total. The total hedged for Oregon was approximately 82%, including 62% in financial ~~swap~~hedges and ~~option contracts, and 17% and 17%~~19% in physical gas ~~supplies, respectively. Hedge contracts entered into prior to the PGA filing~~supplies. The total hedged for Washington was approximately 57%, including 44% in ~~September 2021 were included~~financial hedges and 13% in ~~the PGA for the 2020-21~~physical 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 September 30,									Three Months Ended June 30,
		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	$	69,239	$	(106)	$	28,122	$	136	Benefit (expense) to cost of gas	$	(29,332)	$	(153)	$	16,323	$	(45)
Operating revenues (expense)	Operating revenues (expense)	—		—		658		—		Operating revenues (expense)	—		—		—		—
Amounts deferred to regulatory accounts on balance sheet	Amounts deferred to regulatory accounts on balance sheet	(69,239)		106		(28,684)		(136)		Amounts deferred to regulatory accounts on balance sheet	29,332		153		(16,323)		45
Total gain (loss) in pre-tax earnings	Total gain (loss) in pre-tax earnings	$	—	$	—	$	96	$	—	Total gain (loss) in pre-tax earnings	$	—	$	—	$	—	$	—


		Nine Months Ended September 30,									Six Months Ended June 30,
		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	$	106,044	$	(74)	$	28,271	$	129	Benefit (expense) to cost of gas	$	44,453	$	(73)	$	36,805	$	32
Operating revenues (expense)	Operating revenues (expense)	(26)		—		(1,021)		—		Operating revenues (expense)	—		—		(27)		—
Amounts deferred to regulatory accounts on balance sheet	Amounts deferred to regulatory accounts on balance sheet	(106,022)		74		(27,398)		(129)		Amounts deferred to regulatory accounts on balance sheet	(44,453)		73		(36,782)		(32)
Total gain (loss) in pre-tax earnings	Total gain (loss) in pre-tax earnings	$	(4)	$	—	$	(148)	$	—	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 ~~$6.1~~$21.2 million and ~~$15.4~~$57.2 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022, respectively, from the settlement of natural gas financial derivative contracts, whereas, net ~~losses~~gains of ~~$3.2~~$4.2 million and $9.3 million were realized for the ~~nine~~three and six months ended ~~September~~June 30, ~~2020. There were no net gains or losses realized for the three months ended September 30, 2020.~~2021, respectively. Realized gains and losses offset the higher or lower cost of gas purchased, resulting in no incremental amounts to collect or refund to customers.

Credit Risk Management of Financial Derivatives Instruments

No collateral was posted with or by NW Natural counterparties as of ~~September~~June 30, ~~2021~~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 ~~2021~~2022 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 September 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

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other under specified circumstances. Such circumstances may include a defaulting party, a credit change due to a merger affecting either party, or any other termination event.

NW ~~Natural’s~~Natural's current commodity financial swap and option contracts outstanding reflect unrealized gains of ~~$132.2~~$46.6 million and ~~$34.1~~$54.3 million at ~~September~~June 30, ~~2021~~2022 and ~~2020, respectively.~~2021. If netted by counterparty, NW Natural's physical and financial derivative position would result in an asset of ~~$124.5~~$47.8 million and a liability of ~~$4.9~~$3.4 million as of ~~September~~June 30, ~~2021,~~2022, an asset of ~~$35.6~~$51.8 million and a liability of ~~$1.3~~$1.6 million as of ~~September~~June 30, ~~2020,~~2021, and an asset of ~~$14.1~~$51.8 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 ~~requires~~may require the posting of collateral, guarantees, or letters of credit from counterparties to ~~meet~~maintain its minimum credit requirement standards. See Note 1615 in the ~~2020~~2021 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 ~~September~~June 30, ~~2021. Using significant other observable or Level 2 inputs, the~~2022. The net fair value was an asset of ~~$119.6~~$44.4 million, an asset of ~~$34.3~~$50.2 million, and an asset of ~~$12.8~~$48.0 million as of ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, and December 31, ~~2020,~~2021, respectively. No Level 3 inputs were used in our derivative valuations during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021. See Note 2 in the ~~2020~~2021 Form 10-K.

~~17.~~

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

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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
		September 30,				December 31,		September 30,				December 31,			June 30,				December 31,		June 30,				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	$	6,925	$	8,338	$	7,596	$	40,929	$	43,509	$	43,725	Gasco/Siltronic Sediments	$	6,144	$	6,658	$	7,582	$	40,740	$	41,652	$	42,076
Other Portland Harbor	Other Portland Harbor	2,392		2,760		1,942		6,222		5,882		7,020		Other Portland Harbor	2,313		2,195		2,592		8,613		6,588		9,570
Gasco/Siltronic Upland site	Gasco/Siltronic Upland site	9,720		8,775		14,887		37,408		41,515		40,250		Gasco/Siltronic Upland site	11,050		12,442		15,711		34,352		38,401		36,215

Front Street site	Front Street site	1,002		10,610		3,816		893		1,044		1,107		Front Street site	585		1,219		1,100		868		975		811
Oregon Steel Mills	Oregon Steel Mills	—		—		—		179		179		179		Oregon Steel Mills	—		—		—		179		179		179
Total	Total	$	20,039	$	30,483	$	28,241	$	85,631	$	92,129	$	92,281	Total	$	20,092	$	22,514	$	26,985	$	84,752	$	87,795	$	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/Siltronic~~Gasco Sediments Site and Other Portland Harbor projects.

~~GASCO/SILTRONIC~~GASCO SEDIMENTS. In 2009, NW Natural and Siltronic Corporation entered into a separate Administrative Order on Consent with the EPA to evaluate and design specific remedies for sediments adjacent to the Gasco uplands and Siltronic uplands sites. NW Natural submitted a draft EE/CA to the EPA in May 2012 to provide the estimated cost of potential remedial alternatives for this site. 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 for the Gasco sediments site. These preliminary design discussions did not include a cost estimate for ~~remedial actions. None of the~~cleanup. No design alternatives ~~in the EE/CA~~ are more likely than ~~others~~the EE/CA alternatives at this time, and NW Natural expects further design discussion and iteration with the EPA.

The estimated costs for the various sediment remedy alternatives in the draft EE/CA, for the additional studies and design work needed before the cleanup can occur, and for regulatory oversight throughout the cleanup range from ~~$47.9~~$46.9 million to $350 million. NW Natural has recorded a liability of ~~$47.9~~$46.9 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/Siltronic~~Gasco 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

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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 portion.~~action.

NW Natural submitted a revised Remedial Investigation Report for the uplands to ODEQ in May 2007. In March 2015, ODEQ approved ~~Remedial~~the 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 ~~$1.9~~$1.5 million ~~for long term monitoring,~~costs associated with the discovery during construction of World War II-era munitions, 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 ~~2020~~2021 Form 10-K for a description of SRRM and ECRM collection processes.

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The following table presents information regarding the total regulatory asset deferred:


		September 30,				December 31,			June 30,				December 31,
In thousands	In thousands	2021		2020		2020		In thousands	2022		2021		2021
Deferred costs and interest (1)	Deferred costs and interest (1)	$	45,019	$	35,919	$	44,516	Deferred costs and interest (1)	$	48,814	$	50,604	$	45,122
Accrued site liabilities (2)	Accrued site liabilities (2)	105,607		122,226		120,352		Accrued site liabilities (2)	104,798		110,237		115,773
Insurance proceeds and interest	Insurance proceeds and interest	(59,589)		(69,138)		(69,253)		Insurance proceeds and interest	(60,226)		(69,730)		(59,564)
Total regulatory asset deferral(1)	Total regulatory asset deferral(1)	$	91,037	$	89,007	$	95,615	Total regulatory asset deferral(1)	$	93,386	$	91,111	$	101,331
Current regulatory assets(3)	Current regulatory assets(3)	7,068		4,440		4,992		Current regulatory assets(3)	6,975		5,688		6,694
Long-term regulatory assets(3)	Long-term regulatory assets(3)	83,969		84,567		90,623		Long-term regulatory assets(3)	86,411		85,423		94,636

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

(2) Excludes 3.3% of the Front Street site liability as the OPUC only allows recovery of 96.7% of costs for those sites allocable to Oregon, including those that historically served only Oregon customers. Amounts excluded from regulatory assets were ~~$0.1 million~~$47 thousand at ~~September~~June 30, 2022, $72 thousand at June 30, 2021, ~~$0.4 million at September 30, 2020,~~ and ~~$0.2 million~~$62 thousand 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 ~~nor~~for insurance proceeds received accrue a carrying charge. Current environmental costs represent remediation costs management expects to collect from customers in the next 12 months. Amounts included in this estimate are still subject to a prudence and earnings test review by the OPUC and do not include the $5.0 million tariff rider. The amounts allocable to Oregon are recoverable through NGD rates, subject to an earnings test.

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 ~~2020~~2021 Form 10-K.

For additional information regarding other commitments and contingencies, see Note 1716 in the ~~2020~~2021 Form 10-K.

~~18. DISCONTINUED OPERATIONS~~17. SUBSEQUENT EVENT

~~NW Holdings~~

On ~~June 20, 2018, NWN Gas Storage, then a wholly-owned subsidiary of~~July 15, 2022, NW Natural entered into a Bond Purchase Agreement between NW Natural and ~~Sale~~the institutional investors named as purchasers therein (the Bond Purchase Agreement). The Bond Purchase Agreement ~~(the Agreement) that provided~~provides for the ~~sale by NWN Gas Storage~~issuance of ~~all~~$140.0 million aggregate principal amount of NW Natural's First Mortgage Bonds, 4.78% Series due 2052 (the Bonds). The Bonds are expected to be issued on or about September 30, 2022. The Bonds will bear interest at the rate of 4.78% per annum, payable semi-annually on March 30 and September 30 of each year, commencing March 30, 2023, and will mature on September 30, 2052.The Bonds will be subject to redemption prior to maturity at the option of NW Natural, in whole or in part, (i) at any time prior to March 30, 2052, at a redemption price equal to 100% of the ~~membership interests in Gill Ranch. Gill Ranch owns~~principal amount thereof plus a ~~75%~~“make-whole” premium and accrued and unpaid interest inthereon to 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~~date of ~~all~~redemption, and (ii) at any time on and after March 30, 2052, at 100% of the ~~membership interests in Gill Ranch~~principal amount thereof plus accrued and ~~received payment~~unpaid interest thereon to the date 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) 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~~.redemption.

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As a result of the disposition of the membership interests in Gill Ranch, there were no assets or liabilities classified as held for sale at September 30, 2021 or December 31, 2020 and there was no activity in the consolidated statement of comprehensive income for the three and nine months ended September 30, 2021. The assets and liabilities of the discontinued operations classified as held for sale in the consolidated balance sheet at September 30, 2020 include the following:

NW Holdings
Discontinued Operations

~~In thousands~~

~~September 30, 2020~~

~~Assets:~~

~~Accounts receivable~~

~~1,106~~

~~Inventories~~

~~730~~

~~Other current assets~~

~~Property, plant, and equipment, net~~

~~14,663~~

~~Operating lease right of use asset~~

~~118~~

~~Other non-current assets~~

~~247~~

~~Total discontinued operations assets - current assets~~ ~~(1)~~

~~16,928~~

~~Liabilities:~~

~~Accounts payable~~

~~1,747~~

~~Other current liabilities~~

~~796~~

~~Operating lease liabilities~~

~~113~~

~~Other non-current liabilities~~

~~11,266~~

~~Total discontinued operations liabilities - current liabilities~~ ~~(1)~~

~~13,922~~

~~(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 September 30, Nine Months Ended September 30,
In thousands, except per share data 2020 2020
Revenues $ 3,584 $ 7,866
Expenses:
Operations and maintenance 2,148 6,332
General taxes 61 161
Depreciation and amortization 105 317
Other expenses and interest 229 688
Total expenses 2,543 7,498
Income from discontinued operations before income taxes 1,041 368
Income tax expense 276 101
Income from discontinued operations, net of tax $ 765 $ 267
Earnings from discontinued operations per share of common stock:
Basic $ 0.02 $ 0.01
Diluted $ 0.02 $ 0.01

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~~19. SUBSEQUENT EVENTS~~

~~Credit Agreements~~

On November 3, 2021, NW Holdings entered into an amended and restated $200 million credit agreement with a maturity date of November 3, 2026 and an available extension of commitments for two additional one-year periods, subject to lender approval (Amended NW Holdings Credit Agreement). The prior NW Holdings credit agreement was terminated upon closing of this new agreement. The Amended NW Holdings Credit Agreement permits the issuance of letters of credit in an aggregate amount of up to $40 million.

On November 3, 2021, NW Natural entered into a $400 million credit agreement with a maturity date of November 3, 2026 and an available extension of commitments for two additional one-year periods, subject to lender approval (Amended NW Natural Credit Agreement). The prior NW Natural credit agreement was terminated upon closing of this new agreement. The Amended NW Natural Credit Agreement permits the issuance of letters of credit in an aggregate amount of up to $60 million.

~~Table of Contents~~

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 ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 of NW Holdings, the substantial majority of which consist of the operating results of NW Natural. When significant activity exists at NW Holdings that does not exist at NW Natural, additional disclosure has been provided. References in this discussion to "Notes" are to the Notes to Unaudited Consolidated Financial Statements in this report. A significant portion of the business results are seasonal in nature, and, as such, the results of operations for the three month 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 ~~2020~~2021 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 owned~~wholly-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 14 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 18 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, analysts and creditors in evaluating our financial condition and results of operations. Our non-GAAP financial measures should not be considered a substitute for, or superior to, measures calculated in accordance with U.S. GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than how such measures are calculated in this report, limiting the usefulness of those measures for comparative purposes. A reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is provided below.


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Earnings (loss) per share of common stock (diluted) - Total	$	0.05	$	(0.02)	$	1.77	$	1.92
Diluted earnings (loss) per share - NGD segment(1)	—		(0.05)		1.70		1.71
Diluted earnings per share - NW Holdings - other(1)	0.05		0.03		0.07		0.21

(1) Non-GAAP financial measure

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EXECUTIVE SUMMARY

~~Our core mission is to provide safe, reliable 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 financial results and highlights include:

•Reported a net ~~loss from continuing operations~~income of ~~$0.67~~$1.7 million or $0.05 per share (diluted) for the ~~third~~second quarter of ~~2021,~~2022, compared to a net loss ~~from continuing operations~~ of ~~$0.61~~$0.7 million or $0.02 per share (diluted) in the prior year;

•Reported ~~consolidated~~ net income of ~~$1.24~~$58.0 million or $1.77 per share (diluted) for the first ~~nine~~six months of ~~2021,~~2022, compared to net income of ~~$0.81~~$58.8 million or $1.92 per share (diluted) in the prior year;

•~~Received Washington general rate case order providing a revenue requirement increase~~Issued and sold 2.9 million shares of ~~$8 million over two years;~~common stock on April 1, 2022;

•Added nearly ~~12,000~~10,200 meters during the past twelve months for a growth rate of ~~1.5%~~1.3% at ~~September~~June 30, ~~2021;~~2022;

•~~Invested ove~~Inves~~r $200~~ted more than $165 million in our ut~~utility~~ility systems in the first ~~nine~~six months of ~~2021~~2022 ~~for~~in an effort to achieve greater reliability and resiliency;

•Filed multi-party settlements in the Oregon general rate case; and

•~~Continued executing our~~Announced two water and wastewater ~~investment strategy with two~~acquisitions near our existing service territory in Washington state and closed ~~acquisitions~~one water acquisition in ~~the third quarter of 2021.~~Texas.

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

Three Months Ended September 30,
2021 2020 QTD
In thousands, except per share data Amount Per Share Amount Per Share Change
Net loss from continuing operations $ (20,655) $ (0.67) $ (18,677) $ (0.61) $ (1,978)
Income from discontinued operations, net of tax — — 765 0.02 (765)
Consolidated net loss $ (20,655) $ (0.67) $ (17,912) $ (0.59) $ (2,743)


	Three Months Ended June 30,
	2022				2021				QTD
In thousands, except per share data	Amount		Per Share		Amount		Per Share		Change
Consolidated net income (loss)	$	1,715	$	0.05	$	(724)	$	(0.02)	$	2,439

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


		Three Months Ended September 30,							Three Months Ended June 30,
		2021		2020		QTD			2022		2021		QTD
In thousands	In thousands	Amount		Amount		Change		In thousands	Amount		Amount		Change
Consolidated net loss		$	(21,018)	$	(20,220)	$	(798)
Consolidated net income								Consolidated net income	$	2,733	$	589	$	2,144
Natural gas distribution margin	Natural gas distribution margin	$	61,076	$	55,542	$	5,534	Natural gas distribution margin	$	94,378	$	91,206	$	3,172

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021.

Consolidated net ~~loss~~income increased ~~$0.8~~$2.1 million at NW Natural primarily due to the following factors:

•$~~5.1~~3.2 million increase in NGD segment margin driven by customer growth and higher usage by non-decoupled customers; and

•$2.6 million increase in other income (expense), net primarily due to lower pension costs; partially offset by

•$3.9 million increase in operations and maintenance expenses primarily due to higher ~~lease~~contract labor, amortization expense related to cloud computing arrangements, and professional service ~~expenses,~~fees; and ~~information technology costs;~~

•$~~2.0~~0.5 million increase in ~~interest~~income tax expense primarily due to higher ~~commercial paper balances; and~~

•~~$2.0 million increase in depreciation and amortization expense due to property, plant, and equipment additions as we continued to invest in our natural gas utility systems; partially offset by~~

•~~$5.5 million increase in NGD segment margin driven by the 2020 Oregon rate case and customer growth;~~

•~~$1.7 million increase in other~~pre-tax income ~~(expense), net due to higher interest income on regulatory assets and lower pension non-service costs; and~~

•~~$1.2 million increase in income tax benefit primarily due to higher pre-tax loss~~ in the current period compared to the prior year.

