This report contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, which are subject to the safe harbors created by such Act. Forward-looking statements can be identified by words such as anticipates, assumes, may, intends, plans, projects, seeks, believes, estimates, expects, will, could, and similar references (including the negatives thereof) to future periods.periods, although not all forward-looking statements contain these words. Examples of forward-looking statements include, but are not limited to, statements regarding the following:
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 at Item 1A., "Risk Factors" of Part I and 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, of Part II of this report.
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.
PART I
FILING FORMAT
This annual report on Form 10-K is a combined report being filed by two separate registrants: Northwest Natural Holding Company (NW Holdings), and Northwest Natural Gas Company (NW Natural). Except where the content clearly indicates otherwise, any reference in the report to "we," "us" or "our" is to the consolidated entity of NW Holdings and all of its subsidiaries, including NW Natural, which is a distinct SEC registrant that is a wholly-owned subsidiary of NW Holdings. Each of NW Holdings' subsidiaries is a separate legal entity with its own assets and liabilities. Information contained herein relating to any individual registrant or its subsidiaries is filed by such registrant on its own behalf. Each registrant makes representations only as to itself and its subsidiaries and makes no other representation whatsoever as to any other company.
Item 8 in this Annual Report on Form 10-K includes separate financial statements (i.e. balance sheets, statements of comprehensive income, statements of cash flows, and statements of equity) for NW Holdings and NW Natural, in that order. References in this discussion to the "Notes" are to the Notes to the Consolidated Financial Statements in Item 8 of this report. The Notes to the Consolidated Financial Statements are presented on a combined basis for both entities except where expressly noted otherwise. All Items other than Item 8 are combined for the reporting companies.
ITEM 1. BUSINESS
OVERVIEW
On October 1, 2018, we completed a reorganization into a holding company structure. In this reorganization, shareholders of NW Natural (the predecessor publicly held parent company) became shareholders of NW Holdings, on a one-for-one basis, with the same number of shares and same ownership percentage as they held in NW Natural immediately prior to the reorganization. NW Natural became a wholly owned subsidiary of NW Holdings. Additionally, certain subsidiaries of NW Natural were transferred to NW Holdings. As required under generally accepted accounting principles, these subsidiaries are presented as discontinued operations in the 2018 and 2017 consolidated results of NW Natural within this report.
NW Holdings is a holding company headquartered in Portland, Oregon and owns NW Natural, NW Natural Water Company, LLC (NWN Water), NW Natural Renewables Holdings, LLC, a non-regulated subsidiary established to pursue non-regulated renewable natural gas activities, and other businesses and activities. NW Natural is NW Holdings’ largest subsidiary.
NW Natural distributes natural gas to residential, commercial, and industrial customers in Oregon and southwest Washington. NW Natural and its predecessors have supplied gas service to the public since 1859, was incorporated in Oregon in 1910, and began doing business as NW Natural in 1997. NW Natural's natural gas distribution activities are reported in the natural gas distribution (NGD) segment. All other business activities, including certain gas storage activities, water and wastewater businesses, non-regulated renewable natural gas activities and other investments and activities are aggregated and reported as "other" at their respective registrant.
In addition, NW Holdings has reported discontinued operations results related to the pending sale of Gill Ranch Storage, LLC (Gill Ranch). NW Natural Gas Storage, LLC (NWN Gas Storage), currently an indirect wholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement during the second quarter of 2018 that provides 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. Pacific Gas and Electric Company (PG&E) owns the remaining 25% interest in the Gill Ranch Gas Storage Facility. See Note 19 of the Consolidated Financial Statements in Item 8 of this report for more information.
NATURAL GAS DISTRIBUTION (NGD) SEGMENT
Both NW Holdings and NW Natural have one reportable segment, the NGD segment, which is operated by NW Natural. NGD provides natural gas service through approximately 760,000795,000 meters in Oregon and southwest Washington. Approximately 89%88% of customers are located in Oregon and 11%12% are located in southwest Washington.
NW Natural has been allocated an exclusive service territory by the Oregon Public Utility Commission (OPUC) and Washington Utilities and Transportation Commission (WUTC), which includes the major population centers in western Oregon, including the Portland metropolitan area, most of the Willamette Valley, the Coastal area from Astoria to Coos Bay, and portions of Washington along the Columbia River. Portland serves as a major West Coast port and is a key distribution center. Major businesses located in NW Natural's service territory include retail, manufacturing, and high-technology industries.
Customers
The NGD business serves residential, commercial, and industrial customers with no individual customer accounting for more than 10% of NW Natural's or NW Holdings' revenues. On an annual basis, residential and commercial customers typically account for approximately 60% of NGD volumes delivered and approximately 90% of NGD margin. Industrial and other customers largely account for the remaining volumes and margin.
The following table presents summary meter information for the NGD segment as of December 31, 20192022:
| | | | | | | | | | | | | | | | | | | | |
| | Number of Meters | | % of Volumes | | % of Margin |
Residential | | 724,287 | | | 38 | % | | 65 | % |
Commercial | | 69,139 | | | 23 | % | | 25 | % |
Industrial | | 1,071 | | | 39 | % | | 7 | % |
Other(1) | | N/A | | N/A | | 3 | % |
Total | | 794,497 | | | 100 | % | | 100 | % |
(1) :NGD margin is also affected by other items, including miscellaneous revenues, gains or losses from NW Natural's gas cost incentive sharing mechanism, other margin adjustments, and other regulated services.
|
| | | | | | | | | |
| | Number of Meters | | % of Volumes | | % of Margin |
Residential | | 692,012 |
| | 38 | % | | 63 | % |
Commercial | | 69,858 |
| | 22 | % | | 24 | % |
Industrial | | 1,007 |
| | 40 | % | | 8 | % |
Other(1) | | N/A |
| | N/A |
| | 5 | % |
Total | | 762,877 |
| | 100 | % | | 100 | % |
| |
| NGD margin is also affected by other items, including miscellaneous revenues, gains or losses from NW Natural's gas cost incentive sharing mechanism, other margin adjustments, and other regulated services. |
Generally, residential and commercial customers purchase both their natural gas commodity (gas sales) and natural gas delivery services (transportation services) from the NGD business. Industrial customers also purchase transportation services, but may buy the gas commodity either from NW Natural or directly from a third-party gas marketer or supplier. Gas commodity cost is primarily a pass-through cost to customers; therefore, profit margins are not materiallysignificantly affected by an industrial customer's decision to purchase gas from NW Natural or from third parties. Industrial and large commercial customers may also select between firm and interruptible service levels, with firm services generally providing higher profit margins compared to interruptible services.
To help manage gas supplies, industrial tariffs are designed to provide some certainty regarding industrial customers' volumes by requiring an annual service election, special chargesrates or possible restrictions for changes between elections, and in some cases, a minimum or maximum volume requirement before changing options.
Customer growth rates for natural gas utilities in the Pacific Northwest historically have been among the highest in the nation due to lower market saturation as natural gas became widely available as a residential heating source after other fuel options. We estimate natural gas was in approximately 63% of single-family residential homes in NW Natural's service territory in 2019.2022. Customer growth in our region comes mainly from the following sources: single-family housing, both new construction and conversions; multifamily housing new construction; and commercial buildings, both new construction and conversions. Single-family new construction has consistently been our largest source of growth. Continued customer growth is closely tied to consumer preference for natural gas, the comparative price of natural gas to electricity and fuel oil, regulations and building codes permitting the use of natural gas in new construction and conversions, and the economic health of Portland, Oregon and Vancouver, Washington. We believe there is potential for continued growth as natural gas is a preferred direct energy source due to its affordability, reliability, comfort, convenience, and clean qualities.our service territory.
Competitive Conditions
In its service areas, the NGD business has no direct competition from other natural gas distributors. However, it competes with other forms of energy in each customer class. This competition among energy suppliers is based on price, efficiency, reliability, performance, preference, market conditions, building codes, technology, federal, state, and local energy policy, and environmental impacts.
For residential and small to mid-size commercial customers, the NGD business competes primarily with providers of electricity, fuel oil, and propane.
In the industrial and large commercial markets, the NGD business competes with all forms of energy, including competition from wholesale natural gas marketers. In addition, large industrial customers could bypass NW Natural's natural gas distribution system by installing their own direct pipeline connection to the interstate pipeline system. NW Natural has designed custom transportation service agreements with several large industrial customers to provide transportation service rates that are competitive with the customer’s costs of installing their own pipeline.
Seasonality of Business
The NGD business is seasonal in nature due to higher gas usage by residential and commercial customers during the cold winter heating months. Other categories of customers experience similar seasonality in their usage but to a lesser extent.
Regulation and Rates
The NGD business is subject to regulation by the OPUC and WUTC. These regulatory agencies authorize rates and allow recovery mechanisms to provide the opportunity to recover prudently incurred capital and operating costs from customers, while also earning a reasonable return on investment for investors. In addition, the OPUC and WUTC also regulate the system of accounts and issuance of securities by NW Natural.
NW Natural files general rate cases and rate tariff requests periodically with the OPUC and WUTC to establish approved rates, an authorized return on equity (ROE), an overall rate of return (ROR) on rate base, an authorized capital structure, and other revenue/cost deferral and recovery mechanisms.
NW Natural is also regulated by the Federal Energy Regulatory Commission (FERC). Under NW Natural's Mist interstate storage certificate with FERC, NW Natural is required to file either a petition for rate approval or a cost and revenue study every five years to change or justify maintaining the existing rates for the interstate storage service.
For further discussion on our most recent general rate cases, see Part II, Item 7, "Results of Operations—Regulatory Matters—Regulation and Rates."
Gas Supply
NW Natural strives to secure sufficient, reliable supplies of natural gas to meet the needs of customers at the lowest reasonable cost, while maintaining price stability, and managing gas purchase costs prudently.prudently and supporting our core value of environmental stewardship. This is accomplished through a comprehensive strategy focused on the following items:
| |
• | •Reliability- ensuring gas resource portfolios are sufficient to satisfy customer requirements under extreme cold weather conditions; •Diverse Supply - providing diversity of supply sources; •Diverse Contracts - maintaining a variety of contract durations, types, and counterparties; •Cost Management and Recovery - employing prudent gas cost management strategies; and
•Environmental Stewardship - striving to reduce the carbon content and environmental impacts of the energy we deliver.
- ensuring gas resource portfolios are sufficient to satisfy customer requirements under extreme cold weather conditions;
|
| |
• | Diverse Supply - providing diversity of supply sources;
|
| |
• | Diverse Contracts - maintaining a variety of contract durations, types, and counterparties; and
|
| |
• | Cost Management and Recovery - employing prudent gas cost management strategies.
|
Reliability
The effectiveness of the natural gas distributionTo support system ultimately rests on whether reliable service is provided to NGD customers. To ensure effectiveness,reliability, the NGD business has developed a risk-based methodology in which it uses a planning standard to serve the highest firm sales demand day in any year with 99% certainty.
The projected maximum design day firm NGD customer sendoutsales is approximately 10 million therms. Of this total, the NGD business is currently capable of meeting about 57%approximately 50% of the requirements with gas from storage located within or adjacent to its service territory, while the remaining supply requirements would come from gas purchases under firm gas purchase contracts and recall agreements.
NW Natural segments transportation capacity, which is a natural gas transportation mechanism under which a shipper can leverage its firm pipeline transportation capacity by separating it into multiple segments with alternate delivery routes. The reliability of service on these alternate routes will vary depending on the constraints of the pipeline system. For those segments with acceptable reliability, segmentation provides a shipper with increased flexibility and potential cost savings compared to traditional pipeline service. The NGD business relies on segmentation of firm pipeline transportation capacity that flows from Stanfield, Oregon to various points south of Molalla, Oregon.
We believe gas supplies would be sufficient to meet existing NGD firm customer demand in the event of maximum design day weather conditions.
The following table shows the sources of supply projected to be used to satisfy the design day sendoutsales for the 2019-202022-23 winter heating season:
| | | | | | | | | | | | | | |
Therms in millions | | Therms | | Percent |
Sources of NGD supply: | | | | |
Firm supply purchases | | 3.4 | | | 34 | % |
Mist underground storage (NGD only) | | 3.1 | | | 30 | % |
Company-owned LNG storage | | 1.9 | | | 19 | % |
Off-system storage contract | | 0.5 | | | 5 | % |
Pipeline segmentation capacity | | 0.6 | | | 6 | % |
Recall agreements | | 0.4 | | | 4 | % |
Peak day citygate deliveries | | 0.2 | | | 2 | % |
Total | | 10.1 | | | 100 | % |
|
| | | | | | |
Therms in millions | | Therms | | Percent |
Sources of NGD supply: | | | | |
Firm supply purchases | | 3.4 |
| | 34 | % |
Mist underground storage (NGD only) | | 3.1 |
| | 31 | % |
Company-owned LNG storage | | 1.9 |
| | 19 | % |
Off-system storage contract | | 0.5 |
| | 5 | % |
Pipeline segmentation capacity | | 0.6 |
| | 6 | % |
Recall agreements | | 0.4 |
| | 4 | % |
Peak day citygate deliveries | | 0.1 |
| | 1 | % |
Total | | 10.0 |
| | 100 | % |
The OPUC and WUTC have Integrated Resource Planning (IRP) processes in which utilities define different growthfuture scenarios and corresponding resource acquisitionand compliance strategies in an effort to evaluate supply and demand resource and compliance requirements, consider uncertainties in the planning process and the need for flexibility to respond to changes, and establish a plan for providing reliable service at thewhile meeting carbon compliance obligations within frameworks that emphasize least cost.cost and risk.
NW Natural generally files a full IRP biennially for Oregon and Washington with the OPUC and the WUTC, respectively, and files updates in Oregon between filings. The OPUC acknowledges NW Natural's action plan, whereas the WUTC provides notice that the IRP has met the requirements of the Washington Administrative Code. OPUC acknowledgment of the IRP does not constitute ratemaking approval of any specific resource acquisition strategy or expenditure. However, the OPUC Commissioners generally indicate that they would give considerable weight in prudence reviews to actions consistent with acknowledged plans. The WUTC has indicated the IRP process is one factor it will consider in a prudence review. For additional information see Part II, Item 7, "Results of Operations—Regulatory Matters."
Diversity of Supply Sources
NW Natural purchases gas supplies primarily from the Alberta and British Columbia provinces of Canada and multiple receipt points in the U.S. Rocky Mountains to protect against regional supply disruptions and to take advantage of price differentials. For 2019, 58%2022, 60% of gas supply came from Canada, with the balance primarily coming from the U.S. Rocky Mountain region. The extraction of shale gas has increased the availability of gas supplies throughout North America. We believe gas supplies available in the western United States and Canada are adequate to serve NGD customer requirements for the foreseeable future. NW Natural continues to evaluate the long-term supply mix based on projections of gas production and pricing in the U.S. Rocky Mountain region as well as other regions in North America. NW Natural has also announced its intent to incorporate Renewable Natural Gas (RNG) into its supply portfolio.
NW Natural supplements firm gas supply purchases with gas withdrawals from gas storage facilities, including underground reservoirs and LNG storage facilities. Storage facilities are generally injected with natural gas during the off-peak months in the spring and summer, and the gas is withdrawn for use during peak demand months in the winter.
The following table presents the storage facilities available for NGD business supply:
| | | | | | | | | | | | | | |
| | Maximum Daily Deliverability (therms in millions) | | Designed Storage Capacity (Bcf) |
Gas Storage Facilities | | | | |
Owned Facility | | | | |
Mist, Oregon (Mist Facility)(1) | | 3.1 | | | 11.7 | |
Mist, Oregon (North Mist Facility)(2) | | 1.3 | | | 4.1 | |
Contracted Facility | | | | |
Jackson Prairie, Washington(3) | | 0.5 | | | 1.1 | |
LNG Facilities | | | | |
Owned Facilities | | | | |
Newport, Oregon | | 0.6 | | | 1.0 | |
Portland, Oregon | | 1.3 | | | 0.6 | |
Total | | 6.8 | | | 18.5 | |
|
| | | | | | |
| | Maximum Daily Deliverability (therms in millions) | | Designed Storage Capacity (Bcf) |
Gas Storage Facilities | | | | |
Owned Facility | | | | |
Mist, Oregon (Mist Facility)(1) | | 3.1 |
| | 10.6 |
|
Mist, Oregon (North Mist Facility)(2) | | 1.3 |
| | 4.1 |
|
Contracted Facility | | | | |
Jackson Prairie, Washington(3) | | 0.5 |
| | 1.1 |
|
LNG Facilities | | | | |
Owned Facilities | | | | |
Newport, Oregon | | 0.6 |
| | 1.0 |
|
Portland, Oregon | | 1.3 |
| | 0.6 |
|
Total | | 6.8 |
| | 17.4 |
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(1) The Mist gas storage facility has a total maximum daily deliverability of 5.1 million therms and a total designed storage capacity of about 17.5 Bcf, of which 3.1 million therms of daily deliverability and 11.7 Bcf of storage capacity are reserved for NGD business customers. | |
(1) (2) The North Mist facility is contracted to exclusively serve Portland General Electric, a local electric utility, and may not be used to serve other NGD customers. See "North Mist Gas Storage Facility" below for more information. (3) The storage facility is located near Chehalis, Washington and is contracted from Northwest Pipeline, a subsidiary of The Williams Companies.
| The Mist gas storage facility has a total maximum daily deliverability of 5.4 million therms and a total designed storage capacity of about 16.0 Bcf, of which 3.1 million therms of daily deliverability and 10.6 Bcf of storage capacity are reserved for NGD business customers. |
| |
(2)
| The North Mist facility is contracted to exclusively serve Portland General Electric, a local electric utility, and may not be used to serve other NGD customers. See "North Mist Gas Storage Facility" below for more information.
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(3)
| The storage facility is located near Chehalis, Washington and is contracted from Northwest Pipeline, a subsidiary of The Williams Companies. |
The Mist facility serves NGD segment customers and is also used for non-NGD purposes, primarily for contracts with gas storage customers, including utilities and third-party marketers. Under regulatory agreements with the OPUC and WUTC, gas storage at Mist can be developed in advance of NGD customer needs but is subject to recall when needed to serve such customers as their demand increases. When storage capacity is recalled for NGD purposes it becomes part of the NGD segment. In 2019,2022, the NGD business did not recall additional deliverability or associated storage capacity to serve customer needs. The North Mist facility is contracted for the exclusive use of Portland General Electric, a local electric utility, and may not be used to serve other NGD customers. See "North Mist Gas Storage Facility" below.
Diverse Contract Durations and Types
NW Natural has a diverse portfolio of short-, medium-, and long-term firm gas supply contracts and a variety of contract types including firm and interruptible supplies as well as supplemental supplies from gas storage facilities.
The portfolio of firm gas supply contracts typically includes the following gas purchase contracts: year-round and winter-only baseload supplies; seasonal supply with an option to call on additional daily supplies during the winter heating season; and daily or monthly spot purchases.
During 2019,2022, a total of 836886 million therms were purchased under contracts with durations as follows:
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| | | | |
Contract Duration (primary term) | Percent of Purchases |
Long-term (one year or longer) | 3329 | % |
Short-term (more than one month, less than one year) | 2134 |
|
Spot (one month or less) | 4637 |
|
Total | 100 | % |
Gas supply contracts are renewed or replaced as they expire. During 2019, no2022, there was one supplier that provided 10% of the NGD business gas supply requirements. No other individual supplier provided 10% or more of the NGD business gas supply requirements.
Gas Cost Management
The cost of gas sold to NGD customers primarily consists of the following items, which are included in annual Purchased Gas Adjustment (PGA) rates: gas purchases from suppliers; charges from pipeline companies to transport gas to our distribution system; gas storage costs; gas reserves contracts; and gas commodity derivative contracts.contracts; and renewable natural gas and its attributes, including renewable thermal certificates (RTCs). We expect that costs to comply with Oregon's Climate Protection Program (CPP) and Washington's Climate Commitment Act (CCA) programs will be included in the cost of gas.
The NGD business employs a number of strategies to mitigate the cost of gas sold to customers. The primary strategies for managing gas commodity price risk include:
•negotiating fixed prices directly with gas suppliers;
•negotiating financial derivative contracts that: (1) effectively convert floating index prices in physical gas supply contracts to fixed prices (referred to as commodity price swaps); or (2) effectively set a ceiling or floor price, or both, on floating index priced physical supply contracts (referred to as commodity price options such as calls, puts, and collars);
•buying physical gas supplies at a set price and injecting the gas into storage for price stability and to minimize pipeline capacity demand costs; and
•investing in gas reserves for longer term price stability. See Note 13 for additional information about our gas reserves.
NW Natural also contracts with an independent energy marketing company to capture opportunities regarding storage and pipeline capacity when those assets are not serving the needs of NGD business customers. Asset management activities provide opportunities for cost of gas savings for customers and incremental revenues for NW Natural through regulatory incentive-sharing mechanisms. These activities, net of the amount shared, are included in other for segment reporting purposes.
Gas Cost Recovery
Mechanisms for gas cost recovery are designed to be fair and reasonable, with an appropriate balance between the interests of customers and NW Natural. In general, natural gas distribution rates are designed to recover the costs of, but not to earn a return on, the gas commodity sold. Risks associated with gas cost recovery are minimized by resetting customer rates annually through the PGA and aligning customer and shareholder interests through the use of sharing, weather normalization, and conservation mechanisms in Oregon. See Part II, Item 7, "Results of Operations—Regulatory Matters" and "Results of Operations—Business Segments—Natural Gas Distribution Operations—Cost of Gas".
Environmental Stewardship
Part of our gas supply strategy is working to reduce the carbon content and the environmental impacts of the energy we deliver. To that end, NW Natural developed and implemented an emissions screening tool that uses Environmental Protection Agency (EPA) data to calculate the relative emissions intensity of gas producer operations and prioritize purchases from lower emitting producers. In 2019, we began using this emissions intensity screening tool alongside other purchasing criteria such as price, credit worthiness and geographic diversity. The result has been a cost-neutral way to reduce carbon emissions associated with our natural gas supply.
NW Natural is focused on taking steps to lower its emissions on behalf of customers by purchasing environmental attributes that are generated by the production of renewable natural gas (RNG). Under Oregon Senate Bill 98, NW Natural can purchase or invest in RNG facilities, which generate these environmental attributes known as Renewable Thermal Certificates (RTCs). The RTCs work like renewable energy certificates, or RECs, used in electricity markets. RTCs are verified and certified by the Midwest Renewable Energy Tracking System (M-RETS). The M-RETS Renewable Thermal Tracking System issues one RTC for every dekatherm of RNG injected into the gas system. NW Natural enters into contracts for the purchase of RNG and RTCs either through periodic request for proposals or through formal offerings or informal requests. See Part II, Item 7, "Results of Operations—Regulatory Matters".
In addition to purchases of RNG, NW Natural is subject to the carbon-reduction requirements of the Oregon CPP and the Washington CCA programs. NW Natural has modeled pathways to compliance with the CPP and CCA in its most recent IRP, which are currently under review by the OPUC and WUTC. While costs associated with each possible compliance pathway differ, we intend to pursue recovery of the costs associated with these programs in rates.
Transportation of Gas Supplies
NW Natural's gas distribution system is reliant on a single, bi-directional interstate transmission pipeline to bring gas supplies into the natural gas distribution system. Although dependent on a single pipeline, the pipeline’s gas flows into the Portland metropolitan market from two directions: (1) the north, which brings supplies from the British Columbia and Alberta supply basins; and (2) the east, which brings supplies from Alberta as well as the U.S. Rocky Mountain supply basins.
NW Natural incurs monthly demand charges related to firm pipeline transportation contracts. These contracts have expiration dates ranging from 20202023 to 2061. The largest pipeline agreements are with Northwest Pipeline. NW Natural actively works with Northwest Pipeline and others to renew contracts in advance of expiration to ensure gas transportation capacity is sufficient to meet customer needs.
Rates for interstate pipeline transportation services are established by FERC within the U.S. and by Canadian authorities for services on Canadian pipelines.
As mentioned above, the service territory is dependent on a single pipeline for its natural gas supply. In October 2018, a critical natural gas pipeline in western Canada experienced a rupture and gas supply to the Pacific Northwest was disrupted. NW Natural was able to serve firm NGD business customers during the incident with natural gas from the Mist storage facility and realignment of other supplies. The pipeline was restored to full capacity in December 2019. Pipeline disruptions, replacement projects, and long-term projected natural gas demand in our region underscore the need for pipeline transportation diversity. In addition, there are potential industrial projects in the region, which could increase the demand for natural gas and the need for additional pipeline capacity and diversity.
Currently, there are various interstate pipeline projects proposed, including the Trail West pipeline in which NW Holdings has an interest, that could meet the forecasted demand growth for NW Natural and the region. However, the location of any future pipeline project will likely depend on the location of committed industrial projects. NW Holdings and NW Natural intend to continue to evaluate and closely monitor the currently contemplated projects to determine the best option for our customers. NW Holdings has an equity investment in Trail West Holdings, LLC (TWH), which is developing plans to build the Trail West pipeline. This pipeline would connect TransCanada Pipelines Limited’s (TransCanada) Gas Transmission Northwest (GTN) interstate transmission line to NW Natural's natural gas distribution system. If constructed, this pipeline would provide another transportation path for gas purchases from Alberta and the U.S. Rocky Mountains in addition to the one that currently moves gas through the Northwest Pipeline system.
Gas Distribution
Safety and the protection of employees, customers, and our communities at large are, and will remain, top priorities. NW Natural constructs, operates, and maintains its pipeline distribution system and storage operations with the goal of ensuring natural gas is delivered and stored safely, reliably, and efficiently.
NW Natural has one of the most modern distribution systems in the country with no identified cast iron pipe or bare steel main. The final known bare steel was removed from the system in 2015 and cast iron pipe removal was completed in 2000. Since the 1980s, NW Natural has taken a proactive approach to replacement programs and partnered with the OPUC and WUTC on progressive regulation to further safety and reliability efforts for the distribution system. In the past, NW Natural had a cost recovery program in Oregon that encompassed programs for cast iron replacement, bare steel replacement, transmission pipeline integrity management, and distribution pipeline integrity management programs as appropriate.
Natural gas distribution businesses are likely to be subject to greater federal and state regulation in the future. Additional operating and safety regulations from the U.S. Department of Transportation’s Pipeline and Hazardous Materials Safety Administration (PHMSA) are currently under development. In 2016, PHMSA issued safety requirements for natural gas transmission pipelines.a notice of proposed rulemaking titled the "Safety of Gas Transmission Pipelines: MAOP Reconfirmation, Expansion of Assessment Requirements, and Other Related Amendments." In 2019, PHMSA issued the first of three portions of these regulationsthe rulemaking which will gowent into effect on July 1, 2020 and includeincludes up to a 15-year timeline for compliance. The remaining portionssecond portion of the regulations are anticipatedrule known as the gas gathering rule was issued in late 2021, and final rulemaking titled "The Safety of Gas Transmission Pipelines: Repair Criteria, Integrity Management Improvements, Cathodic Protection, Management of Change, and Other Related Amendments" was issued in August 2022. A Gas Pipeline Leak Detection rule is expected to be issued in 2020.2023. NW Natural intends to continue to work diligently with industry associations as well as federal and state regulators to ensuresupport the safety of the system and compliance with new laws and regulations. TheWe expect the costs associated with compliance with federal, state, and local laws and regulations are expected to be recovered in rates.
North Mist Gas Storage Facility
In May 2019, NW Natural completed an expansion of its existing gas storage facility near Mist, Oregon. The North Mist facility provides long-term, no-notice underground gas storage service and is dedicated solely to Portland General Electric (Portland General)(PGE) under a 30-year contract with options to extend up to an additional 50 years upon mutual agreement of the parties. Portland GeneralPGE uses the facility to supportfuel its gas-fired electric power generation facilities, which incorporatebacks up PGE's variable load of renewable energy intoon the electric grid.
North Mist includes a new reservoir providing 4.1 Bcf of available storage, an additional compressor station with a contractual capacity of 120,000 dekatherms of gas deliverability per day, no-notice service that can be drawn on rapidly, and a 13-mile pipeline to connect to Portland General'sPGE's Port Westward gas plants in Clatskanie, Oregon.
Upon placement into service in May 2019, the facility was included in rate base under an established tariff schedule with revenues recognized consistent with the schedule. Billing rates will beare updated annually to the currentforecasted depreciable asset level and forecasted operating expenses.
While there are additional expansion opportunities in the Mist storage field, further development is not contemplated at this time and any expansion would be based on market demand, cost effectiveness, available financing, receipt of future permits, and other rights.
OTHER
Certain businesses and activities of NW Holdings and NW Natural are aggregated and reported as other for segment reporting purposes. These include the following businesses and activities aggregated under NW Holdings:
NW Natural Water Company, LLC (NWN Water) and its water and wastewater utility operations and acquisition activities;
an equity method investment in TWH, a joint venture to build and operate a gas transmission pipeline in Oregon. TWH is owned 50% by NW Natural Energy LLC (NWN Energy), a wholly owned subsidiary of NW Holdings, and 50% by TransCanada American Investments Ltd., an indirect wholly owned subsidiary of TransCanada;
a minority interest in the Kelso-Beaver Pipeline held by our wholly owned subsidiary NNG Financial Corporation (NNG Financial); and
holding company and corporate activities as well as adjustments made in consolidation.
WATER UTILITIES. After a comprehensive strategic planning process, in December 2017, we entered the water utility sector by announcing several acquisitions, which NWN Water subsequently closed. Through December 31, 2019, NWN Water has completed a total of eight acquisitions, with several additional signed acquisition agreements for privately-owned water and wastewater utilities in the Pacific Northwest and Texas. The pending water distribution transactions are subject to state utility commission approvals and are expected to close during 2020. Once closed, NWN Water expects to serve a total of approximately 62,000 people through 25,000 water and wastewater connections in the Pacific Northwest and Texas, with an aggregate investment of $110 million. NW Holdings continues to pursue additional acquisitions in a disciplined manner.
The water and wastewater utilities primarily serve residential and commercial customers in the Pacific Northwest. Water distribution operations are seasonal in nature with peak demand during warmer summer months, while wastewater is less seasonally affected. Entities generally operate in exclusive service territories with no direct competitors. Water distribution customer rates are regulated by state utility commissions while the wastewater businesses we own currently are not rate regulated by utility commissions.
Additionally, the following businesses and activities are aggregated and reported as other under NW Natural, a wholly ownedwholly-owned subsidiary of NW Holdings:
5.4•5.8 Bcf of the Mist gas storage facility contracted to other utilities and third-party marketers;
•natural gas asset management activities; and
•appliance retail center operations.
MIST GAS STORAGE.
Mist Gas Storage
The Mist gas storage facility began operations in 1989. It is a 1617.5 Bcf facility with 10.611.7 Bcf used to provide gas storage for the NGD business. The remaining 5.45.8 Bcf of the facility is contracted with other utilities and third-party marketers with these results reported in other. In 2022, NW Natural utilized 0.5 Bcf of increased storage capacity realized through reservoir expansion during more than 15 years of delta pressure operations. This change increased the working gas capacity from 17.0 Bcf in 2021 to 17.5 Bcf in 2022.
The overall facility consists of seven depleted natural gas reservoirs, 22 injection and withdrawal wells, a compressor station, dehydration and control equipment, gathering lines, and other related facilities. The capacity at Mist serving other utilities and third-party marketers provides multi-cycle gas storage services to customers in the interstate and intrastate markets. The interstate storage services are offered under a limited jurisdiction blanket certificate issued by FERC. Under NW Natural's interstate storage certificate with FERC, NW Natural is required to file either a petition for rate approval or a cost and revenue study every five years to change or justify maintaining the existing rates for the interstate storage service. Intrastate firm storage services in Oregon are offered under an OPUC-approved rate schedule as an optional service to certain eligible customers. Gas storage revenues from the 5.45.8 Bcf are derived primarily from firm service customers who provide energy-related services,
including natural gas distribution, electric generation, and energy marketing. The Mist facility benefits from limited competition as there are few storage facilities in the Pacific Northwest region. Therefore, NW Natural is able to acquire high-value, multi-year contracts.
ASSET MANAGEMENT ACTIVITIES.Asset Management Activities
NW Natural contracts with an independent energy marketing company to provide asset management services, primarily through the use of natural gas commodity exchange agreements and natural gas pipeline capacity release transactions. The results of these activities are included in other, except for the asset management revenues allocated to NGD business customers pursuant to regulatory agreements, which are reported in the NGD segment.
NW Holdings
These include the following businesses and activities aggregated under NW Holdings: •NW Natural Water Company, LLC (NWN Water) and its water and wastewater utility operations;
•NWN Water's equity investment in Avion Water Company, Inc.;
•NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities;
•a minority interest in the Kelso-Beaver Pipeline held by our wholly-owned subsidiary NNG Financial Corporation (NNG Financial); and
•holding company and corporate activities, including business development activities, as well as adjustments made in consolidation.
NW Natural Water
NWN Water currently serves an estimated 155,000 people through approximately 62,500 water and wastewater connections across five states. NWN Water continues to grow though customer additions within or near its service territories, and continues to pursue acquisitions. For recently acquired water utilities, see further discussion about the status of water general rate cases in Part II, Item 7, "Results of Operations—Regulatory Matters—Water General Rate Cases."
The water and wastewater utilities primarily serve residential and commercial customers. Water distribution operations are seasonal in nature with peak demand during warmer summer months, while wastewater is less seasonally affected. Entities generally operate in exclusive service territories with no direct competitors. Water distribution customer rates are regulated by state utility commissions while the wastewater businesses we own consist of some state regulated systems and some systems that are not rate regulated by utility commissions.
NW Natural Renewables
NW Natural Renewables is a newly formed non-regulated subsidiary of NW Natural Holdings established to invest in renewable energy through the production and supply of lower-carbon fuels. NW Natural Renewables' first project is with a subsidiary of EDL, a global producer of sustainable distributed energy. In September 2021, a subsidiary of NW Natural Renewables and a subsidiary of EDL executed agreements, whereby the subsidiary of NW Natural Renewables committed $50 million toward the development of two production facilities that are designed to convert landfill waste gases to RNG and connect gas production to existing regional pipeline networks. Testing and commissioning of the production facilities is expected to occur in the spring of 2023. 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 produced from the facilities for NW Natural Renewables. In 2022, NW Natural Renewables executed a four-year off-take agreement with a counterparty for the near-term RNG production. NW Natural Renewables is currently in discussions with other counterparties to contract the remaining RNG production under long-term contracts.
ENVIRONMENTAL MATTERS
Properties and Facilities
NW Natural owns, or previously owned, properties and facilities that are currently being investigated that may require environmental remediation and are subject to federal, state, and local laws and regulations related to environmental matters. These laws and regulations may require expenditures over a long time frame to address certain environmental impacts. Estimates of liabilities for environmental costs are difficult to determine with precision because of the various factors that can affect their ultimate disposition. These factors include, but are not limited to, the following:
•the complexity of the site;
•changes in environmental laws and regulations at the federal, state, and local levels;
•the number of regulatory agencies or other parties involved;
•new technology that renders previous technology obsolete, or experience with existing technology that proves ineffective;
•the level of remediation required;
•variations between the estimated and actual period of time that must be dedicated to respond to an environmentally-contaminated site; and
•the application of environmental laws that impose joint and several liabilities on all potentially responsible parties.
NW Natural has received recovery of a portion of such environmental costs through insurance proceeds, seeks the remainder of such costs through customer rates, and believes recovery of these costs is probable. In both Oregon and Washington, NW Natural has mechanisms to recover expenses. Oregon recoveries are subject to an earnings test. See Part II, Item 7, "Results of Operations—Regulatory Matters—Rate Mechanisms—Environmental Cost Deferral and Recovery", and Note 2 and Note 18.17 of the Consolidated Financial Statements in Item 8 of this report for more information.
Greenhouse Gas Matters
We recognize certain of our businesses, including our natural gas business, are likely to be affected by requirements to addressFor information concerning greenhouse gas emissions. Future federal, state or local legislation or regulation may seekmatters, see Part II, Item 7, “Results of Operations—Environmental Regulation and Legislation Matters.”
HUMAN CAPITAL
Our core values of integrity, safety, caring, service ethic, and environmental stewardship guide how we engage with customers, stakeholders, shareholders, and communities. We actively work to limit emissions of greenhouse gases, including both carbon dioxide (CO2) and methane. These potential laws and regulations may require certain activities to reduce emissions and/or increase the price paid for energy based on its carbon content.
Current federal rules require the reporting of greenhouse gas emissions. In September 2009, the Environmental Protection Agency (EPA) issued a final rule requiring the annual reporting of greenhouse gas emissions from certain industries, specified large greenhouse gas 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 greenhouse gas reporting regulations to which NW Natural is subject, requiring the annual reporting of fugitive emissions from operations.
The Oregon and Washington legislatures and governors continue to consider various greenhouse gas reduction initiatives, and ballot measures may be proposed in each state. For example, in prior legislative sessions the Oregon legislature has considered cap and trade bills, and cap and trade may be considered again in future legislative sessions. While the contents of any cap and trade bill are not currently certain, such a bill could create a declining cap on greenhouse gas emissions from a wide variety of sources, including electric and natural gas utilities, and could require entities with a compliance obligation to hold permits, or allowances, to emit greenhouse gas emissions on a per ton basis. A cap and trade bill was considered in the 2019 Oregon legislative session, and failed due to lack of quorum for a vote. That bill included considerations for natural gas utilities, such as provisions for low-income customers and the value of certain allowances that could be used to invest in emission-reducing initiatives.
Even if a state-wide cap and trade program is not addressed in a legislative session, ballot measures may be proposed by advocacy groups in Oregon. These measures may include requirements for carbon free electricity, investments in electrification programs, or accelerating Oregon's existing greenhouse gas pollution targets. While the outcome offoster these federal, state or local climate change policy developments cannot be determined at this time, these initiatives could produce a number of results including new regulations, legal actions, additional charges to fund energy efficiency activities, or other regulatory actions. The adoption and implementation of regulations limiting emissions of greenhouse gases could require NW Natural to incur compliance costs associated with our customers’ use, which we expect to recover through rates and therefore may result in an increase in the prices charged to customers and over time potentially a decline in the demand for natural gas.
Some local and county governments in the United States have been proposing or passing 100% renewable energy resolutions with advocates calling for electrification of new construction or seeking to accelerate renewable energy goals. At least one cityvalues in our service territory is currently considering such action. Similarly, various federal and state agencies have enacted or are considering enactment of rules that would limit greenhouse gas emissions. For example, the state of Washington's Department of Ecology (DOE) enacted the Clean Air Rule (CAR) in 2016, which capped the maximum greenhouse gas emissions allowed from stationary sources, such as natural gas utilities. For gas distribution utilities, the production of emissions from usage by their customers was considered to be production of emissions attributable to the utility. In December 2017, a Washington State Court ruled that the DOE lacked legislative authority to regulate non-emitting sources, such as natural gas distribution utilities. In January 2020, the Supreme Court of the State of Washington upheld the lower court’s ruling that the DOE lacked legislative authority to regulate non-emitters, and remanded to the lower court application of the rule to emitting sources, such as electric generating plants, for further proceedings.
In 2017, NW Natural initiated a multi-pronged, multi-year strategy to accelerate and deliver greater greenhouse gas emission reductions in the communities we serve. Key components of this strategy include energy efficiency, continued adoption of NW Natural's voluntary Smart Energy carbon offset program, and incorporating RNG into our gas supply. 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 associated with the natural gas energy supply. In 2019, Oregon Senate bill 98 (SB 98) was signed into law allowing NW Natural to procure RNG on behalf of customers and providing voluntary targets that would allow us to make qualified investments and purchase RNG from third parties such that up to 30% of the gas distributed to retail customers is RNG by 2050, and creating a limit of 5% of a utility's revenue requirement that can be used to cover the incremental cost of RNG. The OPUC is required to complete the rulemaking for SB 98 by July 31, 2020. NW Natural is actively working to procure RNG contracts 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.
NW Natural continues to take proactive steps in seeking to reduce greenhouse gas emissions in our region and is proactively communicating with local, state and federal governments and communities about those steps. We believe that NW Natural has a vital role in providing energy to the communities we serve. Each year, NW Natural delivers more energy in Oregon than any other utility, while sales of natural gas to our residential and commercial customers account for approximately 5% of Oregon’s greenhouse gas emissions according to the State of Oregon Department of Environmental Quality In-Boundary GHG Inventory 2015 Figures. We intend to continue to provide this necessary energy to our communitiesemployee culture and to usenurture an inclusive and equitable environment that provides opportunities, prioritizes health and safety, encourages respect and trust, and supports growth and learning. We aim to recruit and retain employees who share our modern pipeline system to help the Pacific Northwest move to a low-carbon, renewable energy future.
EMPLOYEES
core values and reflect our communities.
Employees
At December 31, 2019,2022, our workforce consisted of the following:
|
| | | | |
NW Natural: | |
Unionized employees(1) | 626575 |
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Non-unionized employees | 541574 |
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Total NW Natural | 1,1671,149 |
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| |
Other Entities: | |
Water company employees | 38 |
|
Other | 15 |
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Total other entities | 53 |
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| |
Total Employees | 1,220 |
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| |
(1) Other Entities:
| Members of the Office |
Water and Professionalwastewater company employees | 105 | |
Other | 4 | |
Total other entities | 109 | |
| |
Total Employees International Union (OPEIU) Local No. 11, AFL-CIO. | 1,258 | |
(1) Members of the Office and Professional Employees International Union (OPEIU) Local No. 11, AFL-CIO.
NW Natural's labor agreement with members of OPEIU covers wages, benefits, and working conditions. In November 2019, NW Natural's unionized employees ratified a collective bargaining agreement that that took effect on December 1, 2019 and extends to May 31, 2024, and thereafter from year to year unless either party serves notice of its intent to negotiate modifications to the collective bargaining agreement. During calendar year 2022, NW Natural did not incur any work stoppages (strikes or lockouts), and therefore, experienced zero idle days for the year.
Certain subsidiaries may receive services from employees of other subsidiaries. When such services involve regulated entities, those entities receiving services reimburse the entity providing services pursuant to shared services agreements, as applicable.
Safety is one of our greatest responsibilities to employees. In managing the business, we strive to foster a safety culture focused on prevention, open communication, collaboration, and a strong service and safety ethic. We believe employee safety is critical to our success. A portion of executives’ compensation is tied to achieving our safety metrics, and our Board of Directors regularly reviews company safety metrics. NW Natural’s health and safety policies and procedures are designed to comply with all applicable regulations, but we also work to go beyond compliance by striving to incorporate industry best practices and benchmarking.
As part of our commitment to employee health and safety, we maintain regular training programs, emergency preparedness procedures, and specific training and procedures to identify hazards and handle high-risk emergency situations. Employees complete classroom instruction and hands-on, scenario-based training at our training facility in Oregon that allows employees to experience realistic situations in a controlled environment. We also host natural gas safety training events for first responders, which are designed to prepare those first responders and NW Natural field employees to deliver an integrated, seamless response in the event of an emergency that involves or affects the natural gas system. We navigated, and continue to navigate, the COVID-19 pandemic to help keep people safe. We also implemented a new learning management system that went live in early 2021 and provides more efficiency and flexibility in how we train.
Employee Benefits and Support
To attract employees and meet the needs of our workforce, NW Natural strives to offer competitive compensation and benefits packages to employees. The benefits package options vary depending on type of employee and date of hire. NW Natural continuously looks for ways to support employees’ work-life balance and well-being and this is reflected in physical, mental and financial wellness programs to meet the needs of our employees and help them care for their families. Benefits available to employees during 2022 included, among others: healthcare and other insurance coverages, wellness resources, retirement and savings plans, paid time off programs, and flexible and hybrid work schedules, where possible, employee resource groups, and culture and community-focused resources and opportunities, and employee recognition programs and discounts.
Talent Attraction and Development
In order to implement our business strategy and serve our customers, we depend upon our continuing ability to attract and retain diverse, talented professionals and a technically skilled workforce, and being able to transfer the knowledge and expertise of our workforce to new and increasingly diverse employees as our largely older workforce retires. A significant portion of our workforce is currently eligible or will reach retirement eligibility within the next five years, and therefore, we are focused on efforts to attract, train, and retain appropriately qualified and skilled workers to prevent loss of institutional knowledge or skills gaps.
NW Natural seeks to provide its employees with growth and development opportunities through programs designed to build skills and relationships. These programs currently include: (i) a culturally relevant mentoring program that creates opportunities for career growth by building relationships; (ii) a tuition assistance program for qualified educational pursuits; (iii) an internal class that provides participants with a big-picture understanding of the industry and company operations, equipping them to see how they contribute to NW Natural’s success and identify opportunities for career growth; (iv) internal and external continuing educational courses relevant to areas of expertise; and (v) ongoing management and leadership training programs.
We regularly monitor employee engagement and satisfaction through a variety of tools, including our annual engagement survey that is designed to enable company leaders to gather valuable feedback and guidance from employees.
Diversity, Equity and Inclusion
We have a longstanding commitment to creating a diverse and inclusive culture that reflects and supports the communities we serve, and believe a diverse, equitable, and inclusive workforce at all levels contributes to long-term success. Our efforts in recruiting, promoting, and retaining diverse talent, building inclusive teams, and creating a culture that embraces differences are at the core of our workforce strategy. To attract diverse candidates, we work with community partners to help promote awareness of job opportunities within diverse communities.
We have employee-led groups that develop programs and activities that build awareness around issues important to their co-workers, families, customers, and our community. Groups include the Diversity, Equity & Inclusion Council, Women's Network, African American, Rainbow Alliance (LGBTQ+), Veterans, Somos Unidos (Latinx), Asian American, and Neurodiversity employee resource groups, Wellness Advisory Committee, and Sustainability and Equity Engagement Team. We also continue to emphasize diversity, equity and inclusion values through employee training and education, including expanded diversity training as part of new hire onboarding and other diversity, equity, and inclusion education that occurs throughout the year. An area of focus going forward is to understand and increase awareness of internal systems and structures that could limit representation and equity for underrepresented employees. To that end, we are working toward revising and refocusing new manager and new hire training to include implicit bias, diversity, equity and inclusion, and anti-racism education.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
For information concerning executive officers, see Part III, Item 10.
AVAILABLE INFORMATION
NW Holdings and NW Natural file annual, quarterly and current reports and other information with the Securities and Exchange Commission (SEC). The SEC maintains an Internet site where reports, proxy statements, and other information filed can be read, copied, and requested online at its website (www.sec.gov). In addition, we make available, free of charge, on our website (www.nwnaturalholdings.com), our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) and proxy materials filed under Section 14 of the Securities Exchange Act of 1934, as amended (Exchange Act), as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. We have included our website address as an inactive textual reference only. Information contained on our website is not incorporated by reference into this annual report on Form 10-K.
NW Holdings and NW Natural have adopted a Code of Ethics for all employees, officers, and directors that is available on our website. We intend to disclose revisions and amendments to, and any waivers from, the Code of Ethics for officers and directors on our website. Our Corporate Governance Standards, Director Independence Standards, charters of each of the committees of
the Board of Directors, and additional information about NW Holdings and NW Natural are also available at the website. Copies of these documents may be requested, at no cost, by writing or calling Shareholder Services, NWNorthwest Natural Holding Company, 250 S.W. Taylor Street, Portland, Oregon 97204, telephone 503-226-4211 ext. 2402.503-220-2402.
ITEM 1A. RISK FACTORS
NW Holdings’ and NW Natural’s business and financial results are subject to a number of risks and uncertainties, many of which are not within our control, which could adversely affect our business, financial condition, and results of operations. Additional risks and uncertainties that are not currently known to us or that are not currently believed by us to be material may also harm our businesses, financial condition, and results of operations. When considering any investment in NW Holdings’ or NW Natural’s securities, investors should carefully consider the following information, as well as information contained in the caption "Forward-Looking Statements", Item 7A, and our other documents filed with the SEC. This list is not exhaustive and the order of presentation does not reflect management’s determination of priority or likelihood. Additionally, our listing of risk factors that primarily affects one of our businesses does not mean that such risk factor is inapplicable to our other businesses.
Legal, Regulatory and Legislative Risks Related to our Business Generally
REGULATORY RISK. Regulation of NW Holdings’ and NW Natural’s regulated businesses, including changes in the regulatory environment, failure of regulatory authorities to approve rates which provide for timely recovery of costs and an adequate return on invested capital, or an unfavorable outcome in regulatory proceedings may adversely impact NW Holdings’ and NW Natural’s financial condition and results of operations.
The OPUC and WUTC have general regulatory authority over NW Natural’s gas business in Oregon and Washington. NW Holdings’ regulated water utility businesses are generally regulated by the public utility commission in the state in which a water business is located. These public utility commissions have broad regulatory authority, including: the rates charged to customers; authorized rates of return on rate base, including ROE; the amounts and types of securities that may be issued by our regulated utility companies, like NW Natural; services our regulated utility companies provide and the manner in which they provide them; the nature of investments our utility companies make; deferral and recovery of various expenses, including, but not limited to, pipeline replacement, environmental remediation costs, capital and information technology investments, commodity hedging expense, and certain employee benefit expenses such as pension costs; transactions with affiliated interests; regulatory adjustment mechanisms such as weather adjustment mechanisms, and other matters. The OPUC also regulates actions investors may take with respect to our utility companies, NW Natural and NW Holdings. Similarly, FERC has regulatory authority over NW Natural’s interstate storage services, and the CPUC has regulatory authority over NW Holdings’ Gill Ranch storage operations.services. Expansion of our businesses could resultgenerally results in regulation by other regulatory authorities. For example, certain of NW Holdings’ has contracted to acquire aHoldings water sector businesscompanies are regulated in Idaho, Texas that is subject to the regulatory authority of the Public Utility Commission of Texas.and Arizona.
The costs that are deemed recoverable in rates and prices regulators allow us to charge for regulated utility service, and the maximum FERC-approved rates FERC authorizes us to charge for interstate storage and related transportation services, are the most significant factors affecting both NW Natural’s and NW Holdings’ financial position, results of operations and liquidity. State utility regulators have the authority to disallow recovery of costs they find imprudently incurred or otherwise disallowed, and rates that regulators allow may be insufficient for recovery of costs we incur. We expect to continue to make expenditures to expand, improve and safely operate our gas and water utility distribution and gas storage systems, and to work toward decarbonizing our gas systems. Regulators can deny recovery of those costs. Furthermore, while each applicable state regulator has established an authorized rate of return for our regulated utility businesses, we may not be able to achieve the earnings level authorized. Moreover, in the normal course of business we may place assets in service or incur higher than expected levels of operating expense before rate cases can be filed to recover those costs (this is commonly referred to as regulatory lag). The failure of any regulatory commission to approve requested rate increases on a timely basis to recover costs or to allow an adequate return could adversely impact NW Holdings’ or NW Natural’s financial condition, results of operations and liquidity.
As companies with regulated utility businesses, we frequently have dockets open with our regulators, including a general rate case filed with the OPUC on December 30, 2019.regulators. The regulatory proceedings for these dockets typically involve multiple parties, including governmental agencies, consumer, environmental, and other advocacy groups, and other third parties. Each party has differing concerns, but all generally haveadvocates for the common objectiveinterests that they represent, which may include lower rates, additional regulatory oversight over the company, limitations on growth or phasing out of limiting amounts included in rates.the gas system, decisions that favor electrification, or advancing other interests. We cannot predict the timing or outcome of these proceedings, or our pending Oregon general rate case, or the effects of those outcomes on NW Holdings’ and NW Natural’s results of operations and financial condition.
ENVIRONMENTAL LIABILITY RISKREGULATION, COMPLIANCE AND TAXING AUTHORITY RISK. . CertainNW Holdings and NW Natural are subject to governmental regulation, and compliance with local, state and federal requirements, including taxing requirements, and unforeseen changes in or interpretations of NW Natural’s, and possibly NW Holdings’, properties and facilities may pose environmental risks requiring remediation, the costs of which are difficult to estimate and whichsuch requirements could adversely affect NW Holdings’ andor NW Natural’s financial condition and results of operations, and cash flows.operations.
NW Natural owns, or previously owned, properties that require environmental remediation or other action. NW Holdings orand NW Natural may now, or in the future, own other properties that require environmental remediation or other action. NW Naturalare subject to regulation by federal, state and NW Holdings accrue all material loss contingencies relating to these properties. A regulatory asset at NW Natural has been recorded for estimated costs pursuant to a Deferral Order from the OPUC and WUTC. In addition to maintaining regulatory deferrals, NW Natural settled with most of its historical liability insurers for only a portion of the costs it has incurred to date and expects to incur in the future. To the extent amounts NW Natural recovered from insurancelocal governmental authorities. We are inadequate and it is unable to recover these deferred costs in utility customer rates, NW Natural would be required to reduce its regulatory assetscomply with a variety of laws and regulations and to obtain authorizations, permits, approvals and certificates from governmental agencies in various aspects of our business. Significant changes in federal, state, or local governmental leadership can accelerate or amplify changes in existing laws or regulations, or the manner in which would resultthey are interpreted or enforced. For instance, the 2020 United States Presidential election resulted in leadership changes in many federal administrative agencies and resulted in a chargewide range of new policies, executive orders, rules, initiatives and other changes to earnings in the year in which regulatory assets are reduced. In addition, in Oregon, the OPUC approved the
fiscal, tax, regulation,
environmental, climate and other federal policies, many of Contents
SRRM, which limits recovery of deferred amountshave components that affect the energy sector. Similarly, although party leadership in Oregon and Washington did not significantly change in the most recent election, we could continue to those amounts which satisfy an annual prudence reviewface significant legislative, regulatory and an earnings test that requires NW Natural to contribute additional amounts toward environmental remediation costs above approximately $10 millionother policy changes in yearsthe jurisdictions in which NW Natural earns above its authorized ROE. Towe operate. In addition, foreign governments may implement changes to their policies, in response to changes to U.S. policy or otherwise. Although we cannot predict the extent NW Natural earns more than its authorized ROE in a year, it would be requiredimpact, if any, of these changes to cover environmental expenses greater than the $10 million with those earnings that exceed its authorized ROE. The OPUC ordered a review of the SRRM in 2018 or when we obtain greater certainty of environmental costs, whichever occurred first. We submitted information for review in 2018, and believe we could be subject to further review. These ongoing prudence reviews, the earnings test, or the periodic review could reduce the amounts NW Natural is allowed to recover, andour businesses, they could adversely affect NW Holdings’ or NW Natural’s financial condition and results of operations. Until we know what policy changes are made and how those changes impact our businesses and the business of our competitors over the long term, we will not know if, overall, we will benefit from them or will be negatively affected by them.
We cannot predict changes in laws, regulations, interpretations or enforcement or the impact of such changes. Additionally, any failure to comply with existing or new laws and regulations could result in fines, penalties or injunctive measures. For example, under the Energy Policy Act of 2005, the FERC has civil authority under the Natural Gas Act to impose penalties for current violations of nearly $1.5 million per day for each violation. In addition, as the regulatory environment for our businesses increases in complexity, the risk of inadvertent noncompliance may also increase. Changes in regulations, the imposition of additional regulations, and the failure to comply with laws and regulations could negatively influence NW Holdings’ or NW Natural’s operating environment and results of operations.
Additionally, changes in federal, state, local or foreign tax laws and their related regulations, or differing interpretations or enforcement of applicable law by a federal, state, local or foreign taxing authority, could result in substantial cost to us and negatively affect our results of operations. Tax law and its related regulations and case law are inherently complex and dynamic. Disputes over interpretations of tax laws may be settled with the taxing authority in examination, through programs like the Compliance Assurance Process (CAP), upon appeal or through litigation. Our judgments may include reserves for potential adverse outcomes regarding tax positions that have been or plan to be taken that may be subject to challenge by taxing authorities. Changes in laws, regulations or adverse judgments and the inherent difficulty in quantifying potential tax effects of business decisions may negatively affect NW Holdings’ or NW Natural’s financial condition and results of operations.
Furthermore, certain tax assets and liabilities, such as deferred tax assets and regulatory tax assets and liabilities, are recognized or recorded by NW Holdings or NW Natural based on certain assumptions and determinations made based on available evidence, such as projected future taxable income, tax-planning strategies, and results of recent operations. If these assumptions and determinations prove to be incorrect, the recorded results may not be realized, which may negatively impact the financial results of NW Holdings and NW Natural.
There is uncertainty as to how our regulators will reflect the impact of the legislation and other government regulation in rates. The resulting ratemaking treatment may negatively affect NW Holdings’ or NW Natural’s financial condition and results of operations.
REPUTATIONAL RISKS.Customers', legislators', regulators' and other third parties’ opinions of NW Holdings and NW Natural are affected by many factors, including system and fuel reliability and safety, protection of customer information, rates, actual or perceived effects of our products, media coverage, and public sentiment. To the extent that customers, legislators, or regulators have or develop a negative opinion of our businesses, NW Holdings’ and NW Natural’s financial position, results of operations and cash flows.flows could be adversely affected.
Moreover, we may have disputes with regulatorsA number of factors can affect customers’, legislators’, regulators’, and other partiesthird parties’ perception of us or our business including: service interruptions or safety concerns due to failures of equipment or facilities or from other causes, and our ability to promptly respond to such failures; our ability to safeguard sensitive customer information; the timing and magnitude of rate increases; and volatility of rates. Customers', legislators', and regulators' opinions of us can also be affected by media coverage, including the proliferation of social media, which may include information, whether factual or not, that could damage the perception of natural gas, our brand, or our reputation.
