Pension and Other Postretirement Benefits Costs | 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. Effective January 1, 2007 and 2010, the qualified defined benefit pension plans and postretirement benefits for non-union employees and union employees, respectively, were closed to new participants. Non-union and union employees hired or re-hired after December 31, 2006 and 2009, respectively, and employees of NW Natural subsidiaries are provided an enhanced Retirement K Savings Plan benefit. The following table provides a reconciliation of the changes in NW Natural's benefit obligations and fair value of plan assets, as applicable, for NW Natural's pension and other postretirement benefit plans, excluding the Retirement K Savings Plan, and a summary of the funded status and amounts recognized in NW Holdings' and NW Natural's consolidated balance sheets as of December 31: Postretirement Benefit Plans Pension Benefits Other Benefits In thousands 2019 2018 2019 2018 Reconciliation of change in benefit obligation: Obligation at January 1 $ 455,568 $ 486,289 $ 28,172 $ 28,927 Service cost 6,308 7,185 244 282 Interest cost 18,683 16,991 1,117 964 Net actuarial (gain) loss 58,269 (32,979 ) 1,809 (327 ) Benefits paid (23,160 ) (21,918 ) (1,774 ) (1,674 ) Obligation at December 31 $ 515,668 $ 455,568 $ 29,568 $ 28,172 Reconciliation of change in plan assets: Fair value of plan assets at January 1 $ 257,797 $ 287,925 $ — $ — Actual return on plan assets 65,104 (25,925 ) — — Employer contributions 13,310 17,715 1,774 1,674 Benefits paid (23,160 ) (21,918 ) (1,774 ) (1,674 ) Fair value of plan assets at December 31 $ 313,051 $ 257,797 $ — $ — Funded status at December 31 $ (202,617 ) $ (197,771 ) $ (29,568 ) $ (28,172 ) NW Natural's Pension Plan had a projected benefit obligation of $ 477.3 million and $ 420.2 million at December 31, 2019 and 2018 , respectively, and fair values of plan assets of $ 313.1 million and $ 257.8 million , respectively. The plan had an accumulated benefit obligation of $434.9 million and $385.9 million at December 31, 2019 and 2018 , respectively. The following table presents amounts realized through regulatory assets or in other comprehensive loss (income) for the years ended December 31: Regulatory Assets Other Comprehensive Loss (Income) Pension Benefits Other Postretirement Benefits Pension Benefits In thousands 2019 2018 2017 2019 2018 2017 2019 2018 2017 Net actuarial loss (gain) $ 10,424 $ 14,261 $ 12,177 $ 1,809 $ (327 ) $ (214 ) $ 3,595 $ (677 ) $ 2,777 Amortization of: Prior service cost (7 ) (42 ) (127 ) 468 468 468 — — — Actuarial loss (14,057 ) (18,761 ) (14,802 ) (369 ) (448 ) (696 ) (648 ) (1,052 ) (946 ) Total $ (3,640 ) $ (4,542 ) $ (2,752 ) $ 1,908 $ (307 ) $ (442 ) $ 2,947 $ (1,729 ) $ 1,831 The following table presents amounts recognized in regulatory assets and accumulated other comprehensive loss (AOCL) at December 31: Regulatory Assets AOCL Pension Benefits Other Postretirement Benefits Pension Benefits In thousands 2019 2018 2019 2018 2019 2018 Prior service cost (credit) $ — $ 7 $ (1,270 ) $ (1,738 ) $ — $ — Net actuarial loss 166,903 170,535 7,629 6,189 14,484 11,537 Total $ 166,903 $ 170,542 $ 6,359 $ 4,451 $ 14,484 $ 11,537 The following table presents amounts recognized by NW Holdings and NW Natural in AOCL and the changes in AOCL related to NW Natural's non-qualified employee benefit plans: Year Ended December 31, In thousands 2019 2018 Beginning balance $ (7,188 ) $ (8,438 ) Amounts reclassified to AOCL (3,611 ) 642 Amounts reclassified from AOCL: Amortization of actuarial losses 648 1,052 Reclassification of stranded tax effects (1) (1,366 ) — Total reclassifications before tax (4,329 ) 1,694 Tax expense (benefit) 784 (444 ) Total reclassifications for the period (3,545 ) 1,250 Ending balance $ (10,733 ) $ (7,188 ) (1) Reclassification of $1.4 million of income tax effects resulting from the TCJA from accumulated other comprehensive loss to retained earnings was made pursuant to the adoption of ASU 2018-02. See Note 2 . In 2020 , NW Natural will amortize an estimated $ 18.3 million from regulatory assets to net periodic benefit costs, consisting of $ 18.8 million of actuarial losses offset by $0.5 million of prior service credits. A total of $ 0.9 million will be amortized from AOCL to earnings related to actuarial losses in 2020 . The assumed discount rates for NW Natural's Pension Plan and other postretirement benefit plans were determined independently based on the FTSE Above Median