~~Net loss from continuing operations~~Consolidated net income increased ~~$2.0~~$2.4 million at NW Holdings primarily due to the following factors:

•$~~0.8~~2.1 million increase in consolidated net ~~loss~~income at NW Natural as discussed above; and

•$~~1.2~~0.3 million ~~decrease~~increase in other net income primarily reflecting ~~a gain recognized in~~lower business development costs, partially offset by higher interest expense at the ~~prior period related to the sale of NWN Energy's interest in Trail West Holdings, LLC (TWH) and higher~~ holding ~~company expenses.~~company.

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


		Nine Months Ended September 30,											Six Months Ended June 30,
		2021				2020				YTD			2022				2021				YTD
In thousands, except per share data	In thousands, except per share data	Amount		Per Share		Amount		Per Share		Change		In thousands, except per share data	Amount		Per Share		Amount		Per Share		Change
Net income from continuing operations		$	38,138	$	1.24	$	24,467	$	0.80	$	13,671
Income from discontinued operations, net of tax		—		—		267		0.01		(267)

Consolidated net income	Consolidated net income	$	38,138	$	1.24	$	24,734	$	0.81	$	13,404	Consolidated net income	$	57,954	$	1.77	$	58,793	$	1.92	$	(839)

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


		Nine Months Ended September 30,							Six Months Ended June 30,
		2021		2020		YTD			2022		2021		YTD
In thousands	In thousands	Amount		Amount		Change		In thousands	Amount		Amount		Change
Consolidated net income	Consolidated net income	$	39,682	$	24,247	$	15,435	Consolidated net income	$	60,149	$	60,700	$	(551)
Natural gas distribution margin	Natural gas distribution margin	$	324,922	$	289,337	$	35,585	Natural gas distribution margin	$	272,110	$	263,846	$	8,264

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021.

Consolidated net income ~~increased $15.4~~decreased $0.6 million at NW Natural primarily due to the following factors:

•$~~35.6 million increase in NGD segment margin driven by the 2020 Oregon rate case and customer growth;~~

•~~$7.6 million increase in asset management revenue primarily due to the 2021 cold weather event discussed below; and~~

•~~$2.2 million increase in other income (expense), net driven by higher interest income on regulatory assets and lower pension non-service costs; partially offset by~~

•~~$11.8~~8.6 million increase in operations and maintenance expenses due to higher ~~lease~~contract labor, information technology costs, amortization expense ~~compensation and benefit costs,~~related to cloud computing arrangements, and professional service ~~expenses;~~

•~~$7.6 million increase in depreciation expense due to property, plant, and equipment additions as we continued to invest in our natural gas utility systems;~~

•~~$6.7 million increase in income tax expense due to an increase in pretax income and Oregon's Corporate Activity Tax;~~fees; and

•$~~2.5~~5.4 million decrease in asset management revenue primarily due to the February 2021 cold weather event discussed below that did not recur in the current year; partially offset by

•$8.3 million increase in ~~general taxes~~NGD segment margin driven by customer growth, new rates in Washington, and higher usage by non-decoupled customers; and

•$5.3 million increase in other income (expense), net primarily due to ~~higher assessed property values.~~lower pension costs.

~~Net~~Consolidated net income ~~from continuing operations increased $13.7~~decreased $0.8 million at NW Holdings primarily due to the following factors:

•$~~15.4~~0.6 million ~~increase~~decrease in consolidated net income at NW Natural as discussed above; ~~partially offset by~~and

•$~~1.8~~0.3 million decrease in other net income primarily reflecting higher ~~project costs~~interest expense at the holding company.

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~~approximately $29 million ofof 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 ~~three~~six 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 Organization~~include 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 initially mobilized its incident command team~~reports that cybersecurity attacks have and ~~business continuity plans in early March 2020~~, with a focus on the safety of our 1,200 employees and the 2.5 million people, business partners and communities we serve. For employees whose role requires them to work in the field or onsite, we are following CDC, OSHA, and state specific requirements. 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, including the Delta variant, any potential future shutdowns, efficacy and acceptance of vaccines, or any governmental requirements related to vaccines or testing. We currently have the following expectations and beliefs:

•~~Both NW Natural and NW Natural Water expect their capital projects in 2021 to~~will continue to ~~move forward as planned.~~

•increase. We have not experienced material disruptions in our supply chain for goods and services to date. Our suppliers may be subject to ~~vaccine mandates and could be impacted by an inability to comply~~lack of personnel or ~~loss of personnel,~~disruption in their own supply chain for materials, which could disrupt supplier performance or deliveries, and negatively impact our business. We are continuing to actively monitor, and have formulated and continue to evaluate contingency plans as necessary.

•~~NW Natural's customer growth rate is affected by both new meter connections and when existing customers close their accounts and disconnect their meter~~s. Customer growth from construction and conversions remained strong during the first nine months of 2021 and commercial customer counts remained steady. Any slowdown in economic activity could result in a decline in new meter connections, which could adversely affect operating margins in 2021 and the following periods. Commercial and industrial customers have resumed normal collection practices and residential customers are in the process of returning to normal payment practices. There are several bill assistance options available to residential customers, including the arrearage management program, that was specifically designed to help with bills incurred during the pandemic. We do not currently anticipate significant residential meter disconnections.

•~~NW Natural has seen lower utility margin from a reduction in overall sales volumes during the first~~ ~~nine months~~ of 2021 and 2020 attributed to COVID-19. Due to the seasonality of our gas utility business, we may continue to experience declines in volumes, particularly during our winter heating season, depending on the resiliency of businesses in the communities in

~~Table of Contents~~

~~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 recognition of late fee revenue may be delayed beyond our current expectations.~~

•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 and may be subject to modification as a result of those proceedings. See “Results of Operations – Regulatory Matters – ~~COVID-19 Process and Deferral Dockets” below.~~

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 ~~third~~second quarter ~~and nine months~~ of ~~2021.~~2022.

DIVIDENDS

Dividend highlights include:


		Three Months Ended September 30,				Nine Months Ended September 30,				QTD Change			YTD Change				Three Months Ended June 30,						Six Months Ended June 30,					QTD Change		YTD Change
Per common share	Per common share	2021		2020		2021		2020			Per common share			2022				2021			2022			2021
Dividends paid	Dividends paid	$	0.4800	$	0.4775	$	1.4400	$	1.4325		$	0.0025			$	0.0075	Dividends paid		$	0.4825		$	0.4800		$	0.9650	$	0.9600	$	0.0025	$	0.0050

In ~~October 2021,~~July 2022, the Board of Directors of NW Holdings declared a quarterly dividend on NW Holdings common stock of $0.4825 per share. The dividend is payable on ~~November~~August 15, ~~2021~~2022 to shareholders of record on ~~October~~July 29, ~~2021,~~2022, reflecting an annual indicated dividend rate of $1.93 per share.

RESULTS OF OPERATIONS

Business Segment - Natural Gas Distribution (NGD)

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	2022		2021		2022		2021
NGD net income (loss)	$	157	$	(1,381)	$	55,547	$	52,544	$	1,538	$	3,003
Diluted EPS - NGD segment	$	—	$	(0.05)	$	1.70	$	1.71	$	0.05	$	(0.01)
Gas sold and delivered (in therms)	268,553		213,714		696,939		644,834		54,839		52,105
NGD margin(1)	$	94,378	$	91,206	$	272,110	$	263,846	$	3,172	$	8,264

(1) See Natural Gas Distribution Margin Table below for additional detail.

THREE MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021. The primary factors contributing to the $1.5 million, or $0.05 per share, increase in NGD net income were as follows:

•$3.2 millionincrease in NGD margin due to:

•$1.5 million increase driven by customer growth; and

•$0.8 million increase due to higher usage from colder weather, net of the loss from the Oregon gas cost incentive sharing mechanism; and

•$0.7 million increase due to new customer rates from the 2021 Washington rate case that went into effect on November 1, 2021.

•$2.7 million increase in other income (expense), net driven by lower pension non-service costs; partially offset by

•$4.1 million increase in NGD operating and maintenance expenses due primarily to higher contract labor, amortization expense related to cloud computing arrangements, and professional service fees; and

•$0.4 million increase in income tax expense primarily due to higher pre-tax income in the current period compared to the prior year.

For the three months ended June 30, 2022, total NGD volumes sold and delivered increased 26% over the same period in 2021 primarily due to 23% colder than average weather in the second quarter of 2022 compared to 40% warmer than average weather in the prior period.

SIX MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021. The primary factors contributing to the $3.0 million increase in NGD net income were as follows:

•$8.3 millionincrease in NGD margin due to:

•$3.6 million increase driven by customer growth;

•$3.0 million increase due to higher usage from colder comparative weather, net of the loss from the Oregon gas cost incentive sharing mechanism; and

•$2.4 million increase due to new customer rates from the 2021 Washington rate case that went into effect on November 1, 2021.

•$5.2 million increase in other income (expense), net driven by lower pension non-service costs; partially offset by

•$8.8 million increase in NGD operations and maintenance expenses due to higher contract labor, amortization expense related to cloud computing arrangements, information technology costs, and professional service fees.

Diluted EPS for the NGD segment decreased $0.01 per share primarily due to a common share issuance on April 1, 2022, partially offset by an increase in NGD net income.

For the six months ended June 30, 2022, total NGD volumes sold and delivered increased 8% over the same period in 2021 primarily due to 2% warmer than average weather in the first six months of 2022 compared to 12% 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	2022			2021			2022			2021			QTD Change			YTD Change
NGD volumes (therms)
Residential and commercial sales	147,447			102,469			441,374			400,291			44,978			41,083
Industrial sales and transportation	121,106			111,245			255,565			244,543			9,861			11,022
Total NGD volumes sold and delivered	268,553			213,714			696,939			644,834			54,839			52,105
Operating Revenues
Residential and commercial sales	$	159,792		$	120,360		$	474,399		$	398,944		$	39,432		$	75,455
Industrial sales and transportation	19,526			14,093			40,799			31,472			5,433			9,327
Other distribution revenues	409			396			1,016			986			13			30
Other regulated services	4,907			4,765			9,818			9,550			142			268
Total operating revenues	184,634			139,614			526,032			440,952			45,020			85,080
Less: Cost of gas	79,776			41,249			225,420			153,515			(38,527)			(71,905)
Less: Environmental remediation expense	2,272			1,509			6,970			5,286			(763)			(1,684)
Less: Revenue taxes	8,208			5,650			21,532			18,305			(2,558)			(3,227)
NGD margin	$	94,378		$	91,206		$	272,110		$	263,846		$	3,172		$	8,264

Margin(1)
Residential and commercial sales	$	83,535		$	78,900		$	246,663		$	239,672		$	4,635		$	6,991
Industrial sales and transportation	8,065			7,407			16,991			16,161			658			830

Gain (loss) from gas cost incentive sharing	(2,518)			(223)			(2,448)			(2,486)			(2,295)			38
Other margin	390			357			1,088			952			33			136
Other regulated services	4,906			4,765			9,816			9,547			141			269
NGD Margin	$	94,378		$	91,206		$	272,110		$	263,846		$	3,172		$	8,264

Degree days(2)
Average(3)	305			305			1,631			1,631			—			—
Actual	374			182			1,591			1,443			105		%	10		%
Percent colder (warmer) than average weather	23		%	(40)		%	(2)		%	(12)		%


	As of June 30,
	2022	2021	Change	Growth
NGD Meters - end of period:
Residential meters	720,537	710,543	9,994	1.4%
Commercial meters	68,827	68,756	71	0.1%
Industrial meters	1,074	980	94	9.6%
Total number of meters	790,438	780,279	10,159	1.3%

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

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

(3) Average weather represents the 25-year average of heating degree days. Beginning November 1, 2020, average weather is calculated over the period June 1, 1994 through May 31, 2019, as determined in NW Natural’s 2020 Oregon general rate case.

Residential and Commercial Sales

Residential and commercial sales highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands	2022		2021		2022		2021
Volumes (therms)
Residential sales	90,016		61,346		276,345		255,837		28,670		20,508
Commercial sales	57,431		41,123		165,029		144,454		16,308		20,575
Total volumes	147,447		102,469		441,374		400,291		44,978		41,083
Operating revenues
Residential sales	$	107,292	$	82,310	$	324,475	$	278,112	$	24,982	$	46,363
Commercial sales	52,500		38,050		149,924		120,832		14,450		29,092
Total operating revenues	$	159,792	$	120,360	$	474,399	$	398,944	$	39,432	$	75,455
NGD margin






Residential NGD margin	$	60,046	$	56,926	$	179,878	$	174,809	$	3,120	$	5,069






Commercial NGD margin	23,489		21,974		66,785		64,863		1,515		1,922
Total NGD margin	$	83,535	$	78,900	$	246,663	$	239,672	$	4,635	$	6,991

THREE MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021. Residential and commercial margin increased $4.6 million compared to the prior period. The increase was primarily driven by higher usage from non-decoupled customers, 1.4% growth in residential meters, and new customer rates in Washington that took effect on November 1, 2021. Volumes increased 45.0 million therms due to higher usage driven by comparatively colder weather.

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

Industrial Sales and Transportation

Industrial sales and transportation highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands	2022		2021		2022		2021
Volumes (therms)
Firm and interruptible sales	24,329		20,002		53,189		46,245		4,327		6,944
Firm and interruptible transportation	96,777		91,243		202,376		198,298		5,534		4,078


Total volumes - sales and transportation	121,106		111,245		255,565		244,543		9,861		11,022
NGD margin
Firm and interruptible sales	$	3,191	$	2,741	$	6,890	$	6,298	$	450	$	592
Firm and interruptible transportation	4,874		4,666		10,101		9,863		208		238
Total margin - sales and transportation	$	8,065	$	7,407	$	16,991	$	16,161	$	658	$	830

THREE MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021.Industrial sales and transportation margin increased $0.7 million compared to the prior period. Volumes increased 9.9 million therms primarily due to higher usage from multiple customers, most notably in the light manufacturing and electric manufacturing industries, partially offset by lower usage from customers in the pulp and paper industry.

SIX MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021.Industrial sales and transportation margin increased $0.8 million compared to the prior period. Volumes increased 11.0 million therms primarily due to higher usage from multiple customers, most notably in the primary metals and light manufacturing industries, partially offset by lower usage from customers in the plastic manufacturing industry.

Cost of Gas

Cost of gas highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands	2022		2021		2022		2021
Cost of gas	$	79,776	$	41,249	$	225,420	$	153,515	$	38,527	$	71,905
Volumes sold (therms)(1)	171,776		122,471		494,563		446,536		49,305		48,027
Average cost of gas (cents per therm)	$	0.46	$	0.34	$	0.46	$	0.34	$	0.12	$	0.12
Loss from gas cost incentive sharing(2)	$	(2,518)	$	(223)	$	(2,448)	$	(2,486)	$	(2,295)	$	38

(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 ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021. Cost of gas increased $38.5 million primarily due to a 35% increase in average cost of gas with the majority of these higher gas costs embedded in the PGA and customer growth. Volumes sold increased 49.3 million therms driven by 23% colder than average weather in the second quarter of 2022 compared to 40% warmer than average weather in the prior period.

SIX MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021. Cost of gas increased $71.9 million primarily due to a 35% increase in average cost of gas with the majority of these higher gas costs embedded in the PGA and customer growth. Volumes sold increased 48.0 million therms driven by 2% warmer than average weather in the first six months of 2022 compared to 12% warmer than average weather in the prior period.

Other Regulated Services Margin

Other regulated services margin highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands	2022		2021		2022		2021
North Mist storage services	$	4,857	$	4,715	$	9,715	$	9,431	$	142	$	284
Other services	49		50		101		116		(1)		(15)
Total other regulated services	$	4,906	$	4,765	$	9,816	$	9,547	$	141	$	269

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

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

Other

Other activities aggregated and reported as other at NW Holdings include NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas 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). 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. 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 June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands, except EPS data	2022		2021		2022		2021
NW Natural other - net income	$	2,576	$	1,970	$	4,602	$	8,156	$	606	$	(3,554)
Other NW Holdings activity	(1,018)		(1,313)		(2,195)		(1,907)		295		(288)
NW Holdings other - net income	$	1,558	$	657	$	2,407	$	6,249	$	901	$	(3,842)
Diluted EPS - NW Holdings - other	$	0.05	$	0.03	$	0.07	$	0.21	$	0.02	$	(0.14)

THREE MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021.Other net income increased $0.9 million at NW Holdings and $0.6 million at NW Natural. The increase at NW Natural was primarily due to an increase in asset management revenues. The increase at NW Holdings was driven by the increase at NW Natural and lower business development costs, partially offset by higher interest expense at the holding company.

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

Consolidated Operations

Operations and Maintenance

Operations and maintenance highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2022		2021		2022		2021		Change		Change
NW Natural	$	48,879	$	44,939	$	102,756	$	94,126	$	3,940	$	8,630
Other NW Holdings operations and maintenance	4,296		5,108		7,904		8,112		(812)		(208)
NW Holdings	$	53,175	$	50,047	$	110,660	$	102,238	$	3,128	$	8,422

THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Operations and maintenance expense increased$3.1 million at NW Holdings and $3.9 million at NW Natural. The increase at NW Natural was driven by the following:

•$1.5 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects;

•$0.7 million increase in amortization expense related to cloud computing arrangements; and

•$0.6 million increase in professional service fees.

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

SIX MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021.Operations and maintenance expense increased$8.4 million at NW Holdings and $8.6 million at NW Natural. The increase at NW Natural was driven by the following:

•$3.7 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects;

•$1.4 million increase in amortization expense related to cloud computing arrangements;

•$0.9 million increase in professional service fees; and

•$0.9 million increase in information technology maintenance and support.