Although we believe that natural gas serves an important role in helping our region reduce GHG emissions and move to a resilient lower-carbon energy system, certain advocacy groups have opposed the use of natural gas as a fuel source altogether and have pursued policies that limit, restrict, or impose additional costs on, the use of natural gas in a variety of contexts. Concerns raised about the use of natural gas include the potential for natural gas explosions or delivery disruptions, methane leakage along production, transportation and delivery systems, and end-use equipment, and contribution of natural gas energy use to GHG emission levels and global warming. Similarly, concerns have also been raised regarding the severityuse of particular environmental matters, what remediation effortsRNG or hydrogen in place of natural gas. In addition, studies and claims by advocacy groups contend that there are appropriate,detrimental indoor public health effects associated with the use of natural gas, which may also impact public perception. Shifts in public sentiment due to these concerns or others that may be raised may impact further legislative initiatives, regulatory actions, and the portionlitigation, as well as behaviors and perceptions of the costs NW Natural or NW Holdings should bear. We cannot predict with certainty the amount or timing of future expenditures related to environmental investigations, remediationcustomers, investors, lawmakers, and regulators.
If customers, legislators, regulators, or other action, the portionsthird parties have or develop a negative opinion of us and our services, or of natural gas as an energy source generally, this could make it more difficult for us to achieve policy, legislative or regulatory outcomes supportive of our business. Negative opinions could also result in reduced customer growth, sales volumes reductions, increased use of other sources of energy, or difficulties in accessing capital markets. Any of these costs allocable to NW Natural or NW Holdings, or disputes or litigation arising in relation thereto.
Environmental liability estimates are based on current remediation technology, industry experience gained at similar sites, an assessment of probable level of responsibility, and the financial condition of other potentially responsible parties. However, it is difficult to estimate such costs due to uncertainties surrounding the course of environmental remediation, the preliminary nature of certain site investigations, and the application of environmental laws that impose joint and several liabilities on all potentially responsible parties. These uncertainties and disputes arising therefrom could lead to further adversarial administrative proceedings or litigation, with associated costs and uncertain outcomes, all of whichconsequences could adversely affect NW Holdings’ or NW Natural’s financial condition,position, results of operations and cash flows.
ENVIRONMENTAL REGULATION COMPLIANCE
REGULATORY ACCOUNTING RISK.In the future, NW Holdings or NW Natural may no longer meet the criteria for continued application of regulatory accounting practices for all or a portion of our regulated operations.
If we can no longer apply regulatory accounting, we could be required to write off our regulatory assets and precluded from the future deferral of costs not recovered through rates at the time such amounts are incurred, even if we are expected to recover these amounts from customers in the future.
COVID-19 Risk
PUBLIC HEALTH RISK. The continuation of the novel coronavirus (COVID-19) and the resulting economic conditions, or the emergence of other epidemic or pandemic crises, could materially and adversely affect NWHoldings Holdings’ and NW Natural are subject to environmental regulations for our ongoing businesses, compliance withNatural’s business, results of operations, or financial condition.
The novel coronavirus (COVID-19), which was declared a pandemic by the World Health Organization in March 2020, has resulted in widespread and severe global, national and local economic and societal disruptions. As recovery from the COVID-19 pandemic continues, resurgences or mutations of the virus, could ultimately adversely affect our operationsbusiness by, among other things:
•impacting the health, safety, productivity and availability of our employees and contractors;
•disrupting our access to capital markets or financial results.increasing costs of capital affecting our liquidity in the future;
•reducing demand for natural gas, particularly from commercial and industrial customers that are suffering slow-downs or ultimately close completely due to pandemic effects;
NW Holdings•reducing customer growth and NW Natural are subjectnew meter additions due to laws, regulationsless economic, construction or conversion activity;
•limiting our ability to collect on overdue accounts or disconnect gas service for nonpayment, beyond an amount or period of time acceptable to us;
•increasing our operating costs for emergency supplies, personal protective equipment, cleaning services and supplies, remote technology and other legal requirements enactedspecific needs;
•impacting our capital expenditures if construction activities are suspended or adopteddelayed;
•sickening or causing a mandatory quarantine of a large percentage of our workforce, or key workgroups with specialized skill sets, impairing our ability to perform key business functions or execute our business continuity plans;
•impacting our or our contractors’ or suppliers’ ability to recruit and retain qualified personnel or otherwise impairing the functioning of our supply chain or ability to rely on third parties or business partners;
•adversely affecting the asset values of NW Natural’s defined benefit pension plan or causing a failure to maintain sustained growth in pension investments over time, increasing our contribution requirements;
•limiting, delaying or curtailing entirely, public utility commissions’ ability to approve or authorize applications or other requests we may make with respect to our regulated businesses;
•increasing volatility in the price of natural gas; and
•creating additional cybersecurity vulnerabilities due to ongoing heavy reliance on remote working.
Additionally, the long-term effects of COVID-19 or other pandemics could create prolonged unfavorable economic conditions, slowed economic growth, inflation, which may continue to rise, or an economic recession that may result in or be accompanied by federal, stateunprecedented unemployment rates and localdeclines in the value of certain assets, adversely affecting the income and financial resources of many domestic households and businesses. It is unclear whether governmental authorities relatingresponses to protectionthese conditions will lessen the severity or duration of any economic effects. Our operational and financial results would likely be affected by such economic conditions. Less new housing construction, fewer conversions to natural gas, higher levels of residential foreclosures and vacancies, and personal and business bankruptcies or reduced spending could all negatively affect our financial condition and results of operations.
The ultimate long-term impact of COVID-19 on our business cannot be predicted and will depend on factors beyond our knowledge or control, including resurgences of the environment, including those legal requirements that govern discharges of substances into the airpandemic and water, the management and disposal of hazardous substances and waste, groundwater quality and availability, plant and wildlife protection, and other aspects of environmental regulation. For example, our natural gas operations are subjectresidual economic effects, actions taken to reporting requirements to the Environmental Protection Agency (EPA)mitigate its effects, and the Oregon Departmentextent to which normal economic and operating conditions can continue. Any of Environmental Quality (ODEQ) regarding greenhouse gas emissions. These and other current and future additional environmental regulations could result in increased compliance costs or additional operating restrictions, which may or may not be recoverable in customer rates or through insurance. If these costs are not recoverable, theyfactors could have an adverse effect on NW Holdings’ or NW Natural’s operations orour business, outlook, financial condition.
GLOBAL CLIMATE CHANGE RISK.Our businesses may be subject to physical risks associated with climate change, all of which could adversely affect NW Holdings’ or NW Natural’s financial condition, and results of operations and cash flows.
Climate change may cause physical risks, including an increase in sea level, intensified storms, water scarcity and changes in weather conditions, such as changes in precipitation, average temperatures and extreme wind or other climate conditions. A significant portion of the nation’s gas infrastructure is located in areas susceptible to storm damage thatflows, which could be aggravated by wetlandsignificant.
Growth and barrier island erosion, which could give rise to gas supply interruptions and price spikes.
These and other physical changes could result in disruptions to natural gas production and transportation systems potentially increasing the cost of gas and affecting our natural gas businesses’ ability to procure gas to meet customer demand. These changes could also affect our distribution systems resulting in increased maintenance and capital costs, disruption of service, regulatory actions and lower customer satisfaction. Similar disruptions could occur in NW Holdings’ water utility businesses. Additionally, to the extent that climate change adversely impacts the economic health or weather conditions of our service territory directly, it could adversely impact customer demand or our customers' ability to pay. Such physical risks could have an adverse effect on NW Holdings’ or NW Natural’s financial condition, results of operations, and cash flows.
PUBLIC PERCEPTION AND POLICY RISK.Changes in public sentiment or public policy with respect to natural gas, including through local, state or federal laws or legislation or other regulation (including ballot initiatives), could adversely affect NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
There are a number of international, federal, state, and local legislative, legal, regulatory and other initiatives being proposed and adopted in an attempt to measure, control or limit the effects of global warming and climate change, including GHG emissions such as carbon dioxide and methane. For example, there are current legislative efforts in Oregon, Washington, and other states in which we operate to cap or otherwise restrict the maximum GHGs an entity may emit without reduction efforts or other undertakings. A cap and trade bill was considered in the 2019 Oregon legislative session, and failed due to a lack of quorum for a vote. If a state-wide cap and trade program is not passed during the 2020 Oregon short-legislative session, ballot measures may be proposed by advocacy groups in Oregon's November 2020 election. Similarly, one small jurisdiction in NW Natural’s service territory, Eugene, Oregon, is seeking to pursue reductions in GHG emissions by negotiating for GHG targets, carbon offsets and increased use of RNG in their system. Such current or future legislation, regulation or other initiatives (including ballot
initiatives or ordinances) could impose on our natural gas businesses operational requirements or restrictions, additional charges to fund energy efficiency initiatives, or levy a tax based on carbon content. In addition, while no such bans currently exist in NW Natural’s operating territories, certain municipalities, such as Berkeley, California, are moving to restrict new natural gas hookups in residential and other buildings, while other municipalities have considered requiring the conversion of buildings to electric heat, or otherwise adopting policies or incentives to encourage the use of electricity in lieu of natural gas. If successful in our territories, such restrictions could adversely impact customer growth or usage, and could adversely impact our ability to recover costs and maintain reasonable customer rates.
NW Natural believes natural gas has an important role in moving the Pacific Northwest to a low carbon future, and to that end is developing programs and measures to reduce carbon emissions. However, NW Natural’s efforts may not happen quickly enough to keep pace with legislation or other regulation, legal changes or public sentiment, or may not be as effective as expected.
Any of these initiatives, or our unsuccessful response to them, could result in us incurring additional costs to comply with the imposed restrictions, provide a cost or other competitive advantage to energy sources other than natural gas, reduce demand for natural gas, impose costs or restrictions on end users of natural gas, impact the prices we charge our customers, impose increased costs on us associated with the adoption of new infrastructure and technology to respond to such requirements, and could negatively impact public perception of our services or products that negatively diminishes the value of our brand, all of which could adversely affect NW Holdings’ or NW Natural’s business operations, financial condition and results of operations.
Strategic Risks
STRATEGIC TRANSACTION RISK. NW Holdings’ and NW Natural’s ability to successfully complete strategic transactions, including merger, acquisition, divestiture,mergers, acquisitions, combinations, divestitures, joint venture,ventures, business development projects or other strategic transactions is subject to significant risks, including the risk that required regulatory or governmental approvals may not be obtained, risks relating to unknown problems or liabilities or problems or liabilities undisclosed to us, and the risk that for these or other reasons, we may be unable to achieve some or all of the benefits that we anticipate from such transactions, which could adversely affect NW Holdings’ or NW Natural’s financial condition, results of operations, and cash flows.
From time to time, NW Holdings and NW Natural have pursued and may continue to pursue strategic transactions including merger, acquisition, divestiture,mergers, acquisitions, combinations, divestitures, joint venture,ventures, business development projects or other strategic transactions, including, but not limited to, investments in RNG projects on a regulated basis by NW Natural and on a non-regulated basis by NW Holdings, as well as acquisitions by NW Holdings in the water sector of a number of water utilities,and wastewater entities and a water services company, with NW Holdings’ continuing to seek other such water sector related opportunities.sectors. Any such transactions involve substantial risks, including the following:
purchase or sale•such transactions that are contracted for may fail to close for a variety of reasons;
acquired businesses or assets
•the result of such transactions may not produce revenues, earnings or cash flow at anticipated levels, which could, among other things, result in the impairment of any investments or goodwill associated with such acquisitions;transactions;
•acquired businesses or assets could have environmental, permitting, or other problems for which contractual protections prove inadequate;
•there may be difficulties in integration or operation costs of new businesses;
•there may exist liabilities that were not disclosed to us, that exceed our estimates, or for which our rights to indemnification from the seller are limited;
•we may be unable to obtain the necessary regulatory or governmental approvals to close a transaction or receive approvals granted subject to terms that are unacceptable to us, orus;
•we may be unable to achieve the anticipated regulatory treatment of any such transaction as part of the transaction approval or subsequent to closing the transaction; or
•we may be unable to avoid a saledisposition of assets for a price that is less than the book value of those assets.
One or more of these risks could affect NW Holdings’ and NW Natural’s financial condition, results of operations, and cash flows.
BUSINESS DEVELOPMENT RISK. NW Holdings’ and NW Natural’s business development projects may not be successful or may encounter unanticipated obstacles, costs, changes or delays that could result in a project being unsuccessful or becoming impaired, which could negatively impact NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
Business development projects involve many risks. We are currently engaged in several business development projects, including, but not limited to, NW Holdings’ early planningseveral water, wastewater and development stages for a regional pipeline in Oregon.RNG projects. We may also engage in other business development projects such as investments in additional long-term gas reserves, non-regulated investments in RNG projects, in the water sector,and purchasing, marketing and reselling of RNG and its associated attributes, CNG refueling stations, RNG, power to gas or hydrogen projects or other projects intendedsimilar projects. Our business development activities are subject to reduce carbon emissions. These projectsuncertainties and changed circumstances and may not reach the scale expected, be successful.successful or perform as anticipated. Additionally, we may not be able to obtain required governmental permits and approvals to complete our projects in a cost-efficient or timely manner, potentially resulting in delays or abandonment of the projects. We could also experience issues such as: technological challenges; ineffective scalability;failure to achieve expected outcomes; unsuccessful business models; startup and construction delays; construction cost overruns; disputes with contractors; the inability to negotiate acceptable agreements such as rights-of-way, easements, construction, gas supply or other material contracts; changes in customer demand, perception or commitment; public opposition to projects; marketing risk and changes in market prices;regulation, behavior or prices, market volatility or unavailability,including markets for RNG and its associated attributes or other environmental attributes; the inability to receive expected tax or regulatory treatment; and operating cost increases. Additionally, we may be unable to finance our business development projects at acceptable costs or within a scheduled time frame necessary for completing the project. Any of the foregoing risks, if realized, could result in business development efforts failing to produce expected financial results and the project investment becoming impaired, and such failure or impairment could have an adverse effect on NW Holdings’ or NW Natural’s financial condition and results of operations.
JOINT PARTNER RISK. Investing in business development projects through partnerships, joint ventures or other business arrangements affects our ability to manage certain risks and could adversely impact NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
We use joint ventures and other business arrangements to manage and diversify the risks of certain development projects, including NW Holdings’ Trail West pipeline and Gill Ranch Facility and NW Natural’s gas reserves agreements.agreements and certain RNG projects. NW Holdings or NW Natural currently has and may further acquire or develop part-ownership interests in other projects in the future, including but not limited to, in thenatural gas, water, sector.wastewater, RNG, or hydrogen projects. Under these arrangements, we may not be able to fully direct the management and policies of the business relationships, and other participants in those relationships may take actionact contrary to our interests, including making operational decisions that could negatively affect our costs and liabilities. In addition, other participants may withdraw from the project, divest important assets, become financially distressed or bankrupt, or have economic or other business interests or goals that are inconsistent with ours. For example,We have in January 2019, Pacific Gas & Electric Company,the past and may in the future become involved in disputes with our business partners, which owns the remaining 25 percent of the Gill Ranch Facility (75 percent of which is owned by NW Holdings), filed for bankruptcy protection. While NW Holdings will monitor that bankruptcy proceeding, and take appropriate actionscould result in an attempt to protect its interests, it does not control, and cannot predict, the outcome of such proceedings and the impact, if any, of the proceeding on the operations of Gill Ranchadditional cost or the planned sale by NW Holdings’ of its interest in Gill Ranch.divert management’s attention.
NW Natural’s gas reserves arrangements, which operate as a hedge backed by physical gas supplies, involve a number of risks, including: gas production that is significantly less than the expected volumes, or no gas volumes; operating costs that are higher than expected; changes in the consolidated tax position or tax laws that could affect NW Natural’s ability to take, or the timing of, certain tax benefits that impact the financial outcome of this transaction; inherent risks of gas production, including disruption to operations or a complete shut-in of the field; and one or more participants in one of these gas reserves arrangements becoming financially insolvent or acting contrary to NW Natural’s interests. In addition,For example, while Jonah Energy, the counterparty in NW Natural’s gas reserves arrangement, has recently issued asset-backed notes that are rated by credit agencies, Jonah Energy has previously experienced several credit rating downgrades and did not maintain any credit ratings for much of 2022. Although NW Natural intends to continue monitoring Jonah Energy’s financial condition and take appropriate actions to preserve NW Natural’s interests, it does not control Jonah Energy’s financial condition or continued performance under the gas reserves arrangement. The cost of the original gas reserves venture is currently included in customer rates and additional wells under that arrangement are recovered at specific costs, the occurrence of one or more of these risks could affect NW Natural’s ability to recover this hedge in rates. Further, new gas reserves arrangements have not been approved for inclusion in rates, and regulators may ultimately determine to not include all
or a portion of future transactions in rates. The realization of any of the above mentionedthese situations could adversely impact NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
CUSTOMER GROWTH RISK.NW Holdings’ and NW Natural’s NGD margin, earnings and cash flow may be negatively affected if we are unable to sustain customer growth rates in our NGD segment.
NW Natural’s NGD margins and earnings growth have largely depended upon the sustained growth of its residential and commercial customer base due, in part, to the new construction housing market, conversions of customers to natural gas from other energy sources and growing commercial use of natural gas. Building codes recently enacted and others under consideration in our territory may have the effect of reducing our natural gas customer growth rate. For example, 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 are expected to restrict or eliminate the use of gas space and water heating in new commercial construction. In early November, the SBCC voted to include updates to the state residential building energy code that restrict the use of gas space and water heating in residential construction, with certain exceptions including for natural gas-fired heat pumps and hybrid fuel systems.The SBBC commercial and residential rules are expected to become effective July 1, 2023. Certain jurisdictions in Oregon and the State of Oregon are considering similar measures. While we expect these types of codes to be subject to legal challenge, we cannot predict the outcome of any such challenge. Insufficient customer growth, for economic, political, public perception, policy, or other reasons could adversely affect NW Holdings’ or NW Natural’s utility margin, earnings and cash flows.
RISK OF COMPETITION.Our NGD business is subject to increased competition which could negatively affect NW Holdings’ or NW Natural’s results of operations.
In the residential and commercial markets, NW Natural’s NGD business competes primarily with suppliers of electricity, fuel oil, and propane. In the industrial market, NW Natural competes with suppliers of all forms of energy. Competition among these forms of energy is based on price, efficiency, reliability, performance, market conditions, technology, federal, state and local governmental regulation, actual and perceived environmental impacts, and public perception. Technological improvements such as electric heat pumps, batteries or other alternative technologies, or building code restrictions affecting the ability to use certain gas appliances, could erode NW Natural’s competitive advantage. If natural gas prices are high relative to other energy sources, or if the cost, environmental impact or public perception of such other energy sources improves relative to natural gas, it may negatively affect NW Natural’s ability to secure new customers or retain our existing residential, commercial and industrial customers, which could have a negative impact on our customer growth rate and NW Holdings’ and NW Natural’s results of operations.
Our natural gas storage operations compete primarily with other storage facilities and pipelines. Increased competition in the natural gas storage business could reduce the demand for our natural gas storage services, drive prices down for our storage business, and adversely affect our ability to renew or replace existing contracts at rates sufficient to maintain current revenues and cash flows, which could adversely affect NW Holdings’ and NW Natural’s financial condition, results of operations and cash flows.
Operational Risks
OPERATING RISK. Transporting and storing natural gas and distributing natural gas and water involves numerous risks that may result in accidents and other operating risks and costs, some or all of which may not be fully covered by insurance, and which could adversely affect NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
NW Holdings and NW Natural are subject to all of the risks and hazards inherent in the businesses of gas and RNG transmission, distribution and storage, and water distribution, and wastewater services including:
•earthquakes, wildfires, floods, storms, landslides and other severe weather incidents and natural hazards;
•leaks or losses of natural gas or RNG, water or wastewater, or contamination of natural gas, RNG or water by chemicals or compounds, as a result of the malfunction of equipment or facilities or otherwise;
•damages from third parties;
•operator errors;
•negative performance by our storage reservoirs, facilities, or wells that could cause us to fail to meet expected or forecasted operational levels or contractual commitments to our customers;customers or other third parties;
•problems maintaining, or the malfunction of, pipelines, biodigester facilities, wellbores and related equipment and facilities that form a part of the infrastructure that is critical to the operation of our gas and water distribution, wastewater services, RNG and gas storage facilities;
•presence of chemicals or other compounds in RNG or natural gas that could adversely affect the performance of the system or end-use equipment;
•collapse of underground storage reservoirs;
•inadequate supplies of RNG, natural gas or water;water or contamination of water supplies;
•operating costs that are substantially higher than expected;
•supply chain disruptions, including unexpected price increases, or supply restrictions beyond the control of our suppliers;
•migration of natural gas through faults in the rock or to some area of the reservoir where existing wells cannot drain the gas effectively, resulting in loss of the gas;
•blowouts (uncontrolled escapes of gas from a pipeline or well) or other accidents, fires and explosions; and
•risks and hazards inherent in the drilling operations associated with the development of gas storage facilities, and wells.
For example, TC Pipelines, LP (TC Pipelines) has identified the presence of a chemical substance, dithiazine, at several facilities on the system of its subsidiary, Gas Transmission Northwest (GTN), and those of some upstream and downstream connecting pipeline facilities. A portion of NW Natural’s gas supplies from Canada are transported on GTN’s pipelines. TC Pipelines reports that dithiazine can drop out of gas streams in a powdery form at some points of pressure reduction (for example, at a regulator), and that in incidents where a sufficient quantity of the material accumulates in certain places, improper functioning of equipment can occur, which can result in increased preventative and corrective action costs. While NW Natural has not detected significant quantities of dithiazine on its system to date, we continue to monitor and could discover increased levels of dithiazine or other compounds on NW Natural’s system that could affect the performance of the system or end-use equipment.
These and other operational risks could result in disruption of service, personal injury or loss of human life, damage to and destruction of property and equipment, pollution or other environmental damage, breaches of our contractual commitments, and may result in curtailment or suspension of operations, which in turn could lead to significant costs and lost revenues. Further, because our pipeline, storage and distribution facilities are in or near populated areas, including residential areas, commercial business centers, and industrial sites, any loss of human life or adverse financial outcomes resulting from such events could be significant. We could be subject to lawsuits, claims, and criminal and civil enforcement actions. Additionally, we may not be able to maintain the level or types of insurance we desire, and the insurance coverage we do obtain may contain large deductibles or fail to cover certain hazards or cover all potential losses. The occurrence of any operating risks not covered by insurance could adversely affect NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
SAFETY REGULATION RISK.NW Holdings and NW Natural may experience increased federal, state and local regulation of the safety of our systems and operations, which could adversely affect NW Holdings’ or NW Natural’s operating costs and financial results.
The safety and protection of the public, our customers and our employees is and will remain our top priority. We are committed to consistently monitoring, maintaining, and upgrading our distribution systems and storage operations to ensure that RNG, natural gas and water is acquired, stored and delivered safely, reliably and efficiently. Natural gas operators are subject to robust, ongoing federal, state and local regulatory oversight, which intensifies in response to incidents. For example, the 2020 Protecting our Infrastructure of Pipelines and Enhancing Safety Act (PIPES Act) prompted PHSMA to issue three new rulemakings impacting transmission lines, gathering lines, and valve automation in response to past incidents in other parts of the country. Proposed rulemakings planned for 2023 by the Pipeline and Hazardous Materials Safety Administration (PHMSA), include regulations related to the detection and repair of leaks and safety of gas distribution pipelines.
In addition, our workplaces are subject to the requirements of the Department of Transportation, through the Federal Motor Carrier Safety Administration, and the Occupational Safety and Health Administration, as well as state and local statutes and regulations that regulate the protection of the health and safety of workers. The failure to comply with these requirements or general industry standards, including keeping adequate records or preventing occupational injuries or exposure, could expose us to civil or criminal liability, enforcement actions, and regulatory fines and penalties that may not be recoverable through our rates and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We intend to work diligently with industry associations and federal and state regulators to comply with these regulations and other new laws. We expect there to be increased costs associated with compliance, and those costs could be significant. If these costs are not recoverable in our customer rates, they could have a negative impact on NW Holdings’ and NW Natural’s operating costs and financial results.
RELIANCE ON THIRD PARTIES TO SUPPLY NATURAL GAS, RNG AND ENVIRONMENTAL ATTRIBUTES OR CREDITS RISK. NW Natural relies on third parties to supply the natural gas, RNG and environmental attributes or credits in its NGD segment, and limitations on NW Natural’s ability to obtain supplies, or failure to receive expected supplies, could have an adverse impact on NW Holdings’ or NW Natural’s financial results.
NW Natural’s ability to secure natural gas, RNG and environmental attributes or credits depends upon its ability to purchase and receive delivery of them from third parties. NW Natural, and in some cases its suppliers, does not have control over the availability of natural gas, RNG or environmental attributes or credits, competition for those supplies, disruptions in those supplies, priority allocations on transmission pipelines, markets for those supplies, or pricing and other terms related to such supplies. Additionally, third parties on whom NW Natural relies may fail to deliver supplies for which it has contracted. For example, in October, 2018, a 36-inch pipeline near Prince George, British Columbia owned by Enbridge ruptured, disrupting natural gas flows from Canada into Washington while the ruptured pipeline and an adjacent pipeline were assessed and the ruptured pipeline was repaired. Once repaired, pressurization levels for those pipelines were reduced for a significant period of time for assessment and testing. If NW Natural is unable or limited in its ability to obtain natural gas, RNG or environmental attributes or credits from its current suppliers or new sources, it may not be able to meet customers' gas requirements or
regulatory or compliance requirements, and would likely incur costs associated with actions necessary to mitigate service disruptions or regulatory compliance, which could significantly and negatively impact NW Holdings’ and NW Natural’s results of operations.
SINGLE TRANSPORTATION PIPELINE RISK. NW Natural relies on a single pipeline company for the transportation of gas to its service territory, a disruption, limitation, or inadequacy of which could adversely impact its ability to meet customers’ gas requirements, which could significantly and negatively impact NW Holdings’ and NW Natural’s results of operations.
NW Natural’s distribution system is directly connected to a single interstate pipeline, which is owned and operated by Northwest Pipeline. The pipeline’s gas flows are bi-directional, transporting gas into the Portland metropolitan market from two directions: (1) the north, which brings supplies from the British Columbia and Alberta supply basins; and (2) the east, which brings supplies from the Alberta and the U.S. Rocky Mountain supply basins. If there is a rupture or inadequate capacity in, or supplies to maintain adequate pressures in, the pipeline, NW Natural may not be able to meet its customers’ gas requirements and we would likely incur costs associated with actions necessary to mitigate service disruptions, both of which could significantly and negatively impact NW Holdings’ and NW Natural’s results of operations.
THIRD PARTY PIPELINE RISK.NW Natural’s gas storage business depends on third-party pipelines that connect our storage facilities to interstate pipelines, the failure or unavailability of which could adversely affect NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
Our gas storage facilities are reliant on the continued operation of a third-party pipeline and other facilities that provide delivery options to and from our storage facilities. Because we do not own all of these pipelines, their operations are not within our control. If the third-party pipeline to which we are connected were to become unavailable for current or future withdrawals or injections of natural gas due to repairs, damage to the infrastructure, lack of capacity or other reasons, our ability to operate efficiently and satisfy our customers’ needs could be compromised, thereby potentially having an adverse impact on NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
WORKFORCE RISK.NW Holdings’ and NW Natural’s businesses are heavily dependent on being able to attract and retain qualified employees and maintain a competitive cost structure with market-based salaries and employee benefits, and workforce disruptions could adversely affect NW Holdings’ or NW Natural’s operations and results.
NW Holdings’ and NW Natural’s ability to implement our business strategy and serve our customers is dependent upon our continuing ability to attract and retain diverse, talented professionals and a technically skilled workforce, and being able to transfer the knowledge and expertise of our workforce to new and increasingly diverse employees as our largely older workforce retires. A significant portion of our workforce is currently eligible or will reach retirement eligibility within the next five years, which will require that we attract, train and retain skilled workers to prevent loss of institutional knowledge or skills gaps. We face competition for qualified personnel with specific skillsets. This competition is elevated by the record low unemployment in Oregon and may result in increased pressure on wages or other challenges in recruiting or retaining personnel. Without an appropriately skilled workforce, our ability to provide quality service and meet our regulatory requirements will be challenged and this could negatively impact NW Holdings' and NW Natural’s earnings. Additionally, approximately half of NW Natural workers are represented by the OPEIU Local No. 11 AFL-CIO and are covered by a collective bargaining agreement that extends to May 31, 2024. Disputes with the union representing NW Natural employees over terms and conditions of their agreement, or failure to timely and effectively renegotiate the agreement upon its expiration, could result in instability in our labor relationship or other labor disruptions that could impact the timely delivery of gas and other services from our utility and storage facilities, which could strain relationships with customers and state regulators and cause a loss of revenues. The collective bargaining agreements may also limit our flexibility in dealing with NW Natural’s workforce, and the ability to change work rules and practices and implement other efficiency-related improvements to successfully compete in today’s challenging marketplace, which may negatively affect NW Holdings’ and NW Natural’s financial condition and results of operations.
Environmental Risks
ENVIRONMENTAL LIABILITY RISK. Certain of NW Natural’s, and possibly NW Holdings’, properties and facilities may pose environmental risks requiring remediation, the costs of which are difficult to estimate and which could adversely affect NW Holdings’ and NW Natural’s financial condition, results of operations, and cash flows.
NW Natural owns, or previously owned, properties that require environmental remediation or other action. NW Holdings or NW Natural may now, or in the future, own other properties that require environmental remediation or other action. NW Natural and NW Holdings accrue all material loss contingencies relating to these properties. A regulatory asset at NW Natural has been recorded for estimated costs pursuant to a deferral order from the OPUC and WUTC. In addition to maintaining regulatory deferrals, NW Natural settled with most of its historical liability insurers for only a portion of the costs it has incurred to date and expects to incur in the future. To the extent amounts NW Natural recovered from insurance are inadequate and it is unable to recover these deferred costs in utility customer rates, NW Natural would be required to reduce its regulatory assets which would result in a charge to earnings in the year in which regulatory assets are reduced. In addition, in Oregon, the OPUC approved the SRRM, which limits recovery of deferred amounts to those amounts which satisfy an annual prudence review and an earnings test that requires NW Natural to contribute additional amounts toward environmental remediation costs above approximately $10 million in years in which NW Natural earns above its authorized ROE. To the extent NW Natural earns more than its authorized
ROE in a year, it would be required to cover environmental expenses greater than the $10 million with those earnings that exceed its authorized ROE. The OPUC ordered a review of the SRRM in 2018 or when we obtain greater certainty of environmental costs, whichever occurred first. We submitted information for review in 2018, and believe we could be subject to further review. Similarly, in October 2019, the WUTC authorized an ECRM, which allows for recovery of certain past deferred and future prudently incurred remediation costs allocable to Washington through application of insurance proceeds and collections from customers, subject to an annual prudence determination. These ongoing prudence reviews, or with respect to the SRRM, the earnings test, or the periodic review could reduce the amounts NW Natural is allowed to recover, and could adversely affect NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
Moreover, we may have disputes with regulators and other parties as to the severity of particular environmental matters, what remediation efforts are appropriate, whether natural resources were damaged, and the portion of the costs or claims NW Natural or NW Holdings should bear. We cannot predict with certainty the amount or timing of future expenditures related to environmental investigations, remediation or other action, the portions of these costs allocable to NW Natural or NW Holdings, or disputes or litigation arising in relation thereto.
Environmental liability estimates are based on current remediation technology, industry experience gained at similar sites, an assessment of probable level of responsibility, and the financial condition of other potentially responsible parties. However, it is difficult to estimate such costs due to uncertainties surrounding the course of environmental remediation, the preliminary nature of certain site investigations, natural recovery of the site, unavoidable limitations associated with environmental investigations and remedial technologies, evolving science, and the application of environmental laws that impose joint and several liabilities on all potentially responsible parties. These uncertainties and disputes arising therefrom could lead to further adversarial administrative proceedings or litigation, with associated costs and uncertain outcomes, all of which could adversely affect NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
ENVIRONMENTAL REGULATION COMPLIANCE RISK. NWHoldings and NW Natural are subject to environmental regulations for our ongoing businesses, compliance with which or failure to comply with, could adversely affect our operations or financial results.
NW Holdings and NW Natural are subject to laws, regulations and other legal requirements enacted or adopted by federal, state and local governmental authorities relating to protection of the environment, including those legal requirements that govern discharges of substances into the air and water, the management and disposal of hazardous substances and waste, groundwater quality and availability, plant and wildlife protection, the emitting of greenhouse gases, and other aspects of environmental regulation. For example, our natural gas operations are subject to reporting requirements to a number of governmental authorities including, but not limited to, the Environmental Protection Agency (EPA), the Oregon Department of Environmental Quality (ODEQ), and the Washington State Department of Ecology regarding greenhouse gas emissions. We are also required to reduce emissions of GHGs over time in accordance with the Oregon Climate Protection Program and the Washington Climate Commitment Act. These and other current and future additional environmental regulations at the local, state or national level could result in increased compliance costs or additional operating restrictions, which may or may not be recoverable in customer rates, through insurance or otherwise. If these costs are not recoverable, or if these regulations reduce the desirability, availability, or cost-competitiveness of natural gas, they could have an adverse effect on NW Holdings’ or NW Natural’s operations or financial condition. Furthermore, failure to comply with such laws or regulations could subject us to possible enforcement actions, financial liability or litigation, any of which could adversely affect NW Holdings’ or NW Natural’s financial condition and results of operations.
GLOBAL CLIMATE CHANGE RISK.Our businesses may be subject to physical risks associated with climate change, all of which could adversely affect NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
Climate change may cause physical risks, including an increase in sea level, intensified storms, water scarcity, wildfire susceptibility and intensity and changes in weather conditions, such as changes in precipitation, average temperatures and extreme wind or other extreme weather events or climate conditions. Moreover, a significant portion of the nation’s gas infrastructure is located in areas susceptible to storm damage that could be aggravated by wetland and barrier island erosion, which could give rise to gas supply interruptions and price spikes.
These and other physical changes could result in disruptions to natural gas production and transportation systems potentially increasing the cost of gas and affecting our natural gas businesses’ ability to procure or transport gas to meet customer demand. These changes could also affect our distribution systems resulting in increased maintenance and capital costs, disruption of service, regulatory actions and lower customer satisfaction. Similar disruptions could occur in NW Holdings’ water utility businesses. Additionally, to the extent that climate change adversely impacts the economic health or weather conditions of our service territory directly, it could adversely impact customer demand or our customers ability to pay. Such physical risks could have an adverse effect on NW Holdings’ or NW Natural’s financial condition, results of operations, and cash flows.
PUBLIC PERCEPTION AND POLICY RISK. Changes in public sentiment or public policy with respect to natural gas, including through local, state or federal laws or legislation or other regulation (including ballot initiatives, executive orders or regulatory codes) or litigation, could adversely affect NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
There are a number of international, federal, state, and local legislative, legal, regulatory and other initiatives being proposed and adopted in an attempt to measure, control or limit the effects of global warming and climate change, including greenhouse gas (GHG) emissions such as carbon dioxide, nitrous oxide, and methane. Legislation or other forms of public policy or regulation that aim to reduce GHG emissions at the federal, state, or local level have and could continue to 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, and incentives or mandates to conserve energy, or use renewable energy sources. Federal, state, or local governments may provide tax advantages and other subsidies to support alternative energy sources, withdraw funding from fossil fuel sources, mandate the use of specific fuels or technologies, prohibit the use of natural gas, or promote research into new technologies to reduce the cost and increase the scalability of alternative energy sources. In 2021, the United States rejoined the Paris Agreement on Climate Change, and the United States Presidential administration has issued executive orders aimed at reducing GHG emissions, has declared climate change a national security priority, and continues to consider a wide range of policies, executive orders, rules, legislation and other initiatives to address climate change. For example, the Inflation Reduction Act of 2022 (IRA), was signed into law in August 2022 and includes a number of energy and climate related provisions including funding for the EPA to improve GHG reporting and enforcement, as well as a methane fee applicable to activities associated with gas production and processing facilities, transmission pipelines and certain storage facilities. The U.S. Congress may also pass federal climate change legislation in the future. Additionally, other federal agencies have taken or are expected to take actions related to climate change. For example, in March 2022, the Securities and Exchange Commission (SEC) proposed new rules relating to the disclosure of a range of climate-related matters, PHMSA is expected to prepare regulations and other actions to limit methane emissions and the Commodities Futures Trading Commission (CFTC) has indicated it intends to take actions related to oversight of climate-related financial risks as pertinent to the derivatives and underlying commodities markets. Similarly, other federal agencies and regulations, including but not limited to the Consumer Products Safety Commission, the U.S. Department of Treasury, Federal Acquisitions Regulations, and others have indicated impending actions related to regulation related to climate change.
At the state level, the State of Washington has enacted the Climate Commitment Act (CCA), which establishes a comprehensive program that provides an overall limit for GHG emissions from major sources in the state that begins on January 1, 2023 and declines yearly to 95% below 1990 levels by 2050. Similarly, in Oregon, in March 2020, the Oregon Governor issued an executive order (EO) establishing GHG emissions reduction goals and directing state agencies and commissions (including the ODEQ and the OPUC) to facilitate such GHG emission goals. In December 2021, the ODEQ concluded its process and issued final cap and reduce rules for the Climate Protection Program (CPP), which became effective January 1, 2022. The CPP outlines GHG emissions reduction goals of 50% by 2035 and 90% by 2050 from a 1990 baseline. NW Natural is subject to both the CCA and CPP. We expect that there will be additional efforts to address climate change in the 2023 legislative sessions in both Oregon and Washington and we cannot predict whether the legislatures will pass any climate related legislation and the potential impact any such legislation may have on the Company. In addition, the State of Washington has enacted and the State of Oregon and some local jurisdictions are considering building codes that could have the effect of disfavoring or disallowing natural gas in residential or commercial new construction or conversions, including locations within our service territory, such as the recent actions by the City of Eugene to disallow gas in new residential construction beginning with permits issued in mid-2023. A number of local and county jurisdictions are also proposing or passing renewable energy resolutions or other measures in an effort to accelerate renewable energy goals.
Such current or future legislation, regulation or other initiatives (including executive orders, ballot initiatives or ordinances) could impose on our natural gas businesses operational requirements or restrictions, additional charges to fund energy efficiency initiatives, or levy a tax based on carbon content. In addition, certain jurisdictions, including San Francisco, Seattle, and New York have enacted measures to ban or discourage the use of new natural gas hookups in residential or other buildings. Other jurisdictions, including several in our service territory, such as the city of Milwaukie, have considered or are currently considering similar restrictions or other measures discouraging the use of natural gas, such as limitations or bans on the use of natural gas in new construction, requiring the conversion of buildings to electric heat, or adopting policies or incentives to encourage the use of electricity in lieu of natural gas. Such restrictions could adversely impact customer growth or usage and could adversely impact our ability to recover costs and maintain reasonable customer rates. In addition, certain cities, local jurisdictions and private parties have initiated lawsuits against companies related to climate change impacts, GHG emissions or climate-related disclosures. While NW Natural has not been subject to such litigation to date, such climate-related claims or actions could be costly to defend and could negatively impact our business, reputation, financial condition, and results of operations.
NW Natural believes natural gas has an important role in moving the Pacific Northwest to a low carbon future, and to that end is developing programs and measures to reduce carbon emissions. However, NW Natural’s efforts may not happen quickly enough to keep pace with legislation or other regulation, legal changes or public sentiment, or may be more costly or not be as effective as expected. Any of these initiatives, or our unsuccessful response to them, could result in us incurring additional costs to comply with the imposed policies, regulations, restrictions or programs, provide a cost or other competitive advantage to energy sources other than natural gas, reduce demand for natural gas, restrict our customer growth, impose costs or restrictions on end users of natural gas, impact the prices we charge our customers, increase the likelihood of litigation, impose increased costs on us associated with the adoption of new infrastructure and technology to respond to such requirements which may or may not be recoverable in customer rates, and could negatively impact public perception of our services or products that negatively diminishes the value of our brand, all of which could adversely affect NW Holdings’ or NW Natural’s business operations, financial condition and results of operations.
Business Continuity and Technology Risks
BUSINESS CONTINUITY RISK. NW Holdings and NW Natural may be adversely impacted by local or national disasters, pandemic illness, political unrest, terrorist activities, cyber-attacks or data breaches, and other extreme events to which we may not be able to promptly respond, which could adversely affect NW Holdings’ or NW Natural’s operations or financial condition.
Local or national disasters, pandemic illness, political unrest, terrorist activities, cyber-attacks and data breaches, and other extreme events are a threat to our assets and operations. Companies in critical infrastructure industries may face a heightened risk due to being the target of, and having heightened exposure to, acts of terrorism or sabotage, including physical and security breaches of our physical infrastructure and information technology systems in the form of cyber-attacks.cyber-attacks or other forms of attacks. These attacks could, among other things, target or impact our technology or mechanical systems that operate our distribution, transmission or storage facilities and result in a disruption in our operations, damage to our system and inability to meet customer requirements. In addition, the threat of terrorist activities could lead to increased economic instability and volatility in the price of RNG, natural gas or other necessary commodities that could affect our operations. Threatened or actual national disasters or terrorist activities may also disrupt capital or bank markets and our ability to raise capital or obtain debt financing, or impact our suppliers or our customers directly. Local disaster protests or pandemic illnesscivil unrest could result in disruption of our infrastructure or part of our workforce being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. A slow or inadequate response to events may have an adverse impact on our operations and earnings. We may not be able to maintain sufficient insurance to cover all risks associated with local and national disasters, pandemic illness, terrorist activities, cyber-attacks and other attacks or events. Additionally, large scale natural disasters or terrorist attacks could destabilize the insurance industry making the insurance we do have unavailable, which could increase the risk that an event could adversely affect NW Holdings’ or NW Natural’s operations or financial results.
RELIANCE ON TECHNOLOGY RISK. NW Holdings’ and NW Natural’s efforts to integrate, consolidate and streamline each of their operations has resulted in increased reliance on technology, the failure of which could adversely affect NW Holdings’ or NW Natural’s financial condition and results of operations.
NW Holdings and NW Natural have undertaken a variety of initiatives to integrate, standardize, centralize and streamline operations. These efforts have resulted in greater reliance on technological tools such as, at NW Natural: an enterprise resource planning system, a digital dispatch system, an automated meter reading system, a web-based ordering and tracking system, and other similar technological tools and initiatives. Our future success will depend, in part, on our ability to anticipate and adapt to technological changes in a cost-effective manner and to offer, on a timely basis, services that meet customer demands and evolving industry standards. New technologies may emerge that could be superior to, or may not be compatible with, some of our existing technologies, and may require us to make significant expenditures to remain competitive. We continue to implement technology to improve our business processes and customer interactions. In addition, our various existing information technology systems require periodic modifications, upgrades and/or replacement. For example, NW Natural has recently implemented upgrades to its SAP system and intends to replace its customer information system in the near future.
There are various risks associated with these systems in addition to upgrades and replacements, including hardware and software failure, communications failure, data distortion or destruction, unauthorized access to data, misuse of proprietary or confidential data, unauthorized control through electronic means, programming mistakes and other inadvertent errors or deliberate human acts. In addition, we are dependent on a continuing flow of important components and appropriately skilled individuals to maintain and upgrade our information technology systems. Our suppliers have faced disruptions due to COVID-19 and may face additional production or import delays due to natural disasters, strikes, lock-outs, political unrest, pandemics (including COVID-19) or other such circumstances. Technology services provided by third-parties also could be disrupted due to events and circumstances beyond our control which could adversely impact our business, financial condition and results of operations.
Any modifications, upgrades, system maintenance or replacements subject us to inherent costs and risks, including potential disruption of our internal control structure, substantial capital expenditures, additional administrative and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated. There is also risk that we may not be able to recover all costs associated with projects to improve our technological capabilities, which may adversely affect NW Holdings’ or NW Natural’s financial condition and results of operations.
CYBERSECURITY RISK.NWHoldings’ and NW Natural’s status as an infrastructure services provider coupled with its reliance on technology could result in a security breach which could adversely affect NW Holdings’ or NW Natural’s financial condition and results of operations.
Although we take precautions to protect our technology systems and are not aware of any material security breaches to date, there is no guarantee that the procedures we have implemented to protect against unauthorized access to secured data and systems, including our industrial controls and other information technology systems, are adequate to safeguard against all security breaches or other cyberattacks. Additionally, the facilities and systems of clients, suppliers and third party service providers also could be vulnerable to cyber risks and attacks, and such third party systems may be interconnected to our
systems. Therefore, an event caused by cyberattacks or other malicious act at an interconnected third party could impact our business and facilities similarly. As these potential cyber security attacks become more common and sophisticated, we could be required to incur costs to strengthen our systems or maintain insurance coverage against potential losses. Moreover, a variety of regulatory agencies are increasingly focused on cybersecurity risks, and specifically in critical infrastructure sectors. For example, the Transportation Security Administration (TSA) has published multiple security directives and is currently in the process of implementing formal rules mandating cybersecurity actions for critical pipeline owners and operators. Failure to timely and effectively meet the requirements of these directives or other cybersecurity regulations could result in fines or other penalties. We are continuing to evaluate the potential costs of implementation of these directives, and there is no assurance that we will be able to continue to recover in rates costs associated with such compliance.
In addition, our businesses could experience breaches of security pertaining to sensitive customer, employee, and vendor information maintained by us in the normal course of business, which could adversely affect our reputation, diminish customer confidence, disrupt operations, materially increase the costs we incur to protect against these risks, and subject us to possible financial liability or increased regulation or litigation. All of these risks could adversely affect NW Holdings’ or NW Natural’s financial condition and results of operations.
Financial and Economic Risks
HOLDING COMPANY DIVIDEND RISK. As a holding company, NW Holdings depends on its operating subsidiaries, including NW Natural, to meet financial obligations and the ability of NW Holdings to pay dividends on its common stock is dependent on the receipt of dividends and other payments from its subsidiaries, including NW Natural.
As a holding company, NW Holdings’ only significant assets are the stock and membership interests of its operating subsidiaries, which at this time is primarily NW Natural. NW Holdings’ direct and indirect subsidiaries are separate and distinct legal entities, managed by their own boards of directors, and have no obligation to pay any amounts to their respective shareholders, whether through dividends, loans or other payments. The ability of these companies to pay dividends or make other distributions on their common stock is subject to, among other things: their results of operations, net income, cash flows and financial condition, as well as the success of their business strategies and general economic and competitive conditions; the prior rights of holders of existing and future debt securities and any future preferred stock issued by those companies; and any applicable legal restrictions.
In addition, the ability of NW Holdings’ subsidiaries to pay upstream dividends and make other distributions is subject to applicable state law and regulatory restrictions. Under the OPUC and WUTC regulatory approvals for the holding company formation, if NW Natural ceases to comply with credit and capital structure requirements approved by the OPUC and WUTC, it will not, with limited exceptions, be permitted to pay dividends to NW Holdings. Under the OPUC and WUTC orders authorizing 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 levels fall below specified ratings and 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 is 45% or above. 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 is 46% or above. Dividends may not be issued if NW Natural’s long-term secured credit ratings fall to BB+ or below for S&P or Ba1 or below for Moody’s, or if NW Natural’s common equity is below 44%. The ratio is measured using common equity and long-term debt excluding imputed debt or debt-like lease obligations, and is determined on a preceding or projected 13-month basis.
EMPLOYEE BENEFIT RISK. The cost of providing pension and postretirement healthcare benefits is subject to changes in pension assets and liabilities, changing employee demographics and changing actuarial assumptions, which may have an adverse effect on NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
Until NW Natural closed the pension plans to new hires, which for non-union employees was in 2006 and for union employees was in 2009, it provided pension plans and postretirement healthcare benefits to eligible full-time utility employees and retirees. About halfApproximately 30% of NW Natural’s current utility employees were hired prior to these dates, and therefore remain eligible for these plans. Other businesses we acquire may also have pension plans. The costs to NW Natural, or the other applicable businesses we may
acquire, for providing such benefits is subject to change in the market value of the pension assets, changes in employee demographics including longer life expectancies, increases in healthcare costs, current and future legislative changes, and various actuarial calculations and assumptions. The actuarial assumptions used to calculate our future pension and postretirement healthcare expenses may differ materially from actual results due to significant market fluctuations and changing withdrawal rates, wage rates, interest rates and other factors. These differences may result in an adverse impact on the amount of pension contributions, pension expense or other postretirement benefit costs recorded in future periods. Sustained declines in equity markets and reductions in bond rates may have a material adverse effect on the value of the pension fund assets and liabilities. In these circumstances, NW Natural may be required to recognize increased contributions and pension expense earlier than it had planned to the extent that the value of pension assets is less than the total anticipated liability under the plans, which could have a negative impact on NW Holdings’ and NW Natural’s financial condition, results of operations and cash flows.
WORKFORCE RISK.HEDGING RISK. NW Holdings’ and NW Natural’s businesses are heavily dependent on being able to attract and retain qualified employees and maintain a competitive cost structure with market-based salaries and employee benefits, and workforce disruptions could adversely affect NW Holdings’ or NW Natural’s operations and results.
NW Holdings’ and NW Natural’s ability to implement our business strategy and serve our customers is dependent upon our continuing ability to attract and retain talented professionals and a technically skilled workforce, and being able to transfer the knowledge and expertise of our workforce to new employees as our largely older workforce retires. We expect that a significant portion of our workforce will retire within the current decade, which will require that we attract, train and retain skilled workers to prevent loss of institutional knowledge or skills gaps. Without an appropriately skilled workforce, our ability to provide quality service and meet our regulatory requirements will be challenged and this could negatively impact NW Holdings' and NW Natural’s earnings. Additionally, a majority of NW Natural workers are represented by the OPEIU Local No. 11 AFL-CIO, and are covered by a collective bargaining agreement that extends to May 31, 2024. Disputes with the union representing NW Natural employees over terms and conditions of their agreement, or failure to timely and effectively renegotiate the agreement, could result in instability in our labor relationship and work stoppages that could impact the timely delivery of gas and other services from our utility and storage facilities, which could strain relationships with customers and state regulators and cause a loss of revenues. The collective bargaining agreements may also limit our flexibility in dealing with NW Natural’s workforce, and the ability to change work rules and practices and implement other efficiency-related improvements to successfully compete in today’s challenging marketplace, which may negatively affect NW Holdings’ and NW Natural’s financial condition and results of operations.
LEGISLATIVE, COMPLIANCE AND TAXING AUTHORITY RISK. NW Holdings and NW Natural are subject to governmental regulation, and compliance with local, state and federal requirements, including taxing requirements, and unforeseen changes in or interpretations of such requirements could affect NW Holdings’ or NW Natural’s financial condition and results of operations.
NW Holdings and NW Natural are subject to regulation by federal, state and local governmental authorities. We are required to comply with a variety of laws and regulations and to obtain authorizations, permits, approvals and certificates from governmental agencies in various aspects of our business. Significant changes in federal, state, or local governmental leadership can accelerate or amplify changes in existing laws or regulations, or the manner in which they are interpreted or enforced. For example, the current U.S. presidential administration has made numerous leadership changes at federal administrative agencies since the 2016 U.S. presidential election. Moreover, the U.S. Congress and the U.S. presidential administration may make substantial changes to fiscal, tax, regulation and other federal policies, which changes may be significantly impacted by the outcome of the 2020 U.S. presidential and congressional election. The current U.S. presidential administration has called for and implemented significant changes to U.S. fiscal policies, U.S. trade, healthcare, immigration, foreign, and government regulatory policy. To the extent the U.S. Congress or U.S. presidential administration implements changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation and other areas. Similarly, local elections during 2020 may lead to significant policy changes at the state or municipal levels in our service areas that may affect us. In addition, foreign governments may implement changes to their policies, in response to changes to U.S. policy or otherwise. Although we cannot predict the impact, if any, of these changes to our businesses, they could adversely affect NW Holdings’ or NW Natural’s financial condition and results of operations. Until we know what policy changes are made and how those changes impact our businesses and the business of our competitors over the long term, we will not know if, overall, we will benefit from them or be negatively affected by them.
Though we cannot predict changes in laws, regulations, or enforcement, we expect there to continue to be a number of significant changes. We cannot predict with certainty the impact of any future revisions or changes in interpretations of existing regulations or the adoption of new laws and regulations. Additionally, any failure to comply with existing or new laws and regulations could result in fines, penalties or injunctive measures that could affect operating assets. For example, under the Energy Policy Act of 2005, the FERC has civil authority under the Natural Gas Act to impose penalties for current violations of in excess of $1 million per day for each violation. In addition, as the regulatory environment for our businesses increases in complexity, the risk of inadvertent noncompliance may also increase. Changes in regulations, the imposition of additional regulations, and the failure to comply with laws and regulations could negatively influence NW Holdings’ or NW Natural’s operating environment and results of operations.
Additionally, changes in federal, state or local tax laws and their related regulations, or differing interpretations or enforcement of applicable law by a federal, state or local taxing authority, could result in substantial cost to us and negatively affect our results of operations. Tax law and its related regulations and case law are inherently complex and dynamic. Disputes over interpretations of tax laws may be settled with the taxing authority in examination, through programs like the Compliance Assurance Process (CAP), upon appeal or through litigation. Our judgments may include reserves for potential adverse outcomes regarding tax positions that have been taken that may be subject to challenge by taxing authorities. Changes in laws, regulations or adverse judgments and the inherent difficulty in quantifying potential tax effects of business decisions may negatively affect NW Holdings’ or NW Natural’s financial condition and results of operations.
Furthermore, certain tax assets and liabilities, such as deferred tax assets and regulatory tax assets and liabilities, are recognized or recorded by NW Holdings or NW Natural based on certain assumptions and determinations made based on available evidence, such as projected future taxable income, tax-planning strategies, and results of recent operations. If these assumptions and determinations prove to be incorrect, the recorded results may not be realized, which may negatively impact the financial results of NW Holdings and NW Natural.
There is uncertainty as to how our regulators will reflect the impact of the legislation and other government regulation in rates. The resulting ratemaking treatment may negatively affect NW Holdings’ or NW Natural’s financial condition and results of operations.
SAFETY REGULATION RISK. NW Holdings and NW Natural may experience increased federal, state and local regulation of the safety of our systems and operations, which could adversely affect NW Holdings’ or NW Natural’s operating costs and financial results.
The safety and protection of the public, our customers and our employees is and will remain our top priority. We are committed to consistently monitoring and maintaining our distribution systems and storage operations to ensure that natural gas and water is acquired, stored and delivered safely, reliably and efficiently. Given recent high-profile natural gas explosions, leaks and accidents in other parts of the country involving both distribution systems and storage facilities, we anticipate that the natural gas industry may be the subject of even greater federal, state and local regulatory oversight. For example, in 2016, the Protecting our Infrastructure of Pipelines and Enhancing Safety Act (PIPES Act) was signed into law increasing regulations for natural gas storage pipelines and underground storage facilities and prioritizing the completion by the Pipeline and Hazardous Materials Safety Administration (PHMSA) of regulations related to the safety standards for natural gas transmission and gathering pipelines. Similarly, in 2016, California passed legislation directing the Department of Oil, Gas and Geothermal Resources (DOGGR) to develop regulations affecting gas storage operations. DOGGR has issued regulations which require certain integrity testing and tubing for wells at the Gill Ranch Facility within the next 7 years.
We intend to work diligently with industry associations and federal and state regulators to seek to ensure compliance with these and other new laws. We expect there to be increased costs associated with compliance, and those costs could be significant. If these costs are not recoverable in our customer rates, they could have a negative impact on NW Holdings’ and NW Natural’s operating costs and financial results.
HEDGING RISK.NW Natural’s risk management policies and hedging activities cannot eliminate the risk of commodity price movements and other financial market risks, and its hedging activities may expose itus to additional liabilities for
which rate recovery may be disallowed, which could result in an adverse impact on NW Holdings’ and NW Natural’s operating revenues, costs, derivative assets and liabilities and operating cash flows.
NW Natural’s gas purchasing requirements expose itus to risks of commodity price movements, while itsNW Holdings’ and NW Natural’s use of debt and equity financing exposes itus to interest rate, liquidity and other financial market risks. NW Natural attemptsWe attempt to manage these exposures with both financial and physical hedging mechanisms, including itsNW Natural’s gas reserves transactions which are hedges backed by physical gas supplies.supplies and interest rate hedging arrangements at NW Holdings and NWN Water. While NW Natural haswe have risk management procedures for hedging in place, they may not always work as planned and cannot entirely eliminate the risks associated with hedging. Additionally, NW Natural’sour hedging activities may cause itus to incur additional expenses to obtain the hedge. NW Natural doesWe do not hedge itsour entire interest rate or commodity cost exposure, and the unhedged exposure will vary over time. Gains or losses experienced through NW Natural’s hedging activities, including carrying costs, generally flow through NW Natural’s PGA mechanism or are recovered in future general rate cases. However, the hedge transactions NW Natural enters into for utility purposes are subject to a prudence review by the OPUC and WUTC, and, if found imprudent, those expenses may be, and have been previously, disallowed, which could have an adverse effect on NW Holdings’ or NW Natural’s financial condition and results of operations.
In addition, NW Natural’sour actual business requirements and available resources may vary from forecasts, which are used as the basis for its hedging decisions and could cause itsour exposure to be more or less than anticipated. Moreover, if NW Natural’s derivative instruments and hedging transactions do not qualify for regulatory deferral and it does not elect hedge accounting treatment under U.S. GAAP, NW Holdings’ or NW Natural’s results of operations and financial condition could be adversely affected.