Curve (discount rate curve), which uses high quality corporate bonds rated AA- or higher by S&P or Aa3 or higher by Moody’s. The discount rate curve was applied to match the estimated cash flows in each of the plans to reflect the timing and amount of expected future benefit payments for these plans. The assumed expected long-term rate of return on plan assets for the Pension Plan was developed using a weighted-average of the expected returns for the target asset portfolio. In developing the expected long-term rate of return assumption, consideration was given to the historical performance of each asset class in which the plan’s assets are invested and the target asset allocation for plan assets. The investment strategy and policies for Pension Plan assets held in the retirement trust fund were approved by the NW Natural Retirement Committee, which is composed of senior management with the assistance of an outside investment consultant. The policies set forth the guidelines and objectives governing the investment of plan assets. Plan assets are invested for total return with appropriate consideration for liquidity, portfolio risk, and return expectations. All investments are expected to satisfy the prudent investments rule under the Employee Retirement Income Security Act of 1974. The approved asset classes may include cash and short-term investments, fixed income, common stock and convertible securities, absolute and real return strategies, and real estate. Plan assets may be invested in separately managed accounts or in commingled or mutual funds. Investment re-balancing takes place periodically as needed, or when significant cash flows occur, in order to maintain the allocation of assets within the stated target ranges. The retirement trust fund is not currently invested in NW Holdings or NW Natural securities. The following table presents the Pension Plan asset target allocation at December 31, 2019 : Asset Category Target Allocation Long government/credit 20 % U.S. large cap equity 18 Non-U.S. equity 18 Absolute return strategies 12 U.S. small/mid cap equity 10 Real estate funds 7 High yield bonds 5 Emerging markets equity 5 Emerging market debt 5 Non-qualified supplemental defined benefit plan obligations were $ 38.3 million and $ 35.4 million at December 31, 2019 and 2018 , respectively. These plans are not subject to regulatory deferral, and the changes in actuarial gains and losses, prior service costs, and transition assets or obligations are recognized in AOCL, net of tax until they are amortized as a component of net periodic benefit cost. These are unfunded, non-qualified plans with no plan assets; however, a significant portion of the obligations is indirectly funded with company and trust-owned life insurance and other assets. Other postretirement benefit plans are unfunded plans but are subject to regulatory deferral. The actuarial gains and losses, prior service costs, and transition assets or obligations for these plans are recognized as a regulatory asset. Net periodic benefit costs consist of service costs, interest costs, the expected returns on plan assets, and the amortization of gains and losses and prior service costs. The gains and losses are the sum of the actuarial and asset gains and losses throughout the year and are amortized over the average remaining service period of active participants. The asset gains and losses are based in part on a market-related valuation of assets. The market-related valuation reflects differences between expected returns and actual investment returns with the differences recognized over a two-year period from the year in which they occur, thereby reducing year-to-year net periodic benefit cost volatility. 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 NW Natural's pension and other postretirement benefit plans for the years ended December 31: Pension Benefits Other Postretirement Benefits In thousands 2019 2018 2017 2019 2018 2017 Service cost $ 6,308 $ 7,185 $ 7,090 $ 244 $ 282 $ 341 Interest cost 18,684 16,991 18,111 1,116 964 1,141 Expected return on plan assets (20,854 ) (20,639 ) (20,433 ) — — — Amortization of prior service costs 7 43 127 (468 ) (468 ) (468 ) Amortization of net actuarial loss 14,704 19,813 15,748 368 448 696 Net periodic benefit cost 18,849 23,393 20,643 1,260 1,226 1,710 Amount allocated to construction (2,493 ) (2,764 ) (6,597 ) (86 ) (98 ) (587 ) Amount deferred to regulatory balancing account — (10,314 ) (6,542 ) — — — Net periodic benefit