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

Depreciation

Depreciation highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2022		2021		2022		2021		Change		Change
NW Natural	$	27,328	$	27,530	$	54,965	$	54,699	$	(202)	$	266
Other NW Holdings depreciation	782		614		1,574		1,542		168		32
NW Holdings	$	28,110	$	28,144	$	56,539	$	56,241	$	(34)	$	298

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

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

Other Income (Expense), Net

Other income (expense), net highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2022		2021		2022		2021		Change		Change
NW Natural other income (expense), net	$	17	$	(2,566)	$	(964)	$	(6,231)	$	2,583	$	5,267
Other NW Holdings activity	209		(31)		236		92		240		144
NW Holdings other income (expense), net	$	226	$	(2,597)	$	(728)	$	(6,139)	$	2,823	$	5,411

THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021.Other income (expense), net changed $2.8 million and $2.6 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. 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, 2022 COMPARED TO JUNE 30, 2021.Other income (expense), net changed $5.4 million and $5.3 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 June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2022		2021		2022		2021		Change		Change
NW Natural	$	10,599	$	10,696	$	21,430	$	21,486	$	(97)	$	(56)
Other NW Holdings interest expense, net	981		332		1,672		668		649		1,004
NW Holdings	$	11,580	$	11,028	$	23,102	$	22,154	$	552	$	948

THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Interest expense, net increased $0.6 million at NW Holdings and decreased $0.1 million at NW Natural. Interest expense, net at NW Natural decreased $0.6 million due to higher Allowance for Funds Used During Construction (AFUDC) debt interest income, partially offset by $0.5 million of higher interest expense on short and long-term debt. The increase at NW Holdings is primarily due to higher interest expense on the Holdings' credit facility as a result of higher balances outstanding.

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

Income Tax Expense (Benefit)

Income tax expense (benefit) highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2022		2021		2022		2021		Change		Change
NW Natural income tax expense	$	810	$	288	$	20,133	$	20,840	$	522	$	(707)
NW Holdings income tax expense (benefit)	$	470	$	(277)	$	19,393	$	20,244	$	747	$	(851)

THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Income tax expense increased $0.5 million at NW Natural and $0.7 million at NW Holdings. The increase in income tax expense is primarily due to a higher pre-tax income in the current period compared to the prior year.

Regulatory Matters

For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the ~~2020~~2021 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 ~~September~~June 30, ~~2021,~~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 ~~include~~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 ~~(Order)~~(OPUC Order). The OPUC Order ~~provided~~provides for a total revenue requirement increase of approximately $45 million over revenues from ~~pre-existing~~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.

~~Table of Contents~~

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 ~~approves~~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.

~~From~~New 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. ~~Effective~~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 ~~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 WASHINGTON~~2022 OREGON GENERAL RATE ~~CASE.~~CASE. On December ~~18, 2020,~~17, 2021, NW Natural filed a request for a general rate ~~increase~~case (Rate Case) with the ~~WUTC.~~OPUC. On ~~July 27, 2021,~~May 31, 2022, NW Natural, ~~Staff of~~ the ~~WUTC,~~OPUC staff, the Oregon Citizens' Utility Board (CUB), the Alliance of Western Energy Consumers (AWEC), and ~~The Energy Project,~~the Small Business Utility Advocates (SBUA), which comprise ~~all~~some of the parties to the ~~rate case other than the Public Counsel Unit of the Washington State Office of the Attorney General,~~Rate Case, filed a ~~settlement~~stipulation with the ~~WUTC that addresses all~~OPUC addressing a number of issues in the ~~rate case (Comprehensive Settlement).~~ ~~On October 21, 2021,~~Rate Case as well as a second docket, which was consolidated with the ~~WUTC approved the Comprehensive Settlement (Order)~~Rate Case (Stipulation).

The ~~Order~~Stipulation provides for ~~an annual~~a total revenue requirement increase of $62.65 million over ~~two years, consisting of a 6.4% or $5.0 million increase~~revenues from existing rates, subject to adjustment for capital additions and revenues related to new customers added in the ~~first~~test year ~~beginning November 1, 2021 (Year One),~~ and upcompletion of capital projects identified as being placed into service prior to ~~a 3.5% or $3.0 million increase in~~ the ~~second year beginning November 1, 2022 (Year Two).~~rate effective date. 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 Order, 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~~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 ~~6.814%~~6.836%; and

•Average rate base of ~~$194.7 million,~~$1.77 billion or an increase of ~~$20.9~~$337 million ~~since~~compared to the last rate ~~case for capital expenditures already expended at~~case.

On June 29, 2022, NW Natural, the ~~time~~OPUC staff, the Oregon CUB, AWEC, and the Coalition of ~~filing, with an additional expected $31.2 million increase in Year One,~~Communities of Color, Climate Solutions, Verde, Columbia Riverkeeper, Oregon Environmental Council, Community Energy Project, and ~~an additional expected $21.4 million increase in Year Two,~~Sierra Club ("Coalition"), which comprise some of the parties to the Rate Case, filed a second stipulation with the ~~increases~~OPUC addressing a number of issues in ~~Year One~~the Rate Case that were not addressed in the first Stipulation ("Second Stipulation" and ~~Year Two relating~~with the Stipulation, the Stipulations). The Second Stipulation addresses the following:

•Eliminates deposits for new customers;

•Updates to ~~expected capital expenditures in those years.~~the Oregon low-income energy efficiency program; and

•Addresses recovery of the COVID-19 deferral over two years starting November 1, 2022.

The ~~Order does~~Stipulations do not ~~specify~~address all aspects of the ~~underlying inputs~~Rate Case. We expect remaining items to be subject to the ~~cost~~ongoing regulatory litigation process. The Stipulations are subject to review and approval by the OPUC. For the new rates to be effective, the OPUC must issue an order, which may approve or deny the terms of ~~capital, including capital structure and return on equity.~~the Stipulations or be issued under the OPUC's own terms. NW Natural currently expects new rates to take effect November 1, 2022.

~~New rates authorized by the Order were effective November 1, 2021.~~

~~Table of Contents~~

Rate Mechanisms

During ~~2021~~2022 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)

2021 Rate Case

(effective 11/1/2021)

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%

Return on Equity

9.4%

Rate of Return

7.3%

7.0%

7.2%

6.8%

Rate of Return

7.0%

7.2%

6.8%

Debt/Equity Ratio

50%/50%

51%/49%

Debt/Equity Ratio

50%/50%

51%/49%

Key Regulatory Mechanisms:

Purchased Gas Adjustment (PGA)

Gas Cost Incentive Sharing

Decoupling

Weather Normalization (WARM)

Environmental Cost Recovery

Interstate Storage and Asset Management Sharing

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

PURCHASED GAS ADJUSTMENT. Rate changes are established for NW Natural each year under PGA mechanisms in Oregon and Washington to reflect changes in the expected cost of natural gas commodity purchases. The PGA filings include gas costs under spot purchases as well as contract supplies, gas cost hedges, gas costs from the 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, NWNW 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 ~~53%~~approximately 79% in total. The total hedged for Oregon was approximately 82%, including 62% in financial ~~swap~~hedges 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 55%~~level for the 2021-22 PGA year in Oregon ~~and 31%~~to 82% compared to 74% in ~~Washington. The percentage of total forecasted sales volume hedged was approximately 74% for Oregon and approximately 44% for Washington.~~the 2020-2021 PGA year.

NW Natural is also hedged between 2%12% and ~~70%~~50% for annual requirements over the subsequent ~~five~~three gas years, which consists of between 2%13% and ~~74%~~48% in Oregon and between 0% and ~~44%~~67% in Washington. Hedge levels are subject to change based on actual load volumes, which depend to a certain extent on weather, economic conditions, and estimated gas reserve production. Also, gas storage 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 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.

There is currently increased volatility and pricing in the current and forward gas markets. In response to these more volatile markets, NW Natural is hedging at higher-than-normal levels in an effort to appropriately position its portfolio of financial derivatives, gas in storage and fixed price supplies. As of September 30, 2021, NW Natural was hedged at 70% for the 2021-22 PGA year and continues to execute on additional hedges.

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 ~~2019-20~~2020-21 and ~~2020-21~~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 ~~2020,~~2021, the ROE threshold was 10.40%. NW Natural filed the ~~2020~~2021 earnings test in April ~~2021~~2022, indicating no customer refund ~~adjustment and the filing was approved in July 2021.~~adjustment. NW Natural does not expect a customer

refund adjustment for ~~2021~~2022 based on results.

~~Table of Contents~~

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 ~~the application 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 s~~mall~~small commercial customers in Oregon are allowed to opt out of the weather normalization mechanism, and as of ~~September~~June 30, ~~2021, 8%~~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~~Residential 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 June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands	2022		2021		2022		2021
Volumes (therms)
Residential sales	90,016		61,346		276,345		255,837		28,670		20,508
Commercial sales	57,431		41,123		165,029		144,454		16,308		20,575
Total volumes	147,447		102,469		441,374		400,291		44,978		41,083
Operating revenues
Residential sales	$	107,292	$	82,310	$	324,475	$	278,112	$	24,982	$	46,363
Commercial sales	52,500		38,050		149,924		120,832		14,450		29,092
Total operating revenues	$	159,792	$	120,360	$	474,399	$	398,944	$	39,432	$	75,455
NGD margin






Residential NGD margin	$	60,046	$	56,926	$	179,878	$	174,809	$	3,120	$	5,069






Commercial NGD margin	23,489		21,974		66,785		64,863		1,515		1,922
Total NGD margin	$	83,535	$	78,900	$	246,663	$	239,672	$	4,635	$	6,991

•

THREE MONTHS ENDED~~Pre-review -~~ JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Residential and commercial margin increased $4.6 million compared to the prior period. The increase was primarily driven by higher usage from non-decoupled customers, 1.4% growth in residential meters, and new customer rates in Washington that took effect on November 1, 2021. Volumes increased 45.0 million therms due to higher usage driven by comparatively colder weather.

Industrial Sales and Transportation

Industrial sales and transportation highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands	2022		2021		2022		2021
Volumes (therms)
Firm and interruptible sales	24,329		20,002		53,189		46,245		4,327		6,944
Firm and interruptible transportation	96,777		91,243		202,376		198,298		5,534		4,078


Total volumes - sales and transportation	121,106		111,245		255,565		244,543		9,861		11,022
NGD margin
Firm and interruptible sales	$	3,191	$	2,741	$	6,890	$	6,298	$	450	$	592
Firm and interruptible transportation	4,874		4,666		10,101		9,863		208		238
Total margin - sales and transportation	$	8,065	$	7,407	$	16,991	$	16,161	$	658	$	830

Cost of Gas

Cost of gas highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands	2022		2021		2022		2021
Cost of gas	$	79,776	$	41,249	$	225,420	$	153,515	$	38,527	$	71,905
Volumes sold (therms)(1)	171,776		122,471		494,563		446,536		49,305		48,027
Average cost of gas (cents per therm)	$	0.46	$	0.34	$	0.46	$	0.34	$	0.12	$	0.12
Loss from gas cost incentive sharing(2)	$	(2,518)	$	(223)	$	(2,448)	$	(2,486)	$	(2,295)	$	38

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

THREE MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021. Cost of gas increased $38.5 million primarily due to a 35% increase in average cost of gas with the majority of these higher gas costs ~~represents remediation spend that has~~embedded in the PGA and customer growth. Volumes sold increased 49.3 million therms driven by 23% colder than average weather in the second quarter of 2022 compared to 40% warmer than average weather in the prior period.

Other Regulated Services Margin

Other regulated services margin highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD Change		YTD Change
In thousands	2022		2021		2022		2021
North Mist storage services	$	4,857	$	4,715	$	9,715	$	9,431	$	142	$	284
Other services	49		50		101		116		(1)		(15)
Total other regulated services	$	4,906	$	4,765	$	9,816	$	9,547	$	141	$	269

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

Other

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
In thousands, except EPS data	2022		2021		2022		2021
NW Natural other - net income	$	2,576	$	1,970	$	4,602	$	8,156	$	606	$	(3,554)
Other NW Holdings activity	(1,018)		(1,313)		(2,195)		(1,907)		295		(288)
NW Holdings other - net income	$	1,558	$	657	$	2,407	$	6,249	$	901	$	(3,842)
Diluted EPS - NW Holdings - other	$	0.05	$	0.03	$	0.07	$	0.21	$	0.02	$	(0.14)

THREE MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021.Other net income increased $0.9 million at NW Holdings and $0.6 million at NW Natural. The increase at NW Natural was primarily due to an increase in asset management revenues. The increase at NW Holdings was driven by the ~~OPUC. Carrying costs on these remediation expenses are recorded~~increase at NW ~~Natural's authorized cost of capital.~~Natural and lower business development costs, partially offset by higher interest expense at the holding company.

SIX MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021.Other net income decreased $3.6 million at NW Natural ~~anticipates~~and $3.8 million at NW Holdings. The decrease at NW Natural was primarily due to $5.4 million of lower asset management revenue mainly related to the ~~prudence review for annual costs and approval of~~2021 cold weather event, partially offset by $1.4 million lower income tax expense associated with the ~~earnings test prescribed~~lower revenue that did not recur in the current year. The decrease at NW Holdings was driven by the ~~OPUC to occur~~decrease at NW Natural and higher interest expense at the holding company, partially offset by higher net income from our water and wastewater subsidiaries.

Consolidated Operations

Operations and Maintenance

Operations and maintenance highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2022		2021		2022		2021		Change		Change
NW Natural	$	48,879	$	44,939	$	102,756	$	94,126	$	3,940	$	8,630
Other NW Holdings operations and maintenance	4,296		5,108		7,904		8,112		(812)		(208)
NW Holdings	$	53,175	$	50,047	$	110,660	$	102,238	$	3,128	$	8,422

•~~Post-review - This class of costs represents remediation spend that has been deemed prudent~~$1.5 million increase in contract labor for safety 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.reliability and contracted support for information technology and corporate projects;

•~~Amortization - This class of~~$0.7 million increase in amortization expense related to cloud computing arrangements; and

•$0.6 million increase in professional service fees.

The $0.8 million decrease in other NW Holdings operations and maintenance expense primarily reflects lower business development costs ~~represents amounts included in current customer rates for collection~~at the holding company.

SIX MONTHS ENDEDJUNE 30, 2022 COMPARED TO JUNE 30, 2021.Operations and ~~is calculated as one-fifth of the post-review deferred balance.~~maintenance expense increased$8.4 million at NW Holdings and $8.6 million at NW Natural. The increase at NW Natural ~~earns a carrying cost equal~~was driven by the following:

•$3.7 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects;

•$1.4 million increase in amortization expense related to cloud computing arrangements;

•$0.9 million increase in professional service fees; and

•$0.9 million increase in information technology maintenance and support.

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

Depreciation

Depreciation highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2022		2021		2022		2021		Change		Change
NW Natural	$	27,328	$	27,530	$	54,965	$	54,699	$	(202)	$	266
Other NW Holdings depreciation	782		614		1,574		1,542		168		32
NW Holdings	$	28,110	$	28,144	$	56,539	$	56,241	$	(34)	$	298

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

SIX MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Depreciation expense increased $0.3 million at both NW Holdings and NW Natural, respectively, primarily due to additional capital investments in the distribution system, Mist storage, and information technology systems, as well as renovation and construction of resource and operations service centers. The increase was partially offset by the ~~OPUC,~~amortization of cloud computing arrangements, which ~~approximates a short-term borrowing rate.~~are recorded within operations and maintenance expenses beginning in 2022.

Other Income (Expense), Net

Other income (expense), net highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2022		2021		2022		2021		Change		Change
NW Natural other income (expense), net	$	17	$	(2,566)	$	(964)	$	(6,231)	$	2,583	$	5,267
Other NW Holdings activity	209		(31)		236		92		240		144
NW Holdings other income (expense), net	$	226	$	(2,597)	$	(728)	$	(6,139)	$	2,823	$	5,411

THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021.Other income (expense), net changed $2.8 million and $2.6 million at NW Holdings and NW Natural, ~~included $4.2~~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. 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, 2022 COMPARED TO JUNE 30, 2021.Other income (expense), net changed $5.4 million and ~~$5.1~~$5.3 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 June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2022		2021		2022		2021		Change		Change
NW Natural	$	10,599	$	10,696	$	21,430	$	21,486	$	(97)	$	(56)
Other NW Holdings interest expense, net	981		332		1,672		668		649		1,004
NW Holdings	$	11,580	$	11,028	$	23,102	$	22,154	$	552	$	948

THREE MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Interest expense, net increased $0.6 million at NW Holdings and decreased $0.1 million at NW Natural. Interest expense, net at NW Natural decreased $0.6 million due to higher Allowance for Funds Used During Construction (AFUDC) debt interest income, partially offset by $0.5 million of ~~deferred remediation~~higher interest expense ~~approved~~on short and long-term debt. The increase at NW Holdings is primarily due to higher interest expense on the Holdings' credit facility as a result of higher balances outstanding.

Income Tax Expense (Benefit)

Income tax expense (benefit) highlights include:


	Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	2022		2021		2022		2021		Change		Change
NW Natural income tax expense	$	810	$	288	$	20,133	$	20,840	$	522	$	(707)
NW Holdings income tax expense (benefit)	$	470	$	(277)	$	19,393	$	20,244	$	747	$	(851)

SIX MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Income tax expense decreased $0.7 million at NW Natural and ~~2019-20 PGA years, respectively.~~$0.9 million at NW Holdings. The decrease in income tax expense is primarily due to a decrease in pre-tax income.

~~Table of Contents~~

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. For additional information, see Note 18 in the 2020 Form 10-K.Regulatory Matters

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


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

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

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

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

~~NW Natural concluded there was no earnings test adjustment for 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.