NW Holdings and NW Natural also hashave credit-related exposure to derivative counterparties. Counterparties owing NW Holdings, NW Natural or itstheir respective subsidiaries money or physical natural gas commodities could breach their obligations. Should the counterparties to these arrangements fail
to perform, NW Naturalwe may be forced to enter into alternative arrangements to meet itsour normal business requirements. In that event, NW Holdings’ or NW Natural’s financial results could be adversely affected. Additionally, under most of NW Natural’s hedging arrangements, any downgrade of its senior unsecured long-term debt credit rating could allow its counterparties to require NW Natural to post cash, a letter of credit or other form of collateral, which would expose NW Natural to additional costs and may trigger significant increases in borrowing from its credit facilities or equity contribution needs from NW Holdings, if the credit rating downgrade is below investment grade. Further, based on current interpretations, each of NW Holdings, NW Natural and NWN Water is not considered a "swap dealer" or "major swap participant" in 2020,2022, so NW Natural iswe are exempt from certain requirements under the Dodd-Frank Act. If NW Natural iswe are unable to claim this exemption, itwe could be subject to higher costs for itsour derivatives activities, and such higher costs could have a negative impact on NW Holdings’ and NW Natural’s operating costs and financial results.
GAS PRICE RISK.Higher natural gas commodity prices and volatility in the price of gas may adversely affect NW Natural’s NGD business, whereas lower gas price volatility may adversely affect NW Natural’s gas storage business, negatively affecting NW Holdings’ and NW Natural’s results of operations and cash flows.
The cost of natural gas is affected by a variety of factors, including weather, changes in demand, the level of production and availability of natural gas supplies, transportation constraints, availability and cost of pipeline capacity, federal, state and local energy and environmental policy, regulation and legislation, natural disasters and other catastrophic events, national and worldwide economic and political conditions, and the price and availability of alternative fuels. In 2021 and 2022 there was increased pricing and volatility in the current and forward gas markets. At NW Natural, the cost we pay for natural gas is generally passed through to customers through an annual PGA rate adjustment. If gas prices were to increase significantly and remain higher, it could raise the cost of energy to NW Natural’s customers, potentially causing those customers to conserve or switch to alternate sources of energy. Sustained significant price increases could also cause new home builders and commercial developers to select alternative energy sources. Decreases in the volume of gas NW Natural sells could reduce NW Holdings or NW Natural’s earnings, and a decline in customers could slow growth in future earnings. Additionally, notwithstanding NW Natural’s current rate structure, higher gas costs could result in increased pressure on the OPUC or the WUTC to seek other means to reduce NW Natural’s rates, which also could adversely affect NW Holdings’ and NW Natural’s results of operations and cash flows.
Temporary gas price increases can also adversely affect NW Holdings’ and NW Natural’s operating cash flows, liquidity and results of operations because a portion (10% or 20%) of any difference between the estimated average PGA gas cost in rates and the actual average gas cost incurred is recognized as current income or expense.
Temporary or sustained higher gas prices may also cause NW Natural to experience an increase in short-term debt and temporarily reduce liquidity because it pays suppliers for gas when it is purchased, which can be in advance of when these costs are recovered through rates. Significant increases in the price of gas can also slow collection efforts as customers experience increased difficulty in paying their higher energy bills, leading to higher than normal delinquent accounts receivable resulting in greater expense associated with collection efforts and increased bad debt expense.
INABILITY TO ACCESS CAPITAL MARKET RISK. NW Holdings’ or NW Natural’s inability to access capital, or significant increases in the cost of capital, could adversely affect NW Holdings’ or NW Natural’s financial condition and results of operations.
NW Holdings’ and NW Natural’s ability to obtain adequate and cost effective short-term and long-term financing depends on maintaining investment grade credit profiles, as well asperceptions of our business in capital markets, and the existence of liquid and stable financial markets. NW Holdings relies on access to equity and bank markets to finance equity contributions to subsidiaries and other business requirements. NW Natural relies on access to capital and bank markets, including commercial paper and bond markets, to finance its operations, construction expenditures and other business requirements, and to refundrefinance maturing debt that cannot be funded entirely by internal cash flows. Disruptions in capital markets, including but not limited to, pandemics, political unrest, inflationary pressures, recessionary pressures, or rising interest rates could adversely affect our ability to access short-term and long-term financing.financing or refinance maturing indebtedness. Our access to funds under committed credit facilities, which are currently provided by a number of banks, is dependent on the ability of the participating banks to meet their funding commitments. Those banks may not be able to meet their funding commitments if they experience shortages of capital and liquidity. Disruptions in the bank or capital financing markets as a result of economic uncertainty, changing or increased regulation of the financial sector, or failure of major financial institutions, or disruptions in credit markets, could adversely affect NW Holdings’ and NW Natural’s access to capital and negatively impact our ability to run our businesses, achieve NW Natural’s authorized rate of return, and make strategic investments.
Furthermore, recent trends toward investments that are perceived to be “green” or “sustainable” could shift capital away from, or increase the cost of capital for, our natural gas business. We believe our business is an important component of a low carbon future and are striving to decarbonize our systems. Nevertheless, perceptions in the financial markets could differ or outpace our decarbonization progress and result in a shift funding away from, or limit or restrict certain forms of funding for, natural gas businesses.
NW Natural is currently rated by S&P and Moody’s and a negative change in its credit ratings, particularly below investment grade, could adversely affect its cost of borrowing and access to sources of liquidity and capital.
Such a downgrade could further limit its access to borrowing under available credit lines. Additionally, downgrades in its current credit ratings below investment grade could cause additional delays in NW Natural's ability to access the capital markets while it seeks supplemental state regulatory approval, which could hamper its ability to access credit markets on a timely basis. NW Holdings' credit profile is largely supported by NW Natural’s credit ratings and any negative change in NW Natural’s credit ratings would likely negatively impact NW Holdings’ access to sources of liquidity and capital and cost of borrowing. A credit downgrade to NW Natural, or resulting negative impact on NW Holdings, could also require additional support in the form of letters of credit, cash or other forms of collateral and otherwise adversely affect NW Holdings' or NW Natural’s financial condition and results of operations.
REPUTATIONAL RISKS. Customers', legislators', and regulators' opinions of NW Holdings and NW Natural are affected by many factors, including system and fuel reliability and safety, protection of customer information, rates, media coverage, and public sentiment. To the extent that customers, legislators, or regulators have or develop a negative opinion of our businesses, NW Holdings’ and NW Natural’s financial position, results of operations and cash flows could be adversely affected.
A number of factors can affect customer’s perception of us including: service interruptions or safety concerns due to failures of equipment or facilities or from other causes, and our ability to promptly respond to such failures; our ability to safeguard sensitive customer information; the timing and magnitude of rate increases; and volatility of rates. Customers', legislators', and regulators' opinions of us can also be affected by media coverage, including the proliferation of social media, which may include information, whether factual or not, that could damage the perception of natural gas, our brand, or our reputation.
Other concerns about the use of natural gas include the potential for natural gas explosions and the effect of natural gas on indoor air quality. For example, NW Natural’s gas distribution system was struck by a third party resulting in a gas explosion in 2016, and while NW Natural was determined not to be at fault, the perception of natural gas as an energy source could have been affected. In addition, studies from time to time question the indoor health and general climate effects from burning natural gas, which may also impact public perception. These shifts in public sentiment may not only impact further legislative initiatives, but behaviors and perceptions of customers, investors and regulators.
If customers, legislators, or regulators have or develop a negative opinion of us and our services, or of natural gas as an energy source generally, this could make it more difficult for us to achieve favorable legislative or regulatory outcomes. Negative opinions could also result in sales volumes reductions or increased use of other sources of energy, or additional difficulties in accessing capital markets. Any of these consequences could adversely affect NW Holdings’ or NW Natural’s financial position, results of operations and cash flows.
RELIANCE ON TECHNOLOGY RISK. NW Holdings’ and NW Natural’s efforts to integrate, consolidate and streamline each of their operations has resulted in increased reliance on technology, the failure of which could adversely affect NW Holdings’ or NW Natural’s financial condition and results of operations.
NW Holdings and NW Natural have undertaken a variety of initiatives to integrate, standardize, centralize and streamline operations. These efforts have resulted in greater reliance on technological tools such as, at NW Natural: an enterprise resource planning system, a digital dispatch system, an automated meter reading system, a web-based ordering and tracking system, and other similar technological tools and initiatives. Our future success will depend, in part, on our ability to anticipate and adapt to technological changes in a cost-effective manner and to offer, on a timely basis, services that meet customer demands and evolving industry standards. New technologies may emerge that could be superior to, or may not be compatible with, some of our existing technologies, and may require us to make significant expenditures to remain competitive. We continue to implement technology to improve our business processes and customer interactions. In addition, our various existing information technology systems require periodic modifications, upgrades and/or replacement. For example, NW Natural intends to upgrade its SAP system and replace its customer information system in the near future.
There are various risks associated with these systems in addition to upgrades and replacements, including hardware and software failure, communications failure, data distortion or destruction, unauthorized access to data, misuse of proprietary or confidential data, unauthorized control through electronic means, programming mistakes and other inadvertent errors or deliberate human acts. In addition, we are dependent on a continuing flow of important components to maintain and upgrade our information technology systems. Our suppliers may face production or import delays due to natural disasters, strikes, lock-outs, political unrest or other such circumstances.
Any modifications, upgrades, system maintenance or replacements subject us to inherent costs and risks, including potential disruption of our internal control structure, substantial capital expenditures, additional administrative and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated. There is also risk that we may not be able to recover all costs associated with projects to improve our technological capabilities, which may adversely affect NW Holdings’ or NW Natural’s financial condition and results of operations.
CYBERSECURITY RISK. NWHoldings’ and NW Natural’s status as an infrastructure services provider coupled with its reliance on technology could result in a security breach which could adversely affect NW Holdings’ or NW Natural’s financial condition and results of operations.
Although we take precautions to protect our technology systems and are not aware of any material security breaches to date, there is no guarantee that the procedures we have implemented to protect against unauthorized access to secured data and systems are adequate to safeguard against all security breaches or other cyber attacks. Additionally, the facilities and systems of clients, suppliers and third party service providers could be vulnerable to the same cyber risks as our facilities and systems, and such third party systems may be interconnected to our systems both physically and technologically. Therefore, an event caused by cyberattacks or other malicious act at an interconnected third party could impact our business and facilities similarly. As these potential cyber security attacks become more common and sophisticated, we could be required to incur costs to strengthen our systems or obtain specific insurance coverage against potential losses. Our businesses could experience breaches of security pertaining to sensitive customer, employee, and vendor information maintained by us in the normal course of business, which could adversely affect our reputation, diminish customer confidence, disrupt operations, materially increase the costs we incur to protect against these risks, and subject us to possible financial liability or increased regulation or litigation, any of which could adversely affect NW Holdings’ or NW Natural’s financial condition and results of operations.
REGULATORY ACCOUNTING RISK. In the future, NW Holdings or NW Natural may no longer meet the criteria for continued application of regulatory accounting practices for all or a portion of our regulated operations.
If we can no longer apply regulatory accounting, we could be required to write off our regulatory assets and precluded from the future deferral of costs not recovered through rates at the time such amounts are incurred, even if we are expected to recover these amounts from customers in the future.
GAS PRICE RISK. Higher natural gas commodity prices and volatility in the price of gas may adversely affect NW Natural’s NGD business, whereas lower gas price volatility may adversely affect NW Natural’s and NW Holdings’ gas storage business, in each case negatively affecting NW Holdings’ and NW Natural’s results of operations and cash flows.
The cost of natural gas is affected by a variety of factors, including weather, changes in demand, the level of production and availability of natural gas supplies, transportation constraints, availability and cost of pipeline capacity, federal and state energy and environmental regulation and legislation, natural disasters and other catastrophic events, national and worldwide economic and political conditions, and the price and availability of alternative fuels. At NW Natural, the cost we pay for natural gas is generally passed through to customers through an annual PGA rate adjustment. If gas prices were to increase significantly, it would raise the cost of energy to NW Natural’s customers, potentially causing those customers to conserve or switch to alternate sources of energy. Significant price increases could also cause new home builders and commercial developers to select alternative energy sources. Decreases in the volume of gas NW Natural sells could reduce NW Holdings or NW Natural’s earnings, and a decline in customers could slow growth in future earnings. Additionally, because a portion (10% or 20%) of any
difference between the estimated average PGA gas cost in rates and the actual average gas cost incurred is recognized as current income or expense, higher average gas costs than those assumed in setting rates can adversely affect NW Holdings’ and NW Natural’s operating cash flows, liquidity and results of operations. Additionally, notwithstanding NW Natural’s current rate structure, higher gas costs could result in increased pressure on the OPUC or the WUTC to seek other means to reduce NW Natural’s rates, which also could adversely affect NW Holdings’ and NW Natural’s results of operations and cash flows.
Higher gas prices may also cause NW Natural to experience an increase in short-term debt and temporarily reduce liquidity because it pays suppliers for gas when it is purchased, which can be in advance of when these costs are recovered through rates. Significant increases in the price of gas can also slow collection efforts as customers experience increased difficulty in paying their higher energy bills, leading to higher than normal delinquent accounts receivable resulting in greater expense associated with collection efforts and increased bad debt expense.
Conversely, storage businesses benefit from price volatility, which impacts the level of demand for services and the rates that can be charged for storage services. Largely due to the abundant supply of natural gas made available by hydraulic fracturing techniques, natural gas prices have dropped significantly to levels that are near historic lows. If prices and volatility remain low or decline further, then the demand for storage services, and the prices that we will be able to charge for those services, may decline or be depressed for a prolonged period of time. Prices below the costs to operate a storage facility could result in a decision to shut-in all or a portion of the facility. A sustained decline in these prices or a shut-in of all or a portion of the facility could have an adverse impact on NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
IMPAIRMENT OF LONG-LIVED ASSETS OR GOODWILL RISK. Impairments of the value of long-lived assets or goodwill could have a material effect on NW Holdings’ or NW Natural’s financial condition, or results of operations.
NW Holdings and NW Natural review the carrying value of long-lived assets other than goodwill whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. The determination of recoverability is based on the undiscounted net cash flows expected to result from the operation of such assets. Projected cash flows depend on the future operating costs and projected revenues associated with the asset. In 2017, NW Natural recognized a $192.5 million impairment of long-lived assets at the Gill Ranch Facility as of December 31, 2017. We review our other long-lived assets to determine if an impairment analysis is necessary.
We review the carrying value of goodwill annually or whenever events or changes in circumstances indicate that such carrying value may not be recoverable. A goodwill impairment analysis begins with a qualitative analysis of events and circumstances. If the qualitative assessment indicates that the carrying value may be at risk, we will perform a quantitative assessment and recognize a goodwill impairment for any amount in which the fair value of a reporting unit exceeds its fair value. NW Holdings' total goodwill was $49.9$149.3 million as of December 31, 20192022 and $9.0$70.6 million as of December 31, 2018. The increase in the goodwill balance was due to additions associated with acquisitions in the water sector.2021. All of our goodwill is related to water and wastewater acquisitions. There have been no impairments recognized for the water and wastewater acquisitions to date. Any impairment charge taken with respect to our long-lived assets or goodwill could be material and could have a material effect on NW Holdings’ or NW Natural’s financial condition and results of operations.
CUSTOMER GROWTHCONSERVATION RISK. Customers’ conservation efforts may have a negative impact on NW Holdings’ and NW Natural’s NGD margin, earningsrevenues.
An increasing national focus on energy conservation, including improved building practices and cash flowappliance efficiencies may be negatively affected if we are unable to sustain customer growth ratesresult in our NGD segment.
increased energy conservation by customers. This can decrease NW Natural’s NGD margins and earnings growth have largely depended upon the sustained growthsales of its residential and commercial customer base due, in part, to the new construction housing market, conversions of customers to natural gas from other energy sources and growing commercial use of natural gas. The last recession slowed new construction. While new home construction has resumed and the multi-family composition has been higher than its pre-recession pace, overall construction has not returned to the pre-recession pace, and there are predictions of an impending new recessionary cycle. Insufficient growth in these markets, for economic, political or other reasons could adversely affect NW Holdings’ or NW Natural’s utility margin, earnings and cash flows.
RISK OF COMPETITION.Our NGD business is subject to increased competition which could negatively affect NW Holdings’ or NW Natural’s results of operations.
operations because revenues are collected mostly through volumetric rates, based on the amount of gas sold. In theOregon, NW Natural has a conservation tariff which is designed to recover lost utility margin due to declines in residential and small commercial markets, NW Natural’s NGD business competes primarily with suppliers of electricity, fuel oil, and propane. In the industrial market,customers’ consumption. However, NW Natural competes with suppliers of all forms of energy. Competition among these forms of energy is baseddoes not have a conservation tariff in Washington that provides it this margin protection on price, efficiency, reliability, performance, market conditions, technology, environmental impacts and public perception. Technological improvementssales to customers in other energy sources such as heat pumps, batteries or other alternative technologies could erode NW Natural’s competitive advantage. If natural gas prices rise relative to other energy sources, or if the cost, environmental impact or public perception of such other energy sources improves relative to natural gas, itthat state. Similar conservation risks exist for water utilities. Customers’ conservation efforts may negatively affect NW Natural’s ability to attract new customers or retain our existing residential, commercial and industrial customers, which could have a negative impact on our customer growth rate and NW Holdings’ and NW Natural’s results of operations.
Our natural gas storage operations compete primarily with other storage facilities and pipelines. Natural gas storage is an increasingly competitive business, with the ability to expand or build new storage capacity in California, the U.S. Rocky
Mountains and elsewhere in the U.S. and Canada. Increased competition in the natural gas storage business could reduce the demand for our natural gas storage services, drive prices down for our storage business, and adversely affect our ability to renew or replace existing contracts at rates sufficient to maintain current revenues and cash flows, which could adversely affect NW Holdings’Holdings' and NW Natural’s financial condition, results of operationsrevenues and cash flows.
RELIANCE ON THIRD PARTIES TO SUPPLY NATURAL GAS RISK. NW Natural relies on third parties to supply the natural gas in its NGD segment, and limitations on NW Natural’s ability to obtain supplies, or failure to receive expected supplies for which it has contracted, could have an adverse impact on NW Holdings’ or NW Natural’s financial results.
NW Natural’s ability to secure natural gas for current and future sales depends upon its ability to purchase and receive delivery of supplies of natural gas from third parties. NW Natural, and in some cases, its suppliers of natural gas, does not have control over the availability of natural gas supplies, competition for those supplies, disruptions in those supplies, priority allocations on transmission pipelines, or pricing of those supplies. Additionally, third parties on whom NW Natural relies may fail to deliver gas for which it has contracted. For example, in October, 2018, a 36-inch pipeline near Prince George, British Columbia owned by Enbridge ruptured, disrupting natural gas flows from Canada into Washington while the ruptured pipeline and an adjacent pipeline were assessed and the ruptured pipeline was repaired. Once repaired, pressurization levels for those pipelines were reduced for a significant period of time for assessment and testing. If NW Natural is unable or limited in its ability to obtain natural gas from its current suppliers or new sources, it may not be able to meet customers' gas requirements and would likely incur costs associated with actions necessary to mitigate service disruptions, both of which could significantly and negatively impact NW Holdings’ and NW Natural’s results of operations.
SINGLE TRANSPORTATION PIPELINE RISK. NW Natural relies on a single pipeline company for the transportation of gas to its service territory, a disruption of which could adversely impact its ability to meet customers’ gas requirements, which could significantly and negatively impact NW Holdings’ and NW Natural’s results of operations.
NW Natural’s distribution system is directly connected to a single interstate pipeline, which is owned and operated by Northwest Pipeline. The pipeline’s gas flows are bi-directional, transporting gas into the Portland metropolitan market from two directions: (1) the north, which brings supplies from the British Columbia and Alberta supply basins; and (2) the east, which brings supplies from the Alberta and the U.S. Rocky Mountain supply basins. If there is a rupture or inadequate capacity in, or supplies to maintain adequate pressures in, the pipeline, NW Natural may not be able to meet its customers’ gas requirements and we would likely incur costs associated with actions necessary to mitigate service disruptions, both of which could significantly and negatively impact NW Holdings’ and NW Natural’s results of operations.
THIRD PARTY PIPELINE RISK.NW Holdings’ and NW Natural’s gas storage businesses depend on third-party pipelines that connect our storage facilities to interstate pipelines, the failure or unavailability of which could adversely affect NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
Our gas storage facilities are reliant on the continued operation of a third-party pipeline and other facilities that provide delivery options to and from our storage facilities. Because we do not own all of these pipelines, their operations are not within our control. If the third-party pipeline to which we are connected were to become unavailable for current or future withdrawals or injections of natural gas due to repairs, damage to the infrastructure, lack of capacity or other reasons, our ability to operate efficiently and satisfy our customers’ needs could be compromised, thereby potentially having an adverse impact on NW Holdings’ or NW Natural’s financial condition, results of operations and cash flows.
WEATHER RISK.RISK. Warmer than average weather may have a negative impact on our revenues and results of operations.
We are exposed to weather risk in our natural gas business, primarily at NW Natural. A majority of NW Natural’s gas volume is driven by gas sales to space heating residential and small commercial customers during the winter heating season. Current NW Natural rates are based on an assumption of average weather. Warmer than average weather typically results in lower gas sales. Colder weather typically results in higher gas sales. Although the effects of warmer or colder weather on utility margin in Oregon are expected to be mitigated through the operation of NW Natural’s weather normalization mechanism, weather variations from normal could adversely affect utility margin because NW Natural may be required to purchase more or less gas at spot rates, which may be higher or lower than the rates assumed in its PGA. Also, a portion of NW Natural’s Oregon residential and commercial customers (usually less than 10%) have opted out of the weather normalization mechanism, and approximately 11%12% of its customers are located in Washington where it does not have a weather normalization mechanism. These effects could have an adverse effect on NW Holdings’ and NW Natural’s financial condition, results of operations and cash flows.
Water Business Risks
CUSTOMER CONSERVATION RISK. Customers’ conservation efforts may have a negative impact on NW Holdings’ and NW Natural’s revenues.
An increasing national focus on energy conservation, including improved building practices and appliance efficiencies may result in increased energy conservation by customers. This can decrease NW Natural’s sales of natural gas and adversely affect NW Holdings’ or NW Natural’s results of operations because revenues are collected mostly through volumetric rates, based on the amount of gas sold. In Oregon, NW Natural has a conservation tariff which is designed to recover lost utility margin due to declines in residential and small commercial customers’ consumption. However, NW Natural does not have a conservation tariff
in Washington that provides it this margin protection on sales to customers in that state. Similar conservation risks exist for water utilities. Customers’ conservation efforts may have a negative impact on NW Holdings' and NW Natural’s financial condition, revenues and results of operations.
Risks Related Primarily to NW Holdings' Water Sector Businesses
NEW WATER SECTOR BUSINESS.BUSINESS. NW Holdings has entered the water sector through the acquisition of a number of water and wastewater companies. Water and wastewater businesses are subject to a number of risks in addition to the risks described above.
Although the water businesses are not currently expected to materially contribute to the results of operations of NW Holdings, these businesses are subject to risks, in addition to those described above that could adversely affect their results of operations, including:
•contamination of water supplies, including water provided to customers with naturally occurring or human-made substances or other hazardous materials;
•interruptions in water supplies and service, natural disasters and droughts;
•insufficient water supplies, limitations on or disputes with respect to water rights or supplies, or the inability to secure water rights or supplies at a reasonable cost;
•disruptions to the wastewater collection and treatment process;
•reliance on third parties for water supplies and transportation of such water supplies;
•conservation efforts by customers;
•regulatory requirements; and legal requirements, including environmental, health and safety laws and regulations;
•operational risks, including customer and employee safety;
•the outcome of rate cases and other regulatory proceedings; and
•weather conditions.
Significant losses, liabilities or impairments arising from these businesses may adversely affect NW Holdings' financial position or results of operations.
INVESTMENT RISK.RISK. NW Holdings’ expectations with respect to the financial results of its investments in water operations are based on various assumptions and beliefs that may not prove accurate, resulting in failures or delays in achieving expected returns or performance.
NW Holdings’ expansion into the water sector is an important component of its growth strategy. Although NW Holdings expects its water and wastewater utility operations will result in various benefits, including expanding customer bases, providing investment opportunities through infrastructure development and enhancing regulatory relationships within the local communities served, NW Holdings may not be able to realize these or other benefits. Achieving the anticipated benefits is subject to a number of uncertainties, including whether the businesses acquired can be operated in the manner intended and whether costs to finance the acquisitions and investments will be consistent with expectations.expectations, as well as whether investments in the water sector can reach scale in a reasonable period of time. Events outside of our control, including but not limited to regulatory changes or developments, could adversely affect our ability to realize the anticipated benefits from building NW Holdings’ water platform. The integration of newly acquired water businesses, particularly over a noncontiguous geographic regions, may be unpredictable, subject to delays or changed circumstances, and such businesses may not perform in accordance with our expectations. In addition, anticipated costs, level of management’s attention and internal resources to achieve the integration of or operate the acquired businesses may differ significantly from our current estimates resulting in failures or delays in achieving expected returns or performance. If NW Holdings' expectations regarding the financial results of its investments in water operations prove to be inaccurate, it may adversely affect NW Holdings' financial position or results of operations.
INVESTMENT RISK. NW Holdings’ expectations with respect to the financial results of its investments in non-regulated RNG investments are based on various assumptions and beliefs that may not prove accurate, resulting in failures or delays in achieving expected returns.
NW Holdings’ expansion into the non-regulated RNG business is an important component of its growth strategy. Although NW Holdings expects this expansion will result in various benefits, including providing cost-effective solutions to decarbonize the utility, commercial, industrial and transportation sectors, NW Holdings may not be able to realize these or other benefits. Achieving the anticipated benefits is subject to a number of uncertainties, including whether the investments can be made at an
expected scale, whether the investments can be monetized in the manner intended, and whether costs to finance the investments will be consistent with expectations. Events outside of our control, including but not limited to market or regulatory changes or developments, could adversely affect our ability to realize the anticipated benefits from building NW Holdings’ non-regulated RNG platform. The establishment and growth of a non-regulated RNG business may be unpredictable, subject to uncertainties or changed circumstances, and such business may not perform in accordance with our expectations. In addition, anticipated costs, level of management’s attention and internal resources to achieve the integration of the acquired investments may differ significantly from our current estimates resulting in failures or delays in achieving expected returns or performance. We could additionally experience unsuccessful business models; technological challenges; ineffective scalability or inability to achieve production volumes consistent with our expectations and marketing arrangements; construction delays or cost overruns; disputes with third party business partners; risks related to markets for RNG and its associated attributes (including changes in market regulation, behavior, or prices); the inability to receive expected tax or regulatory treatment; or unexpected operating costs. If NW Holdings' expectations regarding the financial results of its investments in non-regulated RNG prove to be inaccurate, it may adversely affect NW Holdings' financial position or results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We have no unresolved staff comments.
ITEM 2. PROPERTIES
NW Natural's Natural Gas Distribution Properties
NW Natural's natural gas pipeline system consists of approximately 14,00014,200 miles of distribution andmains, approximately 700 miles of transmission mains and approximately 10,00010,200 miles of service lines located in its territory in Oregon and southwest Washington. In addition, the pipeline system includes service pipelines, meters and regulators and gas regulatingmeters, as well as district regulators and metering stations. Natural gas pipeline mainspipelines are located in municipal streets or alleyspublic rights-of-way pursuant to franchise or occupation ordinances, in county roads or state highways pursuant to agreements or permits granted pursuant to statute,other ordinances, or on lands of others pursuant to easements obtained from the owners of such lands. NW Natural also holds permits for the crossing of numerous railroads, navigable waterways and smaller tributaries throughout our entire service territory.
NW Natural owns service building facilities in Portland, Oregon, as well as various satellite service centers, garages, warehouses, and other buildings necessary and useful in the conduct of its business. Resource centers are maintained on owned or leased premises at convenient points in the distribution system to provide service within NW Natural's service territory. NW Natural also owns LNG storage facilities in Portland and near Newport, Oregon.
NW Natural also leases office space in Portland for its corporate operations center, which expires on May 31, 2020. In anticipation of the expiration of the current lease, NW Natural executed an extensive search and evaluation process that focused on seismic preparedness, safety, reliability, the least cost to our customers, and a continued commitment to our employees and the communities we serve. In October 2017, NW Natural entered intocommenced a 20-year lease agreementin March 2020 for a new corporateheadquarters and operations center in Portland. NW Natural expects to begin operations at the location in March 2020.Portland, Oregon.
NW Natural's Mortgage and Deed of Trust (Mortgage) is a first mortgage lien on certain gas properties owned from time to time by NW Natural, including substantially all of the property constituting NW Natural's natural gas distribution plant balances.
These properties are used in the NGD segment.
NW Natural's Natural Gas Storage Properties
NW Natural holds leases and other property interests in approximately 12,000 net acres of underground natural gas storage in Oregon and easements and other property interests related to pipelines associated with these facilities. NW Natural owns rights to depleted gas reservoirs near Mist, Oregon that are continuing to be developed and operated as underground gas storage facilities. NW Natural also holds all future storage rights in certain other areas of the Mist gas field in Oregon in addition to other leases and property interests.
NW Natural owns LNG storage facilities in Portland and near Newport, Oregon.
A portion of these properties are used in the NGD segment.
NWN Water's Distribution Properties
NWN Water owns and maintains water pipelinesdistribution pipes, storage, wells and other infrastructure and wastewater treatment facilities, and holds related leases and other property interests in Oregon, Washington, Idaho, Texas and Idaho, associated with water entities that were acquired during 2018 and 2019.Arizona. Pipelines are located in municipal streets or alleys pursuant to franchise or occupation ordinances, in county roads or state highways pursuant to agreements or permits granted pursuant to statute, or on lands of others pursuant to easements obtained from the owners of such lands. These properties are used by entities that are aggregated and reported as other under NW Holdings.
We consider all of our properties currently used in our operations, both owned and leased, to be well maintained, in good operating condition, and, along with planned additions, adequate for our present and foreseeable future needs.
ITEM 3. LEGAL PROCEEDINGS
Other than the proceedings disclosed in Note 18,17, we have only nonmaterial litigation in the ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
NW Holdings' common stock is listed and trades on the New York Stock Exchange under the symbol NWN.
There is no established public trading market for NW Natural's common stock.
As of February 24, 2020,16, 2023, there were 4,7394,249 holders of record of NW Holdings' common stock and NW Holdings was the sole holder of NW Natural's common stock.
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 December 31, 2019:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuer Purchases of Equity Securities |
Period | | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2) |
Balance forward | | | | | | 2,124,528 | | | $ | 16,732,648 | |
10/01/22-10/31/22 | | — | | | $ | — | | | — | | | — | |
11/01/22-11/30/22 | | 4,431 | | | $ | 47.34 | | | — | | | — | |
12/01/22-12/31/22 | | — | | | $ | — | | | — | | | — | |
Total | | 4,431 | | | | | 2,124,528 | | | $ | 16,732,648 | |
|
| | | | | | | | | | | | | | |
Issuer Purchases of Equity Securities |
Period | | Total Number of Shares Purchased(1) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(2) |
Balance forward | | | | | | 2,124,528 |
| | $ | 16,732,648 |
|
10/01/19-10/31/19 | | — |
| | $ | — |
| | — |
| | — |
|
11/01/19-11/30/19 | | 637 |
| | 65.40 |
| | — |
| | — |
|
12/01/19-12/31/19 | | — |
| | — |
| | — |
| | — |
|
Total | | 637 |
| |
|
| | 2,124,528 |
| | $ | 16,732,648 |
|
| |
(1)(1)During the quarter ended December 31, 2022, no shares of NW Holdings common stock were purchased on the open market to meet the requirements of our Dividend Reinvestment and Direct Stock Purchase Plan. However, 4,431 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 December 31, 2022, no shares of NW Holdings common stock were accepted as payment for stock option exercises pursuant to the NW Natural Restated Stock Option Plan.
| During the quarter ended December 31, 2019, no shares of NW Holdings common stock were purchased on the open market to meet the requirements of our Dividend Reinvestment and Direct Stock Purchase Plan. However, 637 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 December 31, 2019, 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 December 31, 2019, no shares of NW Holdings common stock were repurchased pursuant to the NW Holdings Board of Directors-approved share repurchase program. In May 2019, we received NW Holdings Board of Directors approval to extend the repurchase program through May 2022. For more information on this program, see Note 5. |
(2)During the quarter ended December 31, 2022, no shares of NW Holdings common stock were repurchased pursuant to the NW Holdings Board of Directors-approved share repurchase program. In May 2019, we received NW Holdings Board of Directors 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, see Note 5.
ITEM 6. SELECTED FINANCIAL DATARESERVED
Not applicable.
NORTHWEST NATURAL HOLDING COMPANY SELECTED FINANCIAL DATA |
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
In thousands, except per share data | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Operating revenues | | $ | 746,372 |
| | $ | 706,143 |
| | $ | 755,038 |
| | $ | 668,173 |
| | $ | 717,888 |
|
Earnings from continuing operations | | 65,311 |
| | 67,311 |
| | 72,073 |
| | 62,419 |
| | 60,026 |
|
Loss from discontinued operations, net of tax | | (3,576 | ) | | (2,742 | ) | | (127,696 | ) | | (3,524 | ) | | (6,323 | ) |
Net income (loss) | | 61,735 |
| | 64,569 |
| | (55,623 | ) | | 58,895 |
| | 53,703 |
|
| | | | | | | | | | |
Earnings from continuing operations per share of common stock: | | | | |
| | |
| | |
| | |
|
Basic | | $ | 2.19 |
| | $ | 2.34 |
| | $ | 2.51 |
| | $ | 2.26 |
| | $ | 2.19 |
|
Diluted | | 2.19 |
| | 2.33 |
| | 2.51 |
| | 2.25 |
| | 2.19 |
|
Loss from discontinued operations per share of common stock: | | | | |
| | |
| | |
| | |
|
Basic | | $ | (0.12 | ) | | $ | (0.10 | ) | | $ | (4.45 | ) | | $ | (0.13 | ) | | $ | (0.23 | ) |
Diluted | | (0.12 | ) | | (0.09 | ) | | (4.44 | ) | | (0.13 | ) | | (0.23 | ) |
Earnings (loss) per share of common stock: | | | | |
| | |
| | |
| | |
|
Basic | | $ | 2.07 |
| | $ | 2.24 |
| | $ | (1.94 | ) | | $ | 2.13 |
| | $ | 1.96 |
|
Diluted | | 2.07 |
| | 2.24 |
| | (1.93 | ) | | 2.12 |
| | 1.96 |
|
Dividends paid per share of common stock | | 1.90 |
| | 1.89 |
| | 1.88 |
| | 1.87 |
| | 1.86 |
|
| | | | | | | | | | |
Total assets, end of period | | $ | 3,428,454 |
| | $ | 3,242,662 |
| | $ | 3,039,746 |
| | $ | 3,079,801 |
| | $ | 3,069,410 |
|
Total equity | | 865,999 |
| | 762,634 |
| | 742,776 |
| | 850,497 |
| | 780,972 |
|
Long-term debt | | 805,955 |
| | 706,247 |
| | 683,184 |
| | 679,334 |
| | 569,445 |
|
NORTHWEST NATURAL GAS COMPANY SELECTED FINANCIAL DATA |
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, |
In thousands, except per share data | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Operating revenues | | $ | 739,944 |
| | $ | 705,571 |
| | $ | 755,038 |
| | $ | 667,949 |
| | $ | 717,664 |
|
Earnings from continuing operations | | 68,974 |
| | 68,049 |
| | 71,720 |
| | $ | 62,835 |
| | $ | 60,511 |
|
Loss from discontinued operations, net of tax | | — |
| | (1,723 | ) | | (127,343 | ) | | $ | (3,940 | ) | | $ | (6,808 | ) |
Net income (loss) | | 68,974 |
| | 66,326 |
| | (55,623 | ) | | $ | 58,895 |
| | $ | 53,703 |
|
| | | | | | | | | | |
Total assets, end of period | | $ | 3,321,487 |
| | $ | 3,192,736 |
| | $ | 3,043,676 |
| | $ | 3,081,470 |
| | $ | 3,072,100 |
|
Total equity | | 822,196 |
| | 715,668 |
| | $ | 742,776 |
| | $ | 850,497 |
| | $ | 780,972 |
|
Long-term debt | | 769,081 |
| | 704,134 |
| | $ | 683,184 |
| | $ | 679,334 |
| | $ | 569,445 |
|
ITEM 7. 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 covers the years ended December 31, 2019, 2018,2022, 2021, and 20172020 and refers to the consolidated results 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 the Consolidated Financial Statements in Item 8 of this report.
NW Holdings' direct and indirect wholly-owned subsidiaries include:
Northwest Natural Gas Company (NW Natural);
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◦ | Northwest Energy Corporation (Energy Corp); |
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▪ | NWN Gas Reserves LLC (NWN Gas Reserves); |
NW Natural Energy, LLC (NWN Energy);
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◦ | NW Natural Gas Storage, LLC (NWN Gas Storage); |
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▪ | Gill Ranch Storage, LLC (Gill Ranch), which is presented as a discontinued operation; |
NNG Financial Corporation (NNG Financial);
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◦ | KB Pipeline Company (KB); |
NW Natural Water Company, LLC (NWN Water);
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◦ | Falls Water Co., Inc. (Falls Water); |
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◦ | Salmon Valley Water Company; |
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◦ | NW Natural Water of Oregon, LLC (NWN Water of Oregon); |
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▪ | Sunstone Infrastructure, LLC; |
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▪ | Sunriver Water, LLC (Sunriver Water); |
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▪ | Sunriver Environmental, LLC (Sunriver Environmental) |
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◦ | NW Natural Water of Washington, LLC (NWN Water of Washington); |
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▪ | Cascadia Water, LLC (Cascadia Water); |
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▪ | Cascadia Infrastructure, LLC; |
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▪ | Suncadia Water Company, LLC (Suncadia Water); |
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▪ | Suncadia Environmental Company, LLC (Suncadia Environmental); |
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◦ | NW Natural Water of Idaho, LLC (NWN Water of Idaho); |
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▪ | Gem State Water Company, LLC (Gem State Water); |
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▪ | Gem State Infrastructure, LLC; and |
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◦ | NW Natural Water of Texas, LLC (NWN Water of Texas); |
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▪ | Blue Topaz Water, LLC; and |
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▪ | Blue Topaz Infrastructure, LLC. |
On October 1, 2018, we completed a reorganization into a holding company structure. We believe that our holding company structure is an agile and efficient platform from which to pursue, finance, and oversee new opportunities, such as in the water sector, while also providing legal separation between regulated natural gas distribution operations and other businesses. In this reorganization, shareholders of NW Natural (the predecessor publicly held parent company) became shareholders of NW Holdings, on a one-for-one basis, with the same number of shares and same ownership percentage as they held in NW Natural immediately prior to the reorganization. NW Natural became a wholly-owned subsidiary of NW Holdings. Additionally, certain subsidiaries of NW Natural were transferred to NW Holdings. As required under accounting guidance, these subsidiaries are presented as discontinued operations in the 2018 and 2017 consolidated results of NW Natural within this report.
NW Natural's natural gas distribution activities are reported in the natural gas distribution (NGD) segment. The NGD segment also includes NWN Gas Reserves, which is a wholly-owned subsidiary of Energy Corp, and the NGD-portion of NW Natural's Mist storage facility in Oregon.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 Holding, LLC (TWH), which is pursuing the development of a proposed natural gas pipeline through its wholly-owned subsidiary, Trail West Pipeline, LLC (TWP); NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); 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 and wastewater sector. See Note 4 for further discussion of our business segment and other, as well as our direct and indirect wholly-owned subsidiaries.
In addition, NW Holdings has reported discontinued operations results related to the pending sale of Gill Ranch Storage, LLC (Gill Ranch). NW Natural Gas Storage, LLC (NWN Gas Storage), currently an indirect wholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement during the second quarter of 2018 that providesprovided 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. Pacific Gas and Electric Company (PG&E) owns the remaining 25% interest in the Gill Ranch Gas Storage Facility.The sale was completed on December 4, 2020. For more information, see "Results of Operations - Pending Sale of Gill Ranch StorageDiscontinued Operations" below.
NON-GAAP FINANCIAL MEASURESMEASURES. . In addition to presenting the results of operations and earnings amounts in total, certain financial measures are expressed in cents per share, or exclude the effects of certain items, which are non-GAAP financial measures. We present net income or loss andAll references in this section to earnings or loss per share adjusted for certain items along with(EPS) are on the U.S. GAAPbasis of diluted shares. Such non-GAAP financial measures to illustrate their magnitude on ongoing business and operational results. Although the excluded amounts are properly included in the determination of net income or loss and earnings or loss per share under U.S. GAAP, we believe the amount and nature of these items make period to period comparisons of operations difficult or potentially confusing. We use such non-GAAP financial measuresused to analyze our financial performance because we believe they provide useful information to our investors and creditors in evaluating our financial condition and results of operations. Our non-GAAP financial measures should not be considered a substitute for, or superior to, measures calculated in accordance with U.S. GAAP. Reconciliations of theMoreover, 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 their closest U.S.the most directly comparable GAAP financial measure used in subsequent sections of Item 7 areis provided below.
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Diluted EPS - Total(1) | | $ | 2.54 | | | $ | 2.56 | | | $ | 2.51 | |
Diluted EPS - NGD segment(2) | | 2.34 | | | 2.24 | | | 2.08 | |
Diluted EPS - NW Holdings - other(2) | | 0.20 | | | 0.32 | | | 0.22 | |
Diluted EPS - Discontinued operations | | — | | | — | | | 0.21 | |
(1) Total Diluted EPS is equal to the sum of Diluted EPS - NGD segment, Diluted EPS - NW Holdings – other, and Diluted EPS - Discontinued operations.
(2) Non-GAAP financial measure
33
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| | | | | | | | | | | | | | | | | | | | | |
NW HOLDINGS NON-GAAP RECONCILIATIONS | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
In millions, except per share data | | Amount | Per Share | | Amount | Per Share | | Amount | Per Share |
Net income from continuing operations | | $ | 65.3 |
| $ | 2.19 |
| | $ | 67.3 |
| $ | 2.33 |
| | $ | 72.1 |
| $ | 2.51 |
|
Adjustment: | | | | | | | | | |
Tax effects of 2017 TCJA remeasurement(1) | | — |
| — |
| | — |
| — |
| | (3.4 | ) | (0.12 | ) |
Adjusted net income from continuing operations | | $ | 65.3 |
| $ | 2.19 |
| | $ | 67.3 |
| $ | 2.33 |
| | $ | 68.7 |
| $ | 2.39 |
|
| | | | | | | | | |
NGD segment net income from continuing operations | | $ | 60.8 |
| $ | 2.04 |
| | $ | 57.5 |
| $ | 1.99 |
| | $ | 60.5 |
| $ | 2.10 |
|
Adjustment: | | | | | | | | | |
Tax effects of 2017 TCJA remeasurement(1) | | — |
| — |
| | — |
| — |
| | 1.0 |
| 0.03 |
|
Adjusted NGD segment net income from continuing operations | | $ | 60.8 |
| $ | 2.04 |
| | $ | 57.5 |
| $ | 1.99 |
| | $ | 61.5 |
| $ | 2.13 |
|
| | | | | | | | | |
Other net income from continuing operations | | $ | 4.5 |
| $ | 0.15 |
| | $ | 9.8 |
| $ | 0.34 |
| | $ | 11.6 |
| $ | 0.41 |
|
Adjustment: | | | | | | | | | |
Tax effects of 2017 TCJA remeasurement(1) | | — |
| — |
| | — |
| — |
| | (4.4 | ) | (0.15 | ) |
Adjusted other net income from continuing operations | | $ | 4.5 |
| $ | 0.15 |
| | $ | 9.8 |
| $ | 0.34 |
| | $ | 7.2 |
| $ | 0.26 |
|
|
| | | | | | | | | | | | |
NW NATURAL NON-GAAP RECONCILIATIONS | | | | | | |
| | 2019 | | 2018 | | 2017 |
In millions | | Amount | | Amount | | Amount |
Net income from continuing operations | | $ | 69.0 |
| | $ | 68.0 |
| | $ | 71.7 |
|
Adjustment: | | | | | | |
Tax effects of 2017 TCJA remeasurement(1) | | — |
| | — |
| | (3.0 | ) |
Adjusted net income from continuing operations | | $ | 69.0 |
| | $ | 68.0 |
| | $ | 68.7 |
|
| | | | | | |
NGD segment net income from continuing operations | | $ | 60.8 |
| | $ | 57.5 |
| | $ | 60.5 |
|
Adjustment: | | | | | | |
Tax effects of 2017 TCJA remeasurement(1) | | — |
| | — |
| | 1.0 |
|
Adjusted NGD segment net income from continuing operations | | $ | 60.8 |
| | $ | 57.5 |
| | $ | 61.5 |
|
| | | | | | |
Other net income from continuing operations | | $ | 8.1 |
| | $ | 10.6 |
| | $ | 11.2 |
|
Adjustment: | | | | | | |
Tax effects of 2017 TCJA remeasurement(1) | | — |
| | — |
| | (4.0 | ) |
Adjusted other net income from continuing operations | | $ | 8.1 |
| | $ | 10.6 |
| | $ | 7.2 |
|
Note: Totals may not foot due to rounding.
(1) Non-cash TCJA benefit (expense) associated with continuing operations of $3.4 million was recorded in income tax expense (benefit) in the fourth quarter of 2017 as a result of the federal tax rate changing from 35% to 21% effective December 22, 2017. The majority of this benefit was recorded at NW Natural. NW Holdings EPS amounts are calculated using diluted shares of 28.8 million as shown on the NW Holdings Consolidated Statements of Comprehensive Income. The TCJA impacts in the NGD segment and other may not correlate exactly to the consolidated amount due to rounding. See Note 11 for additional information on the TCJA.
EXECUTIVE SUMMARY
NW Holdings' financial results and strategic initiatives with a long-term view of providing service safely and reliably to our customers, working with regulators on key policy initiatives, and remaining focused on growing our businesses. See "2020 Outlook" below for more information. Highlightshighlights for the year include:
added nearly 12,500•Added 8,600 natural gas customers in 20192022 for an annual growth rate of 1.7%1.1% at December 31, 2019;2022;
invested $219.9•Invested nearly $340 million in NGD's infrastructurenatural gas and facilities forwater utility systems to support growth, enhance reliability and technology upgrades;resiliency, and upgrade technology;
completed construction of the North Mist gas storage facility and commenced storage services in May 2019;
scored first•Scored second in the nationWest among large gas utilities in the 20192022 J.D. Power Gas Utility Residential Customer Satisfaction Study;Study, making this the 19th consecutive year customers have ranked NW Natural among the top two utilities;
concluded the Washington general•Completed construction on Lexington renewable natural gas (RNG) facility procuring environmental benefits for NW Natural customers;
•Received Oregon rate case withorder providing a $5.1 million increase in revenue requirement;
filed a general rate case in Oregon requesting a $71.4 million revenue requirement increase;increase of approximately $59.4 million, with new rates effective November 1, 2022;
continued acquiring water utilities, closing the largest transaction to date with the purchase of the•Closed seven water and wastewater utilitiesutility transactions in Sunriver, Oregon2022, including our largest water and wastewater acquisition to date in May 2019;Yuma, Arizona, bringing our total connections to approximately 62,500; and
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• | delivered increasing dividends for the 64th consecutive year to shareholders.
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•Increased dividends for the 67th consecutive year to shareholders.
Key financial highlights for NW Holdings include:
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
In millions, except per share data | | Amount | Per Share | | Amount | Per Share | | Amount | Per Share |
Net income from continuing operations | | $ | 65.3 |
| $ | 2.19 |
| | $ | 67.3 |
| $ | 2.33 |
| | $ | 72.1 |
| $ | 2.51 |
|
Loss from discontinued operations, net of tax | | (3.6 | ) | (0.12 | ) | | (2.7 | ) | (0.09 | ) | | (127.7 | ) | (4.44 | ) |
Consolidated net income (loss) | | $ | 61.7 |
| $ | 2.07 |
| | $ | 64.6 |
| $ | 2.24 |
| | $ | (55.6 | ) | $ | (1.93 | ) |
Adjusted net income from continuing operations(1) | | $ | 65.3 |
| $ | 2.19 |
| | $ | 67.3 |
| $ | 2.33 |
| | $ | 68.7 |
| $ | 2.39 |
|
Natural gas distribution margin | | $ | 422.7 |
| | | $ | 383.7 |
| | | $ | 392.6 |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
In millions | Amount | Per Share | | Amount | Per Share | | Amount | Per Share |
Net income from continuing operations | $ | 86.3 | | $ | 2.54 | | | $ | 78.7 | | $ | 2.56 | | | $ | 70.3 | | $ | 2.30 | |
Income from discontinued operations, net of tax | — | | — | | | — | | — | | | 6.5 | | 0.21 | |
Consolidated net income | $ | 86.3 | | $ | 2.54 | | | $ | 78.7 | | $ | 2.56 | | | $ | 76.8 | | $ | 2.51 | |
| | | | | | | | |
| | | | | | | | |
Key financial highlights for NW Natural include:
|
| | | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
In millions, except per share data | | Amount | | Amount | | Amount |
Net income from continuing operations | | $ | 69.0 |
| | $ | 68.0 |
| | $ | 71.7 |
|
Loss from discontinued operations, net of tax | | — |
| | (1.7 | ) | | (127.3 | ) |
Consolidated net income (loss) | | $ | 69.0 |
| | $ | 66.3 |
| | $ | (55.6 | ) |
Adjusted net income from continuing operations(1) | | $ | 69.0 |
| | $ | 68.0 |
| | $ | 68.7 |
|
(1) See the Non-GAAP Reconciliations table at the beginning of Item 7 for a reconciliation of this non-GAAP financial measure to its closest U.S. GAAP financial measure. | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
In millions | Amount | | Amount | | Amount |
Consolidated net income | $ | 91.6 | | | $ | 81.2 | | | $ | 70.6 | |
Natural gas distribution margin | $ | 505.9 | | | $ | 479.8 | | | $ | 438.1 | |
20192022 COMPARED TO 2018.2021. NW Holdings'Consolidated net income from continuing operations decreased $2.0 million and NW Natural's net income from continuing operations increased $1.0 million.
In March 2019, the OPUC issued an order resolving the remaining open items from NW Natural's 2018 Oregon general rate case regarding recovery of the pension balancing account and treatment of the benefits associated with the TCJA. As a result of the order, in the first quarter of 2019, NW Natural recorded a disallowance and several benefits and expenses through the consolidated statements of comprehensive income as follows:
Pension balancing account.Approximately $12.5 million in previously deferred pension expenses were recognized of which approximately $4.6 million was recorded in operations and maintenance expense and $7.9 million was recorded in other income (expense), net. These charges were offset with a corresponding increase in revenue of $7.1 million and in income tax benefits of $2.7 million as the order required the offset of certain deferred TCJA benefits against the pension balancing account. Additional TCJA income tax benefits were realized throughout 2019 to offset the remainder of the $12.5 million charge.
NW Natural also recognized a regulatory pension disallowance of $10.5 million with approximately $3.9 million recognized in operations and maintenance expense and $6.6 million recognized in other income (expense), net, partially offset by related discrete income tax benefits of $1.1 million. Lastly, NW Natural realized $3.8 million of deferred regulatory interest accrued on the pension balancing account.
Deferred TCJA benefits and timing variance.In addition, the OPUC ordered the return of approximately $6.3 million of excess deferred income taxes associated with plant and gas reserves annually beginning April 1, 2019. As a result, NW Natural recognized approximately $2.0 million in income tax benefits in the first quarter of 2019. Reductions to customer billings commenced April 1, 2019 and offset these income tax benefits in total by the end of 2019. NW Natural will continue reductions to customer billings and recognition of deferred income tax benefits in subsequent years until all benefits have been returned.
The increase of $1.0$10.4 million at NW Natural was primarily due to the following factors:
a $39.0•$26.1 million increase in NGD segment margin driven by new customer rates from the 2018in Oregon rate case and 2019 Washington, rate case, customer growth, and lease revenue from the North Mist storage facility; the remaining increase primarily relates to $7.1 million in revenues which were offset by pension expenses due to the OPUC order as discussed above;amortization of deferred balances; and
| |
• | a $9.4 million decrease in NGD segment income tax expense primarily due to the income tax implications of the March 2019 OPUC order, of which $5.4 million was offset by pension expenses as discussed above, with the remainder driven by the return of deferred TCJA benefit credits to customers and lower pretax income in the current period compared to the prior period; and
|
a $5.8•$12.3 million increase in deferred regulatory interest income in other income, (expense), net of which $5.1 million relates to interest recognized in association with the OPUC order discussed above; offset by
a $34.4 million increase in pension costs within operations and maintenance expense and other income (expense), net, of which $12.5 million relates to costs which were entirely offset by revenues and income tax benefits as discussed above, and $10.5 million relates to the regulatory pension disallowance discussed above. In addition, there was an $11.4 million increase in pension expenses as NW Natural began collecting ongoing pension costs through customer rates on November 1, 2018 and began collecting deferred pension costs through customer rates on April 1, 2019 rather than deferring a portion to the balancing account;
a $5.4 million increase in depreciation and amortization primarily due to additional capital expenditures;
a $5.4 million decrease in non-NGD segment operating revenues due to lower asset management revenues and increased asset management revenue sharing with Oregon customers as a result of the 2018 Oregon rate case;
a $4.6 million increase in NGD segment interest expense due to higher interest on long- and short-term debt balances; and
a $2.9 million increase in NGD segment operations and maintenance expenses primarily attributable to annual employee cost increases.
The decrease of $2.0 million at NW Holdings was primarily driven by increases in professional service costs and expenses associated with developing the water business,pension costs; partially offset by the increase of $1.0 million at NW Natural.
2018 COMPARED TO 2017.•NW Holdings' and NW Natural's net income from continuing operations were $67.3 million and $68.0 million, respectively, in 2018 compared to $72.1 million and $71.7 million, respectively, in 2017. The decrease was primarily due to the benefit associated with the TCJA deferred income tax remeasurement in 2017.
Excluding the benefit in 2017 associated with the TCJA remeasurement, NW Holdings adjusted net income from continuing operations decreased $1.4 million. See the Non-GAAP reconciliations at the beginning of Item 7 for additional information. The decrease was primarily due to the following factors, all of which were driven by activity at NW Natural:
an $8.9 million decrease in NGD segment margin primarily due to the deferral of excess revenue associated with the federal income tax rate decrease as a result of the TCJA;
a $4.3$16.0 million increase in operations and maintenance expenses due to higher contract labor, amortization expense driven by general payrollrelated to cloud computing arrangements, information technology costs, and benefits increases as well as increasesprofessional service fees;
•$3.3 million increase in professional servicesinterest expense primarily due to higher long-term debt balances and contract labor;higher interest rates;
a $4.1•$2.7 million increase in income tax expense due to an increase in pretax income;
•$2.5 million increase in depreciation and amortization primarilyexpense due to additional capital expenditures;investments; and
•$2.0 million increase in general taxes primarily driven by higher property taxes.
Net income from continuing operations increased $7.6 million at NW Holdings primarily due to the following factors:
•$10.4 million increase in consolidated net income at NW Natural as discussed above; partially offset by
•$2.8 million decrease in other net income primarily reflecting higher interest expense at the holding company.
Diluted EPS for NW Holdings decreased $0.02 per share primarily due to a $3.3common share issuance on April 1, 2022 and share issuances through NW Holdings' at-the-market program, partially offset by an increase in consolidated net income.
2021 COMPARED TO 2020. Consolidated net income increased $10.6 million at NW Natural primarily due to the following factors:
•$41.7 million increase in NGD segment margin driven by the 2020 Oregon rate case and residential customer growth;
•$7.9 million increase in asset management revenue primarily due to the 2021 cold weather event discussed below; and
•$2.4 million decrease in other income (expense), net primarilydriven by higher interest income on regulatory assets and lower pension non-service costs; partially offset by
•$19.9 million increase in operations and maintenance expenses due to higher information technology expenses, compensation and benefit costs, and lease expense;
•$8.9 million increase in depreciation expense due to property, plant, and equipment additions as we continued to invest in our gas utility system;
•$7.2 million increase in income tax expense due to an increase in pensionpretax income and postretirement benefitOregon Corporate Activity Tax;
•$3.7 million increase in general taxes primarily due to higher assessed property values; and
•$2.1 million increase in interest expense primarily due to lower AFUDC interest income.
Net income from continuing operations increased $8.4 million at NW Holdings primarily due to the following factors:
•$10.6 million increase in consolidated net income at NW Natural as discussed above; partially offset by an increase
•$2.2 million decrease in other net income primarily reflecting higher business development and consulting costs at NW Holdings.
2021 COLD WEATHER EVENT.In February 2021, Portland, Oregon and the surrounding region, like much of the country, experienced a severe winter storm with several days of colder temperatures resulting in elevated natural gas demand and significantly higher spot prices. Additional market gas purchases and other expenses resulted in approximately $29 million of higher commodity costs, of which approximately $27 million was deferred to a regulatory asset for recovery in future rates. The result was approximately $2 million of lower natural gas utility margin in the equity portionfirst quarter of AFUDC; partially2021. 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. During the first quarter of 2022, NW Natural refunded an interstate storage and asset management sharing credit of approximately $41 million to Oregon customers, which was primarily related to the cold weather event in February 2021.
CURRENT ECONOMIC CONDITIONS.We are evaluating and monitoring current economic conditions, which include but are not limited to: inflation, rising interest rates and commodity costs, recessionary pressures, heightened cybersecurity awareness, geopolitical uncertainty, and supply chain disruptions. We have enhanced cybersecurity monitoring in response to reports that cybersecurity attacks have increased and may continue to increase. We have not experienced material disruptions in our supply chain for goods and services to date. Our suppliers may be subject to lack of personnel or disruption in their own supply chain for materials, which could disrupt supplier performance or deliveries, and negatively impact our business. Developers and HVAC suppliers have reported longer lead times for furnaces and other HVAC equipment, which may affect the timing of placing new meters into service particularly those converting to natural gas. However, because any supply chain issues are being experienced by vendors who supply directly to customers and not us, we do not have visibility of and are not able to quantify the number of new meters affected at this time. We are continuing to actively monitor supply chain disruptions, and have formulated and continue to evaluate contingency plans as necessary.