cost charged to expense 16,356 10,315 7,504 1,174 1,128 1,123 Regulatory pension disallowance 10,500 — — — — — Amortization of regulatory balancing account 16,841 — — — — — Net amount charged to expense $ 43,697 $ 10,315 $ 7,504 $ 1,174 $ 1,128 $ 1,123 Net periodic benefit costs are reduced by amounts capitalized to NGD plant. In addition, a certain amount of net periodic benefit costs were recorded to the regulatory balancing account, representing net periodic pension expense for the Pension Plan above the amount set in rates, as approved by the OPUC, from 2011 through October 31, 2018. In March 2019, the OPUC issued an order concluding the NW Natural 2018 Oregon rate case. The order allowed for the application of certain deferred revenues and tax benefits from the TCJA to reduce NW Natural's pension regulatory balancing account. A corresponding total of $12.5 million in pension expenses were recognized in operating and maintenance expense and other income (expense), net in the consolidated statements of comprehensive income in the first quarter of 2019, with offsetting benefits recorded within operating revenues and income taxes. The order also directed NW Natural to reduce the balancing account by an additional $10.5 million , of which $3.9 million was charged to operations and maintenance expense and $6.6 million was charged to other income (expense), net in the consolidated statements of comprehensive income. Amortization of the remaining amount of the balancing account began in the second quarter of 2019 in accordance with the order. Total amortization of the regulatory balancing account of $16.8 million in 2019 , of which $6.2 million was charged to operations and maintenance expense and $10.6 million was charged to other income (expense), net. Total deferrals of the regulatory balancing account were $10.3 million in 2018 , of which $2.4 million was deferred from operations and maintenance expense and $7.9 million was deferred from other income (expense), net. The following table provides the assumptions used in measuring periodic benefit costs and benefit obligations for the years ended December 31: Pension Benefits Other Postretirement Benefits 2019 2018 2017 2019 2018 2017 Assumptions for net periodic benefit cost: Weighted-average discount rate 4.19 % 3.51 % 3.99 % 4.13 % 3.44 % 3.85 % Rate of increase in compensation 3.25-3.5% 3.25-4.5% 3.25-4.5% n/a n/a n/a Expected long-term rate of return 7.50 % 7.50 % 7.50 % n/a n/a n/a Assumptions for year-end funded status: Weighted-average discount rate 3.16 % 4.20 % 3.52 % 3.11 % 4.13 % 3.44 % Rate of increase in compensation (1) 3.50-6.50% 3.25-4.5% 3.25-4.5% n/a n/a n/a Expected long-term rate of return 7.25 % 7.50 % 7.50 % n/a n/a n/a (1) Rate assumption is 6.50% in 2020 and 3.50% thereafter. The 2020 compensation increase assumption was a result of the 2019 execution of a new collective bargaining agreement with unionized members of NW Natural effective December 1, 2019. The assumed annual increase in health care cost trend rates used in measuring other postretirement benefits as of December 31, 2019 was 6.50% . These trend rates apply to both medical and prescription drugs. Medical costs and prescription drugs are assumed to decrease gradually each year to a rate of 4.75% by 2026 . Assumed health care cost trend rates can have a significant effect on the amounts reported for the health care plans; however, other postretirement benefit plans have a cap on the amount of costs reimbursable by NW Natural. A one percentage point change in assumed health care cost trend rates would have the following effects: In thousands 1% Increase 1% Decrease Effect on net periodic postretirement health care benefit cost $ 49 $ (44 ) Effect on the accumulated postretirement benefit obligation 710 (640 ) Mortality assumptions are reviewed annually and are updated for material changes as necessary. In 2019, mortality rate assumptions were updated from RP-2014 mortality tables using scale MP-2018 to Pri-2012 mortality tables using scale MP-2019, which partially offset increases of the projected benefit obligation. The following table provides information regarding employer contributions and benefit payments for NW Natural's Pension Plan, non-qualified pension plans, and other postretirement benefit plans for the years ended December 31, and estimated future contributions and payments: In thousands Pension Benefits Other Benefits Employer Contributions: 2018 $ 17,715 $ 1,674 2019 13,310 1,774 2020 (estimated) 31,338 1,756 Benefit Payments: 2017 31,580 1,737 2018 21,918 1,674 2019 23,160 1,774 Estimated Future Benefit Payments: 2020 23,412 1,756 2021 24,304 1,833 2022 25,094 1,848 2023 25,941 1,899 2024 26,757 1,903 2025-2029 148,000 8,945 Employer Contributions to Company-Sponsored Defined Benefit Pension Plans NW Natural makes contributions to its qualified defined benefit Pension Plans based on actuarial assumptions and estimates, tax regulations, and funding requirements under federal law. The Pension Protection Act of 2006 (the Act) established funding requirements for defined benefit plans. The Act establishes a 100% funding target over seven years for plan years beginning after December 31, 2008. In July 2012, President Obama signed the Moving Ahead for Progress in the 21st Century Act (MAP-21) into law, which changed several provisions affecting pension plans, including temporary funding relief and Pension Benefit Guaranty Corporation (PBGC) premium increases, which shifts the level of minimum required contributions from the short-term to the long-term as well as increasing the operational costs of running a pension plan. MAP-21 established a new minimum and maximum corridor for segment rates based on a 25-year average of bond yields, which resulted in lower minimum contributions requirements than those under previous regulations. MAP-21, as amended, provides for the current corridor to be in effect through 2020 and subsequently broaden on an annual basis from 2021 through 2024. The Pension Plan was underfunded by $ 164.3 million at December 31, 2019 . NW Natural made cash contributions totaling $ 11.0 million to its Pension Plan for 2019 . During 2020 , NW Natural expects to make contributions of approximately $29.0 million to this plan. Multiemployer Pension Plan In addition to the NW Natural-sponsored Pension Plan presented above, prior to 2014 NW Natural contributed to a multiemployer pension plan for its NGD union employees known as the Western States Office and Professional Employees International Union Pension Fund (Western States Plan). That plan's employer identification number is 94-6076144. Effective December 22, 2013, NW Natural withdrew from the plan, which was a noncash transaction. Vested participants will receive all benefits accrued through the date of withdrawal. As the plan was underfunded at the time of withdrawal, NW Natural was assessed a withdrawal liability of $8.3 million , plus interest, which requires NW Natural to pay $0.6 million each year to the plan for 20 years beginning in July 2014. The cost of the withdrawal liability was deferred to a regulatory account on the balance sheet. Payments were $0.6 million for 2019 , and as of December 31, 2019 the liability balance was $6.5 million . Contributions to the plan were $0.6 million for each of 2018 and 2017, which was approximately 5% to 6% of the total contributions to the plan by all employer participants in those years. Defined Contribution Plan NW Natural's Retirement K Savings Plan is a qualified defined contribution plan under Internal Revenue Code Sections 401(a) and 401(k). NW Natural contributions totaled $ 7.0 million , $6.5 million , and $5.4 million for 2019 , 2018 , and 2017 , respectively. The Retirement K Savings Plan includes an Employee Stock Ownership Plan. Deferred Compensation Plans NW Natural's supplemental deferred compensation plans for eligible officers and senior managers are non-qualified plans. These plans are designed to enhance the retirement savings of employees and to assist them in strengthening their financial security by providing an incentive to save and invest regularly. Fair Value Below is a description of the valuation methodologies used for assets measured at fair value. In cases where NW Natural's Pension Plan is invested through a collective trust fund or mutual fund, the fund's market value is utilized. Market values for investments directly owned are also utilized. U.S. EQUITY. These are non-published net asset value (NAV) assets. The non-published NAV assets consist of commingled trusts where NAV is not published but the investment can be readily disposed of at NAV or market value. The underlying investments in this asset class includes investments primarily in U.S. common stocks. INTERNATIONAL/GLOBAL EQUITY. These are Level 1 and non-published NAV assets. The Level 1 asset is a mutual fund, and the non-published NAV assets consist of commingled trusts where the NAV/unit price is not published, but the