~~INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING.~~On an annual basis, NW Natural credits amounts to Oregon and Washington customers as part of a regulatory incentive sharing mechanism related to net revenues earned from Mist gas storage and asset management activities. Previously, amounts were credited to Oregon customers in June. Starting in 2021, Oregon customers received this credit in February per the 2020 Oregon rate case order. Credits are given to customers in Washington as reductions in rates through the annual PGA filing in November.

~~During the first quarter of~~ ~~2021, NW Natural refunded an interstate storage and asset management sharing credit of approximately $9.1 million to Oregon customers, which was primarily reflected in Oregon customers' February bills. Credits to Oregon and Washington customers in 2020 were approximately $17.0 million and $0.7 million, respectively.~~

~~Regulatory Proceeding Updates~~

~~During 2021, 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 ~~2020~~2021 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, 2022, approximately 88% of NGD customers were located in Oregon, with the remaining 12% in Washington. Earnings and cash flows from natural gas distribution operations are largely determined by rates set in general rate cases and other proceedings in Oregon and Washington. They are also affected by weather, the local economies in Oregon and Washington, the pace of customer growth in the residential, commercial, and industrial markets, customer preferences and NW Natural's ability to remain price competitive, control expenses, and obtain reasonable and timely regulatory recovery of its natural gas distribution-related costs, including operating expenses and investment costs in plant and other regulatory assets. See "Most Recent Completed Rate Cases" below.

~~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.

Most Recent Completed 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 ~~authorizing~~concluding NW Natural's general rate case filed in December 2019 (OPUC Order). The OPUC ~~staff to execute~~Order provides for a ~~term sheet with~~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.

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 ~~other parties~~Jobs Act (TCJA) would be provided to customers directly or applied for 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 reinstitutionbenefit of ~~service disconnection and reconnection fees; and allowing for deferred accounting of COVID-19 related costs.~~customers. The ~~term sheet also directed~~Order in the most recent Oregon rate case directs NW Natural to ~~work with~~include a true-up credit to customers of approximately $1.0 million as a temporary rate adjustment to be amortized over the ~~parties~~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 ~~provide bill payment assistance, petition~~ the ~~Oregon legislature for bill payment assistance funding, explore the applicability~~month of April. The decoupling ~~charges for a period of time, and participate~~mechanism is intended to encourage customers to conserve energy without adversely affecting earnings due to reductions in ~~an investigation and discussion surrounding low income customers and social and environmental justice. The stipulation incorporating the term sheet was approved~~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 ~~2020. A term sheet was approved~~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

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 inOrder were effective November 1, 2021.

From November 1, 2019 through October ~~2020 that provides similar~~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

~~Table of Contents~~

FERC.

~~guidance on key items such as~~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 ~~timing of lifting moratoriums on disconnections, resuming~~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 ~~collection process, and bill assistance and payment plans.~~new federal corporate income tax rate. The revised rates were effective beginning November 1, 2018.

~~Additionally, both~~NW Natural continuously evaluates the need for rate cases in its jurisdictions.

Regulatory Proceeding Updates

~~Costs that may be recoverable include, but are not limited~~the Small Business Utility Advocates (SBUA), which comprise some of the parties to the ~~following: personal protective equipment, cleaning supplies and services, bad debt expense, financing costs to secure liquidity, and certain lost revenue, net~~Rate Case, filed a stipulation with the OPUC addressing a number of ~~offsetting direct expense reductions associated~~issues in the Rate Case as well as a second docket, which was consolidated with ~~COVID-19. As of September 30, 2021, we believe that approximately $9.8 million of~~ the financial effects related to COVID-19 are recoverable and deferred to a regulatory asset approximately $7.4 million for incurred costs. In addition, we expect to recognize revenue in a future period for an additional $2.4 million related to forgone late fee revenue.Rate Case (Stipulation).

The ~~following table outlines some~~Stipulation provides for a total revenue requirement increase of $62.65 million over revenues from existing rates, subject to adjustment for capital additions and revenues related to new customers added in the ~~key items approved by~~test year and completion of capital projects identified as being placed into service prior to the ~~respective Commissions:~~


	~~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~~	*	~~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 Management Program~~	~~1% of Retail Revenues~~		~~1% of Retail Revenues~~

* Jurisdiction retains discretion to re-evaluate daterate effective date. The revenue requirement is based on ~~ongoing pandemic~~the following assumptions:

•Capital structure of 50% common equity and ~~economic conditions.~~

50% long-term debt;

~~ARREARAGE MANAGEMENT PROGRAM.~~•Return on equity of 9.4%;

•~~As part~~Cost of ~~the approved term sheets, NW Natural established programs in Oregon~~capital of 6.836%; and ~~Washington to identify and mitigate residential customer arrearages associated with COVID-19. Under the Oregon program, NW Natural can provide a one-time grant~~

•Average rate base of ~~up to $1,200 per eligible residential customer. Funding for the arrearage management program (AMP) may not exceed 1%~~$1.77 billion or an increase of ~~retail revenues. AMP is funded by NW Natural with recovery facilitated through the COVID deferral dockets. As of September 30, 2021, the amount granted and deferred to a regulatory asset related~~$337 million compared to the ~~AMP was $2.1 million of the total funds available of $6.8 million.~~last rate case.

~~RENEWABLE NATURAL GAS.~~On June ~~19, 2019,~~29, 2022, NW Natural, the OPUC staff, the Oregon ~~legislature passed Senate Bill 98 (SB98)~~CUB, AWEC, and the Coalition of Communities of Color, Climate Solutions, Verde, Columbia Riverkeeper, Oregon Environmental Council, Community Energy Project, and Sierra Club ("Coalition"), which ~~enables natural gas utilities~~comprise some of the parties 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,~~Rate Case, filed a second stipulation with the OPUC ~~opened~~addressing a ~~docket~~number of issues in ~~August 2019 regarding~~ the ~~rules~~Rate Case that were not addressed in the first Stipulation ("Second Stipulation" and with the Stipulation, the Stipulations). The Second Stipulation addresses the following:

•Eliminates deposits for new customers;

•Updates to the ~~bill. After working with parties,~~Oregon low-income energy efficiency program; and

•Addresses recovery of the ~~OPUC adopted final rules in July 2020.~~COVID-19 deferral over two years starting November 1, 2022.

~~SB98 and~~The Stipulations do not address all aspects of 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 utilitiesRate Case. We expect remaining items 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~~be subject to the ~~local gas distribution system;~~ongoing regulatory litigation process. The Stipulations are subject to review and ~~allowing up to 5% of a utility’s revenue requirement~~approval by the OPUC. For the new rates to be ~~used to cover~~effective, the ~~incremental cost~~OPUC must issue an order, which may approve or ~~investments in renewable natural gas infrastructure.~~

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

~~In its first RNG project under SB98,~~OPUC's own terms. NW Natural ~~began a partnership with BioCarbN, a developer and operator of sustainable infrastructure projects,~~currently expects new rates 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. Construction of our first RNG facility with BioCarbN and Tyson Foods began in 2021 with completion and commissioning planned for earlytake effect November 1, 2022.

~~CORPORATE ACTIVITY TAX.In 2019,~~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%

Rate of Return

7.0%

7.2%

6.8%

Debt/Equity Ratio

50%/50%

51%/49%

Key Regulatory Mechanisms:

Purchased Gas Adjustment (PGA)

Gas Cost Incentive Sharing

Decoupling

Weather Normalization (WARM)

Environmental Cost Recovery

Interstate Storage and Asset Management Sharing

** The WUTC Order does not specify 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~~underlying inputs 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~~capital, including capital structure and ~~applies 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~~return on equity.

~~Table~~

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 ~~Contents~~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.

Eac

~~with the CAT as~~h year, NW Natural hedges gas prices on a ~~component~~portion of ~~base rates.~~NW Natural's annual sales requirement based on normal weather, including both physical and financial hedges. NW Natural ~~is also directed~~entered the 2021-22 gas year with its forecasted sales volumes hedged at approximately 79% in total. The total hedged for Oregon was approximately 82%, including 62% in financial hedges and 19% in physical gas supplies. The total hedged for Washington was approximately 57%, including 44% in financial hedges and 13% in physical gas supplies. During 2021, there was increased volatility and pricing in the current and forward gas markets. In response to ~~adjust the amount recovered for the CAT~~higher than normal volatility in ~~each annual PGA to reflect changes~~forward gas markets 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~~2021, NW Natural increased its hedging level 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 the effective date of the rate case will be amortized over the 2021-22 PGA ~~year.~~

~~WATER UTILITIES.In the first nine months of 2021, NW Holdings, through its water subsidiaries, continued~~year in Oregon to ~~acquire water utilities. While COVID-19 has restricted certain activities, we continue~~82% compared 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.

~~OREGON EXECUTIVE ORDER.~~ On March 10, 2020, the governor of Oregon issued an executive order (EO) establishing greenhouse gas (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 decarbonization74% in the utility sector, mitigate 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.2020-2021 PGA year.

NW Natural is actively engaged with Oregon state regulatory entities and held a seat on the ODEQ rules advisory committee, which was considering the cap and reduce rules for the resultant program, now known as the Climate Protection Program (CPP). The complete draft rules were made available for public comment in August 2021. Interested parties have submitted comments on both the proposed rules, as well as potential issues with respect to the ODEQ's authority to implement the proposed rules. Final rules are expected to be considered for adoption by the Environmental Quality Commission (the decision-making body of the ODEQ) in December 2021 and become effective in January 2022.

NW Natural is also ~~engaged~~hedged between 12% and 50% for annual requirements over the subsequent three gas years, which consists of between 13% and 48% in ~~an OPUC Fact-Finding (“Fact-Finding Docket”),~~Oregon and between 0% and 67% in Washington. Hedge levels are subject to change based on actual load volumes, which ~~was opened~~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 ~~response to~~storage contracts with third parties, variations in the ~~EO. The OPUC’s purpose~~heat content of the ~~Fact-Finding Docket~~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 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.

Under the current PGA mechanism in Oregon, there is an incentive sharing provision whereby NW Natural is required to ~~analyze~~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 ~~potential natural gas utility bill impacts that may result~~impact on NW Natural's current earnings from ~~limiting GHG emissions of regulated natural gas utilities under~~ the ~~ODEQ’s CPP and to identify appropriate regulatory tools to mitigate potential customer impacts. Per OPUC Staff’s statement, the ultimate goal~~incentive sharing is either 20% or 10% of the ~~Fact-Finding Docket will be~~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 ~~inform future policy decisions and other key analyses to be considered in 2022, after~~customers through the ~~CPP is in place. We expect OPUC Staff to present a fact-finding report to the OPUC with recommendations for further OPUC engagement.~~annual PGA rate adjustment.

~~INTEGRATED RESOURCE PLAN (IRP).~~EARNINGS TEST REVIEW. NW Natural ~~generally files~~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 ~~full IRP biennially for Oregon and Washington with~~specific ROE level, then 33% of the ~~OPUC and WUTC, respectively.~~amount above that level is required to be deferred or refunded to customers. Under this provision, if NW Natural ~~jointly filed its 2018 IRP for both Oregon~~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 ~~Washington~~2021-22 gas years, NW Natural selected the 90% deferral option. The ROE threshold is subject to adjustment annually based on movements in ~~August 2018, and received both a letter of compliance from~~long-term interest rates. For calendar year 2021, 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.ROE threshold was 10.40%. NW Natural filed ~~an update to~~ the ~~2018 IRP~~2021 earnings test in ~~March 2021 and received acknowledgement of the requested capital projects by~~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 ~~September 2021.~~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.

~~The development~~In 2014, NW Natural amended the original gas reserves agreement in response to Encana's sale 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 uncertaintiesits interest in the ~~planning process, including potential changes~~Jonah field located in ~~governmental~~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 ~~regulatory policies. As a result of~~resulting gas volumes shared at the ~~EO issued by~~amended proportionate working interest for each well in which NW Natural invests. Volumes produced from the ~~governor of Oregon, new regulations and requirements~~additional wells drilled after the amended agreement are ~~currently being developed~~included 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 file~~ NW Natural's ~~next full IRP was extended to July 2022 as approved by the OPUC and WUTC.~~Oregon PGA at a fixed rate of $0.4725 per therm. NW Natural has not participated in additional wells since 2014.

~~PIPELINE SECURITY.~~DECOUPLING. In ~~May~~Oregon, NW Natural has a decoupling mechanism. Decoupling is intended to break the link between earnings and ~~July 2021,~~ the ~~Department~~quantity of ~~Homeland Security’s (DHS) Transportation Security Administration (TSA) released two security directives applicable~~gas consumed by customers, removing any financial incentive to ~~certain notified owners~~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 operators of natural gas pipeline facilities (including local distribution companies) that TSA has determined to be critical. The first security directive required notified owners/operators to implement cybersecurity incident reportingMay to the ~~DHS, designate~~month of April. This mechanism employs 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. The impact on operations or an estimate or range of possible costs cannot be determined at this time. NW Natural is providing frequent updates to the TSA on NW Natural'suse-per-customer decoupling calculation, which adjusts margin revenues

~~Table of Contents~~

WARM.

progress of achieving the security directives. NW Natural filed a request with the OPUC to defer the costs associated with complying with the second security directive and plans to seek recovery of these costs in future ratemaking proceedings.

~~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)~~an approved weather normalization mechanism (WARM), which ~~adjusts margin up or down each month through a deferred regulatory accounting adjustment~~is applied to residential and small commercial customer bills. This mechanism is designed to ~~offset changes resulting from increases or decreases in average use~~help stabilize the collection of fixed costs by adjusting residential and small commercial customer billings based on temperature variances from average weather, with rate decreases when the weather is colder than average and rate increases when the weather is warmer than average. The mechanism is applied to bills from December through mid-May of each heating season. The mechanism adjusts the margin component of customers’ rates to reflect average weather, which uses the 25-year average temperature for each day of the billing period. Daily average temperatures and 25-year average temperatures are based on a set point temperature of 59 degrees Fahrenheit for residential customers and 58 degrees Fahrenheit for commercial customers. The collections of any unbilled WARM amounts due to tariff caps and floors are deferred and earn a carrying charge until collected, or returned, in the PGA the following year. Residential and small commercial customers in Oregon are allowed to opt out of the weather normalization mechanism, and as of June 30, 2022, 7% of total eligible customers had opted out. NW Natural ~~also has~~does not have a weather normalization ~~tariff in Oregon, WARM,~~mechanism approved for Washington customers, 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 volatilityaccount for about 12% of ~~customer bills and natural gas distribution earnings. For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters—~~total customers. See "Business Segment~~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.

~~NGD segment highlights include:~~

Three Months Ended September 30, Nine Months Ended September 30, QTD Change YTD Change
In thousands, except EPS data 2021 2020 2021 2020
NGD net income (loss) $ (23,297) $ (22,120) $ 29,247 $ 19,476 $ (1,177) $ 9,771
Diluted EPS - NGD segment $ (0.76) $ (0.72) $ 0.95 $ 0.64 $ (0.04) $ 0.31
Gas sold and delivered (in therms) 161,229 154,436 806,063 782,566 6,793 23,497
NGD margin(1)
$ 61,076 $ 55,542 $ 324,922 $ 289,337 $ 5,534 $ 35,585

~~(1)~~ ~~See~~ —Natural Gas ~~Distribution Margin Table below for additional detail.~~

~~THREE MONTHS ENDED~~Distribution" ~~SEPTEMBER 30, 2021 COMPARED TO SEPTEMBER 30, 2020.~~ ~~The primary factors contributing to the $1.2 million, or $0.04 per share, increase in NGD net loss were as follows:~~

•~~$5.2 million increase in other NGD operating and maintenance expenses due primarily to higher lease and professional service and information technology expenses;~~

•~~$2.1 million increase in interest expense driven by higher interest on commercial paper borrowings; and~~

•~~$2.0 million increase in depreciation expense due to NGD plant additions as we continued to invest in our gas utility system.~~

~~The increase in NGD net loss was partially offset by:~~

•~~$5.5 millionincrease in NGD margin due to:~~

•~~$4.0 million increase due to new customer rates, primarily from the 2020 Oregon rate case that went into effect on November 1, 2020;~~

•~~$1.0 million increase due primarily to an increase in the number of residential customers and industrial customer volumes; and~~

•~~$1.6 million higher income tax benefit reflecting a higher pre-tax loss.~~

For the three months ended September 30, 2021, total NGD volumes sold and delivered increased 4% over the same period in 2020 primarily due to the recovery of commercial customer activity as compared to the prior year.

~~NINE MONTHS ENDEDSEPTEMBER 30, 2021 COMPARED TO SEPTEMBER 30, 2020.~~ ~~The primary factors contributing to the $9.8 million, or $0.31 per share, increase in NGD net income were as follows:~~

•~~$35.6 millionincrease in NGD margin due to:~~

•~~$32.1 million increase due to new customer rates, primarily from the 2020 Oregon rate case that went into effect on November 1, 2020;~~

•~~$3.7 million increase due primarily to an increase in the number of residential customers and industrial customer volumes; and~~

•~~$1.4 million increase due to the effects of applying the Oregon decoupling calculation to April 2021 as approved in our 2020 general rate case; partially offset by~~

•~~$3.3 million decrease primarily driven by additional market gas purchases and other expenses during the 2021 cold weather event.~~

~~Table of Contents~~below.

INDUSTRIAL TARIFFS.