NW Holdings and NW Natural continue to monitor interest rates and financing options for all of its businesses. Interest rates have increased in 2022 resulting from actions taken by the U.S. Federal Reserve to increase short-term rates as inflation remains elevated. NW Natural generally recovers interest expense on its long-term debt through its authorized cost of capital. Certain working capital items, such as the cost of gas, are deferred and accrue interest in Oregon and Washington. Additionally, short-term debt is incorporated in the capital structure in Washington. NW Natural Water's regulated water and wastewater utilities recover interest expense from long-term debt through their respective authorized cost of capital.
2023 OUTLOOK
| | |
• | a $20.2 million decrease in income tax expense due to the decrease in the federal income tax rate as a result of the TCJA and lower pretax earnings.
|
2020 OUTLOOK
We expect to make significant progressAt NW Natural Holdings, we remain focused on our long-term objectives in the coming year. Our natural gas distribution business is focused on providingmission: to provide safe, reliable and affordable utility services and renewable energy in an environmentally responsiblea sustainable way to better the lives of the publiccommunities we serve. Our watercore values of integrity, safety, service ethic, caring and wastewater utility business is committedenvironmental stewardship are the foundation for our success and fundamental to reliably providing clean water and safe wastewater services to the public, while also continuing to grow organically and through acquisitions.our mission.
In 2020, we remain focused on the strategic pillarsOur common goals for each of our business:
Ensuring safe & reliable service;
Providing superior customer service;
Advancingbusiness lines is: build and sustain a diverse and inclusive workforce; execute operational priorities to further support safety and reliability for our employees and customers; pursue net carbon neutral energy and sustainable water solutions for our customers, communities and operations, focus on profitable growth across our companies; and work to advance constructive legislative policiespolicy and regulation;
Enabling customer growth;regulation that serves the interest of customers and
Leading in a low-carbon future.
supports opportunities for growth.
ENSURING SAFE AND RELIABLE SERVICE.
NW Natural
Delivering our products safely and reliably to customers, while keeping our employees safe, is our first priority. At NW Natural, we remain focused on safety and emergency response through hands-on, scenario-based training for employees, third-party contractors, and first responders.our employees. The reliability, resiliency and safety of our gas system is critical and to this end, we remain focused on investing in necessary maintenance and upgrades, preventing third-party damages, and replacing key system components.performing regular inspections and assessments. Safety for our gas infrastructure also includes maintaining and strengthening our cybersecurity defenses, upgrading key technology systems, over the next several years, and preparing for large-scale emergency events, such as seismic hazards. Our water and wastewater utilities are focused on enhancing their capital expenditure plans to ensure continued safe and reliable service to customers and allow us to readily prioritize capital investments.
PROVIDING SUPERIOR CUSTOMER EXPERIENCE. We have a legacy of providing excellent customer service and a long-standing dedication to continuous improvement, which has resulted in NW Natural consistently receiving high rankings in the J.D. Power and Associates customer satisfaction studies. In 2020, we intendWe plan to strivecontinue this legacy by combining the expertise of our customer care and field employees with the benefits of new technologies to enhance our natural gas customers’ experience toprovide top-notch customer interactions and meet theirthe evolving expectations by prioritizing improvements to technology and internal processes, to supportof our customers’ most frequent interactions and highest value touchpoints.customers.
ADVANCING CONSTRUCTIVE LEGISLATIVE POLICIES AND REGULATION. NW Natural recently worked with lawmakers and the governor to pass a landmark bill for the State of Oregon Senate Bill 98 is groundbreaking legislation that allows utilities to procure renewable natural gas for homes and businesses. While currently in regulatory rulemaking, NW Natural has been pursuing potential renewable natural gas supplies and expects to begin procuring it for customers in 2020. This year, NW Natural plans to submit an integrated resource plan to both the Oregon and Washington Commissions outlining our key long-term capital projects and resource plans for conventional and renewable natural gas. NW Natural will also continue working with the EPA and other stakeholders on an environmentally protective and cost-effective clean-up for the Portland Harbor Superfund Site. For our water utilities, we are focused on building relationships with our current and prospective regulators, pursuing efficient approval processes for acquisitions, and engaging in constructive regulatory proceedings.
ENABLING CUSTOMER GROWTH. Natural gas is the preferred energy choice in our service territory given its efficient, affordable, and reliable qualities. We are focused on leveraging these key attributesworking productively with lawmakers and regulators. In 2023, we intend to capitalize oncontinue proactively communicating with policymakers and other stakeholders about what we believe is the important role of the gas system in achieving climate goals for our region's strong economic growth. We continue to grow our market share in the residential sector and capture new commercial customers as well as multifamily developments. At NW Natural Water,communities. With regulators, we continue to be focusedstrive to work productively on supportingopen proceedings.
At the fast-growing communities we currently servesame time, we'll strive to continue growing our business by pursuing and continuingadopting unique energy solutions, executing on our disciplined acquisition strategy.capital investment plans, and managing and promoting adoption of advanced technologies.
LEADING IN A LOW-CARBON FUTURE.We are deeply committed to our core value of environmental stewardship and the vision of a clean energy future and environmental stewardship. It's whyfuture. NW Natural launchedhas been a low-carbon initiativeleader among gas utilities in innovative programs designed to reduce emissions in the communities we serve by leveraging our modern natural gas pipeline system in new ways, working closely with customers, policymakers and regulators, and embracing cutting-edge technology.support a lower carbon future. In 2020, we will continue to execute on our RNG strategy with plans to procure RNG for our customers as prescribed under Oregon Senate Bill 98, execute on our RNG interconnection projects, and develop voluntary renewable product offerings for our customers. A study commissioned with a premier environmental consultant has concluded that natural gas can help achieve crucial emission reductions of 80% by 2050.2023, NW Natural intends to strive to help itscontinue striving to: execute on our renewable strategy by helping our customers reduce and offset their consumption, work to comply with the Oregon Climate Protection Program (CPP) and Washington Climate Commitment Act (CCA), procure and invest in RNG for our customers, and continue testing hydrogen blending and other hydrogen pilot projects.
NW Natural Water
Our water and wastewater utility business is committed to providing its customers with safe, clean, reliable and affordable water and wastewater services, while growing organically and through acquisitions. These utilities are focused on supporting their fast-growing communities by executing on capital expenditure programs aimed at safety and reliability and filing general rate cases, where needed, to support these investments. In addition, we continue to promote water conservation and sustainable wastewater management through system investments, regulation, policies and customer programs.
NW Natural Renewables
We launched an unregulated business line in 2021 established to invest in renewable energy through the developmentproduction and supply of lower-carbon fuels. In 2023, we expect to begin earning revenues from the resale of RNG and explore other innovative solutions to lower the carbon intensity of natural gas, such as power to gas.from our first project with EDL, which involves two RNG facilities. We also intend to leverage technologycontinue pursuing other similar renewable projects and relationships to examine ways to reduce emissions across the entire value chain from suppliers to end-use heating appliances.opportunities.
DIVIDENDS
NW Holdings dividend highlights include:
| | | | | | | | | | | | | | | | | | | | |
Per common share | | 2022 | | 2021 | | 2020 |
Dividends paid | | $ | 1.9325 | | | $ | 1.9225 | | | $ | 1.9125 | |
|
| | | | | | | | | | | | |
Per common share | | 2019 | | 2018 | | 2017 |
Dividends paid | | $ | 1.9025 |
| | $ | 1.8925 |
| | $ | 1.8825 |
|
In January 2020,2023, the NW Holdings' Board of Directors of NW Holdings declared a quarterly dividend on NW Holdings common stock of $0.4775$0.4850 per share, payable on February 14, 2020,15, 2023, to shareholders of record on January 31, 2020,2023, reflecting an indicated annual dividend rate of $1.91$1.94 per share.
See "Financial Condition - Liquidity and Capital Resources" for more information regarding the NW Holdings and NW Natural dividend policies and regulatory conditions on NW Natural dividends to its parent, NW Holdings.
RESULTS OF OPERATIONS
Regulatory Matters
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. In 2019,2022, approximately 89%88% of NGD customers were located in Oregon, with the remaining 11%12% in Washington. Earnings and cash flows from natural gas distribution operations are largely determined by rates set in general rate cases and other proceedings in Oregon and Washington. They are also affected by weather, the local economies in Oregon and Washington, the pace of customer growth in the residential, commercial, and industrial markets, customer preferences and NW Natural's ability to remain price competitive, control expenses, and obtain reasonable and timely regulatory recovery of its natural gas distribution-related costs, including operating expenses and investment costs in plant and other regulatory assets. See "Most Recent Completed Rate Cases" below.
MIST INTERSTATE GAS STORAGE. NW Natural's interstate storage activity at Mist is subject to regulation by the OPUC, WUTC, and the Federal Energy Regulatory Commission (FERC) with respect to, among other matters, rates and terms of service. The OPUC also regulates the intrastate storage services at Mist, while FERC regulates the interstate storage services at Mist. The FERC uses a maximum cost of service model which allows for gas storage prices to be set at or below the cost of service as approved by theeach agency in NW Natural'stheir last regulatory filing. The OPUC intrastate Schedule 80 rates are tied to the FERC rates, and are updated whenever NW Natural modifies FERC maximum rates.
OTHER. In June 2018, NWN Gas Storage, aThe wholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement for the sale of all of its ownership interests in Gill Ranch, a natural gas storage facility located near Fresno, California. The sale was approved by the CPUC in December 2019. The wholly owned rate regulated water businesses of NWN Water, a wholly ownedwholly-owned subsidiary of NW Holdings, are subject to regulation by the utility commissions in the states in which they are located, which currently includeincludes Oregon, Washington, andArizona, Idaho, and is expectedTexas. The wholly-owned regulated wastewater businesses of NWN Water are subject to include Texas.regulation by the utility commissions in Texas and Arizona.
Most Recent Completed Rate Cases
OREGON. EffectiveOn October 24, 2022, the OPUC issued an order for rates effective November 1, 2018, the OPUC2022, which authorized rates to customers baseda return on an ROEequity of 9.4%, an overall returna cost of 7.317%capital of 6.836%, and a capital structure of 50% common equity and 50% long-term debt. In March 2019,After adjustments provided in the order, the order increased the revenue requirement by $59.4 million, and included a rate base of $1.76 billion, or an increase of $320 million since the last rate case. The OPUC issuedalso ordered an order resolvingadjustment to NW Natural’s current line extension allowance methodology to a five times margin approach (which for an average residential customer is currently approximately $2,300), declining to four times margin on November 1, 2023, and three times margin on November 1, 2024. The OPUC further ordered that the remaining matters of the rate case regarding recovery of NW Natural's pension balancing account and the return of tax reform benefits to customers. For additional information, see "Rate Mechanisms - Pension Cost Deferral and Pension Balancing Account" and "Rate Mechanisms - Tax Reform Deferral" below.
On December 30, 2019,costs NW Natural filed a general rate case in Oregon. For more information, see "Regulatory Proceeding Updates - sought to recover related to its Lexington RNG project were reasonable and prudently incurred under Senate Bill 98 and adopted an automatic adjustment clause that allows for NW Natural’s RNG project costs to be added to rates annually on November 12020 Oregon Rate Case" below.
WASHINGTONst.
Effective January
From November 1, 2009,2020 through October 31, 2019,2022, the WUTCOPUC authorized rates to customers based on an ROE of 10.1%9.4% and an overall ratea cost of returncapital of 8.4%6.965% with a capital structure of 51%50% common equity 5% short-term debt, and 44%50% long-term debt. The OPUC also authorized NW Natural to recover the expense associated with the Oregon Corporate Activity Tax (CAT) as a component of base rates. See "Corporate Activity Tax" in the 2021 Form 10-K. In addition, the OPUC 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 revenue due to reductions in sales volumes.
EffectiveWASHINGTON.On October 21, 2021, the WUTC issued an order concluding NW Natural's general rate case filed in December 2020 (WUTC Order). The WUTC Order provides for an annual revenue requirement increase over two years, consisting of a 6.4% or $5.0 million increase in the first year beginning November 1, 2021 (Year One), and up to a 3.5% or $3.0 million increase in the second year beginning November 1, 2022 (Year Two). The increase is based on the following assumptions:
•Cost of capital of 6.814%; and
•Average rate base of $194.7 million, an increase of $20.9 million since the last rate case for capital expenditures already expended at the time of filing, with an additional expected $31.2 million increase in Year One, and an additional expected $21.4 million increase in Year Two, with the increases in Year One and Year Two relating to expected capital expenditures in those years.
The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity. New rates authorized by the WUTC Order were effective November 1, 2021.
From November 1, 2019 through October 31, 2021, the WUTC authorized rates to customers based on an ROE of 9.4% and an overall rate of return of 7.161% with a capital structure of 50.0% long-term debt, 1.0% short-term debt, and 49.0% common equity. The WUTC also authorized the recovery of environmental remediation expenses allocable to Washington customers through an Environmental Cost Recovery Mechanism (ECRM) and directed NW Natural to provide federal tax reform benefits to customers. See "Rate Mechanisms - Environmental Cost Deferral and Recovery - Washington ECRM" and "Rate Mechanisms -Tax Reform Deferral" 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 cost-based 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. See "Regulatory Proceeding Updates
—Oregon Rate Case" below.
Rate Mechanisms
During 2019,2022 and 2021, NW Natural's key approved rates and recovery mechanisms for each service area included: | | | Oregon | | Washington | | Oregon | | Washington |
| 2018 Rate Case | | 2009 Rate Case | | 2019 Rate Case (effective 11/1/2019) | | 2022 Rate Case (effective 11/1/2022) | 2020 Rate Case (effective 11/1/2020) | | 2021 Rate Case (effective 11/1/2021) | 2019 Rate Case (effective 11/1/2019) |
Authorized Rate Structure: | | Authorized Rate Structure: | |
ROE | 9.4% | | 10.1% | | 9.4% | |
ROR | 7.3% | | 8.4% | | 7.2% | |
Return on Equity | | Return on Equity | 9.4% | | ** | 9.4% |
Rate of Return | | Rate of Return | 6.8% | 7.0% | | 6.8% | 7.2% |
Debt/Equity Ratio | 50%/50% | | 49%/51% | | 51%/49% | Debt/Equity Ratio | 50%/50% | | ** | 51%/49% |
| | |
Key Regulatory Mechanisms: | | Key Regulatory Mechanisms: | |
PGA | X | | X | | X | |
Purchased Gas Adjustment (PGA) | | Purchased Gas Adjustment (PGA) | X | | X |
Gas Cost Incentive Sharing | X | | Gas Cost Incentive Sharing | X | |
Decoupling | X | | Decoupling | X | |
WARM | X | | |
Weather Normalization (WARM) | | Weather Normalization (WARM) | X | |
RNG Automatic Adjustment Clause | | RNG Automatic Adjustment Clause | X | |
Environmental Cost Recovery | X | | X | Environmental Cost Recovery | X | | X |
Interstate Storage and Asset Management Sharing | X | | X | | X | Interstate Storage and Asset Management Sharing | X | | X |
** The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity. | | ** The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity. |
Annually, or more often if circumstances warrant, NW Natural reviews all regulatory assets for recoverability. If NW Natural should determine all or a portion of these regulatory assets no longer meet the criteria for continued application of regulatory accounting, then NW Natural would be required to write-off the net unrecoverable balances against earnings in the period such a determination was made.
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 costs hedged with financial derivatives,cost hedges, gas costs from the withdrawal of storage inventories, the production of gas reserves, interstate pipeline demand costs, renewable natural gas and its attributes, including renewable thermal certificates, temporary rate adjustments, which amortize balances of deferred regulatory accounts, and the removal of temporary rate adjustments effective for the previous year.
Typically, eachEach 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 enteredDuring 2021 and 2022, there was increased price volatility in the 2019-20spot and forward gas year with its forecasted sales volumesmarkets. In response to higher than normal volatility in forward gas markets in 2022, we are hedged at 52% in financial swap and option contracts, including hedging of 56% in Oregon and 24% in Washington, and 19% in physicalhigher levels for the 2022-23 gas supplies, including hedging of 20% in Oregon and 14% in Washington.
year. As of December 31, 2019,2022, NW NaturalNatural's forecasted sales volume was hedged at approximately 71%84% in total for the 2019-202022-23 gas year compared to 82% in the 2021-22 PGA year. The total hedged for Oregon was approximately 85%, including 67% in financial hedges and 18% in physical gas supplies. The total hedged for Washington was hedgedapproximately 79%, including 66% in Oregon at approximately 75%financial hedges and Washington at approximately 38%. 13% in physical gas supplies.
NW Natural is also hedged in total between 1%21% and 29%31% for annual requirements over the subsequent fivesubsequent two gas years, which consists of between 2%23% and 31%30% in Oregon and between 0% and 15%45% 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 planned for the 2022-23 gas year, gas price volatility remained high with current and forward gas prices increasing substantially in 2022. We will continue to monitor gas prices as we begin to fill storage and look at hedging plans for future gas years. Gas purchases and hedges entered into for the upcoming PGA year will be included in the Company’s PGA filings in Oregon and Washington.
In September 2019,2022, NW Natural filed its annual PGAPGAs and received OPUC and WUTC approval in October 2019.2022.
Included in the 2022-23 PGA, the OPUC and WUTC approved a new rate mitigation program to address high gas costs, which includes a temporary bill credit for NW Natural’s residential customers, beginning November 1, 2022, with deferral of the temporary bill credit to warmer months when customers typically see lower bills. As of December 31, 2022, the amount deferred to a regulatory asset was $11.5 million. PGA rate changes were effective November 1, 2019.2022. Rates and hedging approaches may vary between states due to different rate structures, rate mechanisms and mechanisms. In addition, as required with the Washington PGA filing, NW Natural incorporated and began implementing risk-responsive hedging strategies for the 2019-20 PGA for its Washington gas supplies.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 2018-192021-22 and 2019-202022-23 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 2018-192021-22 and 2019-202022-23 gas years, itNW Natural selected the 90% deferral option. The ROE threshold is subject to adjustment annually based on movements in short-termlong-term interest rates. For calendar years 2017, 2018,2020, 2021, and 2019,2022, the ROE threshold was 10.66%, 10.48%, and 10.24%, respectively.10.40% in all periods. There were no refunds required for 20172020 and 2018.2021. NW Natural does not expect a refund for 20192022 based on results, and anticipates filing its 20192022 earnings test in May 2020.2023.
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 earningsrevenue and the quantity of gas consumed by customers, removing any financial incentive to discourage customers’ efforts to conserve energy. The Oregon decoupling mechanism was reauthorized and the baseline expected usage per customer was reset in the 20182020 Oregon general rate case. The Order in the 2020 Oregon general rate case also approved of extending NW Natural’s decoupling calculation for the months of November and May to the month of April. This mechanism employs a use-per-customer decoupling calculation, which adjusts margin revenues to account for the difference between actual and expected customer volumes. The margin adjustment resulting from differences between actual and expected volumes under the decoupling component is recorded to a deferral account, which is included in the annual PGA filing.
WARM. In Oregon, NW Natural has an approved weather normalization mechanism (WARM), which is applied to residential and small commercial customer bills. This mechanism is designed to help stabilize the collection of fixed costs by adjusting residential and small commercial customer billings based on temperature variances from average weather, with rate decreases when the weather is colder than average and rate increases when the weather is warmer than average. The mechanism is applied to bills from December through mid-May of each heating season.mid-May. 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 December 31, 2019, 8%2022, 7% of total eligible customers had opted out. NW Natural does not have a weather normalization mechanism approved for residential and commercial Washington customers, which account for about 11%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. On October 21,Effective beginning November 1, 2019, the WUTC authorized an Environmental Cost Recovery Mechanism (ECRM) for recovery of prudently incurred costs allocable to Washington customers beginning November 1, 2019.customers.
Oregon SRRM
Under the Oregon SRRM collection process, there are three types of deferred environmental remediation expense:
•Pre-review - This class of costs represents remediation spend that has not yet been deemed prudent by the OPUC. Carrying costs on these remediation expenses are recorded at NW Natural's authorized cost of capital. NW Natural anticipates the prudence review for annual costs and approval of the earnings test prescribed by the OPUC to occur by the third quarter of the following year.
•Post-review - This class of costs represents remediation spend that has been deemed prudent and allowed after applying the earnings test, but is not yet included in amortization. NW Natural earns a carrying cost on these amounts at a rate equal to the five-year treasury rate plus 100 basis points.
•Amortization - This class of costs represents amounts included in current customer rates for collection and is generally calculated as one-fifth of the post-review deferred balance. NW Natural earns a carrying cost equal to the amortization rate determined annually by the OPUC, which approximates a short-term borrowing rate. NW Natural included $5.1$6.8 million and $6.1$6.3 million of deferred remediation expense approved by the OPUC for collection during the 2019-202022-23 and 2018-192021-22 PGA years, respectively.
In addition, the SRRM also provides for the annual collection of $5.0 million from Oregon customers through a tariff rider. As it collects amounts from customers, NW Natural recognizes these collections as revenue net of any earnings test adjustments and separately amortizes an equal and offsetting amount of the deferred regulatory asset balance through the environmental remediation operating expense line shown separately in the operating expenses section of the Consolidated Statements of Comprehensive Income (Loss). See Note 1817 for more information on our environmental matters.
The SRRM earnings test is an annual review of adjusted NGD ROE compared to authorized NGD ROE. For 2018, the first ten months were weighted at 9.5% and the last two months at 9.4%, reflecting the ROE change from NW Natural's most recent rate case effective November 1, 2018. 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)(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.
| 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.
For 2019,2022, NW Natural has performed this test, which is anticipated to be submitted to the OPUC in May 2020.2023. No earnings test adjustment is expected for 2019.2022.
Washington ECRM
The ECRM established by the WUTC order on October 21,effective November 1, 2019 permits NW Natural’s recovery of environmental remediation expenses allocable to Washington customers. These expenses represent 3.32 percent3.32% 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.
The WUTC order also disallowed approximately $1.5 million of deferred environmental remediation expenses. NW Natural recognized an after-tax charge of approximately $1.1 million in the fourth quarter of 2019 as a result of this order.
PENSION COST DEFERRAL AND PENSION BALANCING ACCOUNT.From 2011 through October 2018, the OPUC authorized a regulatory mechanism in which NW Natural deferred annual pension expenses above the amount set in rates, with recovery of these deferred amounts through the implementation of a balancing account, which included the expectation of higher and lower
pension expenses in future years. During this period the mechanism permitted NW Natural to accrue interest on the account balance at the NGD business' authorized rate of return. The OPUC ordered the freezing of the account in October 2018 with pension expenses to be recovered through rates beginning November 1, 2018.
In March 2019 the OPUC issued an order (Pension Order) directing the means by which the account would be recovered. As a result, the following items were recorded in the first quarter of 2019:
Applied $7.1 million of TCJA benefits deferred from January 1, 2018 to October 31, 2018, as a reduction against the pension balancing account;
Credited to customers' benefit $5.4 million of deferred income taxes as a reduction against the pension balancing account;
Reduced the amount of the frozen balancing account by an additional $10.5 million; and
Reduced the interest rate on the pension balancing account from NW Natural's authorized rate of return of 7.317% to 4.3%.
The items above resulted in the recovery of $12.5 million of deferred pension expenses by applying deferred tax benefits against the pension balancing account. Recognition of these items resulted in higher operations and maintenance expense and other income (expense), net with offsetting benefits recognized in operating revenues and income tax expense. Additional pension expenses of $10.5 million from the regulatory disallowance were also recognized in operations and maintenance expense and other income (expense), net. Deferred regulatory interest income of $3.8 million was also realized in other income (expense), net.
Commencing April 1, 2019, the OPUC also authorized the collection of the remainder of the pension balancing account over ten years in a customer tariff of $7.3 million per year. Pension expense deferrals, excluding interest, were $10.3 million and $6.5 million in 2018 and 2017, respectively. Deferred pension expense recoveries, inclusive of the applications of deferred TCJA benefits described above, were $16.8 million in 2019.
TAX REFORM DEFERRAL. In December 2017, NW Natural filed applications with the OPUC and WUTC to defer the overall net benefit associated with the TCJA that was enacted on December 22, 2017.
In February 2019, NW Natural and the other parties to the 2018 Oregon rate case agreed upon terms by which the deferred benefits would be returned to customers via a joint stipulation filed with the OPUC. In March 2019, the OPUC approved the terms in their entirety as follows:
Applied $7.1 million of TCJA benefits deferred from January 1, 2018 to October 31, 2018, as a reduction against the pension balancing account;
Credited to customers' benefit $5.4 million of deferred income taxes as a reduction against the pension balancing account;
Commencing April 1, 2019, the OPUC also ordered the following:
Provide an annual credit to base rates of $3.4 million for excess deferred income taxes to all customers, subject to the average rate assumption method;
Provide an additional annual credit of $3.0 million to sales service customers for five years;
An increase in rate base of $15.4 million, and corresponding increase to revenue requirement of $1.4 million.
If NW Natural files a general rate case within five years of the date of the Pension Order, this revenue requirement may be adjusted as part of that general rate case.
On October 21, 2019 the WUTC issued an order dictating the means by which deferred tax reform benefits would be returned to customers beginning November 1, 2019. The order directs NW Natural to provide customers with a rate reduction of $2.1 million over one year to reflect the benefit of the lower federal corporate income tax rate accumulating from January 1, 2018 through October 31, 2019, and provides an additional annual rate reduction initially set at approximately $0.5 million to reflect a benefit from the remeasurement of deferred tax liabilities of approximately $15.0 million.
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. Generally, amounts are credited toIn January 2023, the OPUC approved the annual 2023 bill credit for Oregon customer’s share of interstate storage and asset management activities totaling approximately $23.5 million. This includes revenue generated for the November 2021 through October 2022 PGA year. Commercial and industrial customers in June, while creditsOregon will receive this credit in February 2023. Residential customers in Oregon will receive this credit as a reduction to the temporary rate mitigation adjustment, which begins in March 2023. Credits are given to customers in Washington as reductions in rates through the annual PGA filing in November. In November 2018,
During the percentagefirst quarter of net revenues shared with2022, NW Natural refunded an interstate storage and asset management sharing credit of approximately $41.1 million to Oregon customers increasedover three equal installments in January, February and March. This includes revenue generated for the November 2020 through October 2021 PGA year. A majority of this revenue is from 67% to 90% as a result of the 2018 Oregon general rate case.cold weather event in February 2021 discussed above.
The following table presents the credits to NGD customers: |
| | | | | | | | | | | | |
In millions | | 2019 | | 2018 | | 2017 |
Oregon | | $ | 16.3 |
| | $ | 11.7 |
| | $ | 11.7 |
|
Washington | | 1.2 |
| | 1.0 |
| | 1.0 |
|
| | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
Oregon | | $ | 41.1 | | | $ | 9.1 | | | $ | 17.0 | |
Washington | | $ | 1.5 | | | $ | 3.1 | | | $ | 0.7 | |
HOLDING COMPANY REORGANIZATION.
COVID-19 PROCESS AND DEFERRAL DOCKETS On October 1, 2018,. 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 December 31, 2022, we completedbelieve that approximately $18.7 million of the reorganizationfinancial effects related to a holding company structure. ThereCOVID-19 are a numberrecoverable. As part of conditions under the agreement with2022 Oregon general rate case, NW Natural received approval from the OPUC to recover the 2020 and the WUTC related to the formation of2021 COVID-19 deferral beginning November 1, 2022. Approximately $10.9 million will be amortized over a holding company structure. Onetwo-year period and NW Natural may request recovery of the conditionsremaining amount in the third year. Included in the total balance is approximately $3.4 million of forgone late fee revenue that for three years following formation of the holding company,will be recognized in future periods when billed. Beginning January 2023, NW Natural will no longer defer any COVID-19 related costs in Oregon. NW Natural expects to recover its COVID-19 deferrals in Washington in a future proceeding.
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 |
Arrearage Management Program | 1.5% of Retail Revenue | | 1% of Retail Revenue |
** Date is pending a Commission review of its existing credit and collection practices that is expected to be requiredcompleted over the next year.
ARREARAGE MANAGEMENT PROGRAMS.As part of the approved term sheets, NW Natural established programs in Oregon and Washington to provide an annual $500,000 creditidentify and mitigate residential customer arrearages associated with COVID-19. Under the Washington program, income-eligible customers may receive up to $2,500 per year. In March 2022, the Oregon customersprogram was expanded to include additional funding and a $55,000 credit to Washington customers.low-income focus. AMP is funded by NW Natural with recovery facilitated through the COVID-19 deferral dockets. During 2022, NW Natural granted $9.4 million of the total funds available of $9.9 million. The first and second year credits toprograms in both Oregon and Washington are now closed.
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 wereat four discount tier levels based on household income compared to SMI, with higher discounts given in conjunctionfor lower income levels. Participating customers can self-certify their income and household size to qualify for the program directly with the 2018-19 and 2019-20 PGA filings with the rate adjustments commencing onNW Natural or their local Community Action Agency. The program was available for qualifying customers starting November 1, 20182022. Costs for the bill discount program include simultaneous recovery from all customers. Costs for the bill discount program, inclusive of start-up and 2019, respectively.administrative costs of the program, are recoverable in rates. The amount deferred to a regulatory asset as of December 31, 2022 was not significant.
Regulatory Proceeding Updates
During 2019, NW Natural was involved in the regulatory activities discussed below.
WATER UTILITIES. In 2019, NW Holdings, through its water subsidiaries, continued implementation of its growth strategy and entered into the following agreements which required regulatory approval:
| | | | | | | | | | | |
• | Sunriver Water, LLC and Sunriver Environmental, LLC Total Household Income— NWN Water of Oregon received regulatory approval from the OPUC for the Sunriver Water acquisition in April 2019. Sunriver Environmental is not under the OPUC's jurisdiction. The transaction closed in May 2019.
|
| Bill Discount Percentage |
•Tier 0 | Estates Water Systems Inc. and Monterra Inc.At or below 15% SMI
| — Cascadia Water received regulatory approval from the WUTC for these Sequim, Washington acquisitions in April 2019. The transaction closed in May 2019. |
| 40% |
•Tier 1 | Spirit Lake East Water Company and Lynnwood Water16% - 30% of SMI — Gem State Water received regulatory approval from the IPUC for these Coeur d'Alene, Idaho acquisitions in July 2019. The transaction closed in July 2019.
|
| 25% |
•Tier 2 | Suncadia Water Company, LLC and Suncadia Environmental, LLC — NWN Water31% - 45% of Washington received regulatory approval for the purchase of Suncadia Water in January 2020. Suncadia Environmental is not subject to the WUTC's jurisdiction. The transaction closed in January 2020. See Note 20 for additional information.SMI
|
| 20% |
•Tier 3 | T&W Water Service Company — NWN Water46% - 60% of Texas received regulatory approval from the Public Utility Commission of Texas for the T&W Water Service Company acquisition in February 2020. We expect the transaction to close in 2020.SMI
| | 15% |
INTEGRATED RESOURCE PLAN (IRP). NW Natural files a full IRP biennially for Oregon and Washington with the OPUC and WUTC, respectively. NW Natural filed its 2018 Oregon and Washington IRPs in August 2018, and received both a letter of compliance from the WUTC and acknowledgment by the OPUC in February 2019. The IRP included analysis of different growth scenarios and corresponding resource acquisition strategies. This analysis is needed to develop supply and demand resource requirements, consider uncertainties in the planning process, and to establish a plan for providing reliable and low cost natural gas service.
RENEWABLE NATURAL GAS.GAS AND AUTOMATIC ADJUSTMENT CLAUSE. On June 19, 2019, the Oregon legislature passed Senate Bill 98 (SB98)(SB 98), which enables natural gas utilities to procure or develop renewable natural gas (RNG)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.
SB98 outlines the following parameters for the RNG program including: setting out broad targets for gas utilities that allow for the purchase of RNG from third parties such that 30% of the gas distributed to retail customers is RNG by 2050; allowing gas utilities to invest in RNG infrastructure for the production, processing, pipeline interconnection and distribution of RNG to their customers; and creating a limit of 5% of a utility's revenue requirement that can be used to cover the incremental cost of RNG to protect utilities and ratepayers from increased costs as the RNG market develops.
The bill was signed into law by the governor in July 2019. The2019, and subsequently, the OPUC opened a docket in August to begin2019 regarding the rulemaking processrules for the bill,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 expectedmade from excess wind, solar and hydro power. Renewable hydrogen can be used for the transportation system, industrial use, or blended into the natural gas pipeline system.
Pursuant to conclude withthe 2022 Oregon general rate case, the OPUC adopting rules by July 31, 2020.ordered that the costs NW Natural sought to recover related to its investment in Lexington Renewables Energy, LLC were reasonable and prudently incurred under SB 98. Furthermore, the OPUC approved an automatic adjustment clause that allows for NW Natural's investments in RNG projects, including operating costs, to be added to rates annually on November 1st, following a prudence review. The mechanism allows NW Natural to defer for recovery or credit the differences between the forecasted and actual costs of the RNG projects, subject to an earnings test that includes deadbands at 50 basis points below and above NW Natural's authorized ROE. For RNG procurement contracts, NW Natural seeks recovery of the costs in the PGA, subject to a prudence review.
CORPORATE ACTIVITY TAX. In 2019, the State of Oregon enacted a Corporate Activity Tax (CAT) that is applicable to all businesses with annual Oregon gross revenue in excess of $1 million. The CAT is in addition to the state's corporate income tax and imposes a 0.57% tax on certain Oregon gross receipts less a reduction for a portion of cost of goods sold or labor. The CAT legislation became effective September 29, 2019 and appliesapplied to calendar years beginning January 1, 2020. On December 23, 2019,Under the terms of the Order in NW Natural's 2020 Oregon general rate case, NW Natural filed an applicationis authorized to begin to recover the expense associated with the CAT as a component of base rates. NW Natural is also directed to adjust the amount recovered for the CAT in each annual PGA to reflect changes in gross revenue and cost of goods sold that occur as a result of the PGA.
The Order also provides for certain adjustments if there are legislative, rulemaking, judicial, or policy decisions that would cause the calculation methodology used by NW Natural for the CAT to vary in a fundamental way. Additionally, the CAT deferred from January 2020 through June 2020 was added to and amortized over the 2020-21 PGA gas year, and the CAT amounts deferred from July 2020 through the effective date of the rate case were amortized over the 2021-22 PGA year.
INTEGRATED RESOURCE PLAN (IRP). NW Natural generally files a full IRP biennially for Oregon and Washington with the OPUC to allow us to defer this additional expense, with recovery of these deferred amounts to be determined through future rate case proceedings.
2020 OREGON RATE CASE.On December 30, 2019,and WUTC, respectively. NW Natural jointly filed its 2022 IRP for both Oregon and Washington on September 23, 2022. The 2022 IRP outlines scenarios of future requirements based on a request for a general rate increase withrange of outcomes that would provide the OPUC.
Theleast-cost and least-risk resources to meet future demand and environmental compliance obligations. In our most recent filing, includes a requested $71.4 million annual revenue requirement increase based upon the following assumptions or requests:
Capital structure of 50% debtwe included certain demand and 50% equity;
Return on equity of 10.0%;
Cost of capital of 7.298%;
Average rate base of $1.47 billion.
The filing includes an increasesupply side projects that resulted in average rate base of $269.9 million compared to the last rate case due to the following items:
Investments supporting customer growth and reliability for the distribution system as well as for operating resiliency;
Replacing key components of our Mist storage facility,action plan items which provides service during the peak winter months; and
Upgrading technology including cybersecurity and critical customer interfacing systems.
NW Natural’s filing will be reviewedevaluated by the OPUC and other stakeholders. WUTC. With respect to IRPs generally, the WUTC issues letters of compliance and Oregon acknowledges the IRP. NW Natural anticipates the OPUC and WUTC will take such actions by September 30, 2023.
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 anticipatedintended to takeprovide a long-term outlook of the supply-side and demand-side resource requirements for reliable and low cost natural gas service while also meeting NW Natural's environmental compliance requirements. The IRP examines and analyzes uncertainties in the planning process, including potential changes in governmental and regulatory policies. The CPP in Oregon, as well as the CCA that was passed in Washington, are examples of new policies that result in compliance requirements that need to be included in the planning process.
PIPELINE SECURITY.In May and July 2021, the Department of Homeland Security’s (DHS) Transportation Security Administration (TSA) released two security directives applicable to certain owners and operators of natural gas pipeline facilities (including local distribution companies). The first directive require owners and operators to implement cybersecurity incident reporting to the DHS, designate a cybersecurity coordinator, and perform a gap assessment of current entity cybersecurity practices against certain voluntary TSA security guidelines and report relevant results and proposed mitigation to applicable DHS agencies. The second directive requires entities to implement a significant number of specified cyber security controls and processes. The TSA recently released a third directive renewing the second directive as well as clarifying Operational Technology (OT) scope and providing a risk- and outcome-based framework. The third directive is effective until July 2023. NW Natural is currently evaluating and implementing the security directives and related deliverables. NW Natural frequently updates the TSA on its progress on achieving the security directives.
NW Natural filed requests with the OPUC and WUTC to defer the costs associated with complying with the TSA's security directives. As of December 31, 2022, NW Natural has invested $33.0 million in information and operational technology and has
deferred to a regulatory asset $6.3 million of related costs. A majority of the capital investment was included in rate base starting November 1, 2022 in Oregon.
NW Natural continues to evaluate the potential effect of these directives on our operations and facilities, as well as the potential total cost of implementation, and will continue to monitor for any clarifications or amendments to these directives. We may seek to request recovery from customers of any additional costs incurred to the extent that incremental expenses and capital expenditures are incurred in the future.
ERP UPGRADE 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 will recover 100% of costs incurred up to 10 monthsthe $8.55 million estimate of Oregon-allocated costs provided in the docket. Approval of the Washington deferral was resolved as part of the most recent general rate case. NW Natural placed its new ERP system into service in September 2022. As of December 31, 2022, NW Natural deferred to a regulatory asset $9.4 million of expenses incurred to date. On November 1, 2022, NW Natural began recovering all expenses deferred and accruing interest over a 10-year period.
FACT-FINDING DOCKET. NW Natural was engaged in an OPUC Fact-Finding (“Fact-Finding Docket”), opened in response to the executive order issued by the Governor of Oregon, 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 indicated that the ultimate goal of the Fact-Finding Docket is to inform future policy decisions and other key analyses. OPUC Staff’s final report was issued on January 31, 2023. The report has a number of recommendations concerning the further investigation of regulatory tools, including: 1) expanded energy efficiency programs, 2) additional analysis in future Integrated Resource Plans of decarbonization measures and trends, and 3) additional rate protections for customers. The OPUC has since closed the Fact-Finding Docket without taking any action on Staff’s final report.
WATER UTILITIES. NWN Water currently serves an estimated 155,000 people through approximately 62,500 connections across five states. NWN Water, through one or more of its subsidiaries, acquired an increased ownership stake in Avion Water Company in Oregon to 40.3%, and acquired the assets of five regulated businesses during 2022, after receiving approval from the respective public utility commissions.
For our regulated water utilities, we have been executing general rate cases.
•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.
•In February 2022, the OPUC adopted a comprehensive stipulation in Sunriver Water's rate case with new rates effective May 2022.
•In June 2022, Avion Water Company filed a general rate case with the OPUC and the OPUC allowed rates to go into effect January 1, 2023.
•In July 2022, Gem State Water Company filed a general rate case with the IPUC and a decision is expected in the first half of 2023.
Environmental Regulation and Legislation Matters
There is a growing international and domestic focus on climate change and the contribution of GHG emissions, most notably methane and carbon dioxide, to climate change. In response, there are increasing efforts at the international, federal, state, and local level to regulate GHG emissions. Legislation or other forms of regulation could take a variety of forms including, but not limited to, GHG emissions limits, reporting requirements, carbon taxes, requirements to purchase carbon credits, building codes, increased efficiency standards, additional charges to fund energy efficiency activities or other regulatory actions, incentives or mandates to conserve energy, or use renewable energy sources, tax advantages and other subsidies to support alternative energy sources, a reduction in rate recovery for construction costs related to the installation of new customer services or other new infrastructure investments, mandates for the use of specific fuels or technologies, bans on specific fuels or technologies, or promotion of research into new technologies to reduce the cost and increase the scalability of alternative energy sources. These efforts could include legislation, legislative proposals, or new regulations at the federal, state, and local level, as well as private party litigation related to GHG emissions. We recognize certain of our businesses, including our natural gas business, are likely to be affected by current or future regulation seeking to limit GHG emissions.
International
In early 2021, the U.S. rejoined the Paris Agreement on Climate, which establishes non-binding targets to reduce GHG emissions from both developed and developing nations. Under the Paris Agreement, signatory countries are expected to submit their nationally determined contributions to curb GHG emissions and meet the agreed temperature objectives every five years. On April 22, 2021, the United States federal administration announced the U.S. nationally determined contribution to achieve a fifty to fifty-two percent reduction from 2005 levels in economy-wide net GHG emissions by 2030.
Federal
President Biden’s administration has issued executive orders directing agencies to conduct a general review of regulations and executive actions related to the environment and reestablished a framework for considering the social cost of carbon as part of
certain agency cost-benefit analyses for new regulations. President Biden’s administration continues to consider a wide range of additional policies, executive orders, rules, legislation, and other initiatives to address climate change.
The Inflation Reduction Act of 2022 (IRA) was signed into law in August 2022 and includes several climate and energy provisions. We expect that over a ten year period, the IRA will provide approximately $415 billion of funding through grants, tax credits, and investments to support various initiatives including manufacturing, renewable energy production and consumption, transportation electrification and climate-smart agriculture. The IRA includes tax credits for RNG, hydrogen and carbon capture projects, among other investments. The IRA also includes funding for the EPA to improve GHG reporting and enforcement, as well as a methane fee applicable to activities associated with gas production and processing facilities, transmission pipelines and certain storage facilities, creates a new corporate alternative minimum tax of 15 percent that applies to corporations with average annual financial statement income in excess of one billion dollars, and creates a new 1 percent excise tax on the net stock repurchases by public companies. We are assessing effects of the IRA that are relevant to our businesses, and will continue to do so as it is implemented. The U.S. Congress may also pass federal climate change legislation in the future. We cannot predict when or if Congress will pass such legislation and in what form.
In addition, the EPA regulates GHG emissions pursuant to the Clean Air Act. For example, the EPA requires the annual reporting of greenhouse gas emissions from certain industries, specified emission sources, and facilities. Under this reporting rule, local natural gas distribution companies like NW Natural are required to report system throughput to the EPA on an annual basis. The EPA also has required additional GHG reporting regulations to which NW Natural is subject, requiring the annual reporting of fugitive emissions from operations. Other federal regulatory agencies, including the U.S. Department of Energy and Federal Energy Regulatory Commission, are beginning to address greenhouse gas emissions that may include changes in their regulatory oversight approach, policies and rules.
Other federal agencies have taken or are expected to take effectactions related to climate change. For example, in March 2022, the Securities and Exchange Commission (SEC) proposed new rules relating to the disclosure of a range of climate-related matters, PHMSA is expected to prepare regulations and other actions to limit methane emissions, the Commodities Futures Trading Commission (CFTC) has indicated it intends to take actions related to oversight of climate-related financial risks as pertinent to the derivatives and underlying commodities markets. Similarly, other federal agencies and regulations, including but not limited to the Consumer Products Safety Commission, the U.S. Department of Treasury, Federal Acquisitions Regulations, and others have indicated impending regulatory actions related to climate change. To the extent these agencies adopt final rules as proposed or in modified form, we or our customers could incur increased costs. These could include internal costs as well as external costs such as the cost of independent experts to provide attestation reports on our GHG emissions data and increased audit costs.
Washington State
In 2022, Washington comprised approximately 12% of NW Natural’s revenues, as well as 1% and 18% of new meters from commercial and residential customers, respectively. Effective February 1, 2021, building codes in Washington state require new residential homes to achieve higher levels of energy efficiency based on specified carbon emissions assumptions, which calculate electric appliances to have lower on-site GHG emissions than comparable gas appliances. This increases the cost of new home construction incorporating natural gas depending on a number of factors including home size, equipment configurations, and building envelope measures. Additionally, the Washington State Building Code Council (SBCC) voted in April 2022 to include updates in the state commercial building energy code that are expected to restrict or eliminate the use of gas space and water heating in new commercial construction. In early November, the SBCC voted to include updates to the state residential building energy code that are expected to restrict the use of gas space and water heating in residential construction, with certain exceptions including for natural gas-fired heat pumps and hybrid fuel systems. The SBBC commercial and residential rules are expected to become effective July 1, 2020.2023. 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 expect the building code changes to be subject to legal challenge.
Washington has also enacted the Climate Commitment Act (CCA), which establishes a comprehensive program that includes an overall limit for GHG emissions from major sources in the state that declines yearly beginning January 1, 2023, resulting in an overall reduction of GHG emissions to 95% below 1990 levels by 2050. The Washington Department of Ecology has adopted rules to create a cap-and-invest program, under which entities, including natural gas and electric utilities, large manufacturing facilities, and transportation and other fuel providers, which are subject to the CCA must either reduce their emissions, purchase qualifying offsets (including RNG) or obtain allowances to cover any remaining emissions. NW Natural is subject to the CCA 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.
Local Jurisdictions and Other Advocacy
In addition to legislative activities at the state level, advocacy groups have indicated a willingness to pursue ballot measures. Some local and county governments in the United States also have been proposing or passing renewable energy resolutions, restrictions, taxes, or fees seeking to accelerate climate action goals. A number of cities across the country, and several in our service territory are taking action or currently considering actions such as limitations or bans on the use of natural gas in new construction or otherwise. For example, in February 2023, the Eugene City Council passed an ordinance that prohibits the use of natural gas in low rise residential buildings beginning with permits submitted after June of 2023. Similarly, some jurisdictions and advocates are seeking to ban the use of natural gas and certain natural gas appliances inside homes and contend that there are detrimental indoor public health effects associated with the use of natural gas.
NW Natural is actively engaged with federal, state and local policymakers, consumers, customers, small businesses and other business coalitions, economic development practitioners, and other advocates in our service territory and is working with these communities to communicate the role that direct use natural gas, and in the coming years, RNG and hydrogen, can play in pursuing more effective policies to reduce GHGs while supporting reliability, resiliency, energy choice, equity, and energy affordability.
NW Natural Decarbonization Initiatives & Compliance Actions
Our customers are currently paying less for their natural gas today than they did 15 years ago. We expect that compliance with any form of regulation of GHG emissions, including the CPP in Oregon and CCA in Washington as well as voluntary actions under SB 98 or otherwise, will require additional resources and compliance tools, and will increase costs. The developing and changing implementation guidance for the CCA and CPP, evolving carbon credit markets and other compliance tool options, decades-long timeframes for compliance, likely changing and evolving laws and energy policy, and evolving technological advancements, all make it difficult to accurately predict long-term tools for and costs of compliance. In September 2022, NW Natural filed its integrated resource plans (IRPs) with the OPUC and WUTC. Those IRPs comprehensively evaluate resource options available to serve NW Natural's customers' energy, capacity and environmental compliance needs. The resources selected for compliance with the CPP and CCA, and therefore the costs associated with those resources are, in part, dependent upon the resolution of our IRP dockets and the resources selected. While we have modeled compliance with the CCA and CPP in our IRPs, given the recency of the adoption of the final CPP and CCA rules and changing guidance with respect to those rules, the nature of our compliance obligations, the manner in which we intend to comply, and the expected costs of compliance are uncertain and subject to significant change, particularly after the first compliance period, and especially with respect to the CPP, under which programs are still being developed. For the first compliance period under the CCA, we currently anticipate that we will comply by purchasing RNG or attributes to reduce emissions, making full use of offsets available under the CCA, meeting remaining compliance requirements by purchasing allowances through the processes outlined under the CCA, and returning all money received from the sale of free carbon allowances to customers. We intend to pursue costs of compliance with the CCA in rates, and currently believe that the costs to comply could increase non-low income residential bills by an estimated 1.5% to 6% in the first year of compliance.
The CPP in Oregon is largely tied to the volume of natural gas consumed and as such, we currently expect that CPP cost impacts will be the lowest among residential customers because they generally consume less, and highest among industrial customers that use significantly higher volumes of natural gas, with cost increases for commercial customers falling between residential and industrial customers. We currently expect that the majority of our needed emissions reduction in Oregon for the first CPP compliance period of 2022-2025 can be met with purchases of RNG or its attributes, with modest supplemental purchases of Community Climate Investments (CCIs) when that program becomes available. We intend to pursue costs of compliance costs with the CPP in rates and currently believe those costs could increase non-low income residential bills by an estimated 1% to 9% in the first compliance period.
These projected customer bill impacts of the CCA and CPP are estimates, are likely to increase beyond the first compliance period, and are subject to change as these laws are implemented and compliance begins. The costs are also likely to vary significantly based on forecasting assumptions related to permitted levels of rate recovery, available technologies and equipment, weather patterns and gas usage, customer growth or attrition, allocation of fixed costs among classes of customers, energy efficiency levels, availability, use and cost of renewables, feasibility of broad-scale hydrogen in the natural gas system, and a number of other assumptions used in the complex analysis of integrated resource planning.
We are not currently able to quantify the extent to which current and prospective building code changes, other limitations on natural gas use, or declining line extension allowances provided in rates to cover construction costs for new services, will affect new meter additions, or to what extent carbon compliance costs included in rates will affect the competitiveness of our business and the demand for natural gas service. All of these developments could negatively affect our gas utility customer growth. However, at the same time natural gas utilities will be subject to GHG emissions regulation, we expect that other energy source providers will be subject to similar, or in some cases stricter or more rapid, compliance requirements that are likely to affect their cost and competitiveness relative to natural gas as well. For example, President Biden has announced his intention to have a carbon-free electricity sector by 2035, 15 years before the target date of the CCA or CCP. In June 2021, the State of Oregon enacted HB 2021, a clean electricity bill that requires the state’s two largest investor-owned electric utilities and retail electricity service suppliers to reduce GHG emissions associated with electricity sold to Oregon customers to 100 percent below baseline levels by 2040 with interim steps, including an 80 percent reduction by 2030 and 90 percent reduction by 2035. This bill does not replace the separate renewable portfolio standards previously established in Oregon, which sets requirements for how much of the electricity used in Oregon must come from renewable resources. In Washington, SB 5116, the Clean Energy Transformation Act, requires all electric utilities in Washington to transition to carbon-neutral electricity by 2030 and to 100 percent carbon-free electricity by 2045. We expect compliance with these and other laws will increase the cost of energy for electric customers in our service territory. We are not able to determine at this time whether increased electricity costs will make natural gas use more or less competitive on a relative basis.
We expect these and other trends to drive innovation of, and demand for, technological developments and innovative new products that reduce GHG emissions. Research and development are occurring across the energy sector, including in the gas sector with work being conducted on gas-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 revenue 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. Natural gas sales to our residential and commercial customers account for approximately 6% of Oregon’s GHG emissions according to the 2019 data from the State of Oregon Department of Environmental Quality In-Boundary GHG Inventory. We intend to continue to provide this necessary energy to our communities with the goal of using our modern pipeline system to help the Pacific Northwest transition to a 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 the potential to significantly reduce net GHG emissions because methane that would otherwise be released to the atmosphere can be captured from these organic materials as they decompose and then conditioned to pipeline quality and distributed into our existing system. In 2019, Oregon Senate Bill 98 (SB 98) was signed into law enabling NW Natural to procure RNG on behalf of customers and provided voluntary targets that would allow us to make qualified investments and purchase RNG from third parties.
Under SB 98, NW Natural is actively working to procure RNG supply for customers and increase the amount of RNG on our system and is also exploring the development of renewable hydrogen through power to gas. To that end, in 2020 and 2021, NW Natural announced several agreements and investments to procure RNG for its customers. For example, NW Natural began a partnership with BioCarbN to invest up to an estimated $38 million in four separate RNG development projects that will access biogas derived from water treatment at Tyson Foods’ processing plants, subject to approval by all parties. The first project was commissioned in early 2022 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.
Business Segment - Natural Gas Distribution (NGD)
NGD margin results are primarily affected by customer growth, revenues from rate-base additions, and, to a certain extent, by changes in delivered volumes due to weather and customers’ gas usage patterns. In Oregon, NW Natural has a conservation tariff (also called the decoupling mechanism), which adjusts margin up or down each month through a deferred regulatory accounting adjustment designed to offset changes resulting from increases or decreases in average use by residential and commercial customers. NW Natural also has a weather normalization tariff in Oregon, WARM, which adjusts customer bills up or down to offset changes in margin resulting from above- or below-average temperatures during the winter heating season. Residential and commercial customers in Oregon are allowed to opt out of the weather normalization mechanism, and as of December 31, 2019, 8%2022, approximately 7% of total eligible customers had opted out. NW Natural does not have a weather normalization mechanism approved for residential and commercial Washington customers, which account for about 11%12% of total customers. The decoupling
and WARM mechanisms are designed to reduce, but not eliminate, the volatility of customer bills and natural gas distribution earnings.revenue. See "Regulatory Matters—Rate Mechanisms" above. In addition to NW Natural's local gas distribution business, the NGD segment also includes the portion of the Mist underground storage facility used to serve NGD customers, the North Mist gas storage expansion, NWN Gas Reserves, which is a wholly owned subsidiary of Energy Corp., and NW Natural RNG Holding Company, LLC.
The NGD business is primarily seasonal in nature due to higher gas usage by residential and commercial customers during the cold winter heating months. Other categories of customers experience seasonality in their usage but to a lesser extent. Seasonality affects the comparability of the results of operations of the NGD business across quarters but not across years.
NGD segment highlights include:
|
| | | | | | | | | | | | |
Dollars and therms in millions, except EPS data | | 2019 | | 2018 | | 2017 |
NGD net income | | $ | 60.8 |
| | $ | 57.5 |
| | $ | 60.5 |
|
Adjusted NGD net income(1) | | 60.8 |
| | 57.5 |
| | 61.5 |
|
EPS - NGD segment | | 2.04 |
| | 1.99 |
| | 2.10 |
|
Adjusted EPS - NGD segment(1) | | 2.04 |
| | 1.99 |
| | 2.13 |
|
Gas sold and delivered (in therms) | | 1,215 |
| | 1,128 |
| | 1,240 |
|
NGD margin(2) | | $ | 422.7 |
|
| $ | 383.7 |
| | $ | 392.6 |
|
| | | | | | | | | | | | | | | | | | | | |
Dollars and therms in millions, except EPS data | | 2022 | | 2021 | | 2020 |
NGD net income | | $ | 79.7 | | | $ | 69.0 | | | $ | 63.6 | |
Diluted EPS - NGD segment | | $ | 2.34 | | | $ | 2.24 | | | $ | 2.08 | |
Gas sold and delivered (in therms) | | 1,252 | | | 1,185 | | | 1,143 | |
NGD margin(1) | | $ | 505.9 | | | $ | 479.8 | | | $ | 438.1 | |
(1) See the Non-GAAP Reconciliations table at the beginning of Item 7 for a reconciliation of this non-GAAP financial measure to its closest U.S. GAAP financial measure.
(2) See Natural Gas Distribution Margin Table below for additional detail.
2019
2022 COMPARED TO 20182021. NGD net income was $60.8$79.7 million in 20192022 compared to $57.5$69.0 million in 2018.2021. The primary factors contributing to the increase in NGD net income were as follows:
a $39.0•$26.1 million increase in NGD margin primarily due to:
| |
▪ | a $16.2 million increase due to new customer rates from the 2018 Oregon rate case and 2019 Washington rate case; |
| |
▪ | a $6.1 million increase from customer growth; |
| |
▪ | an $11.8 million increase from revenue generated from NW Natural's North Mist storage contract which commenced service in May 2019 and is included within other regulated services within NGD margin; |
| |
▪ | a $7.1 million increase due to revenues recognized in association with recoveries of NW Natural's pension balancing account, which are entirely offset by pension expenses within operations and maintenance and other income (expense), net; and |
| |
▪ | a $3.7 million increase driven by colder than average weather in the first quarter of 2019 coupled with higher fee revenues from interruptible customers as a result of system restrictions; partially offset by |
| |
▪ | a $3.2 million decrease due to an adjustment to the tax reform deferral estimate in 2018; and |
| |
▪ | a $1.5 million decrease due to a regulatory disallowance of deferred environmental expenditures as a result of the 2019 Washington rate case. |
| |
• | a $9.4 million decrease in income tax expense primarily due to the income tax implications of the March 2019 OPUC order, of which $5.4 million was offset by pension expenses as discussed above, with the remainder driven by the return of deferred TCJA benefit credits to customers and lower pretax income in the current period compared to the prior period; and
|
| |
• | a $5.8 million increase in deferred regulatory interest income in other income (expense), net, of which $5.1 million relates to interest recognized in association with the OPUC order discussed above.
|
The increases were partially offset by:▪$14.9 million increase due to new customer rates from the 2022 Oregon and 2021 Washington rate cases that went into effect November 1, 2022;
a $34.4▪$6.1 million increase driven by customer growth;
▪$3.0 million increase due to higher usage from colder comparative weather from customers that are not decoupled, net of the loss from the Oregon gas cost incentive sharing mechanism;
▪$2.9 million increase due to the amortization of deferred balances primarily related to COVID-19, cybersecurity, and ERP upgrades; and
•$12.1 million increase in other income, net primarily due to lower pension non-service costs withinand interest income from the equity portion of AFUDC; partially offset by
•$16.7 million increase in NGD operations and maintenance expenses due to higher contract labor, amortization expense related to cloud computing arrangements, professional service fees, and other income (expense), net, of which $12.5 million relates to costs which were entirely offset by revenues and income tax benefits in the March 2019 OPUC order, and $10.5 million relates to the regulatory pension disallowance included in the March 2019 OPUC order. In addition, there was a $11.4information technology costs;
•$3.4 million increase in pension expensesinterest expense primarily due to higher long-term debt balances and higher interest rates, partially offset by higher AFUDC debt interest income;
•$2.9 million higher income tax expense reflecting higher pretax income; and
•$2.4 million increase in depreciation expense as NW Natural began collecting ongoing pension costs throughwe continue to invest in our natural gas utility system and facilities.