investment can be readily disposed of at the NAV/unit price. The mutual funds has a readily determinable fair value, including a published NAV, and the commingled trusts are valued at unit price. This asset class includes investments primarily in foreign equity common stocks. LIABILITY HEDGING. These are non-published NAV assets. The non-published NAV assets consist of commingled trusts where NAV is not published but the investment can be readily disposed of at NAV or market value. The underlying investments in this asset class include long duration fixed income investments primarily in U.S. treasuries, U.S. government agencies, municipal securities, mortgage-backed securities, asset-backed securities, as well as U.S. and international investment-grade corporate bonds. OPPORTUNISTIC. These are non-published NAV assets consisting of commingled trusts where the investments can be readily disposed of at unit price, and a hedge fund of funds where the valuation is not published. This hedge fund of funds is winding down. Based on recent dispositions, NW Natural believes the remaining investment is fairly valued. The hedge fund of funds is valued at the weighted average value of investments in various hedge funds, which in turn are valued at the closing price of the underlying securities. This asset class includes investments in emerging market debt, leveraged loans, REITs, high yield bonds, a commodities fund, and a hedge fund of funds . ABSOLUTE RETURN STRATEGY. This is a non-published NAV asset consisting of a hedge fund of funds where the valuation is not published. This hedge fund of funds is winding down. Based on recent dispositions, NW Natural believes the remaining investment is fairly valued. The hedge fund of funds is valued at the weighted average value of investments in various hedge funds, which in turn are valued at the closing price of the underlying securities. This asset class primarily includes investments in common stocks and fixed income securities. CASH AND CASH EQUIVALENTS. These are Level 1 and non-published NAV assets. The Level 1 assets consist of cash in U.S. dollars, which can be readily disposed of at face value. The non-published NAV assets represent mutual funds without published NAV's but the investment can be readily disposed of at the NAV. The mutual funds are valued at the NAV of the shares held by the plan at the valuation date. The preceding valuation methods may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Although we believe these valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain investments could result in a different fair value measurement at the reporting date. Investment securities are exposed to various financial risks including interest rate, market, and credit risks. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of NW Natural's investment securities will occur in the near term and such changes could materially affect NW Natural's investment account balances and the amounts reported as plan assets available for benefit payments. The following tables present the fair value of NW Natural's plan assets, including outstanding receivables and liabilities, of NW Natural's retirement trust fund: In thousands December 31, 2019 Investments Level 1 Level 2 Level 3 Non-Published NAV (1) Total US equity $ — $ — $ — $ 95,604 $ 95,604 International / Global equity 33,168 — — 74,337 107,505 Liability hedging — — — 93,028 93,028 Opportunistic — — — 9,864 9,864 Cash and cash equivalents — — — 7,049 7,049 Total investments $ 33,168 $ — $ — $ 279,882 $ 313,050 December 31, 2018 Investments Level 1 Level 2 Level 3 Non-Published NAV (1) Total US equity $ — $ — $ — $ 85,233 $ 85,233 International / Global equity 24,994 — — 70,017 95,011 Liability hedging — — — 45,659 45,659 Opportunistic — — — 23,186 23,186 Cash and cash equivalents — — — 8,707 8,707 Total investments $ 24,994 $ — $ — $ 232,802 $ 257,796 December 31, 2019 2018 Receivables: Accrued interest and dividend income $ 3,243 $ 1 Due from broker for securities sold — — Total receivables 3,243 1 Liabilities: Due to broker for securities purchased 3,242 — Total investment in retirement trust $ 313,051 $ 257,797 (1) The fair value for these investments is determined using Net Asset Value per share (NAV) as of December 31, as a practical expedient, and therefore they are not classified within the fair value hierarchy. These investments primarily consist of institutional investment products, for which the NAV is generally not publicly available. |