~~In addition~~The OPUC and WUTC have approved tariffs covering NGD service to ~~the increase in margin, NGD net income for 2021 reflects:~~

•~~$11.6 million increase in other NGD operating and maintenance expenses due primarily~~major industrial customers, which are intended to ~~higher lease, professional service and information technology expenses and higher compensation and benefits costs;~~

•~~$4.5 million higher income tax expense reflecting higher pretax income and Oregon's CAT;~~

•~~$7.5 million increase in depreciation expense due to NGD plant additions as we continued to invest in our gas utility system; and~~

•~~$2.5 million increase in general taxes due primarily to higher assessed property values; partially offset by~~

•~~$2.4 million higher interest income on regulatory assets within other income (expense), net.~~

~~For the nine months ended September 30, 2021, total NGD volumes sold and delivered increased 3% over the same period in 2020 primarily due to 12% warmer than average weather~~give NW Natural certainty in the ~~first nine months~~level of ~~2021 compared~~gas supplies needed to ~~15% warmer than average weather in~~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 ~~prior period.~~

~~Table~~term of ~~Contents~~their service election under NW Natural's annual PGA tariff.

~~NATURAL GAS DISTRIBUTION MARGIN TABLE.~~ENVIRONMENTAL COST DEFERRAL AND RECOVERY. ~~The following table summarizes the composition~~NW Natural has authorizations in Oregon and Washington to defer costs related to remediation of ~~NGD gas volumes, revenues,~~properties that are owned or were previously owned by NW Natural. In Oregon, a Site Remediation and ~~cost of sales:~~

Three Months Ended September 30, Nine Months Ended September 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 55,597 54,124 455,888 440,811 1,473 15,077
Industrial sales and transportation 105,632 100,312 350,175 341,755 5,320 8,420
Total NGD volumes sold and delivered 161,229 154,436 806,063 782,566 6,793 23,497
Operating Revenues
Residential and commercial sales $ 71,979 $ 66,384 $ 470,923 $ 431,187 $ 5,595 $ 39,736
Industrial sales and transportation 14,000 12,334 45,472 42,195 1,666 3,277
Other distribution revenues 292 639 1,278 1,607 (347) (329)
Other regulated services 4,771 4,404 14,321 14,251 367 70
Total operating revenues 91,042 83,761 531,994 489,240 7,281 42,754
Less: Cost of gas 25,322 23,797 178,837 173,657 (1,525) (5,180)
Less: Environmental remediation expense 806 867 6,092 6,494 61 402
Less: Revenue taxes 3,838 3,555 22,143 19,752 (283) (2,391)
NGD margin $ 61,076 $ 55,542 $ 324,922 $ 289,337 $ 5,534 $ 35,585
Margin(1)
Residential and commercial sales $ 49,302 $ 43,751 $ 288,974 $ 250,750 $ 5,551 $ 38,224
Industrial sales and transportation 7,295 6,807 23,456 22,410 488 1,046
Gain (loss) from gas cost incentive sharing (546) (33) (3,032) 310 (513) (3,342)
Other margin 256 614 1,208 1,620 (358) (412)
Other regulated services 4,769 4,403 14,316 14,247 366 69
NGD Margin $ 61,076 $ 55,542 $ 324,922 $ 289,337 $ 5,534 $ 35,585
Degree days(2)
Average(3)
9 9 1,640 1,659 — (19)
Actual 4 2 1,447 1,406 100 % 3 %
Percent warmer than average weather(4)
NM NM (12) % (15) %

As of September 30,
2021 2020 Change Growth
NGD Meters - end of period:
Residential meters 712,335 700,062 12,273 1.8%
Commercial meters 68,414 68,767 (353) (0.5)%
Industrial meters 978 988 (10) (1.0)%
Total number of meters 781,727 769,817 11,910 1.5%

~~(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,~~Recovery Mechanism (SRRM) is currently in place to recover prudently incurred costs allocable to Oregon customers, subject to an 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~~test. Effective beginning November 1, ~~2020, average weather is calculated over~~2019, 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.

~~(4)~~ ~~NM indicates that the calculated value is not meaningful.~~

~~Table~~WUTC authorized an Environmental Cost Recovery Mechanism (ECRM) for recovery of ~~Contents~~prudently incurred costs allocable to Washington customers.

Residential and Commercial Sales

Residential and commercial sales highlights include:


		Three Months Ended September 30,				Nine Months Ended September 30,				QTD Change			YTD Change				Three Months Ended June 30,						Six Months Ended June 30,						QTD Change			YTD Change
In thousands	In thousands	2021		2020		2021		2020				In thousands			2022			2021			2022			2021
Volumes (therms)	Volumes (therms)														Volumes (therms)
Residential sales	Residential sales	30,391		32,040		286,228		280,075				(1,649)				6,153	Residential sales		90,016			61,346			276,345			255,837			28,670			20,508
Commercial sales	Commercial sales	25,206		22,084		169,660		160,736		3,122			8,924		Commercial sales		57,431			41,123			165,029			144,454			16,308			20,575
Total volumes	Total volumes	55,597		54,124		455,888		440,811		1,473			15,077		Total volumes		147,447			102,469			441,374			400,291			44,978			41,083
Operating revenues	Operating revenues														Operating revenues
Residential sales	Residential sales	$	47,091	$	44,433	$	325,203	$	298,214	$	2,658		$	26,989	Residential sales		$	107,292		$	82,310		$	324,475		$	278,112		$	24,982		$	46,363
Commercial sales	Commercial sales	24,888		21,951		145,720		132,973		2,937			12,747		Commercial sales		52,500			38,050			149,924			120,832			14,450			29,092
Total operating revenues	Total operating revenues	$	71,979	$	66,384	$	470,923	$	431,187	$	5,595		$	39,736	Total operating revenues		$	159,792		$	120,360		$	474,399		$	398,944		$	39,432		$	75,455
NGD margin	NGD margin														NGD margin
Residential:
Sales		$	32,787	$	31,291	$	198,950	$	179,354	$	1,496		$	19,596
Alternative revenue		1,505		(526)		10,151		2,699		2,031			7,452

Total residential NGD margin		34,292		30,765		209,101		182,053		3,527			27,048
Commercial:
Sales		14,208		12,065		76,181		66,108		2,143			10,073
Alternative revenue		802		921		3,692		2,589		(119)			1,103

Total commercial NGD margin		15,010		12,986		79,873		68,697		2,024			11,176
Residential NGD margin															Residential NGD margin		$	60,046		$	56,926		$	179,878		$	174,809		$	3,120		$	5,069

Commercial NGD margin															Commercial NGD margin		23,489			21,974			66,785			64,863			1,515			1,922
Total NGD margin	Total NGD margin	$	49,302	$	43,751	$	288,974	$	250,750	$	5,551		$	38,224	Total NGD margin		$	83,535		$	78,900		$	246,663		$	239,672		$	4,635		$	6,991

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Residential and commercial margin increased ~~$5.6~~$4.6 million compared to the prior period. The increase was primarily driven by higher usage from non-decoupled customers, 1.4% growth in residential meters, and new customer rates in ~~Oregon~~Washington that took effect on November 1, ~~2020 and~~2021. Volumes increased 45.0 million therms due to higher ~~commercial volumes as COVID-19 restrictions and closures were lifted.~~usage driven by comparatively colder weather.

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Residential and commercial margin increased ~~$38.2~~$7.0 million compared to the prior period. The increase was primarily driven by 1.4% growth in residential meters, new customer rates in ~~Oregon~~Washington that took effect on November 1, ~~2020, 1.8% growth in residential meters,~~2021, and higher usage from non-decoupled customers. Volumes increased 41.1 million therms due to higher usage driven by comparatively colder weather and higher usage from commercial ~~volumes.~~customers as COVID-19 restrictions and closures were lifted.

Industrial Sales and Transportation

Industrial sales and transportation highlights include:


		Three Months Ended September 30,				Nine Months Ended September 30,				QTD Change			YTD Change				Three Months Ended June 30,						Six Months Ended June 30,						QTD Change			YTD Change
In thousands	In thousands	2021		2020		2021		2020				In thousands			2022			2021			2022			2021
Volumes (therms)	Volumes (therms)														Volumes (therms)
Firm and interruptible sales	Firm and interruptible sales	18,353		16,505		64,598		58,945				1,848				5,653	Firm and interruptible sales		24,329			20,002			53,189			46,245			4,327			6,944
Firm and interruptible transportation	Firm and interruptible transportation	87,279		83,807		285,577		282,810		3,472			2,767		Firm and interruptible transportation		96,777			91,243			202,376			198,298			5,534			4,078

Total volumes - sales and transportation	Total volumes - sales and transportation	105,632		100,312		350,175		341,755		5,320			8,420		Total volumes - sales and transportation		121,106			111,245			255,565			244,543			9,861			11,022
NGD margin	NGD margin														NGD margin
Firm and interruptible sales	Firm and interruptible sales	$	2,735	$	2,456	$	9,033	$	8,279	$	279		$	754	Firm and interruptible sales		$	3,191		$	2,741		$	6,890		$	6,298		$	450		$	592
Firm and interruptible transportation	Firm and interruptible transportation	4,560		4,351		14,423		14,131		209			292		Firm and interruptible transportation		4,874			4,666			10,101			9,863			208			238
Total margin - sales and transportation	Total margin - sales and transportation	$	7,295	$	6,807	$	23,456	$	22,410	$	488		$	1,046	Total margin - sales and transportation		$	8,065		$	7,407		$	16,991		$	16,161		$	658		$	830

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Industrial sales and transportation margin increased ~~by $0.5~~$0.7 million compared to the prior ~~period primarily driven by new rates in Oregon that took effect on November 1, 2020.~~period. Volumes increased ~~by 5.3~~9.9 million therms ~~or 5%,~~primarily due ~~primarily~~ to higher usage from multiple customers, most notably in the light manufacturing and electric manufacturing industries, partially offset by lower usage from customers in the pulp and paper ~~and forest products industries.~~industry.

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Industrial sales and transportation margin increased ~~by $1.0~~$0.8 million compared to the prior ~~period primarily driven by new rates in Oregon that took effect on November 1, 2020.~~period. Volumes increased ~~by 8.4~~11.0 million therms ~~or 2%,~~primarily due ~~primarily~~ to higher usage from multiple customers, most notably in the ~~pulp~~primary metals and ~~paper and forest products industries.~~light manufacturing industries, partially offset by lower usage from customers in the plastic manufacturing industry.

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Cost of Gas

Cost of gas highlights include:


		Three Months Ended September 30,				Nine Months Ended September 30,				QTD Change				YTD Change					Three Months Ended June 30,						Six Months Ended June 30,						QTD Change			YTD Change
In thousands	In thousands	2021		2020		2021		2020				In thousands				2022				2021			2022			2021
Cost of gas	Cost of gas	$	25,322	$	23,797	$	178,837	$	173,657			$	1,525				$	5,180	Cost of gas		$	79,776		$	41,249		$	225,420		$	153,515		$	38,527		$	71,905
Volumes sold (therms)(1)	Volumes sold (therms)(1)	73,950		70,629		520,486		499,756		3,321				20,730		Volumes sold (therms)(1)			171,776			122,471			494,563			446,536			49,305			48,027
Average cost of gas (cents per therm)	Average cost of gas (cents per therm)	$	0.34	$	0.34	$	0.34	$	0.35	$	—			$	(0.01)	Average cost of gas (cents per therm)			$	0.46		$	0.34		$	0.46		$	0.34		$	0.12		$	0.12
Gain (loss) from gas cost incentive sharing(2)		$	(546)	$	(33)	$	(3,032)	$	310	$	(513)			$	(3,342)
Loss from gas cost incentive sharing(2)																Loss from gas cost incentive sharing(2)			$	(2,518)		$	(223)		$	(2,448)		$	(2,486)		$	(2,295)		$	38

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

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Cost of gas increased ~~$1.5~~$38.5 million ~~or 6%, compared to the prior year~~primarily due to a 5%35% increase in ~~volumes~~average cost of gas with the majority of these higher gas costs embedded in the PGA and customer growth. Volumes sold ~~coupled with higher natural gas market prices.~~increased 49.3 million therms driven by 23% colder than average weather in the second quarter of 2022 compared to 40% warmer than average weather in the prior period.

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Cost of gas increased ~~$5.2~~$71.9 million ~~or 3%,~~ primarily due to a ~~$3.3 million higher loss from~~35% 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 increased 48.0 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 comparatively colder2% warmer than average weather in ~~2021 as~~the first six months of 2022 compared to ~~2020.~~12% warmer than average weather in the prior period.

Other Regulated Services Margin

Other regulated services margin highlights include:


		Three Months Ended September 30,				Nine Months Ended September 30,				QTD Change				YTD Change					Three Months Ended June 30,						Six Months Ended June 30,						QTD Change			YTD Change
In thousands	In thousands	2021		2020		2021		2020				In thousands				2022				2021			2022			2021
North Mist storage services	North Mist storage services	$	4,716	$	4,866	$	14,147	$	14,599			$	(150)				$	(452)	North Mist storage services		$	4,857		$	4,715		$	9,715		$	9,431		$	142		$	284
Other services	Other services	53		(463)		169		(352)		516				521		Other services			49			50			101			116			(1)			(15)
Total other regulated services	Total other regulated services	$	4,769	$	4,403	$	14,316	$	14,247	$	366			$	69	Total other regulated services			$	4,906		$	4,765		$	9,816		$	9,547		$	141		$	269

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Other regulated services margin ~~increased $0.4 million~~was relatively flat when compared to the prior ~~period primarily due to a regulatory adjustment that occurred in the first nine months of 2020. The adjustment was made in accordance with the 2019 Oregon rate case and did not re-occur in 2021.~~period. The North Mist expansion facility did not experience any significant fluctuations in storage service revenue. See Note 7 for information regarding North Mist expansion lease accounting.

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Other regulated services margin ~~was relatively flat when~~increased $0.3 million compared to the prior ~~period. The North Mist expansion facility did not experience any significant fluctuations~~period due to scheduled rate increases in storage service revenue.

Other

Other activities aggregated and reported as other at NW Holdings include NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas 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). 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); and NWN Water, which 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 1413 for information on our ~~TWH~~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 September 30,				Nine Months Ended September 30,				QTD Change				YTD Change					Three Months Ended June 30,						Six Months Ended June 30,						QTD Change			YTD Change
In thousands, except EPS data	In thousands, except EPS data	2021		2020		2021		2020				In thousands, except EPS data				2022				2021			2022			2021
NW Natural other - net income	NW Natural other - net income	$	2,279	$	1,900	$	10,435	$	4,771			$	379				$	5,664	NW Natural other - net income		$	2,576		$	1,970		$	4,602		$	8,156		$	606		$	(3,554)
Other NW Holdings activity	Other NW Holdings activity	363		1,543		(1,544)		220		(1,180)				(1,764)		Other NW Holdings activity			(1,018)			(1,313)			(2,195)			(1,907)			295			(288)
NW Holdings other - net income	NW Holdings other - net income	$	2,642	$	3,443	$	8,891	$	4,991	$	(801)			$	3,900	NW Holdings other - net income			$	1,558		$	657		$	2,407		$	6,249		$	901		$	(3,842)
Diluted EPS - NW Holdings - other	Diluted EPS - NW Holdings - other	$	0.09	$	0.11	$	0.29	$	0.16	$	(0.02)			$	0.13	Diluted EPS - NW Holdings - other			$	0.05		$	0.03		$	0.07		$	0.21		$	0.02		$	(0.14)

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THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Other net income ~~decreased $0.8~~increased $0.9 million at NW Holdings and ~~increased $0.4~~$0.6 million at NWNW Natural. The increase at NW Natural was primarily due to an increase in ~~interstate storage net income.~~asset management revenues. The ~~decrease~~increase at NW ~~Holdings~~Holdings was driven by ~~higher expenses~~the increase at ~~the holding company~~NW Natural and ~~a gain recognized in the prior period related to the sale of Trail West,~~lower business development costs, partially offset by higher ~~net income~~interest expense at ~~NW Natural.~~the holding company.

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Other net income ~~increased $3.9 million at NW Holdings and $5.7~~decreased $3.6 million at NW ~~Natural.~~Natural and $3.8 million at NW Holdings. The ~~increase~~decrease at NW Natural was primarily due to ~~$7.6~~$5.4 million of ~~higher~~lower asset management revenue ~~primarily~~mainly related to the 2021 cold weather event, partially offset by ~~$2.1~~$1.4 million oflower income tax expense associated with the ~~higher revenue.~~lower revenue that did not recur in the current year. The ~~increase~~decrease at NW Holdings was driven by the ~~increase~~decrease at NW Natural and higher interest expense at the holding company, partially offset by higher ~~project costs at the holding company.~~net income from our water and wastewater subsidiaries.

Consolidated Operations

Operations and Maintenance

Operations and maintenance highlights include:


		Three Months Ended September 30,				Nine Months Ended September 30,				QTD		YTD			Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	In thousands	2021		2020		2021		2020		Change		Change		In thousands	2022		2021		2022		2021		Change		Change
NW Natural	NW Natural	$	43,768	$	38,657	$	137,894	$	126,111	$	5,111	$	11,783	NW Natural	$	48,879	$	44,939	$	102,756	$	94,126	$	3,940	$	8,630
Other NW Holdings operations and maintenance	Other NW Holdings operations and maintenance	3,561		2,695		11,673		8,145		866		3,528		Other NW Holdings operations and maintenance	4,296		5,108		7,904		8,112		(812)		(208)
NW Holdings	NW Holdings	$	47,329	$	41,352	$	149,567	$	134,256	$	5,977	$	15,311	NW Holdings	$	53,175	$	50,047	$	110,660	$	102,238	$	3,128	$	8,422

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Operations and maintenance expense increased $~~6.0~~3.1 million at NW Holdings and ~~$5.1~~$3.9 million at NW Natural. The increase at NW Natural was driven by the following:

•$~~2.3~~1.5 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects;

•$0.7 million increase in amortization expense related to cloud computing arrangements; and

•$0.6 million increase in professional service ~~and information technology expenses;~~

•~~$1.2 million increase in lease expense related to a new headquarters and operations center; and~~

•~~$1.0 million increase related to certain operations and maintenance costs that were deferred to a regulatory asset, net of direct savings, in the third quarter of 2020.~~fees.