Total natural gas sold and delivered in 2022 increased 6% over 2021 primarily due to 1% colder than average weather in 2022 compared to 12% warmer than average weather in 2021.
44
2021 COMPARED TO 2020. NGD net income was $69.0 million in 2021 compared to $63.6 million in 2020. The primary factors contributing to the increase in NGD net income were as follows:
•$41.7 million increase in NGD margin primarily due to:
$36.4 million increase due to new customer rates onprimarily from the 2020 Oregon rate case that went into effect November 1, 20182020;
▪$5.7 million increase from residential customer growth and began collecting deferred pension costs throughan increase in industrial customer rates on April 1, 2019 rather than deferringvolumes; partially offset by
▪$3.6 million decrease primarily driven by a portionloss from the gas cost incentive sharing mechanism in Oregon.
In addition to the balancing account;increase in margin, NGD net income for 2021 reflects:
a $5.7•$19.3 million increase in other NGD operating and maintenance expenses primarily due to higher information technology expenses, compensation and benefits costs, and lease expense;
•$8.9 million increase in depreciation expense due to NGD plant additions;additions as we continued to invest in our gas utility system;
a $4.6•$5.3 million higher income tax expense reflecting higher pretax income and Oregon CAT; and
•$3.3 million increase in interest expense drivengeneral taxes due primarily to higher assessed property values; partially offset by $2.3 million higher interest on long term debt, $1.2 million lower AFUDC debt interest income, and $0.9 million higher commercial paper and line of credit interest;
a $3.3 million decrease in AFUDC equity interest; and
a $2.9•$2.7 million increase in NGD segment operations and maintenance expenses primarily attributable to annual employee cost increases.
Total natural gas sold and delivered in 2019 increased 8% over 2018 primarily due to the impact of weather that was average in the current period compared to weather that was 15% warmer than average in the prior period.
2018 COMPARED TO 2017. NGD net income was $57.5 million in 2018 compared to $60.5 million in 2017. NGD net income in 2017 includes a $1.0 million loss from the remeasurement of deferred income tax balances due to the enactment of the TCJA. Excluding this item, adjusted NGD net income decreased $4.0 million, or $0.14 per share. See the NW Holdings Non-GAAP Reconciliations at the beginning of Item 7 for additional information.
The primary factors contributing to the decrease in adjusted NGD net income were as follows:
a $8.9 million decrease in NGD margin primarily due to:
| |
▪ | a $7.9 million decrease due to revenues collected and deferred in association with the TCJA; partially offset by |
| |
▪ | a $4.8 million increase from customer growth; and |
| |
▪ | the majority of the remaining decrease was due to the effects of warmer than average weather in 2018 compared to colder than average weather in 2017, partially offset by higher rates from the 2018 Oregon general rate case effective November 1, 2018. |
a $6.0 million increase in operations and maintenance expense driven largely from payroll and benefits due to increased headcount, general salary increases, and increased professional services and contract labor expense;
a $4.2 million decrease in other income (expense), net primarily due to increases in pension non-service component costs, partially offset by increases in the equity portion of AFUDC in 2018; and
| |
• | a $4.0 millionincrease in depreciation expense primarily due to additional capital expenditures; partially offset by
|
a $20.0 million decrease inhigher interest income tax expense primarily due to the reduction in the federal statutory tax rate from the TCJA and lower pretax income.on regulatory assets.
Total natural gas sold and delivered in 2018 decreased 9%2021 increased 4% over 20172020 primarily due to the impactrecovery of weather that was 26% warmer thancommercial customer activity as pandemic restrictions lifted compared to the prior period and 15% warmer than average.NGD meter growth.
NATURAL GAS DISTRIBUTION MARGIN TABLE. The following table summarizes the composition of NGD gas volumes, revenues, and cost of sales:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Favorable (Unfavorable) |
In thousands, except degree day and customer data | | 2022 | | 2021 | | 2020 | | 2022 vs. 2021 | | 2021 vs. 2020 |
NGD volumes (therms): | | | | | | | | | | |
Residential and commercial sales | | 766,592 | | | 703,054 | | | 677,271 | | | 63,538 | | | 25,783 | |
Industrial sales and transportation | | 485,745 | | | 481,721 | | | 465,626 | | | 4,024 | | | 16,095 | |
Total NGD volumes sold and delivered | | 1,252,337 | | | 1,184,775 | | | 1,142,897 | | | 67,562 | | | 41,878 | |
Operating revenues: | | | | | | | | | | |
Residential and commercial sales | | $ | 881,370 | | | $ | 730,794 | | | $ | 661,346 | | | $ | 150,576 | | | $ | 69,448 | |
Industrial sales and transportation | | 86,810 | | | 65,299 | | | 58,678 | | | 21,511 | | | 6,621 | |
Other distribution revenues | | 1,944 | | | 1,707 | | | 1,926 | | | 237 | | | (219) | |
Other regulated services | | 19,628 | | | 19,087 | | | 19,122 | | | 541 | | | (35) | |
| | | | | | | | | | |
Total operating revenues | | 989,752 | | | 816,887 | | | 741,072 | | | 172,865 | | | 75,815 | |
Less: Cost of gas | | 429,861 | | | 292,538 | | | 262,980 | | | (137,323) | | | (29,558) | |
Less: Environmental remediation expense | | 12,389 | | | 9,938 | | | 9,691 | | | (2,451) | | | (247) | |
Less: Revenue taxes | | 41,627 | | | 34,600 | | | 30,291 | | | (7,027) | | | (4,309) | |
NGD margin | | $ | 505,875 | | | $ | 479,811 | | | $ | 438,110 | | | $ | 26,064 | | | $ | 41,701 | |
NGD margin(1) | | | | | | | | | | |
Residential and commercial sales | | $ | 455,686 | | | $ | 430,295 | | | $ | 385,989 | | | $ | 25,391 | | | $ | 44,306 | |
Industrial sales and transportation | | 33,543 | | | 32,182 | | | 30,800 | | | 1,361 | | | 1,382 | |
Gain (loss) from gas cost incentive sharing | | (4,917) | | | (3,381) | | | 267 | | | (1,536) | | | (3,648) | |
Other margin | | 1,943 | | | 1,633 | | | 1,938 | | | 310 | | | (305) | |
Other regulated services | | 19,620 | | | 19,082 | | | 19,116 | | | 538 | | | (34) | |
NGD margin | | $ | 505,875 | | | $ | 479,811 | | | $ | 438,110 | | | $ | 26,064 | | | $ | 41,701 | |
Degree days(2) | | | | | | | | | | |
Average(3) | | 2,686 | | | 2,692 | | | 2,706 | | | (6) | | | (14) | |
Actual | | 2,712 | | | 2,378 | | | 2,384 | | | 14 | % | | — | % |
Percent colder (warmer) than average weather | | 1 | % | | (12) | % | | (12) | % | | | | |
NGD meters - end of period: | | | | | | | | | | |
Residential meters | | 724,287 | | | 715,958 | | | 704,675 | | | 8,329 | | | 11,283 | |
Commercial meters | | 69,139 | | | 68,961 | | | 68,812 | | | 178 | | | 149 | |
Industrial meters | | 1,071 | | | 978 | | | 989 | | | 93 | | | (11) | |
Total number of meters | | 794,497 | | | 785,897 | | | 774,476 | | | 8,600 | | | 11,421 | |
NGD meter growth: | | | | | | | | | | |
Residential meters | | 1.2 | % | | 1.6 | % | | | | | | |
Commercial meters | | 0.3 | % | | 0.2 | % | | | | | | |
Industrial meters | | 9.5 | % | | (1.1) | % | | | | | | |
Total meter growth | | 1.1 | % | | 1.5 | % | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Favorable (Unfavorable) |
In thousands, except degree day and customer data | | 2019 | | 2018 | | 2017 | | 2019 vs. 2018 | | 2018 vs. 2017 |
NGD volumes (therms): | | | | | | | | | | |
Residential and commercial sales | | 734,347 |
| | 661,163 |
| | 740,369 |
| | 73,184 |
| | (79,206 | ) |
Industrial sales and transportation | | 480,807 |
| | 467,040 |
| | 499,924 |
| | 13,767 |
| | (32,884 | ) |
Total NGD volumes sold and delivered | | 1,215,154 |
| | 1,128,203 |
| | 1,240,293 |
| | 86,951 |
| | (112,090 | ) |
Operating revenues: | | | | | | | | | | |
Residential and commercial sales | | $ | 638,884 |
| | $ | 621,782 |
| | $ | 684,214 |
| | $ | 17,102 |
| | $ | (62,432 | ) |
Industrial sales and transportation | | 56,553 |
| | 58,713 |
| | 63,925 |
| | (2,160 | ) | | (5,212 | ) |
Other distribution revenues | | 13,035 |
| | (109 | ) | | 3,872 |
| | 13,144 |
| | (3,981 | ) |
Other regulated services | | 12,056 |
| | 262 |
| | — |
| | 11,794 |
| | 262 |
|
Less: Revenue taxes(1) | | — |
| | — |
| | 19,069 |
| | — |
| | (19,069 | ) |
Total operating revenues | | 720,528 |
| | 680,648 |
| | 732,942 |
| | 39,880 |
| | (52,294 | ) |
Less: Cost of gas | | 255,135 |
| | 255,743 |
| | 325,019 |
| | 608 |
| | 69,276 |
|
Less: Environmental remediation expense | | 12,337 |
| | 11,127 |
| | 15,291 |
| | (1,210 | ) | | 4,164 |
|
Less: Revenue taxes(1) | | 30,325 |
| | 30,082 |
| | — |
| | (243 | ) | | (30,082 | ) |
NGD margin | | 422,731 |
| | 383,696 |
| | 392,632 |
| | 39,035 |
| | (8,936 | ) |
Margin(2) | | | | | | | | | | |
Residential and commercial sales | | $ | 366,974 |
| | $ | 352,710 |
| | $ | 355,736 |
| | $ | 14,264 |
| | $ | (3,026 | ) |
Industrial sales and transportation | | 31,985 |
| | 30,817 |
| | 31,847 |
| | 1,168 |
| | (1,030 | ) |
Miscellaneous revenues | | 4,671 |
| | 5,542 |
| | 3,865 |
| | (871 | ) | | 1,677 |
|
Gain (loss) from gas cost incentive sharing | | (1,299 | ) | | (27 | ) | | 1,237 |
| | (1,272 | ) | | (1,264 | ) |
Other margin adjustments(3) | | 8,350 |
| | (5,608 | ) | | (53 | ) | | 13,958 |
| | (5,555 | ) |
Distribution margin | | $ | 410,681 |
| | $ | 383,434 |
| | $ | 392,632 |
| | $ | 27,247 |
| | $ | (9,198 | ) |
Other regulated services | | $ | 12,050 |
| | $ | 262 |
| | $ | — |
| | $ | 11,788 |
| | $ | 262 |
|
NGD margin | | $ | 422,731 |
| | $ | 383,696 |
| | $ | 392,632 |
| | $ | 39,035 |
| | $ | (8,936 | ) |
Degree days(4) | | | | | | | | | | |
Average(5) | | 2,710 |
| | 2,714 |
| | 2,705 |
| | (4 | ) | | 9 |
|
Actual | | 2,709 |
| | 2,313 |
| | 3,114 |
| | 17 | % |
| (26 | )% |
Percent colder (warmer) than average weather | | — | % | | (15 | )% | | 15 | % | | | | |
NGD Meters - end of period: | | | | | | | | | | |
Residential meters | | 692,012 |
| | 680,134 |
| | 668,803 |
| | 11,878 |
| | 11,331 |
|
Commercial meters | | 69,858 |
| | 69,259 |
| | 68,050 |
| | 599 |
| | 1,209 |
|
Industrial meters | | 1,007 |
| | 1,028 |
| | 1,021 |
| | (21 | ) | | 7 |
|
Total number of meters | | 762,877 |
| | 750,421 |
| | 737,874 |
| | 12,456 |
| | 12,547 |
|
NGD Meter growth: | |
|
| |
|
| | | | | | |
Residential meters | | 1.7 | % | | 1.7 | % | | | | | | |
Commercial meters | | 0.9 | % | | 1.8 | % | | | | | | |
Industrial meters | | (2.0 | )% | | 0.7 | % | | | | | | |
Total meter growth | | 1.7 | % | | 1.7 | % | | | | | | |
(1) Amounts reported as NGD margin for each category of meters are operating revenues less cost of gas, environmental remediation expense and revenue taxes. | |
(1)(2) Heating degree days are units of measure reflecting temperature-sensitive consumption of natural gas, calculated by subtracting the average of a day's high and low temperatures from 59 degrees Fahrenheit. (3) Average weather represents the 25-year average of heating degree days. Beginning November 1, 2022, average weather is calculated over the period June 1, 1996 through May 31, 2021, as determined in NW Natural's 2022 Oregon general rate case. From November 1, 2020 through October 31, 2022, average weather was calculated over the period June 1, 1994 through May 31, 2019, as determined in NW Natural’s 2020 Oregon general rate case.
| The change in presentation of revenue taxes was a result of the adoption of ASU 2014-09 "Revenue From Contracts with Customers" and all related amendments on January 1, 2018. This change had no impact on NGD margin results. For additional information, see Note 2. |
| |
(2)
| 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. |
| |
(3)
| Other margin adjustments include net revenue recoveries of $6.2 million and revenue deferrals of $7.9 million for the years ended December 31, 2019 and 2018, respectively, associated with the decline of the U.S. federal corporate income tax rate. |
| |
(4)
| 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. |
| |
(5)
| Average weather represents the 25-year average of heating degree days. Through October 31, 2018, average weather is calculated over the period 1986 - 2010, as determined in NW Natural's 2012 Oregon general rate case, and beginning November 1, 2018, average weather is calculated over the period May 31, 1992 through May 30, 2017, as determined in NW Natural's 2018 Oregon general rate case. |
Residential and Commercial Sales
The primary factors that impact results of operations in the residential and commercial markets are customer growth, seasonal weather patterns, energy prices, competition from other energy sources, and economic conditions in our service areas. The impact of weather on margin is significantly reduced through NW Natural's weather normalization mechanism in Oregon; approximately 82%81% of NW Natural's total customers are covered under this mechanism. The remaining customers either opt out of the mechanism or are located in Washington, which does not have a similar mechanism in place. For more information on the weather mechanism, see "Regulatory Matters—Rate Mechanisms—Weather Normalization MechanismWARM" above.
NGD residential and commercial sales highlights include:
|
| | | | | | | | | | | | |
In millions | | 2019 | | 2018 | | 2017 |
Volumes (therms): | | | | | | |
Residential sales | | 457.2 |
| | 411.7 |
| | 465.2 |
|
Commercial sales | | 277.1 |
| | 249.5 |
| | 275.2 |
|
Total volumes | | 734.3 |
| | 661.2 |
| | 740.4 |
|
Operating revenues: | | | | | | |
Residential sales | | $ | 437.7 |
| | $ | 418.4 |
| | $ | 455.9 |
|
Commercial sales | | 201.2 |
| | 203.3 |
| | 228.3 |
|
Total operating revenues | | $ | 638.9 |
| | $ | 621.7 |
| | $ | 684.2 |
|
Margin: | | | | | | |
Residential: | | | | | | |
Sales | | $ | 272.3 |
| | $ | 240.0 |
| | $ | 262.1 |
|
Alternative revenues: | | | | | | |
Weather normalization | | (1.8 | ) | | 7.6 |
| | (11.9 | ) |
Decoupling | | (6.6 | ) | | (0.6 | ) | | (2.4 | ) |
Amortization of alternative revenue | | 2.0 |
| | 1.9 |
| | — |
|
Total residential NGD margin | | 265.9 |
| | 248.9 |
| | 247.8 |
|
Commercial: | | | | | | |
Sales | | 115.8 |
| | 103.7 |
| | 101.5 |
|
Alternative revenues: | | | | | | |
Weather normalization | | (0.7 | ) | | 2.4 |
| | (4.6 | ) |
Decoupling | | (5.2 | ) | | 7.3 |
| | 11.1 |
|
Amortization of alternative revenue | | (8.8 | ) | | (9.6 | ) | | — |
|
Total commercial NGD margin | | 101.1 |
| | 103.8 |
| | 108.0 |
|
Total residential and commercial NGD margin | | $ | 367.0 |
| | $ | 352.7 |
| | $ | 355.8 |
|
| | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
Volumes (therms): | | | | | | |
Residential sales | | 478.1 | | | 445.6 | | | 435.2 | |
Commercial sales | | 288.5 | | | 257.5 | | | 242.1 | |
Total volumes | | 766.6 | | | 703.1 | | | 677.3 | |
Operating revenues: | | | | | | |
Residential sales | | $ | 595.0 | | | $ | 506.2 | | | $ | 460.3 | |
Commercial sales | | 286.4 | | | 224.6 | | | 201.0 | |
Total operating revenues | | $ | 881.4 | | | $ | 730.8 | | | $ | 661.3 | |
NGD Margin: | | | | | | |
Residential margin | | $ | 328.2 | | | $ | 312.5 | | | $ | 281.1 | |
Commercial margin | | 127.5 | | | 117.8 | | | 104.9 | |
Total NGD margin | | $ | 455.7 | | | $ | 430.3 | | | $ | 386.0 | |
2019
2022 COMPARED TO 20182021. The increasesincrease of $17.2$150.6 million in total NGD residential and commercial operating revenue and $14.3$25.4 million in NGD margin were primarily the result of new customer rates in Oregon and Washington that took effect on November 1, 2022, 1.2% growth in residential customer meters, and higher usage from colder comparative weather from customers that are not decoupled. Sales volumes increased 63.5 million therms, or 9%, primarily due to higher usage driven by comparatively colder weather.
2021 COMPARED TO 2020. The increase of $69.5 million in total residential and commercial operating revenue and $44.3 million in NGD margin were primarily driven bythe result of new customer rates from the 2018in Oregon rate casethat took effect on November 1, 2020, growth in residential customer meters, and 2019 Washington rate casehigher commercial volumes as well as sales volume increases of 73.1COVID-19 restrictions and closures were lifted. Sales volumes increased 25.8 million therms, or 11%4%, primarily due to growth in residential customer growthmeters and average weather in 2019 compared to warmer than average weather in 2018.higher commercial volumes as COVID-19 restrictions and closures were lifted.
2018 COMPARED TO 2017. The decreases of $62.5 million in operating revenue and $3.1 million in total residential and commercial NGD margin were primarily driven by sales volume decreases of 79.2 million therms, or 11%, due to warmer than average weather in 2018 compared to colder than average weather in the prior period, partially offset by customer growth.
Industrial Sales and Transportation
Industrial customers have the option of purchasing sales or transportation services. Under the sales service, the customer buys the gas commodity from NW Natural. Under the transportation service, the customer buys the gas commodity directly from a third-party gas marketer or supplier. The NGD gas commodity cost is primarily a pass-through cost to customers; therefore, NGD profit margins are not materially affected by an industrial customer's decision to purchase gas from third parties. Industrial and large commercial customers may also select between firm and interruptible service options, with firm services generally providing higher profit margins compared to interruptible services. To help manage gas supplies, industrial tariffs are designed to provide some certainty regarding industrial customers' volumes by requiring an annual service election which becomes effective November 1, special charges for changes between elections, and in some cases, a minimum or maximum volume requirement before changing options.
NGD industrial sales and transportation highlights include:
| | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
Volumes (therms): | | | | | | |
Firm and interruptible sales | | 104.4 | | | 90.8 | | | 82.9 | |
Firm and interruptible transportation | | 381.3 | | | 390.9 | | | 382.7 | |
Total volumes | | 485.7 | | | 481.7 | | | 465.6 | |
NGD Margin: | | | | | | |
Firm and interruptible sales | | $ | 13.6 | | | $ | 12.6 | | | $ | 11.6 | |
Firm and interruptible transportation | | 19.9 | | | 19.6 | | | 19.2 | |
Total NGD margin | | $ | 33.5 | | | $ | 32.2 | | | $ | 30.8 | |
|
| | | | | | | | | | | | |
In millions | | 2019 | | 2018 | | 2017 |
Volumes (therms): | | | | | | |
Industrial - firm sales | | 36.6 |
| | 35.3 |
| | 35.7 |
|
Industrial - firm transportation | | 175.7 |
| | 162.7 |
| | 167.7 |
|
Industrial - interruptible sales | | 47.4 |
| | 50.6 |
| | 55.1 |
|
Industrial - interruptible transportation | | 221.1 |
| | 218.4 |
| | 241.4 |
|
Total volumes | | 480.8 |
| | 467.0 |
| | 499.9 |
|
Margin: | | | | | | |
Industrial - sales and transportation | | $ | 32.0 |
| | $ | 30.8 |
| | $ | 31.8 |
|
20192022 COMPARED TO 20182021.Industrial NGD total industrial sales and transportation volumes increased by 13.84.0 million therms, or 1%, primarily due to higher usage from multiple customers, most notably in the light manufacturing, primary metals, and electric manufacturing industries, partially offset by lower usage from customers in the plastic manufacturing industry. NGD margin increased $1.2$1.3 million due to an increase in manufacturing activity in NW Natural's service territory. The increase was partially offset by a reduction in customer count, which wasprimarily driven by customer elections to switch from industrial to commercial rate schedules.new rates in Oregon and Washington that took effect on November 1, 2022.
20182021 COMPARED TO 20172020. IndustrialNGD total industrial sales and transportation volumes decreased by 32.9increased 16.1 million therms, or 3%, primarily due to higher usage from multiple customers, most notably in the pulp and paper and chemical manufacturing industries. NGD margin decreased $1.0increased $1.4 million due to lower usage from warmer than average weatherprimarily driven by new rates in 2018 compared to colder than average weather in 2017.Oregon that took effect on November 1, 2020.
Miscellaneous Revenues
Margin from miscellaneous revenues includes fee income as well as regulatory revenue adjustments, which reflect current period deferrals to and prior year amortizations from regulatory asset and liability accounts, except for gas cost deferrals which flow through cost of gas. Decoupling and other regulatory amortizations from prior year deferrals are included in revenues from residential, commercial, and industrial firm customers.
Margin from NGD miscellaneous revenues highlights include:
|
| | | | | | | | | | | | |
In millions | | 2019 | | 2018 | | 2017 |
Other revenues | | $ | 4.7 |
| | $ | 5.5 |
| | $ | 3.9 |
|
2019 COMPARED TO 2018. Margin from miscellaneous revenues remained flat due to continued entitlement and curtailment revenue in first quarter of 2019 related to the October 2018 Canadian pipeline event.
2018 COMPARED TO 2017. Margin from miscellaneous revenues increased $1.6 million due to increases in entitlement and curtailment revenue due to system restrictions for certain industrial and commercial customers as a result of a Canadian pipeline event in October 2018 that disrupted gas supply.
Other Regulated Services Margin
Other Regulated Services primarily consist of lease revenues from NW Natural's North Mist storage facility as well as other lease revenues for compressed natural gas assets.
Other regulated services revenuemargin highlights include:
|
| | | | | | | | | | | | |
In millions | | 2019 | | 2018 | | 2017 |
North Mist storage services | | $ | 11.8 |
| | $ | — |
| | $ | — |
|
Other services | | 0.3 |
| | 0.3 |
| | — |
|
Total other regulated services | | $ | 12.1 |
| | $ | 0.3 |
| | $ | — |
|
| | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
North Mist storage services | | $ | 19.4 | | | $ | 18.9 | | | $ | 19.5 | |
Other services | | 0.2 | | | 0.2 | | | (0.4) | |
Total other regulated services | | $ | 19.6 | | | $ | 19.1 | | | $ | 19.1 | |
2019
2022 COMPARED TO 20182021. Other regulated services margin increased $11.8$0.5 million in 2019 compared to 2018 due to the commencement ofan increase in storage services atservice revenue from the North Mist expansion facility in May 2019.facility. See Note 7 for more information regarding North Mist expansion lease accounting.
2021 COMPARED TO 2020. Other regulated services margin was relatively flat when compared to the prior period. The North Mist facility did not experience any significant fluctuations in storage service revenue. See Note 7 for more information regarding North Mist expansion lease accounting.
Cost of Gas
Cost of gas as reported by the NGD segment includes gas purchases, gas withdrawn from storage inventory, gains and losses from commodity hedges, pipeline demand costs, seasonal demand cost balancing adjustments, renewable natural gas and its attributes, including renewable thermal certificates, regulatory gas cost deferrals, gas reserves costs, and company gas use. The OPUC and WUTC generally require natural gas commodity costs to be billed to customers at the actual cost incurred, or expected to be incurred. Customer rates are set each year so that if cost estimates were met the NGD business would not earn a profit or incur a loss on gas commodity purchases; however, in Oregon we have
the incentive sharing mechanism described under "Regulatory Matters—Rate Mechanisms—Purchased Gas Adjustment" above. In addition to the PGA incentive sharing mechanism, gains and losses from hedge contracts entered into after annual PGA rates are effective for Oregon customers are also required to be shared and therefore may impact net income. Further, NW Natural also has a regulatory agreement whereby it earns a rate of return on its investment in the gas reserves acquired under the original agreement with Encana and includes gas from the amended gas reserves agreement at a fixed rate of $0.4725 per therm, which are also reflected in NGD margin. See "Application of Critical Accounting Policies and Estimates—Accounting for Derivative Instruments and Hedging Activities" below.
Cost of gas highlights include:
|
| | | | | | | | | | | | |
In millions except where indicated | | 2019 | | 2018 | | 2017 |
Cost of gas | | $ | 255.1 |
| | $ | 255.7 |
| | $ | 325.0 |
|
Volumes sold (therms) | | 818 |
| | 747 |
| | 831 |
|
Average cost of gas (cents per therm) | | $ | 0.31 |
| | $ | 0.34 |
| | $ | 0.39 |
|
Gain (loss) from gas cost incentive sharing | | (1.3 | ) | | — |
| | 1.2 |
|
| | | | | | | | | | | | | | | | | | | | |
In millions, except where indicated | | 2022 | | 2021 | | 2020 |
Cost of gas | | $ | 429.9 | | | $ | 292.5 | | | $ | 263.0 | |
Volumes sold (therms)(1) | | 871.0 | | | 793.9 | | | 760.2 | |
Average cost of gas (cents per therm) | | $ | 0.49 | | | $ | 0.37 | | | $ | 0.35 | |
Gain (loss) from gas cost incentive sharing | | $ | (4.9) | | | $ | (3.4) | | | $ | 0.3 | |
2019(1) This calculation excludes volumes delivered to industrial transportation customers.
2022 COMPARED TO 20182021. Cost of gas was flat compared to the prior year,increased $137.4 million, or 47%, primarily due to a 32% increase in the average cost of gas with the majority of these higher gas costs embedded in the PGA. The remaining increase in cost of gas is primarily the result of a 10% increase in volumes sold, driven by average weather in 2019 compared to warmer than average weather in 2018 and customer growth primarily offset by a three cent decrease in the average cost of gas.
2018 COMPARED TO 2017. Cost of gas decreased 69.3 million, or 21%, primarily due to the 10% decrease in volumes sold due to warmer than average weather in 2018 compared toand comparatively colder than average weather in 2017, and lower average cost of gas collected from customers, partially offset by customer growth.
The effect on net income from NW Natural's Oregon gas cost incentive sharing mechanism resulted in a margin loss of $1.3 million in 2019 compared to a slight margin loss in 2018 and a margin gain of $1.2 million in 2017. In 2019, actual gas prices were higher than those included in rates during the period. In 2018, actual prices closely aligned with estimated prices included in customer rates. In 2017, actual prices were lower than the estimated prices included in customer rates due to warmer than average weather nationally, which resulted in lower national natural gas commodity prices.weather. For a discussion of the gas cost incentive sharing mechanism, see "Regulatory Matters—Rate Mechanisms—Purchased Gas Adjustment" above.
2021 COMPARED TO 2020. Cost of gas increased $29.5 million, or 11%, primarily due to a $3.4 million loss from gas cost incentive sharing driven by costs related to the 2021 cold weather event that were not deferred for future recovery. The remaining increase in cost of gas is primarily the result of a 4% increase in volumes sold driven by customer growth and higher commercial volumes as COVID-19 restrictions and closures were lifted. For a discussion of the gas cost incentive sharing mechanism, see "Regulatory Matters—Rate Mechanisms—Purchased Gas Adjustment" above.
Other
Other activities aggregated and reported as other at NW Holdings include NWN Energy's equity investment in Trail West Holding, LLC (TWH), which is pursuing the development of a proposed natural gas pipeline through its wholly-owned subsidiary, Trail West Pipeline, LLC (TWP); 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 wastewater 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, andsubsidiaries. See Note 1413 for information on our Avion Water investment.
On August 6, 2020, NWN Energy completed the sale of its interest in Trail West Holdings, LLC (TWH) to an unrelated third party. See Note 13 for further details on our investment in TWH.details.
At Mist, NW Natural provides gas storage services to customers in the interstate and intrastate markets using storage capacity that has been developed in advance of NGD customers’ requirements. Pre-tax income from gas storage at Mist and asset management services is subject to revenue sharing with NGD customers.
Under this regulatory incentive sharing mechanism, NW Natural retains 80% of pre-tax income from Mist gas storage services and asset management services when the underlying costs of the capacity being used are not included in NGD business rates. The remaining 20% is credited to a deferred regulatory account for credit to NGD customers.
Through October 2018, when To the extent that the capacity used wasis included in NGD rates, NW Natural retained 33% of pre-tax income with the remaining 67% credited to a deferred regulatory account for credit to NGD customers. In conjunction with the Oregon rate case, effective November 2018 NW Natural retains 10% of pre-tax income from such storage and asset management services and 90% is credited to NGD business customers.
The following table presents the results of activities aggregated and reported as other for both NW Holdings and NW Natural:
|
| | | | | | | | | | | |
In millions, except EPS data | 2019 | | 2018 | | 2017 |
NW Natural other - net income | $ | 8.1 |
| | $ | 10.6 |
| | $ | 11.2 |
|
Other NW Holdings activity | (3.6 | ) | | (0.8 | ) | | 0.4 |
|
NW Holdings other - net income | $ | 4.5 |
| | $ | 9.8 |
| | $ | 11.6 |
|
EPS - NW Holdings - other | $ | 0.15 |
| | $ | 0.34 |
| | $ | 0.41 |
|
The significant drivers of changes in other net income discussed below apply to both NW Holdings and NW Natural.
| | | | | | | | | | | | | | | | | |
In millions, except EPS data | 2022 | | 2021 | | 2020 |
NW Natural other - net income | $ | 11.9 | | | $ | 12.2 | | | $ | 7.0 | |
Other NW Holdings activity | (5.3) | | | (2.5) | | | (0.3) | |
NW Holdings other - net income | $ | 6.6 | | | $ | 9.7 | | | $ | 6.7 | |
Diluted EPS - NW Holdings - other | $ | 0.20 | | | $ | 0.32 | | | $ | 0.22 | |
2019
2022 COMPARED TO 20182021. Other net income decreased $5.3$3.1 million and $2.5$0.3 million at NW Holdings and NW Natural, respectively. The decrease at NW Natural was primarily driven by lower asset management revenues and increased asset management revenue sharing with Oregon customers as a result of the 2018 Oregon rate case. The decrease from other NW Holdings activity was driven by increases in professional servicethe decrease at NW Natural, higher interest expense at the holding company, and costs and expenses associated with developing the water business.non-regulated renewable natural gas activities.
20182021 COMPARED TO 20172020. Other net income decreased compared to the prior periodincreased $3.0 million and $5.2 million at NW Holdings and NW Natural, respectively. The increase at NW Natural was primarily due to $4.2$7.9 million inof higher asset management revenue primarily related to the 2021 cold weather event, partially offset by $2.1 million of income tax expense associated with the higher revenue. The increase at NW Holdings was driven by $4.4 million in income tax benefits recognized in 2017 from the enactment of the TCJA,increase at NW Natural, partially offset by a $2.8 million increase in revenues from asset management agreements for Mist storagehigher business development and transportation capacity.consulting costs at the holding company.
Consolidated Operations
Operations and Maintenance
Operations and maintenance highlights include:
|
| | | | | | | | | | | | |
In millions | | 2019 | | 2018 | | 2017 |
NW Natural | | $ | 169.1 |
| | $ | 155.2 |
| | $ | 152.2 |
|
Other NW Holdings operations and maintenance | | 9.1 |
| | 1.5 |
| | 0.2 |
|
NW Holdings | | $ | 178.2 |
| | $ | 156.7 |
| | $ | 152.4 |
|
| | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
NW Natural | | $ | 204.8 | | | $ | 188.8 | | | $ | 168.9 | |
Other NW Holdings operations and maintenance | | 19.9 | | | 15.4 | | | 11.2 | |
NW Holdings | | $ | 224.7 | | | $ | 204.2 | | | $ | 180.1 | |
2019
2022 COMPARED TO 20182021. Operations and maintenance expense increased $21.5 million and $13.9$16.0 million for NW Holdings and NW Natural respectively. The increase at NW Natural was primarily due to the following:
a $12.5•$6.0 million increase in pension expenses, consisting of:contract labor for safety and reliability and contracted support for information technology system upgrades;
a $4.6•$4.1 million increase from recovery of amounts in NW Natural's pension balancing account upon receipt of an OPUC accounting order in March 2019, which was offset within NGD margin and income tax benefits;amortization expense related to cloud computing arrangements;
a $4.0•$3.0 million increase from higher pension costs asin information technology maintenance and support; and
•$2.0 million increase in professional service fees.
Operations and maintenance expense increased $20.5 million for NW Holdings primarily due to the following:
•$16.0 million increase in operations and maintenance expense at NW Natural began collecting ongoing pension costs through customer rates on November 1, 2018as discussed above; and began collecting deferred pension costs through customer rates on April 1, 2019 rather than deferring a portion to the balancing account; and
a $3.9 million increase from a regulatory pension disallowance as a result of the March 2019 OPUC order in the Oregon general rate case.
The remaining change was primarily attributable to annual employee cost increases.
The $7.6•$4.5 million increase in other NW Holdings operations and maintenance expense was primarily due to expensescosts associated with developing the water business.
and wastewater subsidiaries and non-regulated renewable natural gas activities.
2018
2021 COMPARED TO 20172020. Operations and maintenance expense increased $4.3$19.9 million for NW Natural primarily due to the following:
•$7.4 million increase in contractor, professional service fees and $3.0license costs related to information technology system upgrades;
•$4.8 million increase related to higher compensation and benefit costs; and
•$3.6 million increase in lease expense related to a new headquarters and operations center.
Operations and maintenance expense increased $24.1 million for NW Holdings and NW Natural, respectively, primarily due to the following factors:following:
a $3.4•$19.9 million increase in NGD payrolloperations and benefits due to increased headcountmaintenance expense at NW Natural as discussed above; and general salary increases; and
a $3.2•$4.2 million increase in NGD non-payroll costsother NW Holdings operations and maintenance expense primarily due to increases in general professional serviceshigher business development and contract labor.consulting costs at the holding company.
Delinquent customer receivable balances continue to remain at historically low levels. Bad debt expense as a percent of revenues was 0.1% for 2019, 2018, and 2017.
Depreciation and Amortization
Depreciation and amortization highlights include:
|
| | | | | | | | | | | | |
In millions | | 2019 | | 2018 | | 2017 |
NW Natural | | $ | 90.4 |
| | $ | 85.0 |
| | $ | 81.0 |
|
Other NW Holdings depreciation and amortization | | 1.1 |
| | 0.2 |
| | 0.1 |
|
NW Holdings | | $ | 91.5 |
| | $ | 85.2 |
| | $ | 81.1 |
|
The significant drivers of changes in depreciation and amortization discussed below apply to both NW Holdings and NW Natural.
| | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
NW Natural | | $ | 113.0 | | | $ | 110.5 | | | $ | 101.6 | |
Other NW Holdings depreciation | | 3.7 | | | 3.0 | | | 2.1 | |
NW Holdings | | $ | 116.7 | | | $ | 113.5 | | | $ | 103.7 | |
2019
2022 COMPARED TO 20182021. Depreciation and amortization expense increased $2.5 million for NW Natural, 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 $6.3 millionthe amortization of cloud computing arrangements, which are recorded within operations and $5.4maintenance expenses beginning in 2022.
Depreciation expense increased $3.2 million for NW Holdings, and NW Natural, respectively, primarily due to NGD plant additions that included investments in natural gas transmission and distribution systems supporting customer growth, safety, reliability, facility upgrades, and enhanced technology. In addition, the
North Mist gas storage facility began operations and began depreciating in May 2019. Thea $0.7 million increase in other NW Holdings depreciation and amortization was primarily duerelated to depreciation expense at acquired water and wastewater entities.
subsidiaries and a $2.5 million increase at NW Natural as discussed above.
2018
2021 COMPARED TO 20172020. Depreciation and amortization expense increased by $4.1$8.9 million for NW Natural, primarily due to additional capital investments in the distribution system, Mist storage, and $4.0information technology systems, as well as renovation and construction of resource and operations service centers.
Depreciation expense increased $9.8 million for NW Holdings, and NW Natural, respectively, primarily due to NGD plant additions that included investmentsa $0.9 million increase in natural gas transmissionother NW Holdings depreciation related to water and distribution systems supporting customer growth, safety, reliability, facility upgrades,wastewater acquisitions and enhanced technology.an $8.9 million increase at NW Natural as discussed above.
Other Income (Expense), Net
Other income (expense), net highlights include:
| | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
NW Natural total other income (expense), net | | $ | (0.4) | | | $ | (12.7) | | | $ | (15.1) | |
Other NW Holdings activity | | 1.6 | | | 0.1 | | | 1.2 | |
NW Holdings total other income (expense), net | | $ | 1.2 | | | $ | (12.6) | | | $ | (13.9) | |
|
| | | | | | | | | | | | |
In millions | | 2019 | | 2018 | | 2017 |
Pension and other postretirement costs | | $ | (13.3 | ) | | $ | (17.0 | ) | | $ | (10.2 | ) |
Deferral (amortization) of regulatory pension balancing account | | (10.7 | ) | | 7.9 |
| | 4.1 |
|
Regulatory disallowance of pension costs | | (6.6 | ) | | — |
| | — |
|
Equity portion of AFUDC | | 0.7 |
| | 4.1 |
| | 2.7 |
|
Net interest income (expense) on deferred regulatory accounts | | 7.2 |
| | 1.7 |
| | 2.0 |
|
Other non-operating | | (0.3 | ) | | (0.3 | ) | | 1.2 |
|
NW Natural total other income (expense), net | | $ | (23.0 | ) | | $ | (3.6 | ) | | $ | (0.2 | ) |
Other NW Holdings activity | | 0.2 |
| | — |
| | (0.1 | ) |
NW Holdings total other income (expense), net | | $ | (22.8 | ) | | $ | (3.6 | ) | | $ | (0.3 | ) |
The significant drivers2022 COMPARED TO 2021. Other expense, net decreased $12.3 million at NW Natural primarily due to lower pension non-service costs and interest income from the equity portion of AFUDC. Costs related to our defined benefit pension plan in 2022 decreased compared to the prior year due to changes in assumptions and gains on plan assets.
Other income, net increased $13.8 million at NW Holdings driven by the change at NW Natural discussed above, in addition to earnings from Avion Water. Other income (expense) discussed below apply to both NW Holdings, net primarily consists of regulatory interest, pension and NW Natural.
other postretirement non-service costs, gains from company-owned life insurance, and donations.
2019
2021 COMPARED TO 20182020. Other income (expense), net decreased $19.2changed $2.4 million at NW Natural primarily due to higher interest income on regulatory assets and $19.4lower pension non-service costs. Other income (expense), net changed $1.3 million at NW Holdings and NW Natural, respectively. The decrease was primarily driven by activity in NW Natural's pension balancing account as described below. In addition, net interest income on deferred regulatory accounts increased $5.5 million primarily due to $5.1 million of deferred equity interest income recognized in 2019 in conjunction with amortization of the pension balancing account. Interest income from the equity portion of AFUDC decreased $3.3 million, primarily driven by the placement of the North Mist facility into service in May 2019.
Pension Balancing Account
From 2011 through October 31, 2018,change at NW Natural had OPUC approval to defer certain pension costs in excess of what was recovered in customer rates. This pension cost deferral was recorded to a regulatory balancing account, which stabilized the amount of pension expense recognized each year in the consolidated statements of comprehensive income (loss). Total pension cost deferrals, excluding interest, were $10.3 million and $6.5 million for the years ended December 31, 2018 and 2017, of which $7.9 million and 4.1 million was recognized in other income (expense), net, respectively. In October 2018, the OPUC issued an order freezing the pension balancing account and directing that future pension expense would be recovered through rates with an increase of $8.1 million to revenue requirement.
In March 2019, the OPUC issued another order allowing 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, of which $7.9 million was recognized in 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, disallowed, $10.5 million, of which $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 balancing account for the year ended December 31, 2019, inclusive of the $12.5 million recovery mentioneddiscussed above, was $16.8 million, of which $10.7 million was recorded to other income (expense), net. See Note 10 and "Regulatory Matters—Regulatory Proceeding Updates - Pension Cost Deferral and Pension Balancing Account" for more information regarding the pension balancing account.
2018 COMPARED TO 2017. Other income (expense), net, decreased $3.3 million and $3.4 million at NW Holdings and NW Natural, respectively, primarily due to a $3.0 million increase in pension and other postretirement non-service costs and $0.8 million lower gains from company-owned life insurance, partially offset by a $1.4 million increasegain recognized in the equity portionprior period related to the sale of AFUDC.Trail West.
Interest Expense, Net
Interest expense, net highlights include:
|
| | | | | | | | | | | | |
In millions | | 2019 | | 2018 | | 2017 |
NW Natural | | $ | 41.3 |
| | $ | 37.0 |
| | $ | 37.5 |
|
Other NW Holdings interest expense | | 1.4 |
| | 0.1 |
| | — |
|
NW Holdings | | $ | 42.7 |
| | $ | 37.1 |
| | $ | 37.5 |
|
| | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
NW Natural | | $ | 46.3 | | | $ | 43.0 | | | $ | 40.9 | |
Other NW Holdings interest expense | | 6.9 | | | 1.5 | | | 2.2 | |
NW Holdings | | $ | 53.2 | | | $ | 44.5 | | | $ | 43.1 | |
2019
2022 COMPARED TO 20182021. Interest expense, net, increased $3.3 million at NW Natural primarily due to a higher interest rate on a lower commercial paper balance and higher interest rates and a higher level of amounts capitalizedlong-term debt, partially offset by higher AFUDC debt interest income.
Interest expense, net, increased $5.6 million and $4.3$8.7 million at NW Holdings and NW Natural, respectively. Theprimarily due to the increase at NW Natural was primarily driven by $2.3 milliondiscussed above and higher interest expense on long termthe credit facility and long-term debt at NW Holdings as a result of higher balances $1.2and higher interest rates.
2021 COMPARED TO 2020. Interest expense, net, increased $2.1 million at NW Natural primarily due to lower AFUDC debt interest income and $0.9 million higher commercial paper and line of credit interest. The additional increase at NW Holdings was driven by interest on long-term debt at NWN Water and interest on NW Holdings' line of credit.debt.
2018 COMPARED TO 2017. Interest expense, net, of amounts capitalized, decreased $0.4 million and $0.5increased $1.4 million at NW Holdings and NW Natural, respectively, primarily due to a $2.3 millionthe increase in the interest-related portion of AFUDC,at NW Natural discussed above, partially offset by increased commercial paperlower interest expenses of $1.6 million.expense on the credit agreement at NW Holdings.
Income Tax Expense
NW Holdings income tax expense highlights include:
|
| | | | | | | | | | | | |
In millions | �� | 2019 | | 2018 | | 2017 |
Income tax expense | | $ | 12.6 |
| | $ | 24.2 |
| | $ | 41.0 |
|
Effects from the TCJA(1) | | — |
| | — |
| | 3.4 |
|
Adjusted income tax expense | | $ | 12.6 |
| | $ | 24.2 |
| | $ | 44.4 |
|
| | | | | | |
Effective tax rate | | 16.2 | % | | 26.4 | % | | 36.3 | % |
Adjusted effective tax rate | | 16.2 | % | | 26.4 | % | | 39.3 | % |
(1)See the Non-GAAP Reconciliations table at the beginning of Item 7 for a reconciliation of this non-GAAP financial measure to its closest U.S.GAAP measure.
| | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
Income tax expense | | $ | 29.1 | | | $ | 27.4 | | | $ | 21.1 | |
Effective tax rate | | 25.2 | % | | 25.8 | % | | 23.1 | % |
NW Natural income tax expense highlights include:
| | In millions | | 2019 | | 2018 | | 2017 | In millions | | 2022 | | 2021 | | 2020 |
Income tax expense | | $ | 14.1 |
| | $ | 24.5 |
| | $ | 41.5 |
| Income tax expense | | $ | 31.0 | | | $ | 28.3 | | | $ | 21.1 | |
Effects from the TCJA(1) | | — |
| | — |
| | 3.0 |
| |
Adjusted income tax expense | | $ | 14.1 |
| | $ | 24.5 |
| | $ | 44.5 |
| |
| | | | | | | |
Effective tax rate | | 16.9 | % | | 26.4 | % | | 36.6 | % | Effective tax rate | | 25.3 | % | | 25.9 | % | | 23.0 | % |
Adjusted effective tax rate | | 16.9 | % | | 26.4 | % | | 39.3 | % | |
(1)See the Non-GAAP Reconciliations table at the beginning of Item 7 for a reconciliation of this non-GAAP financial measure to its closest U.S.GAAP measure.
The significant drivers of changes in income tax expense discussed below apply to both NW Holdings and NW Natural.
20192022 COMPARED TO 20182021. The effective tax rate decreased by 10.2%0.6 percentage points at both NW Holdings and 9.5%NW Natural. The decrease in the effective tax rate is primarily due to lower income tax amortization of the 2020 Oregon Corporate Activity Tax (CAT) in 2022, which was subject to regulatory deferral when it became effective on January 1, 2020 and then amortized in income tax expense as recovery began in late 2020, 2021, and 2022.
2021 COMPARED TO 2020. The effective tax rate increased 2.7 and 2.9 percentage points at NW Holdings and NW Natural, respectively. The reduction was driven byincrease in the return of tax reform benefits to customers, including $5.4 million in tax benefits recognized in association with the OPUC 2018 Oregon rate case order which was offset by pension expenses. See "Executive Summary - Deferred TCJA benefits and timing variance" above.
2018 COMPARED TO 2017. The effective tax rate decreased by 9.9% and 10.2% at NW Holdings and NW Natural, respectively,is primarily due to a decline inOregon Corporate Activity Tax, the statutory income taxmajority of which is incurred because of Oregon regulated operations and for which rate from 39.5% to 26.5% as a result of the TCJA enactment in 2017. Income tax expense decreased due to the TCJA and lower pre-tax income, partially offset by a benefit of $3.4 million recognized in 2017 at NW Holdings and a benefit of $3.0 million recognized in 2017 at NW Natural from the remeasurement of deferred tax balances upon the TCJA enactment date. Excluding the impact of the 2017 remeasurement benefits of $3.4 million and $3.0 million at NW Holdings and NW Natural, respectively, the adjusted effective tax rate decreased 12.9% at both NW Holdings and NW Natural due to the statutory tax rate declining from the TCJA. See the Non-GAAP Reconciliations at the beginning of Item 7 for additional information.recovery began on November 1, 2020.
Pending Sale of Gill Ranch StorageDiscontinued Operations
On June 20, 2018, NWN Gas Storage, a wholly ownedwholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement (the Sale Agreement) that providesprovided for the sale by NWN Gas Storage of all of its 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. PG&E owns the remaining 25% interest in the Gill Ranch Facility.
In the Sale Agreement,On December 4, 2020, NWN Gas Storage makes representations and warranties concerning, among other things,closed the sale of all the memberships interests in Gill Ranch the Gill Ranch Facility and Gill Ranch’s business and contractual relationships, and agrees to cause Gill Ranch to conduct its business and maintain its properties inreceived payment of the ordinary course, consistent with material agreements and past practice.
The Sale Agreement provides for an initial cash purchase price of $25.0$13.5 million (subject to a working capital adjustment), plus potentialless the $1.0 million deposit previously paid. Furthermore, additional payments to NWN Gas Storage may be made subject to a maximum amount of up to $26.5$15.0 million in the aggregate if(subject to a working capital adjustment) based on the economic performance of Gill Ranch achieves certain economic performance levels for the first threeeach full gas storage yearsyear (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 during whichand will continue until such time as the closing occurs.
maximum amount has been paid. The decision approving the transaction was issued by the CPUC on December 12, 2019 and the transaction is subject to other customary closing conditions and covenants, including the requirement that allfair value of the representations and warranties be true and correct as ofthis arrangement at the closing date except, as would not,was zero based on a discounted cash flow forecast. Subsequent changes in the case of certain representations and warranties,fair value will be reasonably expected to have a material adverse effect on Gill Ranch. recorded in earnings. The agreement, as amended, is currently subject to termination by either party if the transaction has not closed by March 31, 2020. We continue to strive to close this transaction.
On January 29, 2019, PG&E filed voluntary petitions for relief under chapter 11 bankruptcy. We cannot fully predict the coursecompletion of the bankruptcy proceedings orsale resulted in an after-tax gain of $5.9 million for the impact on the sale and will continue to monitor the situation closely.year ended December 31, 2020.
The results of Gill Ranch Storage have been determined to be discontinued operations until the date of sale and are presented separately, net of tax, from the results of continuing operations of NW Holdings for all periods presented. See Note 1918 for more information on the Sale Agreement and the results of our discontinued operations.
The CPUC regulates Gill Ranch under a market-based rate model which allows for the price of storage services to be set by the marketplace. The CPUC also regulates the issuance of securities, system of accounts, and regulates intrastate storage services. The Geologic Energy Management Division of the California Department of Conservation regulations for gas storage wells were finalized in June 2018, and the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration (PHMSA) proposed new federal regulations for underground natural gas storage facilities, which were finalized during 2019 and increased costs for all storage providers. NW Holdings will continue to monitor and assess additional new regulations until the sale is complete.
Short-term liquidity for Gill Ranch is supported by cash balances, internal cash flow from operations, equity contributions from its parent company, and, if necessary, additional external financing.
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: | | | | December 31, | | December 31, |
| | 2019 | | 2018 | | 2022 | | 2021 |
Common equity | | 49.6 | % | | 50.9 | % | Common equity | | 46.8 | % | | 47.2 | % |
Long-term debt (including current maturities) | | 50.4 |
| | 49.1 |
| Long-term debt (including current maturities) | | 53.2 | | | 52.8 | |
Total | | 100.0 | % | | 100.0 | % | Total | | 100.0 | % | | 100.0 | % |
NW Natural's consolidated long-term capital structure, excluding short-term debt, was as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
Common equity | | 51.4 | % | | 49.8 | % |
Long-term debt (including current maturities) | | 48.6 | | | 50.2 | |
Total | | 100.0 | % | | 100.0 | % |
|
| | | | | | |
| | December 31, |
| | 2019 | | 2018 |
Common equity | | 49.3 | % | | 49.4 | % |
Long-term debt (including current maturities) | | 50.7 |
| | 50.6 |
|
Total | | 100.0 | % | | 100.0 | % |
Including short-term debt balances, asAs of December 31, 20192022 and 2018,2021, NW Holdings' consolidated capital structure included common equity of 45.7%42.4% and 44.4%39.5%, long-term debt of 42.5%45.0% and 41.1%44.0%, and short-term debt including current maturities of long-term debt of 11.8%12.6% and 14.5%16.5%, respectively. As of December 31, 20192022 and 2018,2021, NW Natural's consolidated capital structure included common equity of 45.9%47.9% and 42.9%44.2%, long-term debt of 42.9%41.6% and 42.2%44.7%, and short-term debt including current maturities of long-term debt of 11.2%10.5% and 14.9%11.1%, respectively.
During 2019, changes to2022, NW Natural's capital structures werestructure changed primarily due to capital contributions from NW Holdings and the issuance of long-term debt. Changes to NW Holdings' capital structure were primarily due to issuances of common equity at NW Holdings and the issuance of long-term debt and capital contributions from NW Holdings. NW Holdings' capital structure changed primarily due to the issuance of long-term debt and common stock at NW Natural.Holdings. See further discussiondiscussion below in "Cash Flows — Financing Activities".
Liquidity and Capital Resources
At December 31, 20192022 and December 31, 2018,2021, NW Holdings had approximately $9.6$29.3 million and $12.6$18.6 million, and NW Natural had approximately $5.9$13.0 million and $7.9$12.3 million, of cash and cash equivalents, respectively. In order to maintain sufficient liquidity during periods when capital markets are volatile, NW Holdings and NW Natural may elect to maintain higher cash balances and add short-term borrowing capacity. NW Holdings and NW Natural may also pre-fund their respective capital expenditures when long-term fixed rate environments are attractive. NW Holdings and NW Natural expect to have ample liquidity in the form of cash on hand and from operations and available credit capacity under credit facilities to support funding needs.
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 estimated expenses payable by NW Holdings of approximately $138.6 million.
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 year ended December 31, 2022, NW Holdings issued and sold 1,381,728 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $69.7 million, net of fees and commissions paid to agents of $1.4 million. As of December 31, 2022, NW Holdings had $111.1 million of equity available for issuance under the program.
NW Holdings
For NW Holdings, short-term liquidity is primarily provided by cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a multi-year credit facility, and short-term credit facilities. NW Holdings also has a universal shelf registration statement filed with the SEC for the issuance of debt and equity securities. NW Holdings long-term debt, if any, and equity issuances are primarily used to provide equity contributions to NW Holdings’ operating subsidiaries for operating and capital expenditures and other corporate purposes. From 2023 through 2025, we estimate NW Holdings’ and NW Natural's combined incremental capital needs to be in the range of $450 million to $550 million. NW Holdings intends to use raised capital to support NW Natural, NW Natural Water, and NW Natural Renewables operating and capital expenditure programs. NW Holdings' issuance of securities 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" 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, 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 December 31, 20192022 and 2018,2021, 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 "Contractual Obligations" and "Cash Flows" below.
NW HOLDINGS DIVIDENDS. Quarterly dividends have been paid on common stock each year since NW Holdings’ predecessor’s stock was first issued to the public in 1951. Annual common stock dividend payments per share, adjusted for stock splits, have increased each year since 1956. The declarations and amount of future dividends to shareholders will depend upon earnings, cash flows, financial condition, NW Natural’s ability to pay dividends to NW Holdings and other factors. The amount and timing of dividends payable on common stock is at the sole discretion of the NW Holdings Board of Directors.
NW Natural Gas Distribution Segment
For the NGD business segment, short-term borrowing requirements typically peak during colder winter months when the NGD business borrows money to cover the lag between natural gas purchases and bill collections from customers. Short-term liquidity for the NGD business is primarily provided by cash balances, internal cash flow from operations, proceeds from the sale of commercial paper notes, as well as available cash from multi-year credit facilities, short-term credit facilities, company-owned life insurance policies, the sale of long-term debt, and equity contributions from NW Holdings. NW Natural's long-term debt and contributions from NW Holdings are primarily used to finance NGD capital expenditures, refinance maturing debt, and provide temporary funding for other general corporate purposes of the NGD business.
Based on its current debt ratings (see "Credit Ratings" below), NW Natural has been able to issue commercial paper and long-term debt at attractive rates and has not needed to borrow or issue letters of credit from its back-up credit facility.rates. In the event NW Natural is not able to issue new long-term debt due to adverse market conditions or other reasons, NW Natural expects that near-term liquidity needs can be met using internal cash flows, issuing commercial paper, receiving equity contributions from NW Holdings, or for the NGD segment, drawing upon a committed credit facility. NW Natural also has a universal shelf registration statement filed with the SEC for the issuance of secured and unsecured debt securities.
In the event senior unsecured long-term debt ratings are downgraded, or outstanding derivative positions exceed a certain credit threshold, counterparties under derivative contracts could require NW Natural to post cash, a letter of credit, or other forms of collateral, which could expose NW Natural to additional cash requirements and may trigger increases in short-term borrowings while in a net loss position. NW Natural was not required to post collateral at December 31, 2019. However, if the credit risk-related contingent features underlying these contracts were triggered on December 31, 2019, assuming long-term debt ratings dropped to non-investment grade levels, NW Natural could have been required to post $0.1 million in collateral with our counterparties.2022. See "Credit Ratings" below and Note 16.15 below.
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.
PENSION CONTRIBUTION.CONTRIBUTIONS. NW Natural expectsdoes not expect to make contributions to its company-sponsored defined benefit plan, which is closed to new employees, over the next several years until the plan is fully funded under the Pension Protection Act rules, including the rules issued under the Moving Ahead for Progress in the 21st Century Act (MAP-21), as amended.applicable laws and regulations. See "Application of Critical Accounting Policies—Accounting for Pensions and Postretirement Benefits" below and Note 10 for more information.
ENVIRONMENTAL EXPENDITURES. NW Natural expects to continue using cash resources to fund environmental liabilities.liabilities for future environmental remediation or action. 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.Natural. In Oregon, a Site Remediation and Recovery Mechanism (SRRM) is currently in place to recoveryrecover 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. SeeSee Note 18,17 and "Results of Operations—Regulatory Matters—Environmental Cost Deferral and Recovery" above.
Based on several factors, including current credit ratings, NW Natural's commercial paper program, current cash reserves, committed credit facilities, and an expected ability to issue long-term debt and receive equity contributions from NW Holdings, NW Natural believes its liquidity is sufficient to meet anticipated near-term cash requirements, including all contractual obligations, and investing and financing activities as discussed in "Contractual Obligations" and "Cash Flows" below.