The ~~$0.9~~$0.8 million ~~increase~~decrease in other NW Holdings operations and maintenance expense primarily reflects ~~higher~~lower business development costs at the holding ~~company expenses and operating expenses from water and wastewater subsidiaries.~~company.

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Operations and maintenance expense increased $~~15.3~~8.4 million at NW Holdings and ~~$11.8~~$8.6 million at NW Natural. The increase at NW Natural was driven by the following:

•$~~4.9~~3.7 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects;

•$1.4 million increase in amortization expense related to cloud computing arrangements;

•$0.9 million increase in professional service ~~and information technology expenses;~~

•~~$3.4 million increase in lease expense related to a new headquarters and operations center;~~fees; and

•$~~2.2~~0.9 million increase ~~related to higher compensation~~in information technology maintenance and ~~benefit costs.~~support.

The ~~$3.5~~$0.2 million ~~increase~~decrease in other NW Holdings operations and maintenance expense primarily reflects ~~higher project~~lower business development costs at the holding ~~company and operating expenses from water and wastewater subsidiaries.~~company.

Depreciation ~~and Amortization~~

Depreciation ~~and amortization~~ highlights include:


		Three Months Ended September 30,				Nine Months Ended September 30,				QTD		YTD			Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	In thousands	2021		2020		2021		2020		Change		Change		In thousands	2022		2021		2022		2021		Change		Change
NW Natural	NW Natural	$	27,719	$	25,681	$	82,418	$	74,857	$	2,038	$	7,561	NW Natural	$	27,328	$	27,530	$	54,965	$	54,699	$	(202)	$	266
Other NW Holdings depreciation and amortization		719		253		2,261		1,588		466		673
Other NW Holdings depreciation														Other NW Holdings depreciation	782		614		1,574		1,542		168		32
NW Holdings	NW Holdings	$	28,438	$	25,934	$	84,679	$	76,445	$	2,504	$	8,234	NW Holdings	$	28,110	$	28,144	$	56,539	$	56,241	$	(34)	$	298

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Depreciation expense decreased $34 thousand and $0.2 million at NW Holdings and NW Natural, respectively, primarily due to the amortization of cloud computing arrangements, which are recorded within operations and maintenance expenses beginning in 2022.

SIX MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Depreciation expense increased ~~$2.5~~$0.3 million ~~and $2.0 million~~ at both 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 ~~center renovations.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO SEPTEMBER 30, 2020.~~ ~~Depreciation~~centers. The increase was partially offset by the amortization of cloud computing arrangements, which are recorded within operations and ~~amortization expense increased $8.2 million and $7.6 million at NW Holdings and NW Natural, respectively, primarily due to additional capital investments~~maintenance expenses beginning in ~~the distribution system, Mist storage, and information technology systems, as well as resource and operations service center renovations.~~2022.

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Other Income (Expense), Net

Other income (expense), net highlights include:


		Three Months Ended September 30,				Nine Months Ended September 30,				QTD		YTD			Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	In thousands	2021		2020		2021		2020		Change		Change		In thousands	2022		2021		2022		2021		Change		Change
NW Natural other income (expense), net	NW Natural other income (expense), net	$	(2,295)	$	(4,002)	$	(8,526)	$	(10,744)	$	1,707	$	2,218	NW Natural other income (expense), net	$	17	$	(2,566)	$	(964)	$	(6,231)	$	2,583	$	5,267
Other NW Holdings activity	Other NW Holdings activity	79		715		171		842		(636)		(671)		Other NW Holdings activity	209		(31)		236		92		240		144
NW Holdings other income (expense), net	NW Holdings other income (expense), net	$	(2,216)	$	(3,287)	$	(8,355)	$	(9,902)	$	1,071	$	1,547	NW Holdings other income (expense), net	$	226	$	(2,597)	$	(728)	$	(6,139)	$	2,823	$	5,411

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Other income (expense), net changed ~~$1.1~~$2.8 million and ~~$1.7~~$2.6 million at NW Holdings and NW Natural, respectively, primarily due to ~~higher interest income on regulatory assets in the current quarter and~~ 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 ~~decrease~~change at other NW Holdings was driven by ~~a gain recognized in~~ the ~~prior period related to the sale of Trail West.~~change at NW Natural. Other income (expense), net primarily consists of regulatory interest, pension and other postretirement non-service costs, gains from company-owned life insurance, and donations.

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Other income (expense), net changed ~~$1.5~~$5.4 million and ~~$2.2~~$5.3 million at NW Holdings and NW Natural, respectively, primarily due to ~~higher interest income on regulatory assets and~~ 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 ~~decrease~~change at other NW Holdings was driven by ~~a gain recognized in~~ the ~~prior period related to the sale of Trail West.~~change at NW Natural.

Interest Expense, Net

Interest expense, net highlights include:


		Three Months Ended September 30,				Nine Months Ended September 30,				QTD		YTD			Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	In thousands	2021		2020		2021		2020		Change		Change		In thousands	2022		2021		2022		2021		Change		Change
NW Natural	NW Natural	$	10,850	$	8,806	$	32,336	$	30,518	$	2,044	$	1,818	NW Natural	$	10,599	$	10,696	$	21,430	$	21,486	$	(97)	$	(56)
Other NW Holdings interest expense, net	Other NW Holdings interest expense, net	325		359		993		1,821		(34)		(828)		Other NW Holdings interest expense, net	981		332		1,672		668		649		1,004
NW Holdings	NW Holdings	$	11,175	$	9,165	$	33,329	$	32,339	$	2,010	$	990	NW Holdings	$	11,580	$	11,028	$	23,102	$	22,154	$	552	$	948

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Interest expense, net increased $2.0 million at both NW Holdings and NW Natural. The increase at NW Natural is primarily due to $1.7 million of higher interest on commercial paper borrowings and $0.3 million lower AFUDC debt interest income. The increase at NW Holdings includes the increase at NW Natural while interest on debt at NW Holdings was relatively flat.

~~NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO SEPTEMBER 30, 2020.~~ ~~Interest expense, net increased $1.0 million and $1.8~~$0.6 million at NW Holdings and decreased $0.1 million at NW ~~Natural, respectively. The increase~~Natural. Interest expense, net at NW Natural ~~is primarily~~decreased $0.6 million due to ~~$1.3 million lower AFUDC~~higher Allowance for Funds Used During Construction (AFUDC) debt interest income, ~~and $0.7~~partially offset by $0.5 million of higher interest expense on short and long-term debt. The increase at NW Holdings ~~includes~~is primarily due to higher interest expense on the Holdings' credit facility as a result of higher balances outstanding.

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

Income Tax Expense (Benefit)

Income tax expense (benefit) highlights include:


		Three Months Ended September 30,				Nine Months Ended September 30,				QTD		YTD			Three Months Ended June 30,				Six Months Ended June 30,				QTD		YTD
In thousands	In thousands	2021		2020		2021		2020		Change		Change		In thousands	2022		2021		2022		2021		Change		Change
NW Natural income tax expense (benefit)		$	(7,212)	$	(6,057)	$	13,628	$	6,942	$	(1,155)	$	6,686
NW Natural income tax expense														NW Natural income tax expense	$	810	$	288	$	20,133	$	20,840	$	522	$	(707)
NW Holdings income tax expense (benefit)	NW Holdings income tax expense (benefit)	$	(7,127)	$	(5,363)	$	13,117	$	7,092	$	(1,764)	$	6,025	NW Holdings income tax expense (benefit)	$	470	$	(277)	$	19,393	$	20,244	$	747	$	(851)

THREE MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Income tax ~~benefit~~expense increased ~~$1.2~~$0.5 million at NW Natural and ~~$1.8 million at NW Holdings. The increase in income tax benefit is primarily due to a higher pre-tax loss in the current period compared to the prior year.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2021 COMPARED TO SEPTEMBER 30, 2020.~~ ~~Income tax expense increased $6.7 million at NW Natural and $6.0~~$0.7 million at NW Holdings. The increase in income tax expense is primarily due to ~~an increase~~a higher pre-tax income in the current period compared to the prior year.

SIX MONTHS ENDED JUNE 30, 2022 COMPARED TO JUNE 30, 2021. Income tax expense decreased $0.7 million at NW Natural and $0.9 million at NW Holdings. The decrease in income tax expense is primarily due to a decrease in pre-tax ~~income and Oregon's Corporate Activity Tax, partially offset by the ongoing amortization of TCJA benefits.~~income.

5747

~~Table~~

Regulatory Matters

For additional information, see Part II, Item 7 "Results of ~~Contents~~Operations—Regulatory Matters" in the 2021 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, 2022, approximately 88% of NGD customers were located in Oregon, with the remaining 12% in Washington. Earnings and cash flows from natural gas distribution operations are largely determined by rates set in general rate cases and other proceedings in Oregon and Washington. They are also affected by weather, the local economies in Oregon and Washington, the pace of customer growth in the residential, commercial, and industrial markets, customer preferences and NW Natural's ability to remain price competitive, control expenses, and obtain reasonable and timely regulatory recovery of its natural gas distribution-related costs, including operating expenses and investment costs in plant and other regulatory assets. See "Most Recent Completed Rate Cases" below.

~~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~~are subject to regulation by the utility commissions in the states in which they are located, which currently includes Oregon, Washington, Idaho, and Sale Agreement (the Agreement) that provided for the sale by NWN Gas Storage of all of its membership interests in Gill Ranch. Gill Ranch owns a 75% interest in a natural gas storage facility located near Fresno, California known as the Gill Ranch Gas Storage Facility.Texas.

Most Recent Completed Rate Cases

OREGON.On October 16, 2020, the OPUC issued an order concluding NW Natural's general rate case filed in December ~~4, 2020, NWN Gas Storage closed the sale~~2019 (OPUC Order). The OPUC Order provides for a total revenue requirement increase of ~~all the memberships interests in Gill Ranch and received payment of the initial cash purchase price of $13.5~~approximately $45 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)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.

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

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

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 case (Rate Case) with the OPUC. On May 31, 2022, NW Natural, the OPUC staff, the Oregon Citizens' Utility Board (CUB), the Alliance of Western Energy Consumers (AWEC), and the Small Business Utility Advocates (SBUA), which comprise some of the parties to the Rate Case, filed a stipulation with the OPUC addressing a number of issues in the Rate Case as well as a second docket, which was consolidated with the Rate Case (Stipulation).

The Stipulation provides for a total revenue requirement increase of $62.65 million over revenues from existing rates, subject to adjustment for capital additions and revenues related to new customers added in the test year and completion of capital projects identified as being placed into service prior to the rate effective date. The revenue requirement is based on the following assumptions:

•Capital structure of 50% common equity and 50% long-term debt;

•Return on equity of 9.4%;

•Cost of capital of 6.836%; and

•Average rate base of $1.77 billion or an increase of $337 million compared to the last rate case.

On June 29, 2022, NW Natural, the OPUC staff, the Oregon CUB, AWEC, and the Coalition of Communities of Color, Climate Solutions, Verde, Columbia Riverkeeper, Oregon Environmental Council, Community Energy Project, and Sierra Club ("Coalition"), which comprise some of the parties to the Rate Case, filed a second stipulation with the OPUC addressing a number of issues in the Rate Case that were not addressed in the first Stipulation ("Second Stipulation" and with the Stipulation, the Stipulations). The Second Stipulation addresses the following:

•Eliminates deposits for new customers;

•Updates to the Oregon low-income energy efficiency program; and

•Addresses recovery of the COVID-19 deferral over two years starting November 1, 2022.

The Stipulations do not address all aspects of the Rate Case. We expect remaining items to be subject to the ongoing regulatory litigation process. The Stipulations are subject to review and approval by the OPUC. For the new rates to be effective, the OPUC must issue an order, which may approve or deny the terms of the Stipulations or be issued under the OPUC's own terms. NW Natural currently expects new rates to take effect November 1, 2022.

Rate Mechanisms

During 2022 and 2021, NW Natural's key approved rates and recovery mechanisms for each service area included:

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%

Rate of Return

7.0%

7.2%

6.8%

Debt/Equity Ratio

50%/50%

51%/49%

Key Regulatory Mechanisms:

Purchased Gas Adjustment (PGA)

Gas Cost Incentive Sharing

Decoupling

Weather Normalization (WARM)

Environmental Cost Recovery

Interstate Storage and Asset Management Sharing

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

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 approximately 79% in total. The total hedged for Oregon was approximately 82%, including 62% in financial hedges and 19% in physical gas supplies. The total hedged for Washington was approximately 57%, including 44% in financial hedges and 13% in physical gas supplies. During 2021, there was increased volatility and pricing in the current and forward gas markets. In response to 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 12% and 50% for annual requirements over the subsequent three gas years, which consists of between 13% and 48% in Oregon and between 0% and 67% in Washington. Hedge levels are subject to change based on actual load volumes, which depend to a certain extent on weather, economic ~~performance of Gill Ranch each full~~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, ~~(April~~gas price volatility has remained high with current and forward gas prices increasing substantially in 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.

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 ~~one~~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 ~~March 31~~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.

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

WARM.In Oregon, NW Natural has an approved weather normalization mechanism (WARM), which is applied to residential and small commercial customer bills. This mechanism is designed to help stabilize the collection of fixed costs by adjusting residential and small commercial customer billings based on temperature variances from average weather, with rate decreases when the weather is colder than average and rate increases when the weather is warmer than average. The mechanism is applied to bills from December through mid-May of each heating season. The mechanism adjusts the margin component of customers’ rates to reflect average weather, which uses the 25-year average temperature for each day of the billing period. Daily average temperatures and 25-year average temperatures are based on a set point temperature of 59 degrees Fahrenheit for residential customers and 58 degrees Fahrenheit for commercial customers. The collections of any unbilled WARM amounts due to tariff caps and floors are deferred and earn a carrying charge until collected, or returned, in the PGA the following year. Residential and small commercial customers in Oregon are allowed to opt out of the weather normalization mechanism, and as of June 30, 2022, 7% of total eligible customers had opted out. NW Natural does not have a weather normalization mechanism approved for Washington customers, which account for about 12% of total customers. See "Business Segment—Natural Gas Distribution" below.

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) occurring~~year.

•Post-review - This class of costs represents remediation spend that has been deemed prudent and allowed after applying the ~~closing~~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 ~~the remaining portion~~is calculated as one-fifth of the ~~2020-2021~~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.


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.

NW Natural concluded there was no earnings test adjustment for 2021 based on the environmental earnings test that was submitted in April 2022.

Washington ECRM

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

INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING.On an annual basis, NW Natural credits amounts to Oregon and Washington customers as part of a regulatory incentive sharing mechanism related to net revenues earned from Mist gas storage ~~year~~ and ~~will continue until such time~~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 ~~maximum amount has been paid.~~ annual PGA filing in November.

~~The fair value~~

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

Regulatory Proceeding Updates

During 2022, NW Natural was involved in the regulatory activities discussed below. For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the 2021 Form 10-K.

COVID-19 DEFERRAL DOCKETS.During 2020, Oregon and Washington approved our applications to defer certain COVID-19 related costs. Costs that may be recoverable include, but are not limited to, the following: personal protective equipment, cleaning supplies and services, bad debt expense, financing costs to secure liquidity, and certain lost revenue, net of offsetting direct expense reductions associated with COVID-19. As of June 30, 2022, we believe that approximately $17.0 million of the financial effects related to COVID-19 are recoverable and deferred to a regulatory asset approximately $13.4 million for incurred costs. In addition, we expect to recognize revenue in a future period for an additional $3.6 million related to forgone late fee revenue.

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


	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~~Commission review of its existing credit and collection practices that is expected to be completed over the next year.

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

LOW INCOME DISCOUNT TARIFF.In July 2022, NW Natural received approval from the OPUC for an income-qualifying residential bill discount program. The income threshold for program participation is at or below 60 percent of Oregon state median income (SMI). The program provides a bill discount for income-qualifying residential customers at four discount tier levels based on household income compared to SMI, with higher discounts given for lower income levels. Participating customers can self-certify their income and household size to qualify for the program directly with NW Natural or their local Community Action Agency. We expect the program will be ~~recorded in earnings.~~ ~~The completion~~available for qualifying customers by November 1, 2022. Costs for the bill discount program include simultaneous recovery from all customers. Start-up and administrative costs of the ~~sale resulted~~program are authorized to be deferred for later inclusion in ~~an after-tax gain~~rates.


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

RENEWABLE NATURAL GAS.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 ~~$5.9 million~~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.

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

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

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

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. NW Natural received approval from both the OPUC and the WUTC to extend the filing of our full IRP until September 23, 2022 due to the implementation of new resource planning optimization software.

PIPELINE SECURITY. In May and July 2021, the Department of Homeland Security’s (DHS) Transportation Security Administration (TSA) released two security directives applicable to certain notified owners and operators of natural gas pipeline facilities (including local distribution companies) that TSA has determined to be ~~discontinued~~critical. The first security directive required notified owners/operators to implement cybersecurity incident reporting to the DHS, designate a cybersecurity coordinator, and perform a gap assessment of current entity cybersecurity practices against certain voluntary TSA security guidelines and report relevant results and proposed mitigation to applicable DHS agencies. The second security directive requires notified entities to implement a significant number of specified cyber security controls and processes. The TSA recently released a third security directive, which replaces the second directive. The third security directive provides a framework based on risk and outcome objectives and is effective until July 2023. NW Natural is currently in the process of evaluating and implementing the security directives while ensuring safe and reliable operations. NW Natural is providing frequent updates to the TSA on NW Natural's progress on achieving the security directives. NW Natural filed requests with the OPUC and WUTC to defer the costs associated with complying with the second security directive and plans to seek recovery of these costs in future ratemaking proceedings. As of June 30, 2022, NW Natural has deferred to a regulatory asset $3.1 million of costs incurred and $27.6 million was invested in information technology to date. NW Natural continues to evaluate the potential effect of these directives on our operations ~~until~~and facilities, as well as the ~~date~~potential total cost of ~~sale~~implementation, and ~~are presented separately, net of tax, from the results of continuing operations of NW Holdings~~will continue to monitor for ~~all periods presented. See Note 18 for more information on the Agreement and the results of our discontinued operations.~~any clarifications or amendments to these directives.