NW NATURAL DIVIDENDS. The declarations and amount of future dividends to NW Holdings will depend upon earnings, cash flows, financial condition, the satisfaction of OPUC and WUTC regulatory ring-fencing restrictions, and other factors. The amount and timing of dividends payable on common stock is subject to approval of the NW Natural Board of Directors.
Gas and Pipeline Capacity Purchase Agreements
NW Natural has signed agreements providing for the reservation of firm pipeline capacity under which it is required to make fixed monthly payments for contracted capacity. The pricing component of the monthly payment is established, subject to change, by U.S. or Canadian regulatory bodies, or is established directly with private counterparties, as applicable. In addition, NW Natural has entered into long-term agreements to release firm pipeline capacity. NW Natural also enters into short-term and long-term gas purchase agreements. Refer to Note 16 for gas and pipeline capacity purchase commitments.
OFF-BALANCE SHEET ARRANGEMENTS.
NW Natural Renewables is a newly formed, non-utility regulated subsidiary of NW Natural Holdings established to pursue non-regulated renewable natural gas activities. In September 2021, a subsidiary of NW Natural Renewables and a subsidiary of EDL, a global producer of sustainable distributed energy, executed agreements to develop two production facilities that are designed to convert landfill waste gases to renewable natural gas (RNG). Testing and commissioning of the production facilities is expected to occur in the spring of 2023. Upon completion of each facility, the subsidiary of 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 for NW Natural Renewables. Following the completion of each facility, we estimate the amount of RNG purchases based on prices and quantities specified in the agreements are as follows: approximately $6.6 million in 2023, $10.5 million in 2024, $21.0 million in 2025, $21.0 million in 2026, $27.3 million in 2027 and $567.8 million thereafter.
Other Purchase Agreements
Other purchase commitments primarily consist of remaining balances under existing purchase orders and gas storage agreements. At December 31, 2022, the amount due over the duration of the purchase agreements totaled $41.1 million. Except for these certain lease and purchase commitments, NW Holdings and NW Natural have no material off-balance sheet financing arrangements. See "
Contractual Obligations" below.
In October 2017, NW Natural entered into a 20-year lease agreement for a new corporate operations center location in Portland, Oregon. The existing lease expires in 2020 and after an extensive search and evaluation process with a focus on seismic preparedness, safety, reliability, least cost to customers and a continued commitment to NW Natural's employees and the communities NW Natural serves, NW Natural executed a new lease for suitable commercial office space in Portland, Oregon. Payments under the lease are expected to commence in the third quarter of 2020 and total estimated base rent payments over the 20-year life of the lease are approximately $160 million. NW Natural has the option to extend the term of the lease for two additional seven-year periods.
Additionally, the lease was analyzed in consideration of build-to-suit lease accounting guidance with the conclusion that NW Natural is the accounting owner of the asset during construction. As a result, NW Natural recognized $25.5 million during 2018 in property, plant and equipment and an obligation in other non-current liabilities for the same amount on its consolidated balance sheet. These accounting transactions are non-cash in nature, and as such, are not included in the cash flow analysis and capital expenditures forecasts below, and have no impact on short-term liquidity. When the new lease accounting standard, ASC 842, became effective for NW Holdings and NW Natural in 2019, the associated build-to-suit asset and liability were de-recognized in accordance with the new standard. See Note 2 for more information on the impacts of the new lease standard.
Contractual Obligations
The following table shows contractual obligations from continuing operations at December 31, 2019 by maturity and type of obligation:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due in Years Ending December 31, | | | | |
In millions | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total |
NW Natural | | | | | | | | | | | | | | |
Short-term debt maturities | | $ | 125.1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 125.1 |
|
Long-term debt maturities | | 75.0 |
| | 60.0 |
| | — |
| | 90.0 |
| | — |
| | 624.7 |
| | 849.7 |
|
Interest on long-term debt | | 36.1 |
| | 34.9 |
| | 33.2 |
| | 32.3 |
| | 29.2 |
| | 343.9 |
| | 509.6 |
|
Postretirement benefit payments(1) | | 25.8 |
| | 26.7 |
| | 27.5 |
| | 28.4 |
| | 29.2 |
| | 162.4 |
| | 300.0 |
|
Operating leases | | 4.4 |
| | 6.7 |
| | 6.8 |
| | 7.0 |
| | 7.1 |
| | 130.9 |
| | 162.9 |
|
Gas purchases(2) | | 86.2 |
| | 2.9 |
| | — |
| | — |
| | — |
| | — |
| | 89.1 |
|
Gas pipeline capacity commitments | | 81.1 |
| | 74.5 |
| | 72.8 |
| | 72.5 |
| | 71.0 |
| | 530.4 |
| | 902.3 |
|
Other purchase commitments(3) | | — |
| | 0.9 |
| | 1.6 |
| | 0.1 |
| | 2.0 |
| | — |
| | 4.6 |
|
Other long-term liabilities(4) | | 18.3 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 18.3 |
|
NW Natural Total | | 452.0 |
| | 206.6 |
| | 141.9 |
| | 230.3 |
| | 138.5 |
| | 1,792.3 |
| | 2,961.6 |
|
Other (NW Holdings) | | | | | | | | | | | | | | |
Short-term debt maturities | | 24.0 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 24.0 |
|
Short- and long-term obligations(5) | | 1.3 |
| | 35.8 |
| | 0.3 |
| | 0.3 |
| | 0.3 |
| | 1.1 |
| | 39.1 |
|
NW Holdings Total | | $ | 477.3 |
| | $ | 242.4 |
| | $ | 142.2 |
| | $ | 230.6 |
| | $ | 138.8 |
| | $ | 1,793.4 |
| | $ | 3,024.7 |
|
| |
(1)
| Postretirement benefit payments primarily consists of two NW Natural items: (1) estimated pension and other postretirement plan payments, which are funded by plan assets and future cash contributions, and (2) required payments to the Western States multiemployer pension plan due to NW Natural's withdrawal from the plan in December 2013. See Note 10. |
| |
(2)
| Gas purchases include contracts which use price formulas tied to monthly index prices. The commitment amounts presented incorporate the December 2019 first of month index price for each supply basin from which gas is purchased. For a summary of gas purchase and gas pipeline capacity commitments, see Note 17. |
| |
(3)
| Other purchase commitments primarily consist of remaining balances under existing purchase orders. |
| |
(4)
| Other long-term liabilities includes accrued deferred compensation plan liabilities for executives and directors. The timing of these payments are uncertain; however, these payments are unlikely to all occur in the next 12 months. |
| |
(5)
| Short- and long-term obligations include short- and long-term debt obligations and other immaterial liabilities. |
In addition to known contractual obligations listed in the above table, NW Natural has also recognized liabilities for future environmental remediation or action. The exact timing of payments beyond 12 months with respect to those liabilities cannot be reasonably estimated due to numerous uncertainties surrounding the course of environmental remediation and the preliminary nature of site investigations. See Note 18 for a further discussion of environmental remediation cost liabilities.
At December 31, 2019, 626 of NW Natural's natural gas distribution employees were members of the Office and Professional Employees International Union (OPEIU) Local No. 11. In November 2019, union employees ratified a new collective bargaining agreement that took effect on December 1, 2019, expires on May 31, 2024, and is effective thereafter from year to year unless either party serves notice of its intent to negotiate modifications to the collective bargaining agreement. The remaining terms of the collective bargaining agreement include the following items: a 1.5% wage increase effective December 1, 2019, a 2.0% wage increase effective June 1, 2020, and scheduled wage increases effective June 1 of each subsequent year of 3.5%; competitive health benefits, including 15% to 20% premium cost sharing by employees; a 401(k) contribution of 4% for employees hired after our pension plan was closed on December 31, 2009; and a 401(k) match of 50% of the first 8% of savings.
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 Natural has a separate commercial paper program and separate bank facilities.facilities it may enter into from time to time. In addition to issuing commercial paper or entering into bank loans to meet working capital requirements, including seasonal requirements to finance gas purchases and accounts receivable, short-term debt may also be used to temporarily fund 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 December 31, 20192022 and 2018,2021, NW Holdings hadNatural's short-term debt outstandingconsisted of $149.1 million and $217.6 million, respectively, and NW Natural had short-term debt outstanding of $125.1 million and $217.5 million, respectively. The weightedthe following:
| | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
In millions | Balance Outstanding | Weighted Average Interest Rate(1) | | Balance Outstanding | Weighted Average Interest Rate(1) |
NW Natural: | | | | | |
Commercial paper | $ | 170.2 | | 4.6 | % | | $ | 245.5 | | 0.3 | % |
Other (NW Holdings): | | | | | |
Credit agreement | 88.0 | | 5.3�� | % | | 144.0 | | 1.1 | % |
NW Holdings | $ | 258.2 | | | | $ | 389.5 | | |
(1)Weighted average interest rate on outstanding short-term debt outstanding at December 31, 2019 and 2018 was 2.0% and 3.0%, respectively, at both NW Holdings and NW Natural.
Credit Agreements
NW Holdings
NW Holdings has a $100$200 million sustainability-linked credit agreement, with a feature that allows it to request increases in the total commitment amount, up to a maximum of $150$300 million. The maturity date of the agreement is October 2, 2023,November 3, 2026, with available extensions of commitments for two additional one-year periods, subject to lender approval.
All lenders under the NW Holdings credit agreement are major financial institutions with committed balances and investment grade credit ratings as of December 31, 20192022 as follows:
| | | | | |
In millions | |
Lender rating, by category | Loan Commitment |
AA/Aa | $ | 200 | |
| |
Total | $ | 200 | |
|
| | | |
In millions | |
Lender rating, by category | Loan Commitment |
AA/Aa | $ | 100 |
|
Total | $ | 100 |
|
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. There was $88.0 million and $144.0 million of outstanding balances under the NW Holdings agreement at December 31, 2022 and 2021, respectively.
The NW Holdings credit agreement permits the issuance of letters of credit in an aggregate amount of up to $40 million. The principal amount of borrowings under the credit agreement is due and payable on the maturity date. The credit agreement requires NW Holdings to maintain a consolidated indebtedness to total capitalization ratio of 70% or less. Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and accelerate the maturity of all amounts outstanding. NW Holdings was in compliance with this covenant at December 31, 20192022 and 2018,2021, with consolidated indebtedness to total capitalization ratios of 54.3%57.6% and 55.6%60.5%, respectively.
The NW Holdings credit agreement also requires NW Holdings to maintain debt ratings (which are defined by a formula using NW Natural's credit ratings in the event NW Holdings does not have a credit rating) with Standard & Poor's (S&P) and Moody's Investors Service, Inc. (Moody’s) and notify the lenders of any change in its senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies. A change in NW Holdings' debt ratings by S&P or Moody’s is not an event of default, nor is the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement. Rather, interest rates on any loans outstanding under the credit agreements are tied to debt ratings and therefore, a change in the debt rating would increase or decrease the cost of any loans under the credit agreements when ratings are changed. NW Holdings does not currently maintain ratings with S&P or Moody's.
Interest charges on the NW Holdings credit agreement arewere indexed to the London Interbank Offered Rate (LIBOR). through January 31, 2023. The agreement containswas amended to replace LIBOR with the secured overnight financing rate (SOFR) beginning February 2023. The SOFR is subject to a provision10 basis point spread adjustment. The NW Holdings credit agreement also includes a mechanism that can increase or decrease the undrawn interest rate by up to transition1 basis point and undrawn interest rate by up to an equivalent replacement rate upon the phase-out5 basis points in accordance with NW Holdings’ independently verified achievement of LIBOR in 2021.quantifiable metrics related to two goals—one related to carbon savings and one related to in-line inspections of NW Natural’s transmission pipeline. Performance against these metrics is designed to be assessed annually with pricing adjustments, if any, resetting off of primary pricing annually and not cumulatively.
NW Holdings had $1.0 million and $2.8 million ofno letters of credit issued and outstanding in support of acquisitions of water companies, separate from the aforementioned credit agreement, at December 31, 20192022 and 2018, respectively. The $1.0 million letter of credit outstanding at NW Holdings as of December 31, 2019 for purposes of facilitating the Suncadia acquisition was extinguished after the close of the transaction on January 31, 2020.2021.
NW Natural
NW Natural has a sustainability-linked multi-year credit agreement for unsecured revolving loans totaling $300$400 million, with a feature that allows NW 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, 2023November 3, 2026 with an available extension of commitments for two additional one-year periods, subject to lender approval.
All lenders under the NW Natural credit agreement are major financial institutions with committed balances and investment grade credit ratings as of December 31, 20192022 as follows:
| | | | | |
In millions | |
Lender rating, by category | Loan Commitment |
AA/Aa | $ | 400 | |
| |
Total | $ | 400 | |
|
| | | |
In millions | |
Lender rating, by category | Loan Commitment |
AA/Aa | $ | 300 |
|
Total | $ | 300 |
|
Based on credit market conditions, it is possible one or more lending commitments could be unavailable to NW Natural if the lender defaulted due to lack of funds or insolvency; however, NW Natural does not believe this risk to be imminent due to the lenders' strong investment-grade credit ratings.
The NW Natural credit agreement permits the issuance of letters of credit in an aggregate amount of up to $60 million. The principal amount of borrowings under the credit agreement is due and payable on the maturity date. There were no outstanding balances under this credit agreement or the prior credit agreement at December 31, 20192022 or 2018.2021. The credit agreement requires NW Natural to maintain a consolidated indebtedness to total capitalization ratio of 70% or less. Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and accelerate the maturity of all amounts outstanding. NW Natural was in compliance with this covenant at December 31, 20192022 and 2018,2021, with consolidated indebtedness to total capitalization ratios of 54.1%52.1% and 57.1%55.8%, respectively.
The NW Natural credit agreement also requires NW Natural to maintain credit ratings with S&P and Moody’s and notify the lenders of any change in NW Natural's senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies. A change in NW Natural's debt ratings by S&P or Moody’s is not an event of default, nor is the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement. Rather, interest rates on any loans outstanding under the credit agreement are tied to debt ratings and therefore, a change in the debt rating would increase or decrease the cost of any loans under the credit agreement when ratings are changed. See "Credit Ratings" below.
Interest charges on the NW Natural credit agreement arewere indexed to LIBOR.the LIBOR through January 31, 2023. The agreement containswas amended to replace LIBOR with the SOFR beginning February 2023. The SOFR is subject to a provision10 basis point spread adjustment. The NW Natural credit agreement also includes a mechanism that can increase or decrease the undrawn interest rate by up to transition1 basis point and undrawn interest rate by up to an equivalent replacement rate upon5 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.
In February 2023, NW Natural issued a $14 million letter of credit through its existing credit agreement. There were no other letters of credit outstanding under the phase-out of LIBOR in 2021.credit agreement.
Credit Ratings
NW Holdings does not currently maintain ratings with S&P or Moody's. NW Natural's credit ratings are a factor of liquidity, potentially affecting access to the capital markets including the commercial paper market. NW Natural's credit ratings also have an impact on the cost of funds and the need to post collateral under derivative contracts.
The following table summarizes NW Natural's current credit ratings:
|
| | | | | | | | | | | | | |
| | S&P | | Moody's |
Commercial paper (short-term debt) | | A-1 | | P-2 |
Senior secured (long-term debt) | | AA- | | A2 |
Senior unsecured (long-term debt) | | n/a | | Baa1 |
Corporate credit rating | | A+ | | n/a |
Ratings outlook | | Stable | | Stable |
In May 2019, Moody's revised NW Natural's ratings outlook from negative to stable. In addition, the senior secured (long-term debt) rating changed from A1 to A2 and the senior unsecured (long-term debt) rating was revised from A3 to Baa1.
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
The followingIssuance of Long-Term Debt
In December 2022, NW Natural debenturesentered into a Bond Purchase Agreement between NW Natural and the institutional investors named as purchasers therein. The Bond Purchase Agreement provides for the issuance of (i) $100.0 million aggregate principal amount of NW Natural’s First Mortgage Bonds (FMBs), 5.43% Series due 2053 (5.43% Bonds), (ii) $80.0 million aggregate principal amount of NW Natural’s FMBs, 5.18% Series due 2034 (5.18% Bonds) and (iii) $50.0 million aggregate principal amount of NW Natural’s FMBs, 5.23% Series due 2038 (5.23% Bonds) in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended. The 5.43% Bonds were retiredissued on January 6, 2023, pursuant to the Twenty-fifth Supplemental Indenture to NW Natural’s Mortgage and Deed of Trust, dated as of July 1, 1946, with Deutsche Bank Trust Company Americas as trustee (the Mortgage). The 5.18% Bonds and the 5.23% Bonds are expected to be issued on or about August 4, 2023, pursuant to the Twenty-sixth Supplemental Indenture to the Mortgage.
The 5.43% Bonds will bear interest at the rate of 5.43% per annum, payable semi-annually on January 6 and July 6 of each year, commencing July 6, 2023, and will mature on January 6, 2053. The 5.43% 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 July 6, 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 July 6, 2052, at 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption.
The 5.18% Bonds will bear interest at the rate of 5.18% per annum, payable semi-annually on February 4 and August 4 of each year, commencing February 4, 2024, and will mature on August 4, 2034. The 5.18% 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 May 4, 2034, 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 May 4, 2034, at 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption.
The 5.23% Bonds will bear interest at the rate of 5.23% per annum, payable semi-annually on February 4 and August 4 of each year, commencing February 4, 2024, and will mature on August 4, 2038. The 5.23% 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 May 4, 2038, 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 May 4, 2038, at 100% of the principal amount thereof plus accrued and unpaid interest thereon to the date of redemption.
In September 2022, NW Holdings entered into an 18-month credit agreement for $100.0 million and borrowed the full amount. The loan carries a variable interest rate based on the SOFR, resulting in a rate of 4.2% at December 31, 2022. The loan is due and payable on March 15, 2024. The credit agreement prohibits NW Holdings from permitting consolidated indebtedness to be greater than 70% of total capitalization, each as defined therein and calculated as of the end of each fiscal quarter. Failure to comply with this financial covenant would entitle the lenders to accelerate the maturity of the amounts outstanding under the credit agreement. NW Holdings was in compliance with this financial covenant as of December 31, 2022. In December 2022, NW Holdings entered into a swap to fix the interest rate on this debt beginning in January 2023 through the loan's maturity. See "Interest Rate Swap Agreements" below for more detail.
In September 2022, NWN Water entered into an 18-month credit agreement for $50.0 million and borrowed the full amount. The loan carries a variable interest rate based on the SOFR, resulting in a rate of 4.2% at December 31, 2022. The loan is due and payable on March 15, 2024. The credit agreement prohibits NWN Water and NW Holdings from permitting consolidated indebtedness to be greater than 70% of total capitalization, each as defined therein and calculated as of the end of each fiscal quarter. Failure to comply with this financial covenant would entitle the lenders to accelerate the maturity of the amounts outstanding under the credit agreement. NWN Water and NW Holdings were in compliance with this financial covenant as of December 31, 2022.
In July 2022, NW Natural entered into a Bond Purchase Agreement between NW Natural and the institutional investors named as purchasers therein for the issuance of $140.0 million aggregate principal amount of NW Natural's FMBs due in 2052 (the Bonds). The Bonds were issued on September 30, 2022. The Bonds 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 are 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 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 allocated to finance and/or refinance, in whole or in part, investments in one or more projects of NW Natural deemed to be an eligible project in the periods indicated:bond offering. An amount equivalent to the proceeds were allocated to expenditures related to RNG infrastructure, energy efficiency programs, expenditures related to the operations of our LEED Gold certified headquarters building, and expenditures and program investments related to enabling opportunities for diverse and small business enterprises.
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
In millions | | 2019 | | 2018 | | 2017 |
NW Natural First Mortgage Bonds | | | | | | |
Series 7.00% due 2017 | | $ | — |
| | $ | — |
| | $ | 40 |
|
Series 6.60% due 2018 | | — |
| | 22 |
| | — |
|
Series 1.55% due 2018 | | — |
| | 75 |
| | — |
|
Series 8.31% due 2019 | | 10 |
| | — |
| | — |
|
Series 7.63% due 2019 | | 20 |
| | — |
| | — |
|
Total | | $ | 30 |
| | $ | 97 |
| | $ | 40 |
|
In June 2019,2021, NWN Water, a wholly-owned subsidiary of NW Holdings, entered into a two-yearfive-year term loan agreement for $35.0 million.$55.0 million. The loan carried an interest rate of 2.35%2.5% at December 31, 2019,2022, which is based upon the one-month LIBORone-month SOFR 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 December 31, 2019,2022, with a consolidated indebtedness to total capitalization ratio of 54.3%57.6%. In December 2022, NW Holdings entered into a swap to fix the interest rate on this debt beginning in January 2023 through the loan's maturity. See "Interest Rate Swap Agreements" below for more detail.
Interest Rate Swap Agreements
NW Holdings and NWN Water entered into interest rate swap agreements with major financial institutions that effectively convert variable-rate debt to a fixed rate. Interest payments made between the effective date and expiration date are hedged by the swap agreements. The notional amount, effective date, expiration date and rate of the swap agreements are shown in the table below:
| | | | | | | | | | | | | | |
In millions | Notional Amount | Effective Date | Expiration Date | Fixed Rate |
NW Holdings | $ | 100.0 | | 1/17/2023 | 3/15/2024 | 4.7 | % |
NWN Water | $ | 55.0 | | 1/19/2023 | 6/10/2026 | 3.8 | % |
Retirement of Long-Term Debt
The following NW Natural debentures were retired in the periods indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
In millions | | 2022 | | 2021 | | 2020 |
NW Natural First Mortgage Bonds: | | | | | | |
Series 5.37% due 2020 | | — | | | — | | | 75 | |
Series 9.05% due 2021 | | — | | | 10 | | | — | |
Series 3.18% due 2021 | | — | | | 50 | | | — | |
Total | | $ | — | | | $ | 60 | | | $ | 75 | |
In June 2019, NW Natural issued $140.0 millionWater, a wholly-owned subsidiary of FMBs consistingNW Holdings, entered into a two-year term loan agreement for $35.0 million. The loan was repaid in June 2021 upon its maturity date.
Maturities and Interest on Long-Term Debt
Maturities and payment of $50.0 million with an interest rate of 3.141%, due in 2029, and $90.0 million with an interest rate of 3.869%, due in 2049. In September 2019, NW Natural retired $10.0 million of FMBs with an interest rate of 8.310%, and retired $20.0 million of FMBs with an interest rate of 7.630% in December 2019.
$75.0 million of FMBs with an interest rate of 5.370% matured in February 2020. No otheron long-term debt is scheduled to mature overfor each of the next twelve months.annual periods through December 31, 2027 and thereafter are as follows:
| | | | | | | | | | | | | | |
In millions | | Long-term debt maturities | | Interest on long-term debt |
NW Natural: | | | | |
2023 | | $ | 90.0 | | | $ | 53.9 | |
2024 | | — | | | 50.7 | |
2025 | | 30.0 | | | 50.2 | |
2026 | | 55.0 | | | 48.2 | |
2027 | | 64.7 | | | 44.8 | |
Thereafter | | 895.0 | | | 783.0 | |
NW Natural Total | | $ | 1,134.7 | | | $ | 1,030.8 | |
Other NW Holdings: | | | | |
2023 | | $ | 0.8 | | | $ | 12.8 | |
2024 | | 150.7 | | | 4.2 | |
2025 | | 0.7 | | | 2.7 | |
2026 | | 55.7 | | | 1.3 | |
2027 | | 0.7 | | | 0.1 | |
Thereafter | | 2.6 | | | 0.3 | |
Other NW Holdings Total | | $ | 211.2 | | | $ | 21.4 | |
NW Holdings: | | | | |
2023 | | $ | 90.8 | | | $ | 66.7 | |
2024 | | 150.7 | | | 54.9 | |
2025 | | 30.7 | | | 52.9 | |
2026 | | 110.7 | | | 49.5 | |
2027 | | 65.4 | | | 44.9 | |
Thereafter | | 897.6 | | | 783.3 | |
NW Holdings Total | | $ | 1,345.9 | | | $ | 1,052.2 | |
See "Financial Condition—Contractual Obligations" above 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 December 31, 20192022 and 2018.2021. NW Natural may file a voluntary petition for bankruptcy only if approved unanimously by the Board of Directors of NW Natural, including the independent director, and by the holder of the preferred share.
Cash Flows
Operating Activities
Changes in our operating cash flows are primarily affected by net income or loss, changes in working capital requirements, and other cash and non-cash adjustments to operating results.
Operating activity highlights include:
|
| | | | | | | | | | | | |
NW Holdings |
In millions | | 2019 | | 2018 | | 2017 |
Cash provided by operating activities | | $ | 185.3 |
| | $ | 168.8 |
| | $ | 206.7 |
|
|
| | | | | | | | | | | | |
NW Natural |
In millions | | 2019 | | 2018 | | 2017 |
Cash provided by operating activities | | $ | 186.2 |
| | $ | 173.5 |
| | $ | 206.5 |
|
The significant drivers of changes in cash provided by operating activities discussed below apply to both NW Holdings and NW Natural.
| | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
NW Natural cash provided by operating activities | | $ | 145.2 | | | $ | 141.5 | | | $ | 148.5 | |
NW Holdings cash provided by operating activities | | $ | 147.7 | | | $ | 160.4 | | | $ | 145.3 | |
2019
2022 COMPARED TO 20182021. The significant factors contributing to the $16.5$3.7 million and $12.7 million increases in NW Holdings andincrease at NW Natural cash flow provided by operating activities respectively, were as follows:
an•$52.9 million increase in net deferred gas costs as the actual cost of $27.5 million at NW Holdings and $24.9 million at NW Naturalgas during the year ended December 31, 2022 was higher than the rate embedded in the PGA. In addition, for the year ended December 31, 2021, actual gas costs were 21% above the PGA rate due to net income tax refundsthe 2021 cold weather event; and
•$12.6 million increase in 2019 compared to payments in 2018. The refunds wereaccounts payable primarily due to bonus depreciation taken ona larger volume of gas purchased and the higher cost of gas; partially offset by
•$32.0 million increase in asset optimization revenue sharing bill credits to customers due to the 2021 cold weather event; and
•$32.1 million increase in accounts receivable and accrued unbilled revenue resulting from higher balances due to colder weather.
The $12.7 million decrease in NW Natural's North Mist gas storage expansion which was placed into service in May 2019, as well as $6.0 million in income taxes paid in 2018 and refunded toHoldings cash flow provided by operating activities were driven by the above factors affecting NW Natural, in 2019;
an increase of $10.6 million from collections of both current and deferred pension expenses as a result of NW Natural's Oregon rate case; and
an increase of $4.6 million dueaddition to lower contributions paid to qualified defined benefit pension plansprepaid income taxes in the current period2022 compared to prior periods; partially offset by
a net decrease of $28.5 million at NW Natural from changes in receivables, inventories, and accounts payable, primarily reflecting increased gas purchase expenditures from average weather in the current period compared to warmer-than average weather in the prior period as well as higher gas costs than those included in customer rates.
2021.
2018
2021 COMPARED TO 20172020. The significant factors contributing to the $37.9$7.0 million and $33.0 million decreases in NW Holdings and decrease at NW Natural cash flow provided by operating activities respectively, were as follows:
a decrease of $31.5•$58.1 million increase in cash flow benefits from changes innet deferred gas cost balancescosts as the actual costs during the 2020-21 winter season were 21% above the PGA estimates primarily due to higherthe 2021 cold weather event as opposed to gas pricescosts in the fourth quarter of 2018 and lower current year PGA rates reflecting over-collections of certain fixed costs from customers2019-20 winter season that were in line with estimates embedded in the prior year when weather was colder than average;PGA,
a•$26.5 million decrease of $12.6 million due to $27.4increased receivables; partially offset by
•$51.7 million income taxes paid increase in 2018 duethe regulatory incentive sharing mechanism related to revenues earned from Mist gas storage and asset management activities primarily related to the elimination2021 cold weather event, and
•$19.4 million of bonus depreciation as a result of the TCJA, compared to income taxes paid of $14.8 million in 2017; partially offset by
a net increase of $10.2 million from changes in working capital related to receivables, inventories, and accounts payable reflecting warmer than average weather in 2018 comparedlower contributions to the prior period; and
an increase of $3.9 million due to a decrease in contributions paid to qualified defined benefit pension plans.plan.
The $15.1 million increase in NW Holdings cash flow provided by operating activities were driven by the above factors affecting NW Natural, in addition to:
•$14.0 million increase due to lower income and other taxes, and
•$9.7 million increase due to lower deferred environmental expenses.
During the year ended December 31, 2019,2022, NW Natural contributed $11.0 milliondid not make any cash contributions to its qualified defined benefit pension plan, compared to $15.5 million for 2018 and $19.4$9.6 million in 2017.2021 and $29.0 million 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, NW Natural does not expect to make any plan contributions during 2023. The amount and timing of future contributionscontributions will depend on market interest rates and investment returns on the plans’ assets. See Note 10.
Bonus income tax depreciation of 50% was available in 2017 for a large portion of capital expenditures, and bonus depreciation of 40% was available in 2019 for a large portion of North Mist gas storage expansion capital expenditures for federal and Oregon purposes. This reduced taxable income and provided cash flow benefits in 2017 and 2019. As a result of the enactment of the TCJA on December 22, 2017, bonus depreciation was eliminated for other NGD business property acquired and placed in service after December 31, 2017. Accordingly, bonus depreciation was not available for such property in 2018 and 2019, and we do not anticipate similar cash flow benefits related to bonus depreciation in the future.
We
NW Holdings and NW Natural have lease and purchase commitments relating to our operating activities that are financed with cash flows from operations. For information on cash flow requirements related to leases and other purchase commitments, see “Financial Condition—Contractual Obligations” aboveNote 7 and Note 1716.
.
Investing Activities
Investing activity highlights include: | | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
NW Natural cash used in investing activities | | $ | (320.3) | | | $ | (275.7) | | | $ | (264.1) | |
NW Holdings cash used in investing activities | | $ | (435.5) | | | $ | (300.1) | | | $ | (294.3) | |
|
| | | | | | | | | | | | |
NW Holdings |
In millions | | 2019 | | 2018 | | 2017 |
Cash used in investing activities | | $ | (303.8 | ) | | $ | (217.5 | ) | | $ | (214.2 | ) |
Capital expenditures | | (223.5 | ) | | (214.6 | ) | | (213.3 | ) |
|
| | | | | | | | | | | | |
NW Natural |
In millions | | 2019 | | 2018 | | 2017 |
Cash used in investing activities | | $ | (243.1 | ) | | $ | (238.5 | ) | | $ | (214.2 | ) |
Capital expenditures | | (221.4 | ) | | (214.3 | ) | | (213.3 | ) |
20192022 COMPARED TO 20182021. Cash used in investing activities increased $86.3 million and $4.6$44.6 million at NW HoldingsNatural and $135.4 million at NW Natural,Holdings, respectively. The increase at NW Natural wasis primary driven by continuedan increase in capital expenditures of $40.4 million. The increase at NW Holdings is driven by the increase at NW Natural and $94.3 million in cash paid for water and wastewater acquisitions.
2021 COMPARED TO 2020. Cash used in investing activities increased $11.6 million at NW Natural and $5.8 million at NW Holdings, respectively. The increase at NW Natural is primary driven by an increase in capital expenditures of $12.2 million for customer growth, system reinforcement, and technology, as well as leasehold improvement additions at NW Natural's new corporate operations center. The increase was partially offset by lower capital expenditures due to the completion of the North Mist gas storage expansion in May 2019.technology. The increase at NW Holdings wasis driven by $55.9the $14.5 million higher purchase of an equity method investment and $12.5 million of proceeds from the sale of discontinued operations in 2020, partially offset by a $37.0 million decrease in cash paid for acquisitions.
NW Natural capital expenditures for acquisitions, net2023 are expected to be in the range of cash acquired.
2018 COMPARED TO 2017. The $3.3 million increase in cash used in investing activities at NW Holdings was primarily due to continued capital expenditures primarily related to NW Natural's North Mist gas storage expansion facility as well as customer growth, system reinforcement, technology, and facilities. The additional increase in cash used in investing activities at NW Natural was primarily due to NW Natural's initial cash contribution of $20$310 million to its then subsidiary, and now parent, NW Holdings.
NW Holdings capital expenditures in 2020 are anticipated to be between $240$350 million and $280 million, of which between $230 million and $270 million are anticipated to occur at the NGD business. The total capital investment for the five-year period from 20202023 to 2024 is2027 are expected to range from $980$1.3 billion to $1.5 billion. NW Natural Water is expected to invest approximately $25 million to $1.14 billion, with $950 million to $1.10 billion relating to the natural gas distribution segment and $30 million to $40 millionin 2023 related to maintenance capital expenditures for water and wastewater utilities we currently own or have under a purchaseowned as of December 31, 2022, and sale agreement.for the five-year period from 2023 to 2027 capital expenditures are expected to invest approximately $90 million to $110 million.
The timing and amount of the core capital expenditures and projects for 20202023 and the next five years could change based on regulation, growth, and cost estimates. Additional investments in our infrastructure during and after 20202023 that are not incorporated in the estimates provided above 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
Financing activity highlights include:
|
| | | | | | | | | | | | |
NW Holdings |
In millions | | 2019 | | 2018 | | 2017 |
Cash provided by financing activities | | $ | 115.5 |
| | $ | 57.8 |
| | $ | 7.4 |
|
Change in short-term debt | | (68.5 | ) | | 163.3 |
| | 0.9 |
|
Change in long-term debt | | 145.0 |
| | (47.0 | ) | | 60.0 |
|
Change in common stock issued, net | | 93.0 |
| | — |
| | — |
|
Cash dividend payments on common stock | | 53.3 |
| | 51.3 |
| | 54.0 |
|
|
| | | | | | | | | | | | |
NW Natural |
In millions | | 2019 | | 2018 | | 2017 |
Cash provided by financing activities | | $ | 54.9 |
| | $ | 69.8 |
| | $ | 7.4 |
|
Change in short-term debt | | (92.4 | ) | | 163.3 |
| | 0.9 |
|
Change in long-term debt | | 110.0 |
| | (47.0 | ) | | 60.0 |
|
Cash dividend payments on common stock | | 53.4 |
| | 38.4 |
| | 54.0 |
|
| | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
NW Natural cash provided by financing activities | | $ | 178.9 | | | $ | 139.3 | | | $ | 122.4 | |
NW Holdings cash provided by financing activities | | $ | 301.6 | | | $ | 131.4 | | | $ | 171.8 | |
2019
2022 COMPARED TO 20182021. Cash provided by financing activities increased $57.7 million and decreased $14.9$39.6 million at NW Natural primarily driven by $63.4 million in capital contributions by NW Holdings, and NW Natural, respectively.partially offset by changes in debt.
The decrease in cashCash provided by financing activities at NW Natural was primarily driven by $255.7increased $170.2 million in higher repayments of short-term debt compared to the prior period and $15.0 million higher cash dividends paid. The decrease was partially offset by net issuances of $110.0 million in long-term debt in the current period compared to net repayments of $47.0 million in the prior period as well as a capital contribution from NW Holdings to NW Natural of $93.0 million.
The increase at NW Holdings was primarily due to proceeds of $93.0 million from the June 2019 issuance of NW Holdings common stock, the issuance of $35.0 million of long-term debt at NW Natural Water, and short-term debt issuances of $24 million at NW Holdings. These increases were partially offset by the debt activity at NW Natural described above.
2018 COMPARED TO 2017. The $50.4 million increase in cash provided by financing activities at NW Holdings was primarily due to $162.4 million higher short-term debt issuances, partially offset by $107.0 million lower net proceeds from long-term debt activity in 2018. NW Natural cash provided by financing activities was $12.0 million higher in comparison to NW Holdings primarily due to cash proceeds of $191.1 million from the paymentissuance of common stock and the November 15, 2018 dividend toATM equity program, partially offset by changes in debt.
2021 COMPARED TO 2020. Cash provided by financing activities increased $16.9 million at NW Natural primarily driven by higher short-term debt borrowings of $297.6 million and $116.0 million in capital contributions by NW Holdings, shareholders usingpartially offset by $390.1 million of lower proceeds from and repayments of commercial paper with maturities greater than 90 days.
Cash provided by financing activities decreased $40.4 million at NW Holdings funds.primarily due to $390.1 million of lower proceeds from and repayments of commercial paper with maturities greater than 90 days, partially offset by higher other short-term debt borrowings of $319.6 million and cash proceeds of $17.5 million from the ATM equity program.
Pension Cost and Funding Status of Qualified Retirement Plans
NW Natural's pension costs are determined in accordance with accounting standards for compensation and retirement benefits. See “Application of Critical Accounting Policies and Estimates – Pensions and Postretirement Benefits” below. Pension expense for NW Natural's qualified defined benefit plan, which is allocated between operations and maintenance expenses and capital expenditures and through October 31, 2018, the deferred regulatory balancing account, totaled $16.5$5.4 million in 2019,2022, a decrease of $4.2$11.2 million from 2018.2021. The fair market value of pension assets in this plan increaseddecreased to $313.1$280.3 million at December 31, 20192022 from $257.8$399.2 million at December 31, 2018.2021. The increasedecrease was due to a gainloss on plan assets of $65.1$93.7 million and $11.0 million in employer contributions, partially offset by benefit payments of $20.8$25.2 million.
Contributions made to NW Natural's company-sponsored qualified defined benefit pension plan are based on actuarial assumptions and estimates, tax regulations, and funding requirements under federal law. The qualified defined benefit pension plan was underfunded by $164.3$101.3 million at December 31, 2019.2022. 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, NW Natural plansdoes not expect to make any plan contributions during 20202023. The amount and timing of $29.0 million.future contributions will depend on market interest rates and investment returns on the plan's assets. See Note 10 for furtherinformation regarding employer contributions and estimated future benefit payments and other pension disclosures.
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“Application of Critical Accounting Policies and EstimatesEstimates—Environmental Contingencies” below. At December 31, 2019,2022, NW Natural's total estimated liability related to environmental sites was $136.0$118.8 million. See Note 1817 and "Results of Operations—Regulatory Matters—Rate Mechanisms—Environmental Cost Deferral and Recovery" above.
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.
New Accounting Pronouncements
For a description of recent accounting pronouncements that may have an impact on our financial condition, results of operations, or cash flows, see Note 22.
.
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 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.
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.
Regulatory Accounting
The NGD segment is regulated by the OPUC and WUTC, which establish the rates and rules governingdesigned to recover specific costs of providing regulatory services, provided to customers, and, to a certain extent, set forth special accounting treatment for certain regulatory transactions.transactions for which NW Natural records regulatory assets and liabilities. In general, the same accounting principles as non-regulated companies reporting under U.S. GAAP are used. However, authoritative guidance for regulated operations (regulatory accounting) requires different accounting treatment for regulated companies to show the effects of such regulation. For example, NW Natural accounts for the cost of gas using a PGA deferral and cost recovery mechanism, which is submitted for approval annually to the OPUC and WUTC. See "Results of Operations—Regulatory Matters—Rate Mechanisms—Purchased Gas Adjustment" above. There are other expenses and revenues that the OPUC or WUTC may require NW Natural to defer for recovery or refund in future periods. Regulatory accounting requires NW Natural to account for these types of deferred expenses (or deferred revenues) as regulatory assets (or regulatory liabilities) on the balance sheet. When the recovery of these regulatory assets from, or refund of regulatory liabilities to, customers is approved, NW Natural recognizes the expense or revenue on the income statement at the same time the adjustment to amounts is included in rates charged to customers.
The conditions that must be satisfied to adopt the accounting policies and practices of regulatory accounting include:
•an independent regulator sets rates;
•the regulator sets the rates to cover specific costs of delivering service; and
•the service territory lacks competitive pressures to reduce rates below the rates set by the regulator.
Because NW Natural's NGD operations satisfy all three conditions, NW Natural continues to apply regulatory accounting to NGD operations. Future accounting changes, regulatory changes, or changes in the competitive environment could require NW Natural to discontinue the application of regulatory accounting for some or all of our regulated businesses. This would require the write-off of those regulatory assets and liabilities that would no longer be probable of recovery from or refund to customers.
Based on current accounting and regulatory competitive conditions, NW Natural believes it is reasonable to expect continued application of regulatory accounting for NGD activities. Further, it is reasonable to expect the recovery or refund of NW Natural's regulatory assets and liabilities at December 31, 20192022 through future customer rates. If it is determined that all or a portion of
these regulatory assets or liabilities no longer meet the criteria for continued application of regulatory accounting, then NW Natural would be required to write-off the net unrecoverable balances against earnings in the period such determination is made. The net balance in regulatory asset and liability accounts was a net liability of $285.3$479.3 million and a net liability of $245.3$382.7 million as of December 31, 20192022 and 2018,2021, respectively. See Note 2 for more detail on regulatory balances.
Revenue Recognition
Revenues, which are derived primarily from the sale, transportation, and storage of natural gas, are recognized upon the delivery of gas commodity or services rendered to customers.
Accrued Unbilled Revenue
For a description of the policy regarding accrued unbilled revenue, most of which relates to the NGD business at NW Natural, see Note 2. The following table presents changes in key metrics if the estimated percentage of unbilled volume at December 31 was adjusted up or down by 1%:
| | | | | | | | | | | | | | |
| | 2022 |
In millions | | Up 1% | | Down 1% |
Unbilled revenue increase (decrease)(1) | | $ | 1.6 | | | $ | (1.6) | |
Margin increase (decrease)(1) | | 0.2 | | | (0.2) | |
Net income before tax increase (decrease)(1) | | 0.2 | | | (0.2) | |
|
| | | | | | | | |
| | 2019 |
In millions | | Up 1% | | Down 1% |
Unbilled revenue increase (decrease)(1) | | $ | 0.9 |
| | $ | (0.9 | ) |
Margin increase (decrease)(1) | | 0.2 |
| | (0.1 | ) |
Net income before tax increase (decrease)(1) | | 0.1 |
| | (0.1 | ) |
| |
(1)(1) Includes impact of regulatory mechanisms including decoupling mechanism and excludes the impact of unbilled revenue from water services.
| Includes impact of regulatory mechanisms including decoupling mechanism and excludes the impact of unbilled revenue from water services. |
Derivative Instruments and Hedging Activities
NW Natural's gas acquisitionHoldings and hedgingNW Natural have financial derivative policies that set forth guidelines for using financial derivative instruments to support prudent risk management strategies. These policies specifically prohibit the use of derivatives for trading or speculative purposes. Financial derivative contracts are utilized to hedge a portion of natural gas sale requirements. These contracts include swaps, options, and combinations of option contracts. NW Natural primarily uses these derivative financial instruments to manage commodity price variability. A small portion of NW Natural's derivative hedging strategy involves foreign currency exchange contracts.
Derivative instruments are recorded on the balance sheet at fair value. If certain regulatory conditions are met, then the derivative instrument fair value is recorded together with an offsetting entry to a regulatory asset or liability account pursuant to regulatory accounting, and no unrealized gain or loss is recognized in current income or loss. See "Regulatory Accounting" above for additional information. The gain or loss from the fair value of a derivative instrument subject to regulatory deferral is included in the recovery from, or refund to, NGD business customers in future periods. If a derivative contract is not subject to regulatory deferral, then the accounting treatment for unrealized gains and losses is recorded in accordance with accounting standards for derivatives and hedging which is either in current income or loss or in accumulated other comprehensive income or loss (AOCI or AOCL). Derivative contracts outstanding at December 31, 2019, 20182022, 2021 and 20172020 were measured at fair value using models or other market accepted valuation methodologies derived from observable market data. Estimates of fair value may change significantly from period-to-period depending on market conditions, notional amounts, and prices. These changes may have an impact on results of operations, but the impact would largely be mitigated due to the majority of derivative activities being subject to regulatory deferral treatment. For more information on derivative activity and associated regulatory treatment, see Note 2 and Note 16.15.
The following table summarizes the amount of lossesgains realized from commodity price transactions for the last three years:
| | | | | | | | | | | | | | | | | | | | |
In millions | | 2022 | | 2021 | | 2020 |
NGD business net gain on commodity swaps | | $ | 107.8 | | | $ | 50.9 | | | $ | 2.3 | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | |
In millions | | 2019 | | 2018 | | 2017 |
NGD business net gain (loss) on: | | | | | | |
Commodity Swaps | | $ | 17.9 |
| | $ | 7.4 |
| | $ | (7.8 | ) |
Realized gains and losses from commodity hedges shown above were recorded in cost of gas and were, or will be, included in annual PGA rates.
NW Holdings and NWN Water also use financial derivatives to hedge interest rate risk in the form of pay-fixed interest rate swaps. Unrealized gains and losses related to these interest rate swap agreements are recorded in AOCI on the consolidated balance sheet.
Pensions and Postretirement Benefits
NW Natural maintains a qualified non-contributory defined benefit pension plan, non-qualified supplemental pension plans for eligible executive officers and certain key employees, and other postretirement employee benefit plans covering certain non-union employees. NW Natural also has a qualified defined contribution plan (Retirement K Savings Plan) for all eligible employees. Only the qualified defined benefit pension plan and Retirement K Savings Plan have plan assets, which are held in qualified trusts to fund the respective retirement benefits. The qualified defined benefit retirement plan for union and non-union employees was closed to new participants several years ago. Non-union and union employees hired or re-hired after December 31, 2006 and 2009, respectively, and employees of certain NW Holdings subsidiaries are provided an enhanced Retirement K Savings Plan benefit. The postretirement Welfare Benefit Plan for non-union employees was also closed to new participants several years ago.
Net periodic pension and postretirement benefit costs (retirement benefit costs) and projected benefit obligations (benefit obligations) are determined using a number of key assumptions, including discount rates, rate of compensation increases, retirement ages, mortality rates and an expected long-term return on plan assets. See Note 10.
Accounting standards also require balance sheet recognition of unamortized actuarial gains and losses and prior service costs in AOCI or AOCL, net of tax. However, the retirement benefit costs related to qualified defined benefit pension and postretirement benefit plans are generally recovered in rates charged to NGD customers, which are set based on accounting standards for pensions and postretirement benefit expenses. As such, NW Natural received approval from the OPUC to recognize the unamortized actuarial gains and losses and prior service costs as a regulatory asset or regulatory liability based on expected rate recovery, rather than including it as AOCI or AOCL under common equity. See "Regulatory Accounting" above and Note 2, "Industry RegulationRegulation.".
In 2011, NW Natural received regulatory approval from the OPUC and began deferring a portion of pension expense above or below the amount set in rates to a regulatory balancing account on the balance sheet. As part of general rate case proceedings, on October 26, 2018, the OPUC issued an order to freeze NW Natural's pension balancing account as of October 31, 2018. In March 2019, the OPUC issued an order resolving the remaining open items for NW Natural's 2018 Oregon general rate case regarding recovery of the pension balancing account. At December 31, 2019, the cumulative amount deferred for future pension cost recovery was $54.2 million, including accrued interest. The regulatory balancing account includes the recognition of accrued interest on the account balance at NW Natural's authorized rate of return from 2011 through October 31, 2018, and at 4.3% thereafter. See "Regulatory Matters - Rate Mechanisms - Pension Cost Deferral and Pension Balancing Account" above for more information.
A number of factors, as discussed above, are considered in developing pension and postretirement benefit assumptions. For the December 31, 20192022 measurement date, NW Natural reviewed and updated:
•the weighted-average discount rate assumptions for pensions decreasedincreased from 4.20%2.71% for 20182021 to 3.16%5.18% for 2019,2022, and ourthe weighted-average discount rate assumptions for other postretirement benefits decreasedincreased from 4.13%2.72% for 20182021 to 3.11%5.19% for 2019.2022. The new rate assumptions were determined for each plan based on a matching of benchmark interest rates to the estimated cash flows, which reflect the timing and amount of future benefit payments. Benchmark interest rates are drawn from the FTSE Above Median Curve, which consists of high quality bonds rated AA- or higher by S&P or Aa3 or higher by Moody’s;
•the expected annual rate of future compensation increasesis separately determined for bargaining unit employees, which was updatedand non-bargaining unit employees. The rate assumption ranges from a range of 3.25%4.5% to 3.50% for 2018,5.0% in 2023, 4.0% to the 2019 assumption of 6.50%6.0% in 20202024 and 3.50%4.0% thereafter. The increase was a result of a new collective bargaining agreement that took effect December 1, 2019. The assumed range of 3.25% to 3.50% for non-bargaining employees remained unchanged;
•the expected long-term return on qualified defined benefit plan assets decreasedincreased to 7.50% in 2022 from 7.50% to 7.25%;7.00% in 2021; and
the mortality rate assumptions were updated RP-2014 mortality tables using scale MP-2018 to Pri-2012 mortality tables using scale MP-2019, which partially offset the increase of our projected benefit obligation; and
•other key assumptions, which were based on actual plan experience and actuarial recommendations.
At December 31, 2019,2022, the net pension liability (benefit obligations less market value of plan assets) for NW Natural's qualifiedthe defined benefit pension plan increased $1.9decreased $3.3 million compared to 2018.2021. The increasedecrease in the net pension liability is primarily due to the $57.1$118.9 million increasedecrease in plan assets and the $122.3 million decrease to the pension benefit obligation, partially offset by a $55.3 million increase in plan assets.obligation. The liability for non-qualified plans increased $3.0decreased $6.9 million, and the liability for other postretirement benefits increased $1.4decreased $7.3 million in 2019.
2022.
The expected long-term rate of return on plan assets is determined by averaging the expected earnings for the target asset portfolio. In developing expected return, historical actual performance, and long-term return projections are analyzed, which gives consideration to the current asset mix and target asset allocation.
NW Natural believes its pension assumptions are appropriate based on plan design and an assessment of market conditions. The following shows the sensitivity of retirement benefit costs and benefit obligations to changes in certain actuarial assumptions:
| | | | | | | | | | | | | | | | | | | | |
Dollars in millions | | Change in Assumption | | Impact on 2022 Retirement Benefit Costs | | Impact on Retirement Benefit Obligations at Dec. 31, 2022 |
Discount rate: | | (0.25) | % | | | | |
Qualified defined benefit plans | | | | $ | 1.6 | | | $ | 10.5 | |
Non-qualified plans | | | | — | | | 0.1 | |
Other postretirement benefits | | | | 0.1 | | | 0.5 | |
Expected long-term return on plan assets: | | (0.25) | % | | | | |
Qualified defined benefit plans | | | | 0.9 | | | N/A |
|
| | | | | | | | | | | |
Dollars in millions | | Change in Assumption | | Impact on 2019 Retirement Benefit Costs | | Impact on Retirement Benefit Obligations at Dec. 31, 2019 |
Discount rate: | | (0.25 | )% | | | | |
Qualified defined benefit plans | | | | $ | 1.4 |
| | $ | 16.2 |
|
Non-qualified plans | | | | — |
| | 0.8 |
|
Other postretirement benefits | | | | 0.1 |
| | 0.9 |
|
Expected long-term return on plan assets: | | (0.25 | )% | | | | |
Qualified defined benefit plans | | | | 0.7 |
| | N/A |
|
In July 2012, President Obama signed MAP-21 into law. This legislation 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.
Income Taxes
Valuation Allowances
Deferred tax assets are recognized to the extent that these assets are believed to be more likely than not to be realized. In making such a determination, available positive and negative evidence is considered, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. NW Holdings and NW Natural have determined that all recorded deferred tax assets are more likely than not to be realized as of December 31, 2019.2022. See Note 11.
Uncertain Tax Benefits
The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in the jurisdictions in which we operate. A tax benefit from a material uncertain tax position will only be recognized when it is more likely than not that the position, or some portion thereof, will be sustained upon examination, including resolution of any related appeals or litigation processes, on the basis of the technical merits. NW Holdings and NW Natural participate in the Compliance Assurance Process (CAP) with the Internal Revenue Service (IRS). Under the CAP program companies work with the IRS to identify and resolve material tax matters before the federal income tax return is filed each year. No reserves for uncertain tax benefits were recorded during 2019, 2018,2022, 2021, or 2017.2020. See Note 11.
Tax Legislation
When significant proposed or enacted changes in income tax rules occur, we consider whether there may be a material impact to our financial position, results of operations, cash flows, or whether the changes could materially affect existing assumptions used in making estimates of tax related balances.
On December 22, 2017, H.R.1 - An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018, also known as the Tax Cuts and Jobs Act (TCJA), was enacted. The TCJA lowers the U.S. federal corporate income tax rate to 21% from the existing maximum rate of 35%, effective for our tax year beginning January 1, 2018. The TCJA includes specific provisions related to regulated public utilities that generally provide for the continued deductibility of interest expense and the elimination of bonus depreciation. Certain rate normalization requirements for accelerated cost recovery benefits related to regulated plant balances also continue. See Note 11 for more information on how we are impacted by the TCJA.
With respect to other tax legislation, the final tangible property regulations applicable to all taxpayers were issued on September 13, 2013 and were generally effective for taxable years beginning on or after January 1, 2014. In addition, procedural guidance related to the regulations was issued under which taxpayers may make accounting method changes to comply with the regulations. We have evaluated the regulations and do not anticipate any material impact. However, unit-of-property guidance applicable to natural gas distribution networks has not yet been issued and is expected in the near future. We will further evaluate the effect of these regulations after this guidance is issued, but believe the current method is materially consistent with the new regulations and do not expect this additional guidance to have a material effect on our financial statements.
Regulatory Matters
Regulatory tax assets and liabilities are recorded to the extent it is probable they will be recoverable from, or refunded to, customers in the future. At December 31, 20192022 and 2018,2021, NW Natural had net regulatory income tax assets of $19.4$10.2 million and $21.4$12.4 million, respectively, representing future rate recovery of deferred tax liabilities resulting from differences in NGD plant financial statement and tax bases and NGD plant removal costs. These regulatory assets are currently being recovered through customer rates. At December 31, 20192022 and 2018,2021, regulatory income tax assets of $2.5$2.9 million and $2.3$2.4 million, respectively, were recorded by NW Natural, representing probable future rate recovery of deferred tax liabilities resulting from the equity portion of AFUDC.
At December 31, 20192021, regulatory income tax asset of $0.4 million was recorded by NW Natural, representing future recovery of Oregon CAT that was deferred between January 1, 2020 and 2018,October 31, 2020. In October 2020, the OPUC issued an order providing for recovery of deferred Oregon CAT as well as CAT incurred prospectively beginning November 1, 2020. This asset was fully recovered as of December 31, 2022.
At December 31, 2022 and 2021, regulatory liability balances, representing the estimated net benefit to NGD customers resulting from the change in deferred taxes as a result of the TCJA,TCJA, of $205.0$181.4 million and $217.1$189.6 million, respectively,respectively, were recorded by NW Natural. These balances include a gross up for income taxestaxes of $54.3$48.0 million and $57.5and $50.2 million, respectively.
The TCJA includes specific guidance for determining the shortest time period over which the portion of this regulatory liability resulting from accelerated cost recovery of NGD plant may accrue to the benefit of customers to avoid incurring federal normalization penalties. However, it is anticipated that until such time that customers receive the direct benefit of this regulatory liability, the balance, net of the additional gross up for income taxes, will continue to provide an indirect benefit to customers by reducing the NGD rate base which determines customer rates for service. Regulatory orders were issued by Oregon in March 2019 and by Washington in October 2019 addressing the provision of these TCJA tax benefits to customers. See "Regulatory Matters-Regulatory Proceeding Updates-Tax Reform Deferral" for more information.
NGD rates in effect for Oregon through October 31, 2018 and for Washington through October 31, 2019 included an allowance to provide for the recovery of the anticipated provision for income taxes incurred as a result of providing regulated services. The provision for income taxes during these periods included an allowance for federal income taxes determined by utilizing the pre-TCJA federal corporate income tax rate of 35 percent. NW Natural recorded an additional regulatory liability in 2018 and 2019 reflecting the deferral of estimated rate benefit for customers due to the newly enacted 21 percent federal corporate income tax rate. As of December 31, 2019 and 2018, regulatory liabilities of $1.7 million and $8.3 million, respectively, were recorded to reflect the estimated revenue deferral benefit to be provided to Oregon and Washington customers.
Environmental Contingencies
Environmental liabilities are accounted for in accordance with accounting standards under the loss contingency guidance when it is probable that a liability has been incurred and the amount of the loss is reasonablyreasonably estimable. Amounts recorded for environmental contingencies take numerous factors into consideration, including, among other variables, changes in enacted laws, regulatory orders, estimated remediation costs, interest rates, insurance proceeds, participation by other parties, timing of payments, and the input of legal counsel and third-party experts. Accordingly, changes in any of these variables or other factual circumstances could have a material impact on the amounts recorded for our environmental liabilities. For a complete discussion of environmental accounting policies refer to Note 2. For a discussion of current environmental sites and liabilities refer to Note 18.17. In addition, for information regarding the regulatory treatment of these costs and NW Natural's regulatory recovery mechanism, see "Results of Operations—Regulatory Matters—Rate Mechanisms—Environmental Cost Deferral and Recovery" above.
Impairment of Long-Lived Assets and Goodwill
Long-lived assetsLong-Lived Assets
We review the carrying value of long-lived assets whenever events or changes in circumstances indicate the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment of long-lived assets include a significant adverse change in the extent or manner in which the asset is used, a significant adverse change in legal factors or business climate that could affect the value of the asset, or a significant decline in the observable market value or expected future cash flows of the asset, among others.
When such factors are present, we assess the recoverability by determining whether the carrying value of the asset will be recovered through expected future cash flows. An asset is determined to be impaired when the carrying value of the asset exceeds the expected undiscounted future cash flows from the use and eventual disposition of the asset. If an impairment is indicated, we record an impairment loss for the difference between the carrying value and the fair value of the long-lived assets. Fair value is estimated using appropriate valuation methodologies, which may include an estimate of discounted cash flows.