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

Environmental, Legislation and Regulation Matters

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

International

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

Federal

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

The U.S. Congress has not yet passed any federal climate change legislation, and we cannot predict when or if Congress will pass such legislation and in what form. In the absence of such legislation, the Environmental Protection Agency (EPA) regulates

GHG emissions pursuant to the Clean Air Act. In September 2009, the EPA issued a final rule requiring the annual reporting of greenhouse gas emissions from certain industries, specified large GHG emission sources, and facilities that emit 25,000 metric tons or more of CO2 equivalents per year. NW Natural began reporting emission information in 2011. Under this reporting rule, local natural gas distribution companies like NW Natural are required to report system throughput to the EPA on an annual basis. The EPA also has required additional GHG reporting regulations to which NW Natural is subject, requiring the annual reporting of fugitive emissions from operations. Other federal regulatory agencies, including the Federal Energy Regulatory Commission, are beginning to address greenhouse gas emissions through changes in their regulatory oversight approach and policies.

Additionally, the Securities and Exchange Commission (SEC) recently proposed new rules relating to the disclosure of a range of climate-related matters. These include corporate governance and risk management, disaggregated financial disclosure in the notes to audited financial statements, and detailed disclosure concerning GHG emissions. We are currently assessing these proposed rules. We cannot predict what any final rules adopted by the SEC may require, nor can we predict the time periods for compliance, the costs of implementation, or any potential impacts resulting from any final climate-related rules that may be adopted. To the extent these rules are finalized as proposed or in modified form, we or our customers could incur increased costs related to the assessment and disclosure of climate-related risks. These could include internal 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, large manufacturing facilities, and transportation and other fuel providers, which are subject to the CCA must either reduce their emissions or obtain allowances and approved offset credits to cover any remaining emissions. These rules are expected by the end of 2022. NW Natural is subject to the CCA and intends to pursue inclusion of CCA compliance costs in rates.

Oregon

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

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

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

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

Local Jurisdictions and Other Advocacy

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

NW Natural Decarbonization Initiatives & Actions

Our customers are currently paying less for their natural gas today than they did 15 years ago. We expect that compliance with any form of regulation of GHG emissions, including the CPP in Oregon and CCA in Washington as well as voluntary actions under SB 98, will require additional resources and compliance tools. The developing and changing carbon credit markets and other compliance tool options, decades-long timeframes for compliance, likely changing and evolving laws and energy policy, and evolving technological advancements, all make it difficult to accurately predict long-term tools for and costs of compliance. Given that CCA rules are in development and the recency of the adoption of the final CPP rules, we have not completed our full integrated resources planning process to identify our compliance obligations and expected costs. Even as we develop these compliance and cost projections, they will be uncertain and subject to significant change over the nearly 30-year time horizon. It is our current expectation that costs associated with compliance generally would be recovered in rates and would result in an increase in the prices charged to customers. The CPP in Oregon is largely tied to the volume of natural gas consumed and as such, we currently expect that CPP cost impacts will be the lowest among residential customers because they generally consume less and highest among industrial customers that use significantly higher volumes of natural gas, with cost increases for commercial customers falling between residential and industrial customers. The projected customer bill impact of the CPP varies significantly based on forecasting assumptions related to permitted levels of rate recovery, available technologies and equipment, weather patterns and gas usage, customer growth or attrition, allocation of fixed costs among classes of customers, energy efficiency levels, availability, use and cost of renewables, feasibility of broad-scale hydrogen in the natural gas system, and a number of other assumptions used in the complex analysis of integrated resource planning.

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

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

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 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:


		September 30,				December 31,			June 30,				December 31,
		2021		2020		2020			2022		2021		2021
Common equity	Common equity	49.3	%	47.2	%	48.2	%	Common equity	52.1	%	48.6	%	47.2	%
Long-term debt (including current maturities)	Long-term debt (including current maturities)	50.7		52.8		51.8		Long-term debt (including current maturities)	47.9		51.4		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:


		September 30,				December 31,			June 30,				December 31,
		2021		2020		2020			2022		2021		2021
Common equity	Common equity	49.3	%	46.8	%	47.7	%	Common equity	54.3	%	48.6	%	49.8	%
Long-term debt (including current maturities)	Long-term debt (including current maturities)	50.7		53.2		52.3		Long-term debt (including current maturities)	45.7		51.4		50.2
Total	Total	100.0	%	100.0	%	100.0	%	Total	100.0	%	100.0	%	100.0	%

Including short-term debt balances, as of ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, and December 31, ~~2020,~~2021, NW Holdings' consolidated capital structure included common equity of ~~40.4%~~47.3%, ~~42.0%~~43.2% and ~~41.4%~~39.5%; long-term debt of ~~41.5%~~43.4%, ~~42.3%~~42.8% and ~~40.0%~~44.0%; and short-term debt including current maturities of long-term debt of ~~18.1%~~9.3%, ~~15.7%~~14.0% and ~~18.6%~~16.5%, respectively. As of ~~September~~June 30, 2022 and 2021, and ~~2020, and~~

December 31, ~~2020,~~2021, NW Natural's consolidated capital structure included common equity of ~~40.5%~~52.4%, ~~43.0%~~43.8%, and ~~42.1%~~44.2%; long-term debt of ~~41.5%~~44.1%, ~~45.8%~~43.2% and ~~43.2%~~44.7%; and short-term debt including current maturities of long-term debt of ~~18.0%~~3.5%, ~~11.2%~~13.0%, and ~~14.7%~~11.1%, respectively.

Liquidity and Capital Resources

At ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, NW Holdings had approximately ~~$19.5~~$17.2 million and ~~$35.9~~$20.1 million, and NW Natural had approximately ~~$9.7~~$10.3 million and ~~$27.1~~$11.5 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

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NW Natural expect to have ample liquidity in the form of cash on hand and from operations and available credit capacity under credit facilities to support funding needs.

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

Equity Issuance

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

ATM Equity Program

In August 2021, NW Holdings initiated an at-the-market (ATM) equity program by entering into an equity distribution agreement under which NW Holdings may issue and sell from time to time shares of common stock, no par value, having an aggregate gross sales price of up to $200 million. NW Holdings is under no obligation to offer and sell common stock under the ATM equity program, which expires in August 2024. Any shares of common stock offered under the ATM equity program are registered on NW Holdings’ universal shelf registration statement filed with the SEC. During the ~~quarter~~three months ended ~~September~~June 30, ~~2021,~~2022, NW Holdings issued and sold ~~41,421~~482,200 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of ~~$2.1~~$25.1 million, net of fees and commissions paid to agents of ~~$22 thousand. As of September~~$0.4 million. During the six months ended June 30, ~~2021,~~2022, NW Holdings ~~had~~ issued and sold ~~41,421~~678,101 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of ~~$2.1~~$35.2 million, net of fees and commissions paid to agents of ~~$22 thousand.~~$0.7 million. As of June 30, 2022, NW Holdings had $146.2 million of equity available for issuance under the program. The ATM equity program was initiated to raise funds for general corporate purposes, including equity contributions to NW Holdings’ subsidiaries, NW Natural and NW Natural Water. Contributions to NW Natural and NW Natural Water will be used for general corporate purposes.

NW Holdings

For NW Holdings, short-term liquidity is primarily provided by cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a 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's~~Holdings long-term debt, if any, and equity issuances are primarily used to provide equity contributions to NW Holdings’ operating subsidiaries for operating and capital expenditures and other corporate purposes. ~~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. NW Holdings has issued more than $170 million of equity through July 2022 and NW Natural entered into a $140 million private placement FMB that we expect to receive the proceeds on September 30, 2022. NW Holdings intends to use raised capital to support NW Natural, NW Natural Water, and NW Natural ~~Water's~~Renewables 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 June 30, 2022, NW Natural satisfied the ring-fencing provisions described above.

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

~~At September 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.

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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 NW Natural 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 ~~September~~June 30, 2021. If the credit risk-related contingent features underlying these contracts were triggered on September 30, 2021, 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.2022. See "Credit Ratings" below and Note ~~16.~~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 ~~2020~~2021 Form 10-K.

~~Contractual Obligations~~

NW Natural Renewables is a newly formed and non-regulated subsidiary of NW Natural Holdings established to pursue non-regulated renewable activities. In September 2021, a subsidiary of NW Natural Renewables and a subsidiary of EDL, a global producer of sustainable distributed energy, executed agreements to develop two production facilities that are designed to convert landfill waste gases to renewable natural gas (RNG). Testing and commissioning of the production facilities are expected to occur in 2023. Upon completion of each facility, NW Natural Renewables is committed to make cash payments totaling $50.1 million to partially fund the infrastructure required to condition biogas and connect gas production to existing regional pipeline networks.

Alongside these development agreements, a subsidiary of NW Natural Renewables and a subsidiary of EDL executed agreements designed to secure a 20-year supply of RNG. At September 30, 2021, the amount of RNG purchases based on prices and quantities specified in the agreements are as follows: approximately $9.2 million in 2023, $10.5 million in 2024, $21.0 million in 2025 and $605.0 million thereafter.

~~See Part II, Item 7, "Financial Condition—Contractual Obligations" in the 2020 Form 10-K for additional contractual obligations.~~

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.~~it may enter into from time to time. In addition to issuing commercial paper or entering into bank loans to meet working capital requirements, including seasonal requirements to finance gas purchases and accounts receivable, short-term debt may also be used to temporarily fund 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.

At ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, NW Holdings had short-term debt outstanding of ~~$399.5~~$222.7 million and ~~$223.0~~$240.0 million, respectively. At ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, NW Natural had short-term debt outstanding of ~~$370.5~~$78.7 million and ~~$150.0~~$198.0 million, respectively. NW Holdings' short-term debt at ~~September~~June 30, ~~2021~~2022 consisted of ~~$29.0~~$144.0 million in revolving credit agreement loans at NW Holdings and ~~$270.5~~$78.7 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 ~~September~~June 30, ~~2021~~2022 was ~~1.1%~~2.7% at NW Holdings. The weighted average interest rate of commercial paper ~~and the Term Loan outstanding~~ at ~~September~~June 30, ~~2021~~2022 was ~~0.2% and 0.7%, respectively,~~2.0% at NW Natural.

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Credit Agreements

NW Holdings

At ~~September~~June 30, ~~2021,~~2022, NW Holdings had 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, with available extensions of commitments for two additional one-year periods, subject to lender approval. On November 3, 2021, NW Holdings and the parties to the credit agreement amended and restated the agreement to, among other things, increase the initial commitment to $200 million with a feature that allows it to request increases in the total commitment amount up to a maximum of $300 million, and extend the maturity date to November 3, 2026, with available extensions of commitments for two additional one-year periods, subject to lender ~~approval (Amended NW Holdings Credit Agreement).~~approval.

All lenders under the NW Holdings credit agreement are major financial institutions with committed balances and investment grade credit ratings as of ~~September~~June 30, ~~2021~~2022 as follows:


In millions
Lender rating, by category	Loan Commitment
AA/Aa	$	~~100~~200

Total	$	~~100~~200

~~The lenders remain the same under the Amended NW Holdings Credit Agreement with a loan commitment of $200 million.~~ 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 ~~September~~June 30, ~~2021, September~~2022, June 30, ~~2020~~2021 and December 31, ~~2020, $29.0~~2021, $144.0 million, ~~$73.0~~$42.0 million and ~~$73.0~~$144.0 million were drawn under the ~~existing~~ NW Holdings Credit Agreement, respectively.

The ~~existing and amended~~NW Holdings credit ~~agreements permit~~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 ~~as existing and amended~~ is due and payable on the maturity date. The ~~existing and amended NW Holding~~ credit ~~agreements require~~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 ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, with consolidated indebtedness to total capitalization ratios of ~~59.6%~~52.7% and ~~58.0%~~56.8%, respectively.

The ~~existing and amended agreements~~NW Holdings credit agreement also ~~require~~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 ~~agreements.~~agreement. Rather, interest rates on any loans outstanding under the credit agreements are tied to debt ratings and therefore, a change in the debt rating would increase or decrease the cost of any loans under the credit agreements when ratings are changed. NW Holdings does not currently maintain ratings with S&P or Moody's.

The NW Holdings credit agreement also includes a mechanism that can increase or decrease the undrawn interest rate by up to 1 basis point and undrawn interest rate by up to 5 basis points in accordance with NW Holdings’ independently verified achievement of quantifiable metrics related to two goals—one related to carbon savings and one related to in-line inspections of NW Natural’s transmission pipeline. Performance against these metrics is designed to be assessed annually with pricing adjustments, if any, resetting off of primary pricing annually and not cumulatively.

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

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

NW Natural

At ~~September~~June 30, ~~2021,~~2022, NW Natural had a ~~$300 million~~sustainability-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. On November 3, 2021, NW Natural and the parties to the credit agreement amended and restated the agreement to, among other things, increase the initial commitment to $400 million with a feature that allows it to request increases in the total commitment amount up to a maximum of $600 million, and extend the maturity date to November 3, 2026, with available extensions of commitments for two additional one-year periods, subject to lender approval (Amended NW Natural Credit Agreement).

All lenders under the NW Natural credit agreement are major financial institutions with committed balances and investment grade credit ratings as of ~~September~~June 30, ~~2021~~2022 as follows:


In millions
Lender rating, by category	Loan Commitment
AA/Aa	$	~~300~~400

Total	$	~~300~~400

~~The lenders remain the same under the Amended NW Natural Credit Agreement with a loan commitment of $400 million.~~ 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 ~~September~~June 30, ~~2021, September~~2022, June 30, ~~2020~~2021 and December 31, ~~2020.~~2021.

~~Table of Contents~~

The ~~existing and amended~~NW Natural credit ~~agreements permit~~agreement permits the issuance of letters of credit in an aggregate amount of up to $60 million. The principal amount of borrowings under ~~both~~the credit ~~agreements~~agreement is due and payable on the maturity date. There were no outstanding balances under this credit agreement at June 30, 2022 or 2021. The ~~existing and amended~~ credit ~~agreements permit~~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 ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, with consolidated indebtedness to total capitalization ratios of ~~59.5%~~47.6% and ~~57.0%~~56.2%, respectively.

The ~~existing and amended agreements~~NW Natural credit agreement also ~~require~~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-

Senior unsecured (long-term debt)

n/a

Baa1

Corporate credit rating

A+

n/a

Ratings outlook

Stable

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

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

Long-Term Debt

On July 15, 2022, NW Natural entered into a Bond Purchase Agreement between NW Natural and the institutional investors named as purchasers therein (the Bond Purchase Agreement). The Bond Purchase Agreement provides for the issuance of $140.0 million aggregate principal amount of NW Natural's First Mortgage Bonds, 4.78% Series due 2052 (the Bonds). The

Bonds are expected to be issued on or about September 30, 2022. The Bonds will bear interest at the rate of 4.78% per annum, payable semi-annually on March 30 and September 30 of each year, commencing March 30, 2023, and will mature on September 30, 2052. The Bonds will be subject to redemption prior to maturity at the option of NW Natural, in whole or in part, (i) at any time prior to March 30, 2052, at a redemption price equal to 100% of the principal amount thereof plus a “make-whole” premium and accrued and unpaid interest thereon to the date of redemption, and (ii) at any time on and after March 30, 2052, at 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption.

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

In June 2021, NW Natural Water entered into a five-year term loan ~~credit~~ agreement for $55.0 ~~million and borrowed the full amount.~~million. The loan carried an interest rate of ~~0.9%~~2.3% at ~~September~~June 30, ~~2021,~~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 ~~September~~June 30, ~~2021,~~2022, with a consolidated indebtedness to total capitalization ratio of ~~59.6%~~52.7%.

~~In August 2021, NW Natural retired $10.0 million of FMBs with an interest rate of 9.1%. In September 2021, NW Natural Retired $50.0 million of FMBs with an interest rate of 3.2%.~~ No ~~other~~ long-term debt is scheduled to mature over the next twelve months as of ~~September~~June 30, ~~2021~~.

2022 at NW Natural. See Part II, Item 7, "Financial Condition—~~Contractual Obligations~~Long-Term Debt" in the ~~2020~~2021 Form 10-K for long-term debt maturing over the next five years.

Bankruptcy Ring-fencing Restrictions

As part of the ring-fencing conditions agreed upon with the OPUC and WUTC, ~~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 ~~September~~June 30, ~~2021.~~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.

~~Table of Contents~~

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.