In the fourth quarter of 2017, we recognized a non-cash pre-tax impairment of long-lived assets at the Gill Ranch Facility of $192.5 million. We determined circumstances existed that indicated the carrying value of the assets may not be recoverable. Those circumstances included the completion of a comprehensive strategic review process that evaluated various alternatives including a potential sale, as well as contracting for available storage at lower than anticipated values for the coming storage year. Given these considerations, management was required to re-evaluate the estimated cash flows from our interests in the Gill Ranch Facility, and determined that those estimated cash flows were no longer sufficient to cover the carrying value of the assets.
We used the income approach to estimate fair value, using the estimated future net cash flows. We also compared the results of the income approach to our own recent sale experience and recent market comparable transactions in order to estimate fair value. Many factors and assumptions impact the net cash flows used. The most significant and uncertain estimates included our forecast of gas storage pricing, our ability to successfully identify and contract with higher-value customers in and/or near the northern California market that Gill Ranch serves, and exploring the possibility of providing energy storage services such as compressed gas energy storage (CGES). After completing the strategic evaluation, which included a potential sale in the fourth quarter of 2017, we lowered our views of a near-term market recovery and decreased the likelihood associated with contracting with higher-value customers. These changes were the most significant estimates that caused our cash flow projections to decrease to a point where they were no longer sufficient to cover the carrying value of the asset.
On June 20, 2018, NWN Gas Storage, NW Holdings' wholly-owned subsidiary, entered into a Purchase and Sale Agreement that provides for the sale by NWN Gas Storage of all of the membership interests in Gill Ranch. As a result of our strategic shift away from California gas storage operations and the significance of Gill Ranch's financial results in 2017, we concluded that the pending sale of Gill Ranch qualifies as assets and liabilities held for sale and discontinued operations. As such, the assets and liabilities associated with Gill Ranch have been classified as discontinued operations assets and discontinued operations liabilities, respectively, and, the results of Gill Ranch are presented separately from the results of continuing operations, net of tax, as discontinued operations for the consolidated results of NW Holdings in all periods presented. The expenses included in the results of discontinued operations within the consolidated results of NW Holdings are the direct operating expenses incurred by Gill Ranch that may be reasonably segregated from the costs of our continuing operations. See "Results of Operations - Pending Sale of Gill Ranch Storage" above, Note 4, and Note 19 for additional information.
Goodwill and Business Combinations
In a business combination, goodwill is initially measured as any excess of the acquisition-date fair value of the consideration transferred over the acquisition-date fair value of the net identifiable assets acquired.
The carrying value of goodwill is reviewed annually during the fourth quarter, using balances as of October 1, or whenever events or changes in circumstance indicate that such carrying values may not be recoverable.
NW Holdings and NW Natural early-adopted ASU 2017-04, "Simplifying the Test for Goodwill Impairment" in the third quarter of 2018. The ASU removes Step 2 from the goodwill impairment test and under the amended guidance an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount in which the carrying amounts exceed the fair value of the reporting unit. In accordance with the updated guidance per ASU 2017-04,
NW Holdings' and NW Natural's policy for goodwill assessments begins with a qualitative analysis in which events and circumstances are evaluated, including macroeconomic conditions, industry and market conditions, regulatory environments, and the overall financial performance of the reporting unit. If the qualitative assessment indicates that the carrying value may be at risk of recoverability, a quantitative evaluation is performed to measure the carrying value against the fair value of the reporting unit. This evaluation may involve the assessment of future cash flows and other subjective factors for which uncertainty exists and could impact the estimation of future cash flows. These factors include, but are not limited to, the amount and timing of future cash flows, future growth rates, and the discount rate. Unforeseen events and changes in circumstances or market conditions could adversely affect these estimates, which could result in an impairment charge. A qualitative assessment was performed during the fourth quarter of 20192022 which indicated a quantitative assessment was not required; thus, no goodwill impairment was recorded. See Note 2 and Note 1514 for additional information.
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at fair value at the acquisition date, and the fair value of any non-controlling interest in the acquiree. Acquisition-related costs are expensed as incurred. When NW Natural acquires a business, it assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as of the acquisition date. When there is substantial judgment or uncertainty around the fair value of acquired assets, we may engage a third party expert to assist in determining the fair values of certain assets or liabilities.
67
ITEM 7A. 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. The following describes NW Holdings' and NW Natural's exposure to these risks, as applicable.
Commodity Supply Risk
NW Natural enters into spot, short-term, and long-term natural gas supply contracts, along with associated pipeline transportation contracts, to manage commodity supply risk. Historically, NW Natural has arranged for physical delivery of an adequate supply of gas, including gas in Mist storage and off-system storage facilities, to meet expected requirements of core NGD customers. NW Natural's long-term gas supply contracts are primarily index-based and subject to monthly re-pricing, a strategy that is intended to substantially mitigate credit exposure to physical gas counterparties. Absolute notional amounts under physical gas contracts related to open positions on derivative instruments were 512.8463 million therms and 472.3432 million therms as of December 31, 20192022 and 2018,2021, respectively.
Commodity Price Risk
Natural gas commodity prices are subject to market fluctuations due to unpredictable factors including weather, pipeline transportation congestion, drilling technologies, market speculation, and other factors that affect supply and demand. Commodity price risk is managedhedged with financial swaps, storage and physical gas reserves from a long-term investment in working interests in gas leases operated by Jonah Energy. These financial hedge contracts and gas reserves volumeshedges are generally included in NW Natural's annual PGA filing for recovery, subject to a regulatory prudence review. Notional amounts under financial derivative contracts were $123.3$359.5 million and $77.7$159.9 million as of December 31, 20192022 and 2018,2021, respectively. The fair value of financial swaps, based on market prices at December 31, 2019,2022, was an unrealized gain of $5.6$150.6 million, which would result in cash inflows of $1.2$134.3 million in 2020, $0.72023, $10.8 million in 2021,2024, and $3.7$5.5 million in 2022.2025.
Interest Rate Risk
NW Holdings and NW Natural are exposed to interest rate risk primarily associated with new debt financing needed to fund capital requirements, including future contractual obligations and maturities of long-term and short-term debt. Interest rate risk is primarily managed through the issuance of fixed-rate debt with varying maturities. NW Holdings and NW Natural may also enter into financial derivative instruments, including interest rate swaps, options and other hedging instruments, to manage and mitigate interest rate exposure. NW Holdings and NWN Water entered into interest rate swaps transactions for a total notional amount of $155 million to manage variable interest rate risk in December 2022. NW Natural did not have any outstanding interest rate swaps outstanding as of December 31, 20192022 or 2018.2021.
Foreign Currency Risk
The costs of certain pipeline and off-system storage services purchased from Canadian suppliers are subject to changes in the value of the Canadian currency in relation to the U.S. currency. Foreign currency forward contracts are used to hedge against fluctuations in exchange rates for NW Natural's commodity-related demand and reservation charges paid in Canadian dollars. Notional amounts under foreign currency forward contracts were $6.7$7.6 million and $6.9$6.3 million as of December 31, 20192022 and 2018,2021, respectively. If all of the foreign currency forward contracts had been settled on December 31, 2019,2022, a gainloss of $0.1 million$165 thousand would have been realized. See Note 16.15.
Credit Risk
Credit Exposure to Natural Gas Suppliers
Certain gas suppliers have either relatively low credit ratings or are not rated by major credit rating agencies. To manage this supply risk, NW Natural purchases gas from a number of different suppliers at liquid exchange points. NW Natural evaluates and monitors suppliers’ creditworthiness and maintains the ability to require additional financial assurances, including deposits, letters of credit, or surety bonds, in case a supplier defaults. In the event of a supplier’s failure to deliver contracted volumes of gas, the NGD business would need to replace those volumes at prevailing market prices, which may be higher or lower than the original transaction prices. NW Natural expects these costs would be subject to its PGA sharing mechanism discussed above. Since most of NW Natural's commodity supply contracts are priced at the daily or monthly market index price tied to liquid exchange points, and NW Natural has adequate storage flexibility, NW Natural believes it is unlikely a supplier default would have a material adverse effect on its financial condition or results of operations.
Credit Exposure to Financial Derivative Counterparties
Based on estimated fair value at December 31, 2019,2022, NW Natural's overall credit exposure relating to commodity contracts is considered immaterial as it reflects amounts owedwas $150.6 million. We generally have credit exposure to financial commodity swap derivative counterparties (see table below). However, changes in naturalwhen forward gas prices could result inexceed our hedge prices, which was the case with all financial swap counterparties owingat December 31, 2022. NW Natural money. Therefore,Natural’s credit exposure also includes interest rate swap and foreign exchange forward counterparties, neither of which were significant at December 31, 2022. NW Natural's financial derivatives policy requires counterparties to have at least an investment-grade credit rating at the time the derivative instrument is entered into and specific limits on the contract amount and duration based on each counterparty’s credit rating. NW Natural actively monitors and manages derivative credit exposure and places counterparties on hold for trading purposes or requires cash collateral, letters of credit, or guarantees as circumstances warrant.
The following table summarizes NW Natural's overall financial swap and option credit exposure, based on estimated fair value, and the corresponding counterparty credit ratings. The table uses credit ratings from S&P and Moody’s, reflecting the higher of the S&P or Moody’s rating or a middle rating if the entity is split-rated with more than one rating level difference:
| | | | | | | | | | | | | | |
| | Financial Derivative Position by Credit Rating Unrealized Fair Value Gain (Loss) |
In millions | | 2022 | | 2021 |
| | | | |
AA/Aa | | $ | 77.9 | | | $ | 44.3 | |
A/A | | 72.7 | | | 6.9 | |
| | | | |
Total | | $ | 150.6 | | | $ | 51.2 | |
|
| | | | | | | | |
| | Financial Derivative Position by Credit Rating Unrealized Fair Value Gain (Loss) |
In millions | | 2019 | | 2018 |
AA/Aa | | $ | 4.0 |
| | $ | (6.3 | ) |
A/A | | 1.6 |
| | (1.5 | ) |
Total | | $ | 5.6 |
| | $ | (7.8 | ) |
In most cases, NW Natural also mitigates the credit risk of financial derivatives by having master netting arrangements with counterparties which provide for making or receiving net cash settlements. Generally, transactionsTransactions of the same type in the same currency that have settlement on the same day with a single counterparty are netted and a single payment is delivered or received depending on which party is due funds.
Additionally, NW Natural has master contracts in place with each derivative counterparty, most of which include provisions for posting or calling for collateral. Generally, NW Natural can obtain cash or marketable securities as collateral with one day’s notice. Various collateral management strategies are used to reduce liquidity risk. The collateral provisions vary by counterparty but are not expected to result in the significant posting of collateral, if any. NW Natural has performed stress tests on the portfolio and concluded the liquidity risk from collateral calls is not material. Derivative credit exposure is primarily with investment grade counterparties rated AA-/Aa3 or higher. Contracts are diversified across counterparties, business types and countries to reduce credit and liquidity risk.
At December 31, 2019,2022, financial derivative commodity credit risk on a volumetric basis was geographically concentrated 38%28% in the United States and 62%71% in Canada, based on counterparties' location. At December 31, 2018,2021, financial derivative commodity credit risk on a volumetric basis was geographically concentrated 33%37% in the United States and 67%63% in Canada with our counterparties.
Credit Exposure to Insurance Companies
Credit exposure to insurance companies for loss or damage claims could be material. NW Holdings and NW Natural regularly monitor the financial condition of insurance companies who provide general liability insurance policy coverage to NW Holdings, NW Natural, their predecessors, and their subsidiaries.
Weather Risk
NW Natural has a weather normalization mechanism in Oregon; however, it is exposed to weather risk primarily from NGD business operations. A large percentage of NGD margin is volume driven, and current rates are based on an assumption of average weather. NW Natural's weather normalization mechanism in Oregon is for residential and small commercial customers, which is intended to stabilize the recovery of NGD business fixed costs and reduce fluctuations in customers’ bills due to colder or warmer than average weather. Customers in Oregon are allowed to opt out of the weather normalization mechanism. As of December 31, 2019,2022, approximately 8%7% of Oregon customers had opted out. In addition to the Oregon customers opting out, Washington residential and commercial customers account for approximately 11%12% of our total customer base and are not covered by weather normalization. The combination of Oregon and Washington customers not covered by a weather normalization mechanism is 18% of19% of all residential and commercial customers. See "Results of Operations—Regulatory Matters—Rate Mechanisms—WARM" above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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Supplemental Schedules Omitted
All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included elsewhere in the financial statements.
70
NW HOLDINGS MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
NW Holdings management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, as amended. NW Holdings' internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). NW Holdings' internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions involving company assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the NW Holdings Board of Directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use, or disposition of NW Holdings' assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or fraud. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
NW Holdings management assessed the effectiveness of NW Holdings' internal control over financial reporting as of December 31, 2019.2022. In making this assessment, NW Holdings management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on NW Holdings management's assessment and those criteria, NW Holdings management has concluded that it maintained effective internal control over financial reporting as of December 31, 2019.2022.
The effectiveness of internal control over financial reporting as of December 31, 20192022 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in this annual report.
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
/s/ Frank H. Burkhartsmeyer
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
March 2, 2020February 24, 2023
71
NW NATURAL MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
NW Natural management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, as amended. NW Natural's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). NW Natural's internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions involving company assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the NW Natural Board of Directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use, or disposition of NW Natural's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements or fraud. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
NW Natural management assessed the effectiveness of NW Natural's internal control over financial reporting as of December 31, 2019.2022. In making this assessment, NW Natural management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).
Based on NW Natural management's assessment and those criteria, NW Natural management has concluded that it maintained effective internal control over financial reporting as of December 31, 2019.2022.
/s/ David H. Anderson
David H. Anderson
President and Chief Executive Officer
/s/ Frank H. Burkhartsmeyer
Frank H. Burkhartsmeyer
Senior Vice President and Chief Financial Officer
March 2, 2020February 24, 2023
72
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Northwest Natural Holding Company:Company
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Northwest Natural Holding Company and its subsidiaries (the “Company”) as of December 31, 20192022 and 2018,2021, and the related consolidated statements of comprehensive income (loss), of shareholders' equity and of cash flows for each of the three years in the period ended December 31, 2019,2022, including the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying NW Holdings’ Management’s Report on Internal Control overOver Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit mattersmatter communicated below are mattersis a matter arising from the current period audit of the consolidated financial statements that werewas communicated or required to be communicated to the audit committee and that (i) relaterelates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Accounting for the Effects of Regulatory Matters
As described in Note 2 to the consolidated financial statements, there were $457.9 million of regulatory assets and $938.2 million of regulatory liabilities as of December 31, 2022. As disclosed by management, the Company has operations that are subject to the actions of regulators wherewhich establish rates in general rate cases and other proceedings which are designed to recover specific costs of providing regulatory services for which requires the Company to recordmanagement records regulatory assets and liabilities. As of December 31, 2019, there were $385.1 million of regulatory assets and $670.4 million of regulatory liabilities. The Company’s Natural Gas Distribution segment is regulated by the Oregon Public Utility Commission and Washington Utilities and Transportation Commission, which establish the rates and rules governing services provided to customers, and, to a certain extent, set forth special accounting treatment for certain regulatory transactions. Regulatory accounting requires management to account for deferred expenses (or deferred revenues) as regulatory assets (or regulatory liabilities) on the balance sheet. When the recovery of these regulatory assets from, or refund of regulatory liabilities to, customers is approved, management recognizes the expense or revenue on the income statement at the same time the adjustment to amounts is included in rates charged to customers.
The principal considerations for our determination that performing procedures relating to the Company’s accounting for the effects of regulatory matters is a critical audit matter are there was athe significant amount of judgment by management in assessing the potential outcomes and related accounting impacts associated with the ongoing accounting application of regulated operations, including alternative revenue programs, deferralrate cases and amortization accounting, and the results of earnings tests.other proceedings. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the recovery of regulatory assets and the settlement of regulatory liabilities.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s assessment of regulatoryrates cases and other proceedings, and the ongoing accounting application of regulated operations, including alternative revenue programs, deferral and amortization accounting, and the results of earnings tests, and including the probability of recovering incurred costsrecovery of regulatory assets and the settlement of regulatory liabilities and related accounting and disclosure impacts. These procedures also included, among others (i) evaluating (i) the reasonableness of management’s assessment regarding the probability of recovery of regulatory assets and settlement of regulatory liabilities, and (ii) evaluating the sufficiency of the disclosures in the consolidated financial statements. Testingstatements, and (iii) testing the regulatory assets and liabilities, and ongoing accounting application of regulated operationsincluding those subject to regulatory proceedings, also involved considering the provisions and formulas outlined in rate orders, other regulatory correspondence, and the application of relevant regulatory precedents.
Valuation of Acquired Tangible Assets for Sunriver Environmental, LLC
As described in Note 15 to the consolidated financial statements, in May 2019 the Company completed the acquisition of Sunriver Water, LLC and Sunriver Environmental, LLC for cash consideration of $55.0 million, subject to closing adjustments, which resulted in $14.0 million of tangible assets being recorded. The Sunriver acquisition met the criteria of a business combination, and as such a preliminary allocation of the consideration to the acquired assets based on their estimated fair value as of the acquisition date was performed. The fair value determination was made using existing regulatory conditions for assets associated with Sunriver Water, LLC as well as existing market conditions and standard valuation approaches for assets associated with Sunriver Environmental, LLC in order to allocate value as determined by an independent third party assessor for certain assets, which involved the use of management judgment in determining the significant estimates and assumptions used by the assessor, with the remaining difference from the consideration transferred being recorded as goodwill.
The principal considerations for our determination that performing procedures relating to the valuation of acquired tangible assets for Sunriver Environmental, LLC is a critical audit matter are (i) there was a high degree of auditor judgment and subjectivity in applying procedures relating to the fair value measurement of tangible assets acquired due to the significant amount of judgment by management when developing the estimate; (ii) significant audit effort was required in evaluating the estimate of the appraisal values of the acquired assets; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to business combination acquisition accounting, including controls over management’s valuation of the tangible assets, as well as controls over the estimate of the appraisal values of the acquired property. These procedures also included, among others, reading the purchase agreement and testing management’s process for estimating the fair value of the acquired tangible assets. Professionals with specialized skill and knowledge were used to assist in the evaluation of management’s valuation method and the reasonableness of the estimate of the appraisal values of the acquired assets.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
February 24, 2023
March 2, 2020
We have served as the Company’s auditor since 1997.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of Northwest Natural Gas Company:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Northwest Natural Gas Company and its subsidiaries (the “Company”) as of December 31, 20192022 and 2018,2021, and the related consolidated statements of comprehensive income (loss), of shareholders'shareholder's equity and of cash flows for each of the three years in the period ended December 31, 2019,2022, including the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192022 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for the Effects of Regulatory Matters
As described in Note 2 to the consolidated financial statements, there were $457.9 million of regulatory assets and $937.2 million of regulatory liabilities as of December 31, 2022. As disclosed by management, the Company has operations that are subject to the actions of regulators which establish rates in general rate cases and other proceedings which are designed to recover specific costs of providing regulatory services for which management records regulatory assets and liabilities. Regulatory accounting requires management to account for deferred expenses (or deferred revenues) as regulatory assets (or regulatory liabilities) on the balance sheet. When the recovery of these regulatory assets from, or refund of regulatory liabilities to, customers is approved, management recognizes the expense or revenue on the income statement at the same time the adjustment to amounts is included in rates charged to customers.
The principal considerations for our determination that performing procedures relating to the Company’s accounting for the effects of regulatory matters is a critical audit matter are the significant judgment by management in assessing the potential outcomes and related accounting impacts of rate cases and other proceedings. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence obtained related to the recovery of regulatory assets and the settlement of regulatory liabilities.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s assessment of rates cases and other proceedings, including the probability of recovery of regulatory assets and the settlement of regulatory liabilities and related accounting and disclosure impacts. These procedures also included, among others (i) evaluating the reasonableness of management’s assessment regarding the probability of recovery of regulatory assets
and settlement of regulatory liabilities, (ii) evaluating the sufficiency of the disclosures in the consolidated financial statements, and (iii) testing the regulatory assets and liabilities, including those subject to regulatory proceedings, also involved considering the provisions and formulas outlined in rate orders, other regulatory correspondence, and the application of relevant regulatory precedents.
/s/ PricewaterhouseCoopers LLP
Portland, Oregon
February 24, 2023
March 2, 2020
We have served as the Company’s auditor since 1997.
75
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) NORTHWEST NATURAL HOLDING COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
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| Year Ended December 31, | | Year Ended December 31, |
In thousands, except per share data | | 2019 | | 2018 | | 2017 | In thousands, except per share data | | 2022 | | 2021 | | 2020 |
| | | | | | | |
Operating revenues | | $ | 746,372 |
| | $ | 706,143 |
| | $ | 755,038 |
| Operating revenues | | $ | 1,037,353 | | | $ | 860,400 | | | $ | 773,679 | |
| | | | | | | |
Operating expenses: | | | | | | | Operating expenses: | |
Cost of gas | | 254,911 |
| | 255,519 |
| | 324,795 |
| Cost of gas | | 429,635 | | | 292,314 | | | 262,755 | |
Operations and maintenance | | 178,191 |
| | 156,698 |
| | 152,358 |
| Operations and maintenance | | 224,667 | | | 204,227 | | | 180,129 | |
Environmental remediation | | 12,337 |
| | 11,127 |
| | 15,291 |
| Environmental remediation | | 12,389 | | | 9,938 | | | 9,691 | |
General taxes | | 32,388 |
| | 32,172 |
| | 30,639 |
| General taxes | | 41,031 | | | 38,633 | | | 35,078 | |
Revenue taxes | | 30,325 |
| | 30,082 |
| | — |
| Revenue taxes | | 41,826 | | | 34,740 | | | 30,291 | |
Depreciation and amortization | | 91,496 |
| | 85,156 |
| | 81,053 |
| |
Depreciation | | Depreciation | | 116,707 | | | 113,534 | | | 103,683 | |
Other operating expenses | | 3,250 |
| | 3,227 |
| | — |
| Other operating expenses | | 3,621 | | | 3,897 | | | 3,701 | |
Total operating expenses | | 602,898 |
| | 573,981 |
| | 604,136 |
| Total operating expenses | | 869,876 | | | 697,283 | | | 625,328 | |
Income from operations | | 143,474 |
| | 132,162 |
| | 150,902 |
| Income from operations | | 167,477 | | | 163,117 | | | 148,351 | |
Other income (expense), net | | (22,836 | ) | | (3,601 | ) | | (295 | ) | Other income (expense), net | | 1,203 | | | (12,559) | | | (13,944) | |
Interest expense, net | | 42,685 |
| | 37,059 |
| | 37,526 |
| Interest expense, net | | 53,247 | | | 44,486 | | | 43,052 | |
Income before income taxes | | 77,953 |
| | 91,502 |
| | 113,081 |
| Income before income taxes | | 115,433 | | | 106,072 | | | 91,355 | |
Income tax expense | | 12,642 |
| | 24,191 |
| | 41,008 |
| Income tax expense | | 29,130 | | | 27,406 | | | 21,082 | |
Net income from continuing operations | | 65,311 |
| | 67,311 |
| | 72,073 |
| Net income from continuing operations | | 86,303 | | | 78,666 | | | 70,273 | |
Loss from discontinued operations, net of tax | | (3,576 | ) | | (2,742 | ) | | (127,696 | ) | |
Net income (loss) | | 61,735 |
| | 64,569 |
| | (55,623 | ) | |
Income from discontinued operations, net of tax | | Income from discontinued operations, net of tax | | — | | | — | | | 6,508 | |
Net income | | Net income | | 86,303 | | | 78,666 | | | 76,781 | |
Other comprehensive income (loss): | | | | | | | Other comprehensive income (loss): | |
Change in employee benefit plan liability, net of taxes of $956 for 2019, ($166) for 2018, and $735 for 2017 | | (2,655 | ) | | 476 |
| | (2,059 | ) | |
Amortization of non-qualified employee benefit plan liability, net of taxes of ($172) for 2019, ($278) for 2018, and ($374) for 2017 | | 476 |
| | 774 |
| | 572 |
| |
Comprehensive income (loss) | | $ | 59,556 |
| | $ | 65,819 |
| | $ | (57,110 | ) | |
Change in employee benefit plan liability, net of taxes of $(1,511) for 2022, $(219) for 2021, and $1,025 for 2020 | | Change in employee benefit plan liability, net of taxes of $(1,511) for 2022, $(219) for 2021, and $1,025 for 2020 | | 4,195 | | | 593 | | | (2,848) | |
Amortization of non-qualified employee benefit plan liability, net of taxes of $(286) for 2022, $(320) for 2021, and $(244) for 2020 | | Amortization of non-qualified employee benefit plan liability, net of taxes of $(286) for 2022, $(320) for 2021, and $(244) for 2020 | | 795 | | | 905 | | | 679 | |
Unrealized gain on interest rate swaps, net of taxes of $(47) for 2022 | | Unrealized gain on interest rate swaps, net of taxes of $(47) for 2022 | | 129 | | | — | | | — | |
Comprehensive income | | Comprehensive income | | $ | 91,422 | | | $ | 80,164 | | | $ | 74,612 | |
Average common shares outstanding: | | | | | | | Average common shares outstanding: | | | | | | |
Basic | | 29,786 |
| | 28,803 |
| | 28,669 |
| Basic | | 33,934 | | | 30,702 | | | 30,541 | |
Diluted | | 29,859 |
| | 28,873 |
| | 28,753 |
| Diluted | | 33,984 | | | 30,752 | | | 30,599 | |
Earnings from continuing operations per share of common stock: | | | | | | | Earnings from continuing operations per share of common stock: | |
Basic | | $ | 2.19 |
| | $ | 2.34 |
| | $ | 2.51 |
| Basic | | $ | 2.54 | | | $ | 2.56 | | | $ | 2.30 | |
Diluted | | 2.19 |
| | 2.33 |
| | 2.51 |
| Diluted | | 2.54 | | | 2.56 | | | 2.30 | |
Loss from discontinued operations per share of common stock: | | | | | | | |
Earnings from discontinued operations per share of common stock: | | Earnings from discontinued operations per share of common stock: | |
Basic | | $ | (0.12 | ) | | $ | (0.10 | ) | | $ | (4.45 | ) | Basic | | $ | — | | | $ | — | | | $ | 0.21 | |
Diluted | | (0.12 | ) | | (0.09 | ) | | (4.44 | ) | Diluted | | — | | | — | | | 0.21 | |
Earnings (loss) per share of common stock: | | | | | | | |
Earnings per share of common stock: | | Earnings per share of common stock: | |
Basic | | $ | 2.07 |
| | $ | 2.24 |
| | $ | (1.94 | ) | Basic | | $ | 2.54 | | | $ | 2.56 | | | $ | 2.51 | |
Diluted | | 2.07 |
| | 2.24 |
| | (1.93 | ) | Diluted | | 2.54 | | | 2.56 | | | 2.51 | |
See Notes to Consolidated Financial Statements
NORTHWEST NATURAL HOLDING COMPANY NORTHWEST NATURAL HOLDING COMPANY CONSOLIDATED BALANCE SHEETS |
| | | | | | | | |
| | As of December 31, |
In thousands | | 2019 | | 2018 |
| | | | |
Assets: | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 9,648 |
| | $ | 12,633 |
|
Accounts receivable | | 67,137 |
| | 66,970 |
|
Accrued unbilled revenue | | 56,192 |
| | 57,827 |
|
Allowance for uncollectible accounts | | (673 | ) | | (977 | ) |
Regulatory assets | | 41,929 |
| | 41,930 |
|
Derivative instruments | | 6,802 |
| | 9,001 |
|
Inventories | | 43,985 |
| | 44,149 |
|
Gas reserves | | 15,278 |
| | 16,647 |
|
Income taxes receivable | | 256 |
| | 6,000 |
|
Other current assets | | 38,004 |
| | 28,472 |
|
Discontinued operations - current assets | | 15,134 |
| | 13,269 |
|
Total current assets | | 293,692 |
| | 295,921 |
|
Non-current assets: | | | | |
Property, plant, and equipment | | 3,476,746 |
| | 3,414,490 |
|
Less: Accumulated depreciation | | 1,037,847 |
| | 993,118 |
|
Total property, plant, and equipment, net | | 2,438,899 |
| | 2,421,372 |
|
Gas reserves | | 48,394 |
| | 66,197 |
|
Regulatory assets | | 343,146 |
| | 371,786 |
|
Derivative instruments | | 3,337 |
| | 725 |
|
Other investments | | 63,333 |
| | 63,558 |
|
Operating lease right of use asset | | 2,950 |
| | — |
|
Assets under sales-type leases | | 146,310 |
| | — |
|
Goodwill | | 49,929 |
| | 8,954 |
|
Other non-current assets | | 38,464 |
| | 14,149 |
|
Total non-current assets | | 3,134,762 |
| | 2,946,741 |
|
Total assets | | $ | 3,428,454 |
| | $ | 3,242,662 |
|
CONSOLIDATED BALANCE SHEETS | | | | | | | | | | | | | | |
| | As of December 31, |
In thousands | | 2022 | | 2021 |
| | | | |
Assets: | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 29,270 | | | $ | 18,559 | |
| | | | |
Accounts receivable | | 168,906 | | | 101,495 | |
Accrued unbilled revenue | | 89,048 | | | 82,169 | |
Allowance for uncollectible accounts | | (3,296) | | | (2,018) | |
Regulatory assets | | 117,491 | | | 72,391 | |
Derivative instruments | | 194,412 | | | 48,130 | |
Inventories | | 87,096 | | | 57,262 | |
| | | | |
| | | | |
Other current assets | | 61,286 | | | 59,288 | |
Total current assets | | 744,213 | | | 437,276 | |
Non-current assets: | | | | |
Property, plant, and equipment | | 4,261,566 | | | 3,997,243 | |
Less: Accumulated depreciation | | 1,147,166 | | | 1,125,873 | |
Total property, plant, and equipment, net | | 3,114,400 | | | 2,871,370 | |
Regulatory assets | | 340,432 | | | 314,579 | |
Derivative instruments | | 5,045 | | | 10,730 | |
Other investments | | 95,704 | | | 89,278 | |
| | | | |
Operating lease right of use asset, net | | 73,429 | | | 75,049 | |
Assets under sales-type leases | | 134,302 | | | 138,995 | |
Goodwill | | 149,283 | | | 70,570 | |
Other non-current assets | | 91,518 | | | 56,757 | |
| | | | |
Total non-current assets | | 4,004,113 | | | 3,627,328 | |
Total assets | | $ | 4,748,326 | | | $ | 4,064,604 | |
See Notes to Consolidated Financial Statements
NORTHWEST NATURAL HOLDING COMPANY NORTHWEST NATURAL HOLDING COMPANY CONSOLIDATED BALANCE SHEETS |
| | | | | | | | |
| | As of December 31, |
In thousands | | 2019 | | 2018 |
| | | | |
Liabilities and equity: | | | | |
Current liabilities: | | | | |
Short-term debt | | $ | 149,100 |
| | $ | 217,620 |
|
Current maturities of long-term debt | | 75,109 |
| | 29,989 |
|
Accounts payable | | 113,370 |
| | 115,878 |
|
Taxes accrued | | 11,971 |
| | 11,023 |
|
Interest accrued | | 7,451 |
| | 7,306 |
|
Regulatory liabilities | | 44,657 |
| | 47,436 |
|
Derivative instruments | | 2,000 |
| | 12,381 |
|
Operating lease liabilities | | 2,101 |
| | — |
|
Other current liabilities | | 62,705 |
| | 54,492 |
|
Discontinued operations - current liabilities | | 13,709 |
| | 12,959 |
|
Total current liabilities | | 482,173 |
| | 509,084 |
|
Long-term debt | | 805,955 |
| | 706,247 |
|
Deferred credits and other non-current liabilities: | | | | |
Deferred tax liabilities | | 295,643 |
| | 280,463 |
|
Regulatory liabilities | | 625,717 |
| | 611,560 |
|
Pension and other postretirement benefit liabilities | | 228,129 |
| | 221,886 |
|
Derivative instruments | | 609 |
| | 3,025 |
|
Operating lease liabilities | | 841 |
| | — |
|
Other non-current liabilities | | 123,388 |
| | 147,763 |
|
Total deferred credits and other non-current liabilities | | 1,274,327 |
| | 1,264,697 |
|
Commitments and contingencies (see Note 17 and Note 18) | |
|
| |
|
|
Equity: | | | | |
Common stock - no par value; authorized 100,000 shares; issued and outstanding 30,472 and 28,880 at December 31, 2019 and 2018, respectively | | 558,282 |
| | 457,640 |
|
Retained earnings | | 318,450 |
| | 312,182 |
|
Accumulated other comprehensive loss | | (10,733 | ) | | (7,188 | ) |
Total equity | | 865,999 |
| | 762,634 |
|
Total liabilities and equity | | $ | 3,428,454 |
| | $ | 3,242,662 |
|
CONSOLIDATED BALANCE SHEETS | | | | | | | | | | | | | | |
| | As of December 31, |
In thousands | | 2022 | | 2021 |
| | | | |
Liabilities and equity: | | | | |
Current liabilities: | | | | |
Short-term debt | | $ | 258,200 | | | $ | 389,500 | |
Current maturities of long-term debt | | 90,697 | | | 345 | |
Accounts payable | | 180,667 | | | 133,486 | |
Taxes accrued | | 15,625 | | | 15,520 | |
Interest accrued | | 10,169 | | | 7,503 | |
Regulatory liabilities | | 248,582 | | | 112,281 | |
Derivative instruments | | 28,728 | | | 10,402 | |
Operating lease liabilities | | 1,514 | | | 1,296 | |
Other current liabilities | | 64,552 | | | 54,432 | |
Total current liabilities | | 898,734 | | | 724,765 | |
Long-term debt | | 1,246,167 | | | 1,044,587 | |
Deferred credits and other non-current liabilities: | | | | |
Deferred tax liabilities | | 366,022 | | | 340,231 | |
Regulatory liabilities | | 689,578 | | | 658,332 | |
Pension and other postretirement benefit liabilities | | 149,143 | | | 166,684 | |
Derivative instruments | | 20,838 | | | 412 | |
Operating lease liabilities | | 78,965 | | | 79,468 | |
Other non-current liabilities | | 123,438 | | | 114,979 | |
| | | | |
Total deferred credits and other non-current liabilities | | 1,427,984 | | | 1,360,106 | |
Commitments and contingencies (see Note 16 and Note 17) | | | | |
Equity: | | | | |
Common stock - no par value; authorized 100,000 shares; issued and outstanding 35,525 and 31,129 at December 31, 2022 and 2021, respectively | | 805,253 | | | 590,771 | |
Retained earnings | | 376,473 | | | 355,779 | |
Accumulated other comprehensive loss | | (6,285) | | | (11,404) | |
Total equity | | 1,175,441 | | | 935,146 | |
Total liabilities and equity | | $ | 4,748,326 | | | $ | 4,064,604 | |
See Notes to Consolidated Financial Statements
78
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Equity |
In thousands | | | | |
| | | | | | | | |
Balance at December 31, 2019 | | $ | 558,282 | | | $ | 318,450 | | | $ | (10,733) | | | $ | 865,999 | |
Comprehensive income (loss) | | — | | | 76,781 | | | (2,169) | | | 74,612 | |
Dividends on common stock, $1.91 per share | | — | | | (58,708) | | | — | | | (58,708) | |
Stock-based compensation | | 4,361 | | | — | | | — | | | 4,361 | |
Shares issued pursuant to equity based plans | | 2,469 | | | — | | | — | | | 2,469 | |
| | | | | | | | |
| | | | | | | | |
Balance at December 31, 2020 | | 565,112 | | | 336,523 | | | (12,902) | | | 888,733 | |
Comprehensive income (loss) | | — | | | 78,666 | | | 1,498 | | | 80,164 | |
Dividends on common stock, $1.92 per share | | — | | | (59,410) | | | — | | | (59,410) | |
Stock-based compensation | | 3,615 | | | — | | | — | | | 3,615 | |
Shares issued pursuant to equity based plans | | 4,543 | | | — | | | — | | | 4,543 | |
Issuance of common stock, net of issuance costs | | 17,501 | | | — | | | — | | | 17,501 | |
| | | | | | | | |
Balance at December 31, 2021 | | 590,771 | | | 355,779 | | | (11,404) | | | 935,146 | |
Comprehensive income (loss) | | — | | | 86,303 | | | 5,119 | | | 91,422 | |
Dividends on common stock, $1.93 per share | | — | | | (65,609) | | | — | | | (65,609) | |
| | | | | | | | |
Stock-based compensation | | 3,228 | | | — | | | — | | | 3,228 | |
Shares issued pursuant to equity based plans | | 2,978 | | | — | | | — | | | 2,978 | |
Issuance of common stock, net of issuance costs | | 208,276 | | | — | | | — | | | 208,276 | |
Balance at December 31, 2022 | | $ | 805,253 | | | $ | 376,473 | | | $ | (6,285) | | | $ | 1,175,441 | |
|
| | | | | | | | | | | | | | | | |
| | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Equity |
In thousands | | | | |
| | | | | | | | |
Balance at December 31, 2016 | | $ | 445,187 |
| | $ | 412,261 |
| | $ | (6,951 | ) | | $ | 850,497 |
|
Comprehensive income (loss) | | — |
| | (55,623 | ) | | (1,487 | ) | | (57,110 | ) |
Dividends on common stock, $1.88 per share | | — |
| | (54,289 | ) | | — |
| | (54,289 | ) |
Stock-based compensation | | 2,882 |
| | — |
| | — |
| | 2,882 |
|
Shares issued pursuant to equity based plans | | 796 |
| | — |
| | — |
| | 796 |
|
Balance at December 31, 2017 | | 448,865 |
| | 302,349 |
| | (8,438 | ) | | 742,776 |
|
Comprehensive income | | — |
| | 64,569 |
| | 1,250 |
| | 65,819 |
|
Dividends on common stock, $1.89 per share | | — |
| | (54,736 | ) | | — |
| | (54,736 | ) |
Stock-based compensation | | 3,020 |
| | — |
| | — |
| | 3,020 |
|
Shares issued pursuant to equity based plans | | 5,175 |
| | — |
| | — |
| | 5,175 |
|
Cash purchase of shares for business combination | | (7,945 | ) | | — |
| | — |
| | (7,945 | ) |
Value of shares transferred for business combination | | 8,525 |
| | — |
| | — |
| | 8,525 |
|
Balance at December 31, 2018 | | 457,640 |
| | 312,182 |
| | (7,188 | ) | | 762,634 |
|
Comprehensive income (loss) | | — |
| | 61,735 |
| | (2,179 | ) | | 59,556 |
|
Dividends on common stock, $1.90 per share | | — |
| | (56,833 | ) | | — |
| | (56,833 | ) |
Stock-based compensation | | 2,601 |
| | — |
| | — |
| | 2,601 |
|
Shares issued pursuant to equity based plans | | 5,085 |
| | — |
| | — |
| | 5,085 |
|
Issuance of common stock, net of issuance costs | | 92,956 |
| | — |
| | — |
| | 92,956 |
|
Reclassification of tax effects from the TCJA | | — |
| | 1,366 |
| | (1,366 | ) | | — |
|
Balance at December 31, 2019 | | $ | 558,282 |
| | $ | 318,450 |
| | $ | (10,733 | ) | | $ | 865,999 |
|
See Notes to Consolidated Financial Statements
NORTHWEST NATURAL HOLDING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | | |
| | Year Ended December 31, |
In thousands | | 2019 | | 2018 | | 2017 |
| | | | | | |
Operating activities: | | | | | | |
Net income (loss) | | $ | 61,735 |
| | $ | 64,569 |
| | $ | (55,623 | ) |
Adjustments to reconcile net income (loss) to cash provided by operations: | | | | | | |
Depreciation and amortization | | 91,496 |
| | 85,156 |
| | 81,053 |
|
Regulatory amortization of gas reserves | | 19,172 |
| | 16,684 |
| | 16,353 |
|
Deferred income taxes | | 6,317 |
| | 14,356 |
| | (52,414 | ) |
Qualified defined benefit pension plan expense | | 16,497 |
| | 8,108 |
| | 5,364 |
|
Contributions to qualified defined benefit pension plans | | (10,970 | ) | | (15,540 | ) | | (19,430 | ) |
Deferred environmental expenditures, net | | (16,226 | ) | | (14,528 | ) | | (13,716 | ) |
Environmental remediation expense | | 12,337 |
| | 11,127 |
| | 15,291 |
|
Regulatory revenue deferral from the TCJA | | 853 |
| | 7,929 |
| | — |
|
Regulatory disallowance of pension costs | | 10,500 |
| | — |
| | — |
|
Other | | 13,907 |
| | 1,596 |
| | 2,102 |
|
Changes in assets and liabilities: | | | | | | |
Receivables, net | | 5,844 |
| | 181 |
| | 3,282 |
|
Inventories | | (5,969 | ) | | 3,207 |
| | 5,600 |
|
Income and other taxes | | 4,528 |
| | (16,904 | ) | | 6,734 |
|
Accounts payable | | (16,485 | ) | | 16,792 |
| | 1,092 |
|
Interest accrued | | 145 |
| | 526 |
| | 807 |
|
Deferred gas costs | | (23,471 | ) | | (14,395 | ) | | 17,122 |
|
Decoupling mechanism | | 18,661 |
| | 4,497 |
| | 4,436 |
|
Other, net | | (4,285 | ) | | (3,945 | ) | | (8,529 | ) |
Discontinued operations | | 712 |
| | (645 | ) | | 197,180 |
|
Cash provided by operating activities | | 185,298 |
| | 168,771 |
| | 206,704 |
|
Investing activities: | |
| | | | |
Capital expenditures | | (223,471 | ) | | (214,636 | ) | | (213,325 | ) |
Acquisitions, net of cash acquired | | (56,786 | ) | | (873 | ) | | — |
|
Leasehold improvement expenditures | | (18,812 | ) | | (4,415 | ) | | — |
|
Other | | (2,885 | ) | | 1,898 |
| | (577 | ) |
Discontinued operations | | (1,827 | ) | | 573 |
| | (270 | ) |
Cash used in investing activities | | (303,781 | ) | | (217,453 | ) | | (214,172 | ) |
| | | | | | |
NORTHWEST NATURAL HOLDING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
Financing activities: | | | | | | |
Repurchases related to stock-based compensation | | — |
| | — |
| | (2,034 | ) |
Proceeds from stock options exercised | | 2,015 |
| | 1,546 |
| | 4,819 |
|
Proceeds from common stock issued | | 92,956 |
| | — |
| | — |
|
Long-term debt issued | | 175,000 |
| | 50,000 |
| | 100,000 |
|
Long-term debt retired | | (30,000 | ) | | (97,000 | ) | | (40,000 | ) |
Change in short-term debt | | (68,520 | ) | | 163,274 |
| | 900 |
|
Cash dividend payments on common stock | | (53,339 | ) | | (51,311 | ) | | (53,957 | ) |
Stock purchases related to acquisitions | | — |
| | (7,951 | ) | | — |
|
Other | | (2,614 | ) | | (715 | ) | | (2,309 | ) |
Cash provided by financing activities | | 115,498 |
| | 57,843 |
| | 7,419 |
|
Increase (decrease) in cash and cash equivalents | | (2,985 | ) | | 9,161 |
| | (49 | ) |
Cash and cash equivalents, beginning of period | | 12,633 |
| | 3,472 |
| | 3,521 |
|
Cash and cash equivalents, end of period | | $ | 9,648 |
| | $ | 12,633 |
| | $ | 3,472 |
|
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Interest paid, net of capitalization | | $ | 41,231 |
| | $ | 35,324 |
| | $ | 34,787 |
|
Income taxes paid (refunded) | | (96 | ) | | 27,370 |
| | 14,780 |
|
See Notes to Consolidated Financial Statements
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
In thousands | | 2022 | | 2021 | | 2020 |
Operating activities: | | | | | | |
Net income | | $ | 86,303 | | | $ | 78,666 | | | $ | 76,781 | |
Adjustments to reconcile net income to cash provided by operations: | | | | | | |
Depreciation | | 116,707 | | | 113,534 | | | 103,683 | |
Regulatory amortization of gas reserves | | 5,589 | | | 13,897 | | | 17,779 | |
Deferred income taxes | | 17,410 | | | 14,617 | | | 18,667 | |
Qualified defined benefit pension plan expense | | 5,351 | | | 16,556 | | | 18,370 | |
Contributions to qualified defined benefit pension plans | | — | | | (9,590) | | | (28,980) | |
Deferred environmental expenditures, net | | (18,160) | | | (18,187) | | | (27,871) | |
Environmental remediation expense | | 12,389 | | | 9,938 | | | 9,691 | |
| | | | | | |
Gain on sale of discontinued operations, net of tax | | — | | | — | | | (5,902) | |
Asset optimization revenue sharing bill credits | | (41,102) | | | (9,053) | | | (16,970) | |
Other | | 21,558 | | | 20,622 | | | 10,028 | |
Changes in assets and liabilities: | | | | | | |
Receivables, net | | (76,454) | | | (44,128) | | | (16,799) | |
Inventories | | (29,269) | | | (14,571) | | | 1,262 | |
Income and other taxes | | 6,908 | | | 3,292 | | | (10,710) | |
Accounts payable | | 24,508 | | | 12,118 | | | (15,910) | |
Deferred gas costs | | 12,334 | | | (40,541) | | | 17,590 | |
Asset optimization revenue sharing | | 28,937 | | | 44,458 | | | (7,244) | |
Decoupling mechanism | | 10,922 | | | (5,206) | | | 2,884 | |
Cloud-based software | | (23,908) | | | (7,407) | | | (4,265) | |
Other, net | | (12,351) | | | (18,662) | | | 1,340 | |
Discontinued operations | | — | | | — | | | 1,894 | |
Cash provided by operating activities | | 147,672 | | | 160,353 | | | 145,318 | |
Investing activities: | | | | | | |
Capital expenditures | | (338,602) | | | (293,892) | | | (273,016) | |
Acquisitions, net of cash acquired | | (94,279) | | | (1,289) | | | (38,263) | |
Leasehold improvement expenditures | | (761) | | | (1,364) | | | (7,878) | |
Proceeds from the sale of assets | | 870 | | | 3,926 | | | 8,149 | |
Purchase of equity method investment | | (1,000) | | | (14,450) | | | — | |
Proceeds from sale of equity method investment | | — | | | 7,000 | | | 7,000 | |
Proceeds from sale of discontinued operations | | — | | | — | | | 12,500 | |
Other | | (1,688) | | | (54) | | | 1,654 | |
Discontinued operations | | — | | | — | | | (4,423) | |
Cash used in investing activities | | (435,460) | | | (300,123) | | | (294,277) | |
NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
In thousands | | 2019 | | 2018 | | 2017 |
| | | | | | |
Operating revenues | | $ | 739,944 |
| | $ | 705,571 |
| | $ | 755,038 |
|
| | | | | | |
Operating expenses: | | |
| | |
| | |
|
Cost of gas | | 255,135 |
| | 255,743 |
| | 325,019 |
|
Operations and maintenance | | 169,091 |
| | 155,225 |
| | 152,180 |
|
Environmental remediation | | 12,337 |
| | 11,127 |
| | 15,291 |
|
General taxes | | 32,075 |
| | 32,086 |
| | 30,602 |
|
Revenue taxes | | 30,325 |
| | 30,082 |
| | — |
|
Depreciation and amortization | | 90,405 |
| | 84,986 |
| | 81,024 |
|
Other operating expenses | | 3,230 |
| | 3,223 |
| | — |
|
Total operating expenses | | 592,598 |
| | 572,472 |
| | 604,116 |
|
Income from operations | | 147,346 |
| | 133,099 |
| | 150,922 |
|
Other income (expense), net | | (22,968 | ) | | (3,599 | ) | | (198 | ) |
Interest expense, net | | 41,339 |
| | 36,992 |
| | 37,526 |
|
Income before income taxes | | 83,039 |
| | 92,508 |
| | 113,198 |
|
Income tax expense | | 14,065 |
| | 24,459 |
| | 41,478 |
|
Net income from continuing operations | | 68,974 |
| | 68,049 |
| | 71,720 |
|
Loss from discontinued operations, net of tax | | — |
| | (1,723 | ) | | (127,343 | ) |
Net income (loss) | | 68,974 |
| | 66,326 |
| | (55,623 | ) |
Other comprehensive income (loss): | | |
| | |
| | |
|
Change in employee benefit plan liability, net of taxes of $956 for 2019, ($166) for 2018, and $735 for 2017 | | (2,655 | ) | | 476 |
| | (2,059 | ) |
Amortization of non-qualified employee benefit plan liability, net of taxes of ($172) for 2019, ($278) for 2018, and ($374) for 2017 | | 476 |
| | 774 |
| | 572 |
|
Comprehensive income (loss) | | $ | 66,795 |
| | $ | 67,576 |
| | $ | (57,110 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Financing activities: | | | | | | |
| | | | | | |
| | | | | | |
Proceeds from common stock issued, net | | 208,561 | | | 17,501 | | | — | |
Long-term debt issued | | 290,000 | | | 185,000 | | | 150,000 | |
Long-term debt retired | | — | | | (95,000) | | | (75,000) | |
Proceeds from term loan due within one year | | — | | | 100,000 | | | 150,000 | |
Repayment of term loan | | — | | | (100,000) | | | (150,000) | |
Proceeds from commercial paper, maturities greater than three months | | — | | | — | | | 195,025 | |
Repayments of commercial paper, maturities greater than three months | | — | | | (195,025) | | | — | |
Changes in other short-term debt, net | | (131,300) | | | 280,000 | | | (39,600) | |
Cash dividend payments on common stock | | (62,771) | | | (55,919) | | | (55,420) | |
| | | | | | |
Other | | (2,858) | | | (5,121) | | | (3,228) | |
Cash provided by financing activities | | 301,632 | | | 131,436 | | | 171,777 | |
Increase (decrease) in cash, cash equivalents and restricted cash | | 13,844 | | | (8,334) | | | 22,818 | |
Cash, cash equivalents and restricted cash, beginning of period | | 27,120 | | | 35,454 | | | 12,636 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 40,964 | | | $ | 27,120 | | | $ | 35,454 | |
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Interest paid, net of capitalization | | $ | 50,823 | | | $ | 43,719 | | | $ | 42,651 | |
Income taxes paid, net of refunds | | 2,779 | | | 10,555 | | | 13,644 | |
See Notes to Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY CONSOLIDATED BALANCE SHEETS |
| | | | | | | | |
| | As of December 31, |
In thousands | | 2019 | | 2018 |
| | | | |
Assets: | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 5,919 |
| | $ | 7,947 |
|
Accounts receivable | | 66,823 |
| | 66,824 |
|
Accrued unbilled revenue | | 56,139 |
| | 57,773 |
|
Receivables from affiliates | | 787 |
| | 4,166 |
|
Allowance for uncollectible accounts | | (672 | ) | | (975 | ) |
Regulatory assets | | 41,929 |
| | 41,930 |
|
Derivative instruments | | 6,802 |
| | 9,001 |
|
Inventories | | 43,896 |
| | 44,126 |
|
Gas reserves | | 15,278 |
| | 16,647 |
|
Other current assets | | 33,258 |
| | 25,347 |
|
Total current assets | | 270,159 |
| | 272,786 |
|
Non-current assets: | | | | |
Property, plant, and equipment | | 3,456,075 |
| | 3,410,439 |
|
Less: Accumulated depreciation | | 1,036,593 |
| | 992,855 |
|
Total property, plant, and equipment, net | | 2,419,482 |
| | 2,417,584 |
|
Gas reserves | | 48,394 |
| | 66,197 |
|
Regulatory assets | | 343,146 |
| | 371,786 |
|
Derivative instruments | | 3,337 |
| | 725 |
|
Other investments | | 49,837 |
| | 49,922 |
|
Operating lease right of use asset | | 2,760 |
| | — |
|
Assets under sales-type leases | | 146,310 |
| | — |
|
Other non-current assets | | 38,062 |
| | 13,736 |
|
Total non-current assets | | 3,051,328 |
| | 2,919,950 |
|
Total assets | | $ | 3,321,487 |
| | $ | 3,192,736 |
|
NORTHWEST NATURAL GAS COMPANYCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
In thousands | | 2022 | | 2021 | | 2020 |
| | | | | | |
Operating revenues | | $ | 1,014,339 | | | $ | 843,057 | | | $ | 758,748 | |
| | | | | | |
Operating expenses: | | | | | | |
Cost of gas | | 429,861 | | | 292,538 | | | 262,980 | |
Operations and maintenance | | 204,845 | | | 188,762 | | | 168,869 | |
Environmental remediation | | 12,389 | | | 9,938 | | | 9,691 | |
General taxes | | 40,151 | | | 38,150 | | | 34,459 | |
Revenue taxes | | 41,627 | | | 34,600 | | | 30,291 | |
Depreciation | | 112,957 | | | 110,504 | | | 101,586 | |
Other operating expenses | | 3,135 | | | 3,332 | | | 3,232 | |
Total operating expenses | | 844,965 | | | 677,824 | | | 611,108 | |
Income from operations | | 169,374 | | | 165,233 | | | 147,640 | |
Other income (expense), net | | (436) | | | (12,745) | | | (15,116) | |
Interest expense, net | | 46,338 | | | 42,983 | | | 40,866 | |
Income before income taxes | | 122,600 | | | 109,505 | | | 91,658 | |
Income tax expense | | 31,036 | | | 28,333 | | | 21,095 | |
Net income | | 91,564 | | | 81,172 | | | 70,563 | |
Other comprehensive income (loss): | | | | | | |
Change in employee benefit plan liability, net of taxes of $(1,511) for 2022, $(219) for 2021, and $1,025 for 2020 | | 4,195 | | | 593 | | | (2,848) | |
Amortization of non-qualified employee benefit plan liability, net of taxes of $(286) for 2022, $(320) for 2021, and $(244) for 2020 | | 795 | | | 905 | | | 679 | |
| | | | | | |
Comprehensive income | | $ | 96,554 | | | $ | 82,670 | | | $ | 68,394 | |
See Notes to Consolidated Financial Statements
83
NORTHWEST NATURAL GAS COMPANY CONSOLIDATED BALANCE SHEETS |
| | | | | | | | |
| | As of December 31, |
In thousands | | 2019 | | 2018 |
| | | | |
Liabilities and equity: | | | | |
Current liabilities: | | | | |
Short-term debt | | $ | 125,100 |
| | $ | 217,500 |
|
Current maturities of long-term debt | | 74,907 |
| | 29,989 |
|
Accounts payable | | 111,641 |
| | 114,937 |
|
Payables to affiliates | | 1,546 |
| | 523 |
|
Taxes accrued | | 11,717 |
| | 10,990 |
|
Interest accrued | | 7,441 |
| | 7,273 |
|
Regulatory liabilities | | 44,657 |
| | 47,436 |
|
Derivative instruments | | 2,000 |
| | 12,381 |
|
Operating lease liabilities | | 1,979 |
| | — |
|
Other current liabilities | | 61,438 |
| | 53,027 |
|
Total current liabilities | | 442,426 |
| | 494,056 |
|
Long-term debt | | 769,081 |
| | 704,134 |
|
Deferred credits and other non-current liabilities: | | | | |
Deferred tax liabilities | | 309,297 |
| | 294,739 |
|
Regulatory liabilities | | 625,717 |
| | 611,560 |
|
Pension and other postretirement benefit liabilities | | 228,129 |
| | 221,886 |
|
Derivative instruments | | 609 |
| | 3,025 |
|
Operating lease liabilities | | 772 |
| | — |
|
Other non-current liabilities | | 123,260 |
| | 147,668 |
|
Total deferred credits and other non-current liabilities | | 1,287,784 |
| | 1,278,878 |
|
Commitments and contingencies (see Note 17 and Note 18) | |
|
| |
|
|
Equity: | | | | |
Common stock | | 319,557 |
| | 226,452 |
|
Retained earnings | | 513,372 |
| | 496,404 |
|
Accumulated other comprehensive loss | | (10,733 | ) | | (7,188 | ) |
Total equity | | 822,196 |
| | 715,668 |
|
Total liabilities and equity | | $ | 3,321,487 |
| | $ | 3,192,736 |
|
NORTHWEST NATURAL GAS COMPANYCONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| | As of December 31, |
In thousands | | 2022 | | 2021 |
| | | | |
Assets: | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 12,977 | | | $ | 12,271 | |
| | | | |
Accounts receivable | | 165,607 | | | 99,780 | |
Accrued unbilled revenue | | 87,482 | | | 82,028 | |
Receivables from affiliates | | 634 | | | 261 | |
Allowance for uncollectible accounts | | (3,079) | | | (1,962) | |
Regulatory assets | | 117,491 | | | 72,391 | |
Derivative instruments | | 194,236 | | | 48,130 | |
Inventories | | 86,207 | | | 56,752 | |
| | | | |
| | | | |
Other current assets | | 57,269 | | | 47,378 | |
| | | | |
Total current assets | | 718,824 | | | 417,029 | |
Non-current assets: | | | | |
Property, plant, and equipment | | 4,148,547 | | | 3,931,640 | |
Less: Accumulated depreciation | | 1,137,231 | | | 1,119,361 | |
Total property, plant, and equipment, net | | 3,011,316 | | | 2,812,279 | |
Regulatory assets | | 340,407 | | | 314,539 | |
Derivative instruments | | 5,045 | | | 10,730 | |
Other investments | | 80,110 | | | 74,786 | |
| | | | |
| | | | |
Operating lease right of use asset, net | | 72,720 | | | 74,987 | |
Assets under sales-type leases | | 134,302 | | | 138,995 | |
Other non-current assets | | 89,994 | | | 55,027 | |
| | | | |
Total non-current assets | | 3,733,894 | | | 3,481,343 | |
Total assets | | $ | 4,452,718 | | | $ | 3,898,372 | |
See Notes to Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | |
| | As of December 31, |
In thousands | | 2022 | | 2021 |
| | | | |
Liabilities and equity: | | | | |
Current liabilities: | | | | |
Short-term debt | | $ | 170,200 | | | $ | 245,500 | |
Current maturities of long-term debt | | 89,942 | | | — | |
Accounts payable | | 177,590 | | | 131,475 | |
Payables to affiliates | | 9,175 | | | 1,248 | |
Taxes accrued | | 15,426 | | | 15,476 | |
Interest accrued | | 8,900 | | | 7,296 | |
Regulatory liabilities | | 248,553 | | | 112,281 | |
Derivative instruments | | 28,728 | | | 10,402 | |
Operating lease liabilities | | 1,363 | | | 1,273 | |
Other current liabilities | | 62,019 | | | 53,591 | |
| | | | |
Total current liabilities | | 811,896 | | | 578,542 | |
Long-term debt | | 1,035,935 | | | 986,495 | |
Deferred credits and other non-current liabilities: | | | | |
Deferred tax liabilities | | 362,353 | | | 337,717 | |
Regulatory liabilities | | 688,599 | | | 657,350 | |
Pension and other postretirement benefit liabilities | | 149,143 | | | 166,684 | |
Derivative instruments | | 20,838 | | | 412 | |
Operating lease liabilities | | 78,345 | | | 79,431 | |
Other non-current liabilities | | 114,527 | | | 113,934 | |
| | | | |
Total deferred credits and other non-current liabilities | | 1,413,805 | | | 1,355,528 | |
Commitments and contingencies (see Note 16 and Note 17) | | | | |
Equity: | | | | |
Common stock | | 614,903 | | | 435,515 | |
Retained earnings | | 582,593 | | | 553,696 | |
Accumulated other comprehensive loss | | (6,414) | | | (11,404) | |
| | | | |
Total equity | | 1,191,082 | | | 977,807 | |
Total liabilities and equity | | $ | 4,452,718 | | | $ | 3,898,372 | |
See Notes to Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
|
| | | | | | | | | | | | | | | | |
| | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Equity |
In thousands | | | | |
| | | | | | | | |
Balance at December 31, 2016 | | $ | 445,187 |
| | $ | 412,261 |
| | $ | (6,951 | ) | | $ | 850,497 |
|
Comprehensive income (loss) | | — |
| | (55,623 | ) | | (1,487 | ) | | (57,110 | ) |
Dividends on common stock | | — |
| | (54,289 | ) | | — |
| | (54,289 | ) |
Stock-based compensation | | 2,882 |
| | — |
| | — |
| | 2,882 |
|
Shares issued pursuant to equity based plans | | 796 |
| | — |
| | — |
| | 796 |
|
Balance at December 31, 2017 | | 448,865 |
| | 302,349 |
| | (8,438 | ) | | 742,776 |
|
Comprehensive income | | — |
| | 66,326 |
| | 1,250 |
| | 67,576 |
|
Dividends on common stock | | — |
| | (41,035 | ) | | — |
| | (41,035 | ) |
Stock-based compensation(1) | | 2,161 |
| | — |
| | — |
| | 2,161 |
|
Shares issued pursuant to equity based plans(1) | | 3,075 |
| | — |
| | — |
| | 3,075 |
|
Transfer of investments to NW Holdings as of October 1, 2018 | | (227,649 | ) | | 168,764 |
| | — |
| | (58,885 | ) |
Balance at December 31, 2018 | | 226,452 |
| | 496,404 |
| | (7,188 | ) | | 715,668 |
|
Comprehensive income (loss) | | — |
| | 68,974 |
| | (2,179 | ) | | 66,795 |
|
Dividends on common stock | | — |
| | (53,372 | ) | | — |
| | (53,372 | ) |
Capital contribution from parent | | 93,105 |
| | — |
| | — |
| | 93,105 |
|
Reclassification of tax effects from the TCJA | | — |
| | 1,366 |
| | (1,366 | ) | | — |
|
Balance at December 31, 2019 | | $ | 319,557 |
| | $ | 513,372 |
| | $ | (10,733 | ) | | $ | 822,196 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Equity | |
In thousands | | | | | |
| | | | | | | | | |
Balance at December 31, 2019 | | $ | 319,557 | | | $ | 513,372 | | | $ | (10,733) | | | $ | 822,196 | | |
Comprehensive income (loss) | | — | | | 70,563 | | | (2,169) | | | 68,394 | | |
Dividends on common stock | | — | | | (55,355) | | | — | | | (55,355) | | |
Other | | (51) | | | — | | | — | | | (51) | | |
| | | | | | | | | |
| | | | | | | | | |
Balance at December 31, 2020 | | 319,506 | | | 528,580 | | | (12,902) | | | 835,184 | | |
Comprehensive income (loss) | | — | | | 81,172 | | | 1,498 | | | 82,670 | | |
Dividends on common stock | | — | | | (56,056) | | | — | | | (56,056) | | |
| | | | | | | | | |
Capital contributions from parent | | 116,009 | | | — | | | — | | | 116,009 | | |
Balance at December 31, 2021 | | 435,515 | | | 553,696 | | | (11,404) | | | 977,807 | | |
Comprehensive income (loss) | | — | | | 91,564 | | | 4,990 | | | 96,554 | | |
Dividends on common stock | | — | | | (62,667) | | | — | | | (62,667) | | |
| | | | | | | | | |
Capital contributions from parent | | 179,388 | | | — | | | — | | | 179,388 | | |
Balance at December 31, 2022 | | $ | 614,903 | | | $ | 582,593 | | | $ | (6,414) | | | $ | 1,191,082 | | |
(1) Stock-based compensation is based on stock awards of NW Natural to be issued in shares of NW Holdings.