		Nine Months Ended September 30,							Six Months Ended June 30,
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	$	161,828	$	156,970	$	4,858	NW Natural cash provided by operating activities	$	193,436	$	189,945	$	3,491
NW Holdings cash provided by operating activities	NW Holdings cash provided by operating activities	$	181,724	$	150,797	$	30,927	NW Holdings cash provided by operating activities	$	196,564	$	194,281	$	2,283

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Cash provided by operating activities increased ~~$30.9~~$2.3 million at NW Holdings and increased ~~$4.9~~$3.5 million at NW Natural. The significant factors contributing to the increase at NW Holdings were as follows:

•$~~51.1~~29.6 million decrease in net deferred gas costs as gas costs for the six months ended June 30, 2021 were 27% above the PGA estimates primarily due to the 2021 cold weather event;

•$23.3 million increase in accounts receivable and accrued unbilled revenue resulting from higher balances due to colder weather; and

•$16.5 million increase in NW Natural's decoupling mechanism; partially offset by

•$32.9 million decrease in the regulatory incentive sharing mechanism related to revenues earned from Mist gas storage and asset management activities primarily related to the 2021 cold weather event;

•~~$14.1 million of lower contributions to the defined benefit pension plan;~~ and

•$~~13.4~~32.0 million increase in ~~net income; partially offset by~~

•~~$30.9 million increase in net deferred gas costs as the actual costs for the nine months ended September 30, 2021 were 27% above the PGA estimates primarily due~~asset optimization revenue sharing bill credits to ~~the 2021 cold weather event as opposed to gas costs for the nine months ended September 30, 2020 that were 3% below estimates embedded in the PGA; and~~

•~~$16.2 million increase in inventories primarily driven by higher gas costs.~~customers.

~~During the nine months ended September 30, 2021,~~ NW Natural ~~contributed~~ ~~$9.6 million~~did not make any cash contributions to ~~the NGD segment's~~its qualified defined benefit pension ~~plan~~plans during the six months ended June 30, 2022 compared to ~~$23.7~~$9.6 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 10.

The increase in cash provided by operating activities at NW Natural was primarily driven by the increase discussed ~~above, partially offset by a $16.9 million decrease in income and other taxes.~~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, Item~~Note 7 ~~"Financial Condition—Contractual Obligations"~~ and Note 1716 in the ~~2020~~2021 Form 10-K.

Investing Activities


		Nine Months Ended September 30,							Six Months Ended June 30,
In thousands	In thousands	2021		2020		YTD Change		In thousands	2022		2021		YTD Change
NW Natural cash used in investing activities	NW Natural cash used in investing activities	$	(197,169)	$	(188,611)	$	(8,558)	NW Natural cash used in investing activities	$	(158,180)	$	(122,887)	$	(35,293)
NW Holdings cash used in investing activities	NW Holdings cash used in investing activities	$	(203,521)	$	(226,765)	$	23,244	NW Holdings cash used in investing activities	$	(169,687)	$	(127,883)	$	(41,804)

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Cash used in investing activities ~~decreased $23.2~~increased $41.8 million at NW Holdings and increased ~~$8.6~~ $35.3 million at NW Natural. ~~NW Holdings' decrease~~The increase in cash used in investing activities was primarily due to ~~$38.1~~an increase of $37.6 million and $31.0 million of ~~cash used for water and waste water acquisitions, net of cash acquired, during the nine months ended September 30, 2020. The increase~~capital expenditures at NW Holdings and NW Natural, ~~is primarily due to an increase in capital expenditures of $10.8 million partially offset by decreased leasehold improvement expenditures of $7.3 million.~~respectively.

NW Natural capital expenditures in ~~2021~~2022 (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 ~~2021~~2022 to ~~2025~~2026 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 ~~2021~~2022 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 ~~2021~~2022 to ~~2025,~~2026, capital expenditures are expected to be approximately ~~$40~~$60 million to ~~$50~~$70 million. Investments in our infrastructure during and after ~~2021~~2022 will depend largely on additional regulations, growth, and expansion opportunities. Required funds for the investments are expected to be internally generated or financed with long-term debt or equity, as appropriate.

Financing Activities

~~Table of Contents~~


	Six Months Ended June 30,
In thousands	2022		2021		YTD Change
NW Natural cash used in financing activities	$	(32,995)	$	(63,083)	$	30,088



NW Holdings cash used in financing activities	$	(23,962)	$	(73,542)	$	49,580

~~Financing Activities~~

Nine Months Ended September 30,
In thousands 2021 2020 YTD Change
NW Natural cash provided by financing activities $ 37,469 $ 55,112 $ (17,643)
NW Holdings cash provided by financing activities $ 14,015 $ 104,503 $ (90,488)

~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2021~~ 2022 COMPARED TO ~~SEPTEMBER~~JUNE 30, ~~2020.~~2021. Cash ~~provided by~~used in financing activities decreased ~~$90.5~~$49.6 million and ~~$17.6~~$30.1 million at NW Holdings and NW Natural, respectively. The decrease at NW Holdings was attributable to net proceeds from the issuance of common stock and the ATM equity program of $174.1 million, partially offset by changes in ~~cash provided by financing activities~~debt. The decrease at NW Natural was ~~driven by a $135.0~~attributable to cash contributions from NW Holdings of $165.5 million, ~~decrease in long-term debt,~~ partially offset by ~~an increase of $114.1 million~~changes in ~~higher borrowings of short-term debt instruments.~~debt.

In addition to the decrease at NW Natural, the decrease in cash provided by financing activities at NW Holdings was primarily due to the repayment of the $35.0 million two-year loan agreement at NW Natural Water and lower borrowings on NW Holdings' credit facility during the nine months ended September 30, 2021, partially offset by the proceeds from the $55.0 million five-year term loan credit agreement at NW Natural Water.

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 ~~2020~~2021 Form 10-K. At ~~September~~June 30, ~~2021,~~2022, NW Natural's total estimated liability related to environmental sites is ~~$105.7~~$104.8 million. See "Results of Operations—Regulatory Matters—Rate Mechanisms—Environmental Costs" in the ~~2020~~2021 Form 10-K and Note ~~17.~~

16.

~~Table of Contents~~

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 ~~2020~~2021 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 ~~2020~~2021 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 ~~nine~~six months ended ~~September~~June 30, ~~2021.~~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 ~~2020~~2021 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 ~~September~~June 30, ~~2021~~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).

~~Table of Contents~~

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Other than the proceedings disclosed in Note 1716 and those proceedings disclosed and incorporated by reference in Part I, Item 3, “Legal Proceedings” in the ~~2020~~2021 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 ~~2020~~2021 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 ~~September~~June 30, ~~2021:~~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
07/01/21-07/31/21		—	—		—	—
08/01/21-08/31/21		2,877	$	53.67	—	—
09/01/21-09/30/21		—	—		—	—
04/01/22-04/30/22								04/01/22-04/30/22	—	—		—	—
05/01/22-05/31/22								05/01/22-05/31/22	3,100	50.03		—	—
06/01/22-06/30/22								06/01/22-06/30/22	—	$	—	—	—
Total	Total	2,877	$	53.67	2,124,528	$	16,732,648	Total	3,100	$	50.03	2,124,528	$	16,732,648

(1)During the quarter ended ~~September~~June 30, ~~2021,~~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, ~~2,877~~3,100 shares of NW Holdings common stock were purchased on the open market to meet the requirements of share-based compensation programs. During the quarter ended ~~September~~June 30, ~~2021,~~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 ~~September~~June 30, ~~2021,~~2022, no shares of NW Holdings common stock were repurchased pursuant to the Board-approved share repurchase program. In May 2019, we received NW Holdings Board approval to extend the repurchase program through May 2022. Effective August 3, 2022, we received NW Holdings Board approval to extend the repurchase program. Such authorization will continue until the program is used, terminated or replaced. For more information on this program, refer to Note 5 in the ~~2020~~2021 Form 10-K.

ITEM 5. OTHER INFORMATION

~~This~~The following disclosure is intended to satisfy any obligation to provide disclosures pursuant to Item ~~2.03~~5.03 of Form 8-K.

~~New~~Bylaws Amendment

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

•Article II, Sections 1 and 2 of the Bylaws were amended to allow NW Holdings ~~Credit Facility~~

On November 3, 2021, NW Holdings entered into an amended and restated credit agreement for unsecured revolving loans with JPMorgan Chase Bank, N.A., as administrative agent, and Bank of America, N.A., U.S. Bank National Association, and Wells Fargo Bank, National Association, as co-syndication agents, and J.P. Morgan Securities, LLC as the sustainability structuring agent (NW Holdings Facility). The aggregate commitment under the NW Holdings Facility is $200 million, with an accordion feature whereby NW Holdings may request, subjectflexibility to ~~certain agent~~hold its annual meeting or ~~lender consent rights, increases~~any special meeting in the ~~aggregate commitment amount up~~City of Portland, or such other place as determined by the Board of Directors.

•Article II, Section 9 of the Bylaws was amended to ~~an additional $100 million. As~~clarify that a shareholder must be a shareholder of ~~November 5, 2021, NW Holdings had borrowed $129 million on the NW Holdings Facility, leaving $71 million~~record to properly bring notice of business to be ~~drawn. The NW Holdings Facility is expected~~conducted at the meeting.

•Article II, Section 10 of the Bylaws was amended to ~~be drawn on from time~~include additional procedural and informational requirements for shareholders to ~~time~~nominate director candidates and ~~used for general corporate purposes, including, but not limited~~incorporate provisions related to ~~contributions from NW Holdings~~the Securities and Exchange Commission’s (SEC)’s new universal proxy rules.

•Article VII, Section 1 of the Bylaws was amended to ~~its subsidiaries for working capital~~eliminate the requirement that the Board annually elect the President and Secretary, consistent with other ~~general corporate purposes.~~officer appointments.

The ~~NW Holdings Facility will also permit the usage of a portion~~foregoing description of the revolving credit facility for the issuance of letters of credit in an aggregate amount up to $40 million for the account of NW Holdings. Generally, NW Holdings is required to reimburse drawings on letters of credit on the same day such drawings are made, provided that NW Holdings may (subjectamendments to the ~~conditions~~Bylaws does not purport to ~~borrowing set forth~~be complete and is qualified in its entirety by reference to the ~~NW Holdings Facility) finance such reimbursements with a revolving loan that will bear interest at~~full text of the ~~Alternate Base Rate (as defined).~~Bylaws, which are attached to this Quarterly Report on Form 10-Q as Exhibit 3.1 and are incorporated by reference herein.

The ~~maturity date for the NW Holdings Facility~~following disclosure is ~~November 3, 2026, provided that NW Holdings may request, subject~~intended to ~~lender consent rights, up~~satisfy any obligation to two, additional one-year extensions. NW Holdings may prepay any ABR Loan (as defined) without premium payment or penalty. NW Holdings may prepay a Term Benchmark Loan (as defined) without premium or penalty except customary breakage fees if prepaid on a date that is other than the endprovide disclosures pursuant to Item 8.01 of ~~the applicable interest period.~~

~~Table of Contents~~Form 8-K.

Share Repurchase Program

~~Under~~Effective August 3, 2022, NW Holdings’ Board of Directors approved an extension to the ~~terms of~~Company’s previously authorized share repurchase program for our common stock, under which the NW Holdings Facility, NW Holdings will pay arrangement fees, upfront fees, administrative agent fees, letter of credit fronting fees and annual facility fees but is not required to maintain compensating bank balances. The interest rates on borrowings under the NW Holdings Facility are basedCompany purchases shares on the ~~Debt Rating (as defined), which~~open market or through privately negotiated transactions. The Company has Board authorization to repurchase up to an aggregate of 2.8 million shares or up to an aggregate of $100 million. Such authorization will continue until the program is ~~defined as certain credit ratings assigned by Standard & Poor's (S&P)~~used, terminated or ~~Moody's Investor Services (Moody's) to certain categories~~replaced. Since the program’s inception in 2000, the Company has repurchased 2.1 million shares of ~~indebtedness~~common stock at a total cost of ~~NW Holdings or NW Natural (depending on which credit ratings are available).~~$83.3 million.

The NW Holdings Facility requires that NW Natural maintain credit ratings with S&P and Moody’s and that NW Holdings notify the banks of any change in the Debt Rating. A change in the Debt Rating is not an event of default, nor is the maintenance of a specific minimum level of credit rating a condition to drawing upon the NW Holdings Facility. However, interest rates on any loans outstanding under the NW Holdings Facility are tied to the Debt Rating, which would increase or decrease the cost of borrowings when ratings are changed.

Interest on any borrowing under the NW Holdings Facility, is payable (a) with respect to any ABR Loan, on the second business day following the last day of each of March, June, September and December and (b) with respect to any Term Benchmark Loan, on the last day of the Interest Period (as defined) applicable thereto or, in the case of a Term Benchmark Borrowing with an Interest Period of more than three months’ duration, each day prior to the last day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period.

The NW Holdings Facility requires NW Holdings to maintain a ratio of Consolidated Indebtedness to Total Capitalization (each as defined) of 70 percent or less. Failure to comply with this financial covenant would entitle the banks to terminate their lending commitments and to accelerate the maturity of all amounts outstanding.

~~New NW Natural Credit Facility~~

On November 3, 2021, NW Natural entered into an amended and restated credit agreement for unsecured revolving loans with JPMorgan Chase Bank, N.A., as administrative agent, and Bank of America, N.A., U.S. Bank National Association, and Wells Fargo Bank, National Association, as co-syndication agents, and J.P. Morgan Securities, LLC as the sustainability structuring agent (NW Natural Facility). The aggregate commitment under the NW Natural Facility is $400 million, with an accordion feature whereby NW Natural may request, subject to certain agent or lender consent rights, increases in the aggregate commitment amount up to an additional $200 million. NW Natural expects the NW Natural Facility to be used primarily to back the NW Natural commercial paper program.

The NW Natural Facility will also permit the usage of a portion of the revolving credit facility for the issuance of letters of credit in an aggregate amount up to $60 million for the account of NW Natural. Generally, NW Natural is required to reimburse drawings on letters of credit on the same day such drawings are made, provided that NW Natural may (subject to the conditions to borrowing set forth in the NW Natural Facility) finance such reimbursements with a revolving loan that will bear interest at the Alternate Base Rate (as defined in the NW Natural Facility).

The maturity date for the NW Natural Facility is November 3, 2026, provided that NW Natural may request, subject to lender consent rights, up to two, additional one-year extensions. NW Natural may prepay any ABR Loan (as defined) without premium payment or penalty. NW Natural may prepay a Term Benchmark Loan (as defined) without premium or penalty except customary breakage fees if prepaid on a date that is other than the end of the applicable interest period.

Under the terms of the NW Natural Facility, NW Natural will pay arrangement fees, upfront fees, administrative agent fees, letter of credit fees and annual facility fees but is not required to maintain compensating bank balances. The interest rates on borrowings under the NW Natural Facility, are based on the Debt Rating (as defined), which is defined as certain credit ratings assigned by Standard & Poor's (S&P) or Moody's Investor Services (Moody's) to certain categories of indebtedness of NW Natural (depending) on which credit ratings are available.

The NW Natural Facility requires that NW Natural maintain credit ratings with S&P and Moody’s and that NW Natural notify the banks of any change in the Debt Rating. A change in the Debt Rating is not an event of default, nor is the maintenance of a specific minimum level of credit rating a condition to drawing upon the NW Natural Facility. However, interest rates on any loans outstanding under the NW Natural Facility are tied to the Debt Rating, which would increase or decrease the cost of borrowings when ratings are changed.

Interest on any borrowing under the NW Natural Facility, is payable (a) with respect to any ABR Loan, on the second business day following the last day of each of March, June, September and December and (b) with respect to any Term Benchmark Loan, on the last day of the Interest Period (as defined) applicable thereto or, in the case of a Term Benchmark Borrowing with an Interest Period of more than three months’ duration, each day prior to the last day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period.

The NW Natural Facility requires NW Natural to maintain a ratio of Consolidated indebtedness to Total Capitalization (each as defined) of 70 percent or less. Failure to comply with this financial covenant would entitle the banks to terminate their lending commitments and to accelerate the maturity of all amounts outstanding.

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ITEM 6. EXHIBITS

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

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NORTHWEST NATURAL GAS COMPANY

NORTHWEST NATURAL HOLDING COMPANY

Exhibit Index to Quarterly Report on Form 10-Q

For the Quarter Ended ~~September~~June 30, ~~2021~~2022


Exhibit Index
Exhibit Number			Document
~~4.1~~3.1			Amended and Restated ~~Credit Agreement, dated as~~Bylaws of ~~November 3, 2021, among~~ Northwest Natural Holding Company and the lenders party thereto, with JPMorgan Chase Bank, N.A. as administrative agent and Bank of America, N.A., U.S. Bank National Association, and Wells Fargo Bank, National Association, as co-syndication agents.Company.

~~4.2~~3.2			Amended and Restated ~~Credit Agreement, dated as~~Bylaws of ~~November 3, 2021, among~~ Northwest Natural Gas Company and the lenders party thereto, with JPMorgan Chase Bank, N.A. as administrative agent and Bank of America, N.A., U.S. Bank National Association, and Wells Fargo Bank, National Association, as co-syndication agents.

~~10.1~~			~~Deferred Compensation Plan for Directors and Executives, effective January 1, 2005, restated as of September 23, 2021.~~Company.

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

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

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

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

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

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

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

104			The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2021,~~2022, formatted in Inline XBRL.

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

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SIGNATURES

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:	~~November 5, 2021~~August 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:	~~November 5, 2021~~August 4, 2022
		/s/ Brody J. Wilson
		Brody J. Wilson
		Principal Accounting Officer Vice President, Treasurer, Chief Accounting Officer and Controller

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	As of						As of
	December 31, 2020		Nine Months Ended September 30, 2021				September 30, 2021
In thousands	Beginning Balance		Provision recorded, net of adjustments		Write-offs recognized, net of recoveries		Ending Balance
Allowance for uncollectible accounts:
Residential	$	2,153	$	1,322	$	(1,111)	$	2,364
Commercial	704		(337)		(303)		64
Industrial	142		(106)		5		41
Accrued unbilled and other	220		96		(83)		233
Total	$	3,219	$	975	$	(1,492)	$	2,702


	As of September 30,
	2021	2020	Change	Growth
NGD Meters - end of period:
Residential meters	712,335	700,062	12,273	1.8%
Commercial meters	68,414	68,767	(353)	(0.5)%
Industrial meters	978	988	(10)	(1.0)%
Total number of meters	781,727	769,817	11,910	1.5%