See Notes to Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | | |
| | Year Ended December 31, |
In thousands | | 2019 | | 2018 | | 2017 |
| | | | | | |
Operating activities: | | | | | | |
Net income (loss) | | $ | 68,974 |
| | $ | 66,326 |
| | $ | (55,623 | ) |
Adjustments to reconcile net income (loss) to cash provided by operations: | | | | | | |
Depreciation and amortization | | 90,405 |
| | 84,986 |
| | 81,024 |
|
Regulatory amortization of gas reserves | | 19,172 |
| | 16,684 |
| | 16,353 |
|
Deferred income taxes | | 4,046 |
| | 12,330 |
| | 15,894 |
|
Qualified defined benefit pension plan expense | | 16,497 |
| | 8,108 |
| | 5,364 |
|
Contributions to qualified defined benefit pension plans | | (10,970 | ) | | (15,540 | ) | | (19,430 | ) |
Deferred environmental expenditures, net | | (16,226 | ) | | (14,528 | ) | | (13,716 | ) |
Environmental remediation expense | | 12,337 |
| | 11,127 |
| | 15,291 |
|
Regulatory revenue deferral from the TCJA | | 853 |
| | 7,929 |
| | — |
|
Regulatory disallowance of pension costs | | 10,500 |
| | — |
| | — |
|
Other | | 12,317 |
| | 883 |
| | 2,003 |
|
Changes in assets and liabilities: | | | | | | |
Receivables, net | | 9,264 |
| | (3,920 | ) | | 3,215 |
|
Inventories | | (5,990 | ) | | 3,212 |
| | 5,601 |
|
Income and other taxes | | 496 |
| | (7,854 | ) | | 6,730 |
|
Accounts payable | | (18,548 | ) | | 13,937 |
| | 3,332 |
|
Interest accrued | | 168 |
| | 500 |
| | 807 |
|
Deferred gas costs | | (23,471 | ) | | (14,395 | ) | | 17,122 |
|
Decoupling mechanism | | 18,661 |
| | 4,497 |
| | 4,436 |
|
Other, net | | (2,309 | ) | | (3,958 | ) | | (8,291 | ) |
Discontinued operations | | — |
| | 3,184 |
| | 126,371 |
|
Cash provided by operating activities | | 186,176 |
| | 173,508 |
| | 206,483 |
|
Investing activities: | | | | | | |
Capital expenditures | | (221,380 | ) | | (214,328 | ) | | (213,325 | ) |
Leasehold improvement expenditures | | (18,812 | ) | | (4,415 | ) | | — |
|
Other | | (2,885 | ) | | 898 |
| | (577 | ) |
Discontinued operations | | — |
| | (20,617 | ) | | (270 | ) |
Cash used in investing activities | | (243,077 | ) | | (238,462 | ) | | (214,172 | ) |
Financing activities: | | | | | | |
Repurchases related to stock-based compensation | | — |
| | — |
| | (2,034 | ) |
Proceeds from stock options exercised | | — |
| | 1,368 |
| | 4,819 |
|
Long-term debt issued | | 140,000 |
| | 50,000 |
| | 100,000 |
|
Long-term debt retired | | (30,000 | ) | | (97,000 | ) | | (40,000 | ) |
Change in short-term debt | | (92,400 | ) | | 163,300 |
| | 900 |
|
Cash contributions received from parent | | 93,155 |
| | — |
| | — |
|
Cash dividend payments on common stock | | (53,372 | ) | | (38,387 | ) | | (53,957 | ) |
Other | | (2,510 | ) | | (1,539 | ) | | (2,309 | ) |
Discontinued operations | | — |
| | (7,951 | ) | | — |
|
Cash provided by financing activities | | 54,873 |
| | 69,791 |
| | 7,419 |
|
Increase (decrease) in cash and cash equivalents | | (2,028 | ) | | 4,837 |
| | (270 | ) |
Cash and cash equivalents, beginning of period | | 7,947 |
| | 3,110 |
| | 3,380 |
|
Cash and cash equivalents, end of period | | $ | 5,919 |
| | $ | 7,947 |
| | $ | 3,110 |
|
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Interest paid, net of capitalization | | $ | 39,927 |
| | $ | 35,305 |
| | $ | 34,787 |
|
Income taxes paid (refunded) | | 2,479 |
| | 27,350 |
| | 14,780 |
|
See Notes to Consolidated Financial Statements
86
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
In thousands | | 2022 | | 2021 | | 2020 |
Operating activities: | | | | | | |
Net income | | $ | 91,564 | | | $ | 81,172 | | | $ | 70,563 | |
Adjustments to reconcile net income to cash provided by operations: | | | | | | |
Depreciation | | 112,957 | | | 110,504 | | | 101,586 | |
Regulatory amortization of gas reserves | | 5,589 | | | 13,897 | | | 17,779 | |
Deferred income taxes | | 16,288 | | | 13,223 | | | 4,645 | |
Qualified defined benefit pension plan expense | | 5,351 | | | 16,556 | | | 18,370 | |
Contributions to qualified defined benefit pension plans | | — | | | (9,590) | | | (28,980) | |
Deferred environmental expenditures, net | | (18,160) | | | (18,187) | | | (27,871) | |
Environmental remediation expense | | 12,389 | | | 9,938 | | | 9,691 | |
| | | | | | |
Asset optimization revenue sharing bill credits | | (41,102) | | | (9,053) | | | (16,970) | |
Other | | 20,448 | | | 18,517 | | | 9,945 | |
Changes in assets and liabilities: | | | | | | |
Receivables, net | | (75,177) | | | (43,030) | | | (16,540) | |
Inventories | | (28,890) | | | (14,427) | | | 1,539 | |
Income and other taxes | | 6,729 | | | (10,405) | | | 10,832 | |
Accounts payable | | 21,375 | | | 8,728 | | | (18,909) | |
Deferred gas costs | | 12,334 | | | (40,541) | | | 17,590 | |
Asset optimization revenue sharing | | 28,937 | | | 44,458 | | | (7,244) | |
Decoupling mechanism | | 10,922 | | | (5,206) | | | 2,884 | |
Cloud-based software | | (23,908) | | | (7,407) | | | (4,265) | |
Other, net | | (12,455) | | | (17,653) | | | 3,872 | |
| | | | | | |
Cash provided by operating activities | | 145,191 | | | 141,494 | | | 148,517 | |
Investing activities: | | | | | | |
Capital expenditures | | (318,686) | | | (278,237) | | | (266,048) | |
Leasehold improvement expenditures | | (761) | | | (1,364) | | | (7,878) | |
Proceeds from the sale of assets | | 870 | | | 3,926 | | | 8,149 | |
Other | | (1,688) | | | (54) | | | 1,654 | |
| | | | | | |
Cash used in investing activities | | (320,265) | | | (275,729) | | | (264,123) | |
Financing activities: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Long-term debt issued | | 140,000 | | | 130,000 | | | 150,000 | |
Long-term debt retired | | — | | | (60,000) | | | (75,000) | |
Proceeds from term loan due within one year | | — | | | 100,000 | | | 150,000 | |
Repayment of term loan | | — | | | (100,000) | | | (150,000) | |
Proceeds from commercial paper, maturities greater than three months | | — | | | — | | | 195,025 | |
Repayment of commercial paper, maturities greater than three months | | — | | | (195,025) | | | — | |
Changes in other short-term debt, net | | (75,300) | | | 209,000 | | | (88,600) | |
Cash contributions received from parent | | 179,388 | | | 116,009 | | | — | |
Cash dividend payments on common stock | | (62,667) | | | (56,056) | | | (55,355) | |
| | | | | | |
Other | | (2,508) | | | (4,600) | | | (3,632) | |
| | | | | | |
Cash provided by financing activities | | 178,913 | | | 139,328 | | | 122,438 | |
Increase in cash, cash equivalents and restricted cash | | 3,839 | | | 5,093 | | | 6,832 | |
Cash, cash equivalents and restricted cash, beginning of period | | 20,832 | | | 15,739 | | | 8,907 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 24,671 | | | $ | 20,832 | | | $ | 15,739 | |
| | | | | | |
Supplemental disclosure of cash flow information: | | | | | | |
Interest paid, net of capitalization | | $ | 44,813 | | | $ | 42,395 | | | $ | 40,624 | |
Income taxes paid, net of refunds | | 5,990 | | | 26,451 | | | 6,100 | |
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
On October 1, 2018, we completed a reorganization into a holding company structure. In this reorganization, shareholders of NW Natural (the predecessor publicly held parent company) became shareholders of NW Holdings on a one-for-one basis; maintaining the same number of shares and ownership percentage as held in NW Natural immediately prior to the reorganization. NW Natural became a wholly-owned subsidiary of NW Holdings. Additionally, certain subsidiaries of NW Natural were transferred to NW Holdings. This reorganization was accounted for as a transaction among entities under common control. As required under accounting guidance, these subsidiaries are presented in this report as discontinued operations in the consolidated results of NW Natural. See Note 19 for additional information.
The accompanying consolidated financial statements represent the respective, consolidated financial results of NW Holdings and 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 and wastewater businesses, and other investments are aggregated and reported as other at their respective registrant.
In addition, NW Holdings has reported discontinued operations results related to the pending sale of Gill Ranch Storage, LLC (Gill Ranch). All prior period amounts have been retrospectively adjusted to reflect this change both in operational results and reportable segments for NW Holdings and NW Natural respectively. These reclassifications and the reorganization activities described above had no effect on the prior year’s consolidated results of operations,consolidate all entities in which they have a controlling financial condition, or cash flows. See Note 19 for additional information.
NW Holdings' direct and indirect wholly-owned subsidiaries as of the filing date of this report include:
Northwest Natural Gas Company (NW Natural);
Northwest Energy Corporation (Energy Corp);
NWN Gas Reserves LLC (NWN Gas Reserves);
NW Natural Energy, LLC (NWN Energy);
NW Natural Gas Storage, LLC (NWN Gas Storage);
Gill Ranch Storage, LLC (Gill Ranch), which is presented as a discontinued operation;
NNG Financial Corporation (NNG Financial);
KB Pipeline Company (KB);
NW Natural Water Company, LLC (NWN Water);
Falls Water Co., Inc. (Falls Water);
Salmon Valley Water Company;
NW Natural Water of Oregon, LLC (NWN Water of Oregon);
Sunstone Water, LLC;
Sunstone Infrastructure, LLC;
Sunriver Water, LLC (Sunriver Water);
Sunriver Environmental, LLC (Sunriver Environmental);
NW Natural Water of Washington, LLC (NWN Water of Washington);
Cascadia Water, LLC (Cascadia Water);
Cascadia Infrastructure, LLC;
| |
▪ | Suncadia Water Company, LLC (Suncadia Water); |
| |
▪ | Suncadia Environmental Company, LLC (Suncadia Environmental); |
NW Natural Water of Idaho, LLC (NWN Water of Idaho);
Gem State Water Company, LLC (Gem State Water);
Gem State Infrastructure, LLC; and
NW Natural Water of Texas, LLC (NWN Water of Texas);
Blue Topaz Water, LLC; and
Blue Topaz Infrastructure, LLC.
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 Energy'sWater's investment in Trail West Holdings, LLC (TWH)Avion Water Company, Inc., which are accounted for under the equity method. NW Natural RNG Holding Company, LLC holds an investment in Lexington Renewable Energy, LLC, which is also accounted for under the equity method. See Note 13 for activity related to equity method investments. NW Holdings and its direct and indirect subsidiaries are collectively referred to herein as NW Holdings, and NW Natural and its direct and indirect subsidiaries are collectively referred to herein as NW Natural. The consolidated financial statements of NW Holdings and NW Natural are presented after elimination of all intercompany balances and transactions.
During the second quarter of 2018, we moved forward with our long-term strategic plans, which include a shift away from the California gas storage business. In June 2018, NWN Gas Storage, a wholly-owned subsidiary of NW Natural at the time and now a wholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement that providesprovided for the sale of all of the membership interests in its wholly-owned subsidiary, Gill Ranch.Ranch Storage, LLC (Gill Ranch). We received regulatory approval for the sale in December 2019. We have concluded that the pending sale of Gill Ranch qualifiesqualified as assets and liabilities held for sale and discontinued operations. As such, the results of Gill Ranch have beenwere presented as a discontinued operation for NW Holdings for all periods presented and for NW Natural up until the holding company reorganization was effective on October 1, 2018 on the consolidated statements of comprehensive income and cash flows, and the assets and liabilities associated with Gill Ranch have beenwere classified as discontinued operations assets and liabilities on the NW Holdings consolidated balance sheet. The sale closed on December 4, 2020. See Note 1918 for additional information. Additionally, we reevaluated reportable segments and concluded that the remaining gas storage activities no longer met the requirements to be separately reported as a segment. Interstate Storage Services is now reported in Other under NW Natural and NW Holdings as applicable, and all prior periods reflect this change. See Note 4, which provides segment 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
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect reported amounts in the consolidated financial statements and accompanying notes. Actual amounts could differ from those estimates, and changes would most likely be reported in future periods. Management believes the estimates and assumptions used are reasonable.
Industry Regulation
NW Holdings' principal business is to operate as a holding company for NW Natural and its other subsidiaries.
NW Natural's principal business is the distribution of natural gas, which is regulated by the OPUC and WUTC. NW Natural also has natural gas storage services, which are regulated by the FERC, and to a certain extent by the OPUC and WUTC. Additionally, certain of NW Holdings' subsidiaries own water businesses, which are regulated by the public utility commission in the state in which the water utility is located, which is currently Oregon, Washington, Idaho, Texas and Idaho.Arizona. Wastewater businesses, to the extent they are regulated, are generally regulated by the public utility commissions in the state in which the wastewater utility is located, which is currently Texas and Arizona. Accounting records and practices of the regulated businesses conform to the requirements and uniform system of accounts prescribed by these regulatory authorities in accordance with U.S. GAAP. The businesses in which customer rates are regulated by the OPUC, WUTC, IPUC, PUTC, ACC and FERC have approved cost-based rates which are intended to allow such businesses to earn a reasonable return on invested capital.
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 applicable state public utility commission, which provide for the recovery of revenues or expenses from, or refunds to, utility customers in future periods, including a return or a carrying charge in certain cases.
Amounts NW Natural deferred as regulatory assets and liabilities were as follows:
| | | | | | | | | | | | | | |
| | Regulatory Assets |
In thousands | | 2022 | | 2021 |
NW Natural: | | | | |
Current: | | | | |
Unrealized loss on derivatives(1) | | $ | 28,728 | | | $ | 10,402 | |
Gas costs | | 61,223 | | | 35,641 | |
Environmental costs(2) | | 7,392 | | | 6,694 | |
Decoupling(3) | | — | | | 969 | |
Pension balancing(4) | | 7,131 | | | 7,131 | |
Income taxes | | 2,208 | | | 2,568 | |
| | | | |
Other(5) | | 10,809 | | | 8,986 | |
Total current | | $ | 117,491 | | | $ | 72,391 | |
Non-current: | | | | |
Unrealized loss on derivatives(1) | | $ | 20,838 | | | $ | 412 | |
Pension balancing(4) | | 32,997 | | | 38,302 | |
Income taxes | | 10,943 | | | 12,609 | |
Pension and other postretirement benefit liabilities | | 101,413 | | | 116,440 | |
Environmental costs(2) | | 104,253 | | | 94,636 | |
Gas costs | | 22,355 | | | 15,477 | |
| | | | |
Other(5) | | 47,608 | | | 36,663 | |
Total non-current | | $ | 340,407 | | | $ | 314,539 | |
Other (NW Holdings) | | 25 | | | 40 | |
Total non-current -NW Holdings | | $ | 340,432 | | | $ | 314,579 | |
| | | | | | | | | | | | | | |
| | Regulatory Liabilities |
In thousands | | 2022 | | 2021 |
NW Natural: | | | | |
Current: | | | | |
Gas costs | | $ | 4,121 | | | $ | 70 | |
Unrealized gain on derivatives(1) | | 194,236 | | | 48,130 | |
Decoupling(3) | | 14,026 | | | 4,475 | |
Income taxes(6) | | 7,166 | | | 8,192 | |
Asset optimization revenue sharing | | 26,368 | | | 45,124 | |
Other(5) | | 2,636 | | | 6,290 | |
Total current - NW Natural | | $ | 248,553 | | | $ | 112,281 | |
| | | | |
| | | | |
Other (NW Holdings) | | 29 | | | — | |
Total current - NW Holdings | | $ | 248,582 | | | $ | 112,281 | |
Non-current: | | | | |
Gas costs | | $ | 12,644 | | | $ | 250 | |
Unrealized gain on derivatives(1) | | 5,045 | | | 10,730 | |
Decoupling(3) | | 3,814 | | | 3,412 | |
Income taxes(6) | | 174,212 | | | 181,404 | |
Accrued asset removal costs(7) | | 467,742 | | | 445,952 | |
Asset optimization revenue sharing | | 8,401 | | | 1,810 | |
Other(5) | | 16,741 | | | 13,792 | |
Total non-current - NW Natural | | $ | 688,599 | | | $ | 657,350 | |
Other (NW Holdings) | | 979 | | | 982 | |
Total non-current -NW Holdings | | $ | 689,578 | | | $ | 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 natural gas distribution rates as part of the annual Purchased Gas Adjustment (PGA) mechanism when realized at settlement.
|
| | | | | | | | |
|
| Regulatory Assets |
In thousands |
| 2019 |
| 2018 |
Current: |
|
|
|
|
Unrealized loss on derivatives(1) |
| $ | 2,000 |
|
| $ | 12,381 |
|
Gas costs | | 20,140 |
| | 2,873 |
|
Environmental costs(2) | | 4,762 |
| | 5,601 |
|
Decoupling(3) | | 1,969 |
| | 9,140 |
|
Pension balancing(4) | | 5,939 |
| | — |
|
Income taxes | | 2,209 |
| | 2,218 |
|
Other(5) |
| 4,910 |
|
| 9,717 |
|
Total current |
| $ | 41,929 |
|
| $ | 41,930 |
|
Non-current: |
|
|
|
|
Unrealized loss on derivatives(1) |
| $ | 609 |
|
| $ | 3,025 |
|
Pension balancing(4) |
| 48,251 |
|
| 74,173 |
|
Income taxes |
| 17,173 |
|
| 19,185 |
|
Pension and other postretirement benefit liabilities |
| 173,262 |
|
| 174,993 |
|
Environmental costs(2) |
| 87,624 |
|
| 76,149 |
|
Gas costs | | 2,866 |
| | 9,978 |
|
Decoupling(3) | | — |
| | 2,545 |
|
Other(5) |
| 13,361 |
|
| 11,738 |
|
Total non-current |
| $ | 343,146 |
|
| $ | 371,786 |
|
(2)Refer to the Environmental Cost Deferral and Recovery table in Note 17 for a description of environmental costs.(3)This deferral represents the margin adjustment resulting from differences between actual and expected volumes.
(4)Refer to Note 10 for information regarding the deferral of pension expenses.
|
| | | | | | | | |
| | Regulatory Liabilities |
In thousands | | 2019 | | 2018 |
Current: | | | | |
Gas costs | | $ | 1,223 |
| | $ | 17,182 |
|
Unrealized gain on derivatives(1) | | 6,622 |
| | 8,740 |
|
Decoupling(3) | | 4,831 |
| | 2,264 |
|
Income taxes(6) | | 8,435 |
| | — |
|
Other(5) | | 23,546 |
| | 19,250 |
|
Total current | | $ | 44,657 |
| | $ | 47,436 |
|
Non-current: | | | | |
Gas costs | | $ | 2,013 |
| | $ | 552 |
|
Unrealized gain on derivatives(1) | | 3,337 |
| | 725 |
|
Decoupling(3) | | 6,378 |
| | — |
|
Income taxes(6) | | 198,219 |
| | 225,408 |
|
Accrued asset removal costs(7) | | 401,893 |
| | 380,464 |
|
Other(5) | | 13,877 |
| | 4,411 |
|
Total non-current | | $ | 625,717 |
| | $ | 611,560 |
|
| |
| 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 natural gas distribution rates as part of the annual Purchased Gas Adjustment (PGA) mechanism when realized at settlement. |
| |
(2)
| Refer to the Environmental Cost Deferral and Recovery table in Note 18 for a description of environmental costs. |
| |
(3)
| This deferral represents the margin adjustment resulting from differences between actual and expected volumes. |
| |
(4)
| Refer to Note 10 for information regarding the deferral of pension expenses. |
| |
(5)
| Balances consist of deferrals and amortizations under approved regulatory mechanisms and typically earn a rate of return or carrying charge. |
| |
(6)
| This balance represents estimated amounts associated with the Tax Cuts and Jobs Act. See Note 11. |
| |
(7)
| Estimated costs of removal on certain regulated properties are collected through rates. See "Accounting Policies—Plant, Property, and Accrued Asset Removal Costs" below.
|
(5)Balances consist of deferrals and amortizations under approved regulatory mechanisms and typically earn a rate of return or carrying charge.
(6)This balance represents estimated amounts associated with the Tax Cuts and Jobs Act. See Note 11.
(7)Estimated costs of removal on certain regulated properties are collected through rates. See "Accounting Policies—Plant, Property, and Accrued Asset Removal Costs" below.
The amortization period for NW Natural's regulatory assets and liabilities ranges from less than one year to an indeterminable period. Regulatory deferrals for gas costs payable are generally amortized over 12 months beginning each November 1 following the gas contract year during which the deferred gas costs are recorded. Similarly, most other regulatory deferred accounts are amortized over 12 months. However, certain regulatory account balances, such as income taxes, environmental costs, pension
liabilities, and accrued asset removal costs, are large and tend to be amortized over longer periods once NW Natural has agreed upon an amortization period with the respective regulatory agency.
We believe all costs incurred and deferred at December 31, 20192022 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 Natural would be required to write-off the net unrecoverable balances in the period such determination is made.
Regulatory interest income of $19.6$7.0 millionand $7.6$6.1 million and regulatory interest expense of $12.3$2.0 millionand $5.9$1.3 million was recognized within other income (expense), net for the years ended December 31, 20192022 and 2018,2021, respectively.
Environmental Regulatory Accounting
See Note 1817 for information about the SRRM and OPUC orders regarding implementation.
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 December 31, 2022, we believe that approximately $18.7 million of the financial effects related to COVID-19 are recoverable. As part of the 2022 Oregon general rate case, NW Natural received approval from the OPUC to recover the 2020 and 2021 COVID-19 deferral beginning November 1, 2022. Approximately $10.9 million will be amortized over a two-year period and NW Natural may request recovery of the remaining amount in the third year. Included in the total balance is approximately $3.4 million of forgone late fee revenue that will be recognized in future periods as billed. Beginning January 2023, NW Natural will no longer defer any COVID-19 related costs in Oregon. NW Natural expects to recover its COVID-19 deferrals in Washington in a future proceeding.
New Accounting Standards
NW 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 consolidated financial position or results of operations.
Recently Adopted Accounting Pronouncements
ACCUMULATED OTHER COMPREHENSIVE INCOME.REFERENCE RATE REFORM. On February 14, 2018,In March 2020, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This update was issued in response to concerns from certain stakeholders regarding the current requirements under U.S. GAAP that deferred tax assets and liabilities are adjusted for a change in tax laws or rates, and the effect is to be included in income from continuing operations in the period2020-04, "Reference Rate Reform (Topic 848): Facilitation of the enactment date. This requirement is also applicable to items in accumulated other comprehensive income where the related tax effects were originally recognized in other comprehensive income. The adjustmentEffects of deferred taxes due to the new corporate income tax rate enacted through the Tax Cuts and Jobs Act (TCJA)Reference Rate Reform on December 22, 2017 recognized in income from continuing operations causes the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects) to not reflect the appropriate tax rate. The amendments in this update allow but do not require a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA and require certain disclosures about stranded tax effects. NW Natural adopted and applied the standard in the first quarter of 2019. NW Natural elected to reclassify the stranded tax effects of the TCJA of $1.4 million from accumulated other comprehensive loss to retained earnings in the period of adoption. Going forward, our policy is that, in the event that regulation changes result in stranded tax effects, such amounts will be reclassified from accumulated other comprehensive income (loss) to retained earnings in the final period that the related deferred tax balance remeasurement is expected to impact income from continuing operations.
DERIVATIVES AND HEDGING. On August 28, 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities.Financial Reporting." The purpose of the amendment is to more closely align hedgeprovide optional expedients and exceptions for applying generally accepted accounting with companies’ risk management strategies. The ASU amends the accounting for risk componentprinciples (GAAP) to contracts, hedging the hedged item in fair value hedges of interestrelationships, and other transactions affected by reference rate risk, and amounts excluded from the assessment of hedge effectiveness. The guidance also amends the recognition and presentation of the effect of hedging instruments and includes other simplifications of hedge accounting.reform if certain criteria are met. The amendments in this update wereASU 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.
In January 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 beginning January 1, 2019 and were applied prospectivelyfor all entities as of March 12, 2020 through December 31, 2022.
In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848." The purpose of the amendment is to hedging instruments. defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.The adoption didobjective of the guidance in Topic 848 is to provide temporary relief during the transition period. The Board included a sunset provision within Topic 848 based on expectations of when the London Interbank Offered Rate (LIBOR) would cease being published. We do not have an impact onexpect the ASUs to materially affect the financial statements orand disclosures of NW Holdings or NW Natural.
GOODWILL. LEASES.On January 26, 2017, In July 2021, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment.2021-05, "Leases (Topic 842), Lessors - Certain Leases with Variable Lease Payments." The ASU removes Step 2 from the goodwill impairment test and under the amended guidance an entity should perform its annual goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount in which the carrying amounts exceed the fair valuepurpose of the reporting unit.amendment is to require lessors to account for certain lease transactions that contain variable lease payments as operating leases. The amendments in this standardASU are intended to eliminate the recognition of any day-one loss
associated with certain sales-type and direct-financing lease transactions. The changes do not impact lessee accounting. The new guidance was effective for us beginningon January 1, 20202022 and early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. NW Natural early adopted ASU 2017-04 in the quarter ended September 30, 2018.using a prospective approach. The adoption of this ASU did not materially affect the financial statements and disclosures of NW Holdings or NW Natural.
LEASES. On February 25, 2016, the FASB issued ASU 2016-02, "Leases," which revises the existing lease accounting guidance. Pursuant to the new standard (“ASC 842”), lessees are required to recognize all leases, including operating leases that are greater than 12 months at lease commencement, on the balance sheet and record corresponding right of use assets and lease liabilities. Lessor accounting will remain substantially the same under the new standard. Quantitative and qualitative disclosures are also required for users of the financial statements to have a clear understanding of the nature of our leasing activities.
We elected the alternative prospective transition approach for adoption beginning January 1, 2019. All comparative periods prior to January 1, 2019 will retain the financial reporting and disclosure requirements of ASC 840 “Leases” (“ASC 840”). There was 0 cumulative effect adjustment to the opening balance of retained earnings recorded as of January 1, 2019 for adoption as there were 0 initial direct costs or other capitalized costs related to the legacy leases that needed to be derecognized upon adoption of ASC 842.
We elected the land easement optional practical expedient to not evaluate existing or expired land easements that were not previously accounted for as leases under the ASC 840 lease guidance. For the existing lease portfolio, we did not elect the optional practical expedient package to retain the legacy lease accounting conclusions upon adoption; we re-assessed our existing contracts under the new leasing standard including whether the contract meets the definition of a lease and lease classification. As a result, we determined that most of our underground gas storage contracts no longer meet the definition of a lease under the new lease standard.
In October 2017, NW Natural entered into a 20-year operating lease agreement commencing in 2020 for a new corporate operations center location in Portland, Oregon. The lease was analyzed under ASC 840 in consideration of build-to-suit lease accounting guidance with the conclusion that NW Natural was the owner of the asset during construction for accounting purposes. Under the new lease standard, ASC 842, NW Natural is no longer considered the owner of the asset during construction for accounting purposes. As such, in January 2019 we derecognized the build-to-suit asset and liability balances of $26.0 million as of December 31, 2018 that were previously recorded within property, plant and equipment and other non-current liabilities in the consolidated balance sheet.
Upon adoption on January 1, 2019, NW Holdings recorded an operating lease right of use asset and an associated operating lease liability of approximately $7.3 million, of which $7.0 million was recorded at NW Natural. Lease liabilities are measured using NW Natural's incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments. As of December 31, 2019, our lessee portfolio under the new standard consists primarily of our current leased corporate operations center, which expires in 2020. Our lessor portfolio primarily consists of our North Mist Facility which classified as a sales-type lease. See Note 7 for more information.
CLOUD COMPUTING. On August 29, 2018, the FASB issued ASU 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The purpose of the amendment is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update are effective for us beginning January 1, 2020. Early adoption is permitted, and NW Holdings and NW Natural early adopted ASU 2018-15 in the quarter ended March 31, 2019 utilizing the prospective application methodology. The adoption of this ASU did not materially affect the financial statements and disclosures of NW Holdings or NW Natural.
Recently Issued Accounting Pronouncements
INCOME TAXES. On December 18, 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The purpose of the amendment is to reduce cost and complexity related to accounting for income taxes by removing certain exceptions to the general principles and improving consistent application for other areas in Topic 740. The amendments in this update are effective for us beginning January 1, 2021. Early adoption is permitted. The amended presentation and disclosure guidance should be applied retrospectively. We do not expect this ASU to materially affect the financial statements and disclosures of NW Holdings or NW Natural.
RETIREMENT BENEFITS. On August 28, 2018, the FASB issued ASU 2018-14, "Changes to the Disclosure Requirements for Defined Benefit Plans." The purpose of the amendment is to modify the disclosure requirements for defined benefit pension and other postretirement plans. The amendments in this update are effective for us beginning January 1, 2020. Early adoption is permitted. The amended presentation and disclosure guidance should be applied retrospectively. We do not expect this ASU to materially affect the financial statements and disclosures of NW Holdings or NW Natural.
FAIR VALUE MEASUREMENT. On August 28, 2018, the FASB issued ASU 2018-13, "Changes to the Disclosure Requirements for Fair Value Measurement." The purpose of the amendment is to modify the disclosure requirements for fair value measurements. The amendments in this update are effective for us beginning January 1, 2020. Early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. NW Holdings and NW Natural do not have either Level 3 fair value measurements or transfers between Level 1 or Level 2 in their current portfolios, and therefore, we do not expect this ASU to have an impact on the financial statements and disclosures of NW Holdings or NW Natural.
CREDIT LOSSES. On June 16, 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which applies to financial assets subject to credit losses and measured at amortized cost. The new standard will require financial assets measured at amortized cost to be presented at the net amount expected to be collected and the allowance for credit losses is to be recorded as a valuation account that is deducted from the amortized cost basis. The amendments in this update are effective beginning January 1, 2020. Early adoption is permitted for fiscal years beginning after December 15, 2018. The majority of NW Holdings' and NW Natural's financial assets are short-term in nature, such as trade receivables, and therefore, we do not expect this ASU to materially affect our financial statements and disclosures.
Accounting Policies
The accounting policies discussed below apply to both NW Holdings and NW Natural.
Plant, Property, and Accrued Asset Removal Costs
Plant and property are stated at cost, including capitalized labor, materials, and overhead. In accordance with regulatory accounting standards, the cost of acquiring and constructing long-lived plant and property generally includes an allowance for funds used during construction (AFUDC) or capitalized interest. AFUDC represents the regulatory financing cost incurred when debt and equity funds are used for construction (see “AFUDC” below). When constructed assets are subject to market-based rates rather than cost-based rates, the financing costs incurred during construction are included in capitalized interest in accordance with U.S. GAAP, not as regulatory financing costs under AFUDC.
In accordance with long-standing regulatory treatment, our depreciation rates consist of three components: one based on the average service life of the asset, a second based on the estimated salvage value of the asset, and a third based on the asset’s estimated cost of removal. We collect, through rates, the estimated cost of removal on certain regulated properties through depreciation expense, with a corresponding offset to accumulated depreciation. These removal costs are non-legal obligations as defined by regulatory accounting guidance. Therefore, we have included these costs as non-current regulatory liabilities rather than as accumulated depreciation on our consolidated balance sheets. In the rate setting process, the liability for removal costs is treated as a reduction to the net rate base on which the NGD business has the opportunity to earn its allowed rate of return.
The costs of NGD plant retired or otherwise disposed of are removed from NGD plant and charged to accumulated depreciation for recovery or refund through future rates. Gains from the sale of regulated assets are generally deferred and refunded to customers. For assets not related to NGD, we record a gain or loss upon the disposal of the property, and the gain or loss is recorded in operating income or loss in the consolidated statements of comprehensive income.
The provision for depreciation of NGD property, plant, and equipment is recorded under the group method on a straight-line basis with rates computed in accordance with depreciation studies approved by regulatory authorities. The weighted-average depreciation rate for NGD assets in service was approximately 2.9%3.0% for 2019,2022, 2021 and 2.8% for 2018, and 2017,2020, reflecting the approximate weighted-average economic life of the property. This includes 20192022 weighted-average depreciation rates for the following asset categories: 2.6%2.5% for transmission and distribution plant, 2.2%2.1% for gas storage facilities, 5.7%6.1% for general plant, and 4.7%6.7% for intangible and other fixed assets.
AFUDC. Certain additions to NGD plant include AFUDC, which represents the net cost of debt and equity funds used during construction. AFUDC is calculated using actual interest rates for debt and authorized rates for ROE, if applicable. If short-term debt balances are less than the total balance of construction work in progress, then a composite AFUDC rate is used to represent interest on all debt funds, shown as a reduction to interest charges, and on ROE funds, shown as other income. While cash is not immediately recognized from recording AFUDC, it is realized in future years through rate recovery resulting from the higher NGD cost of service. Our composite AFUDC rate was 3.9%2.8% in 2019, 5.2%2022, 0.7% in 2018,2021, and 5.5%1.9% in 2017.2020.
IMPAIRMENT OF LONG-LIVED ASSETS. We review the carrying value of long-lived assets whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. Factors that would necessitate an impairment assessment of long-lived assets include a significant adverse change in the extent or manner in which the asset is used, a significant adverse change in legal factors or business climate that could affect the value of the asset, or a significant decline in the observable market value or expected future cash flows of the asset, among others.
When such factors are present, we assess the recoverability by determining whether the carrying value of the asset will be recovered through expected future cash flows. An asset is determined to be impaired when the carrying value of the asset exceeds the expected undiscounted future cash flows from the use and eventual disposition of the asset. If an impairment is indicated, we record an impairment loss for the difference between the carrying value and the fair value of the long-lived assets. Fair value is estimated using appropriate valuation methodologies, which may include an estimate of discounted cash flows.
In the fourth quarter of 2017, a non-cash pre-tax impairment of long-lived assets at the Gill Ranch Facility of $192.5 million was recognized. The income approach was used to estimate fair value, using the estimated future net cash flows. We also compared the results of the income approach to our own recent sale experience and recent market comparable transactions in order to estimate fair value. The Gill Ranch Facility was originally included in the gas storage segment, which has since been eliminated, and is now included in discontinued operations. We determined circumstances existed that indicated the carrying value of the assets may not be recoverable. Those circumstances included the completion of a comprehensive strategic review process that evaluated various alternatives including a potential sale, as well as contracting for available storage at lower than anticipated values for the coming storage year. Given these considerations, management re-evaluated the estimated cash flows from our interests in the Gill Ranch Facility, and determined that those estimated cash flows were no longer sufficient to cover the carrying value of the assets. The results of Gill Ranch have been presented as a discontinued operation for NW Holdings and NW Natural on the consolidated statements of comprehensive income and cash flows, and the assets and liabilities associated with Gill Ranch have been classified as discontinued operations assets and liabilities on the consolidated balance sheets. See Note 19 for additional information.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand plus highly liquid investment accounts with original maturity dates of three months or less. At December 31, 2019 and 2018,2022, NW Holdings had outstanding checks of approximately $3.2$5.8 million, and $2.7 million, respectively, substantially all of which is recorded at NW Natural.Natural, and at December 31, 2021, NW Holdings had no outstanding checks. These balances are included in accounts payable in the NW Holdings and NW Natural balance sheets.
Restricted cash is primarily comprised of funds from public purpose charges for programs that assist low-income customers with bill payments or energy efficiency. These balances are included in other current assets in the NW Holdings and NW Natural balance sheets. There were no transfers between restricted cash and cash and cash equivalents during the years ended December 31, 2022 and 2021. 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 December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | December 31, |
In thousands | | 2022 | | 2021 |
Cash and cash equivalents | | $ | 29,270 | | | $ | 18,559 | |
Restricted cash included in other current assets | | 11,694 | | | 8,561 | |
Cash, cash equivalents and restricted cash | | $ | 40,964 | | | $ | 27,120 | |
The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Natural as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | |
| | December 31, |
In thousands | | 2022 | | 2021 |
Cash and cash equivalents | | $ | 12,977 | | | $ | 12,271 | |
Restricted cash included in other current assets | | 11,694 | | | 8,561 | |
Cash, cash equivalents and restricted cash | | $ | 24,671 | | | $ | 20,832 | |
Revenue Recognition and Accrued Unbilled Revenue
Revenues, derived primarily from the sale and transportation of natural gas, are recognized upon delivery of the gas commodityor water, or service to customers. Revenues include accruals for gas or water delivered but not yet billed to customers based on estimates of deliveries from meter reading dates to month end (accrued unbilled revenue). Accrued unbilled revenue is dependent upon a number of factors that require management’s judgment, including total natural gas receipts and deliveries, customer use of natural gas or water by billing cycle, and weather factors. Accrued unbilled revenue is reversed the following month when actual billings occur. NW Holdings' accrued unbilled revenue at December 31, 20192022 and 20182021 was $56.2$89.0 million and $57.8$82.2 million, respectively, substantially all of which is accrued unbilled revenue at NW Natural.
Revenues not related to NGD are derived primarily from Interstate Storage Services, asset management activities at the Mist gas storage facility, and other investments and business activities. At the Mist underground storage facility, revenues are primarily firm service revenues in the form of fixed monthly reservation charges. In addition, we also have asset management service revenue from an independent energy marketing company that optimizes commodity, storage, and pipeline capacity release transactions. Under this agreement, guaranteed asset management revenue is recognized using a straight-line, pro-rata methodology over the term of each contract. Revenues earned above the guaranteed amount are recognized as they are earned.
Revenue Taxes
Revenue-based taxes are primarily franchise taxes, which are collected from customers and remitted to taxing authorities. In 2018, revenueRevenue taxes are included in operating expenses in the statements of comprehensive income for NW Holdings and NW Natural. In 2017 and 2016, revenueRevenue taxes are included in operating revenues in the statements of comprehensive income forat NW Holdings were $41.8 million, $34.7 million, and NW Natural. All revenue taxes are recorded at NW Natural and were $30.3 million $30.1 million,for 2022, 2021, and $19.1 million for 2019, 2018, and 2017,2020, respectively.
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. At NW Holdings and NW Natural we establish allowances for uncollectible accounts (allowance) for trade receivables, including accrued unbilled revenue, based on the aging of receivables, collection experience of past due account balances including payment plans, and historical trends of write-offs as a percent of revenues. A specific allowance is established and recorded for large individual customer receivables when amounts are identified as unlikely to be partially or fully recovered. Inactive accounts are written-off against the allowance after they are 120 days past due or when deemed uncollectible. Differences between the estimated allowance and actual write-offs will occur based on a number of factors, including changes in economic conditions, customer creditworthiness, and natural gas prices. The allowance for uncollectible accounts is adjusted quarterly, as necessary, based on information currently available.
ALLOWANCE FOR TRADE RECEIVABLES.The payment term of our NGD receivables is generally 15 days. For these short-term receivables, it is not expected that forecasted economic conditions would significantly affect the loss estimates under stable economic conditions. For extreme situations like a financial crisis, natural disaster, and the economic slowdown caused by the COVID-19 pandemic, we enhanced our review and analysis.
For the 2022 residential and commercial uncollectible provision, we primarily followed our standard methodology, which includes assessing historical write-off trends and current information on delinquent accounts. Beginning October 1, 2022, new collection rules from the OPUC applied to residential and commercial customers. This included enhanced protections for low-income customers, a return to pre-pandemic time payment arrangements terms, revised disconnection rules during the heating season, and other items. As a result of these Oregon rule changes and our recent collection process experience, we augmented our
provision review in the third and fourth quarter for Oregon accounts in the following categories: closed or inactive accounts aged less than 120 days, accounts on payment plans, and all other open accounts not on payment plans. For industrial accounts, we continue to assess the provision on an account-by-account basis with specific reserves taken as necessary. NW Natural will continue to closely monitor and evaluate our accounts receivable and the provision for uncollectible accounts.
The following table presents the activity related to the NW Holdings provision for uncollectible accounts by pool, substantially all of which is related to NW Natural's accounts receivable:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2021 | | | | As of December 31, 2022 |
| | Year ended December 31, 2022 | |
In thousands | Beginning Balance | | Provision recorded, net of adjustments | | Write-offs recognized, net of recoveries | | Ending Balance |
Allowance for uncollectible accounts: | | | | | | | |
Residential | $ | 1,460 | | | $ | 1,974 | | | $ | (1,062) | | | $ | 2,372 | |
Commercial | 178 | | | 546 | | | (324) | | | 400 | |
Industrial | 67 | | | 186 | | | (65) | | | 188 | |
Accrued unbilled and other | 313 | | | 185 | | | (162) | | | 336 | |
Total | $ | 2,018 | | | $ | 2,891 | | | $ | (1,613) | | | $ | 3,296 | |
ALLOWANCE FOR NET INVESTMENTS IN SALES-TYPE LEASES.NW Natural currently holds two net investments in sales-type leases, with substantially all of the net investment balance related to the North Mist natural gas storage agreement with Portland General Electric (PGE) which is billed under an OPUC-approved rate schedule. See Note 7 for more information on the North Mist lease. Due to the nature of this service, PGE may recover the costs of the lease through general rate cases. Therefore, we expect the risk of loss due to the credit of this lessee to be remote. As such, no allowance for uncollectibility was recorded for our sales-type lease receivables. NW Natural will continue monitoring the credit health of the lessees and the overall economic environment, including the economic factors closely tied to the financial health of our current and future lessees.
Inventories
NGD gas inventories, which consist of natural gas in storage for NGD customers, are stated at the lower of weighted-average cost or net realizable value. The regulatory treatment of these inventories provides for cost recovery in customer rates. NGD gas inventories injected into storage are priced in inventory based on actual purchase costs, and those withdrawn from storage are charged to cost of gas during the period they are withdrawn at the weighted-average inventory cost.
Gas storage inventories which primarily represent inventories at the Gill Ranch Facility and are included in Discontinued operations - current assets on the consolidated balance sheets, mainly consist of natural gas received as fuel-in-kind from storage customers. Gas storage inventories are valued at the lower of average cost or net realizable value. Cushion gas is not included in inventory balances, is recorded at original cost, and is classified as a long-term plant asset.
Materials and supplies inventories consist of inventories both related to and unrelated to NGD and are stated at the lower of average cost or net realizable value.
NW Natural's NGD and gas storage inventories totaled $27.5$61.9 million and $29.9$37.4 million at 2019December 31, 2022 and 2018,2021, respectively. At December 31, 20192022 and 2018,2021, NW Holdings' materials and supplies inventories, which are comprised primarily of NW Natural's materials and supplies, totaled $16.5$23.5 million and $14.2$19.9 million, respectively.
During 2022 and 2021, NW Natural entered into certain agreements to purchase renewable thermal certificates (RTCs). RTCs are initially recorded at cost and subsequently assessed for impairment based on the lower-of-cost or market model. NW Natural's RTCs inventory totaled $1.7 million at December 31, 2022, and all RTCs purchased during 2021 were retired or used on customers behalf prior to December 31, 2021.
Gas Reserves
Gas reserves are payments to acquire and produce natural gas reserves. Gas reserves are stated at cost, adjusted for regulatory amortization, with the associated deferred tax benefits recorded as liabilities on the balance sheet. The current portion is calculated based on expected gas deliveries within the next fiscal year. NW Natural recognizes regulatory amortization of this asset on a volumetric basis calculated using the estimated gas reserves and the estimated therms extracted and sold each month. The amortization of gas reserves is recorded to cost of gas along with gas production revenues and production costs. See Note 13.
Derivatives
NW Natural's derivatives are measured at fair value and recognized as either assets or liabilities on the balance sheet. Changes in the fair value of the derivatives are recognized in earnings unless specific regulatory or hedge accounting criteria are met. Accounting for derivatives and hedges provides an exception for contracts intended for normal purchases and normal sales for which physical delivery is probable. In addition, certain derivative contracts are approved by regulatory authorities for recovery or refund through customer rates. Accordingly, the changes in fair value of these approved contracts are deferred as regulatory
assets or liabilities pursuant to regulatory accounting principles. NW Natural's financial derivatives generally qualify for deferral under regulatory accounting. NW Natural's index-priced physical derivative contracts also qualify for regulatory deferral accounting treatment.
Derivative contracts entered into for NGD requirements after the annual PGA rate has been set and maturing during the PGA year are subject to the PGA incentive sharing mechanism. In Oregon, NW Natural participates in a PGA sharing mechanism under which it is required to select either an 80% or 90% 90% deferral of higher or lower gas costs such that the impact on current earnings from the gas cost sharing is either 20% or 10% of gas cost differences compared to PGA prices, respectively. For each of the PGA years in Oregon beginning November 1, 2019, 2018,2022, 2021, and 2017,2020, NW Natural selected the 90% deferral of gas cost differences. In Washington, 100% of the differences between the PGA prices and actual gas costs are deferred. See Note 16.15.
NW Natural'sHoldings and NW Natural have financial derivatives policy setsderivative policies that set forth the guidelines for using selected derivative products to support prudent risk management strategies within designated parameters. NW Natural's objective for using derivatives is to decrease the volatility of gas prices and cash flows without speculative risk. The use of derivatives is permitted only after the risk exposures have been identified, are determined not to exceed acceptable tolerance levels, and are determined necessary to support normal business activities. NW Natural does not enter into derivative instruments for trading purposes. All commodity and foreign exchange derivatives for NW Holdings are currently held at NW Natural.Natural, and interest rate swaps are held at NW Holdings and NWN Water.
Fair Value
In accordance with fair value accounting, we use the following fair value hierarchy for determining inputs for our debt, pension plan assets, and derivative fair value measurements:
•Level 1: Valuation is based on quoted prices for identical instruments traded in active markets;
•Level 2: Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market; and
•Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions market participants would use in valuing the asset or liability.
In addition, the fair value for certain pension trust investments is determined using Net Asset Value per share (NAV) as a practical expedient, and therefore they are not classified within the fair value hierarchy. These investments primarily consist of institutional investment products.
When developing fair value measurements, it is our policy to use quoted market prices whenever available or to maximize the use of observable inputs and minimize the use of unobservable inputs when quoted market prices are not available. Fair values are primarily developed using industry-standard models that consider various inputs including: (a) quoted future prices for commodities; (b) forward currency prices; (c) time value; (d) volatility factors; (e) current market and contractual prices for underlying instruments; (f) market interest rates and yield curves; (g) credit spreads; and (h) other relevant economic measures. NW Natural considers liquid points for natural gas hedging to be those points for which there are regularly published prices in a nationally recognized publication or where the instruments are traded on an exchange.
Goodwill and Business Combinations
NW Holdings, through its wholly-owned subsidiary NWN Water and NWNWN Water's wholly-owned subsidiaries, has completed various acquisitions that resulted in the recognition of goodwill. Goodwill is measured as the excess of the acquisition-date fair value of the consideration transferred over the acquisition-date fair value of the net identifiable assets assumed. Adjustments are recorded during the measurement period to finalize the allocation of the purchase price. The carrying value of goodwill is reviewed annually during the fourth quarter, using balances as of October 1, or whenever events or changes in circumstance indicate that such carrying values may not be recoverable. The goodwill assessment policy begins with a qualitative analysis in which events and circumstances are evaluated, including macroeconomic conditions, industry and market conditions, regulatory environments, and overall financial performance of the reporting unit. If the qualitative assessment indicates that the carrying value may be at
risk of recoverability, a quantitative evaluation is performed to measure the carrying value of the goodwill against the fair value of the reporting unit. The reporting unit is determined primarily based on current operating segments and the level of review provided by the Chief Operating Decision Maker (CODM) and/or segment management on the operating segment's financial results. Reporting units are evaluated periodically for changes in the corporate environment.
As of December 31, 20192022 and 2018,2021, NW Holdings had goodwill of $49.9$149.3 million and $9.0$70.6 million, respectively. All of NW Holdings' goodwill was acquired in 2018 and 2019 through the business combinations completed by NWN Water and its wholly-owned subsidiaries. NaNNo impairment charges were recorded as a result of the fourth quarter goodwill impairment assessment.
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at fair value at the acquisition date, and the fair value of any non-controlling interest in the acquiree. Acquisition-related costs are expensed as incurred. When NW Natural acquires a business, it assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as of the acquisition date. When there is substantial judgment or
uncertainty around the fair value of acquired assets, we may engage a third party expert to assist in determining the fair values of certain assets or liabilities.
Income Taxes
We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the enactment date period unless, for NW Natural, a regulatory order specifies deferral of the effect of the change in tax rates over a longer period of time.
For NW Natural, deferred income tax assets and liabilities are also recognized for temporary differences where the deferred income tax benefits or expenses have previously been flowed through in the ratemaking process of the NGD business. Regulatory tax assets and liabilities are recorded on these deferred tax assets and liabilities to the extent it is believed they will be recoverable from or refunded to customers in future rates.
Deferred investment
Investment tax credits on NGDassociated with rate regulated plant additions which reduce income taxes payable, are deferred for financial statement purposes and amortized over the lifeestimated useful lives of the related plant.
NW Holdings files consolidated or combined income tax returns that include NW Natural. Income tax expense is allocated on a separate company basis incorporating certain consolidated return considerations. Subsidiary income taxes payable or receivable are generally settled with NW Holdings, the common agent for income tax matters.
Interest and penalties related to unrecognized tax benefits, if any, are recognized within income tax expense and accrued interest and penalties are recognized within the related tax liability line in the consolidated balance sheets. No accrued interest or penalties for uncertain tax benefits have been recorded. See Note 11.
Environmental Contingencies
Loss contingencies are recorded as liabilities when it is probable a liability has been incurred and the amount of the loss is reasonably estimable in accordance with accounting standards for contingencies. Estimating probable losses requires an analysis of uncertainties that often depend upon judgments about potential actions by third parties. Accruals for loss contingencies are recorded based on an analysis of potential results.
With respect to environmental liabilities and related costs, estimates are developed based on a review of information available from numerous sources, including completed studies and site specific negotiations. NW Natural's policy is to accrue the full amount of such liability when information is sufficient to reasonably estimate the amount of probable
liability. When information is not available to reasonably estimate the probable liability, or when only the range of
probable liabilities can be estimated and no amount within the range is more likely than another, it is our policy to accrue at the low end of the range. Accordingly, due to numerous uncertainties surrounding the course of environmental remediation and the preliminary nature of several site investigations, in some cases, it may not be possible to reasonably estimate the high end of the range of possible loss. In those cases, the nature of the potential loss and the fact that the high end of the range cannot be reasonably estimated is disclosed. See Note 18.17.
Unconsolidated Affiliates
NW Holdings, NW Natural and NWN Water have equity interests in businesses which we account for under the equity method as we do not exercise control of the major operating and financial policies. The carrying value of these investments was $23.4 million and $14.5 million as of December 31, 2022 and 2021, respectively. The business transactions with our equity method investments are not significant. We regularly assesses the profitability and valuation of our investments for any potential impairment. See Note 13.
Cloud Computing Arrangements
Implementation costs associated with its cloud computing arrangements are capitalized consistent with costs capitalized for internal-use software. Capitalized implementation costs are included in other assets in the consolidated balance sheets. The 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 implementation costs are recorded as operations and maintenance expenses in the consolidated statements of comprehensive income. The implementation costs are included within operating activities in the consolidated statements of cash flows.
Subsequent Events
We monitor significant events occurring after the balance sheet date and prior to the issuance of the financial statements to determine the impacts, if any, of events on the financial statements to be issued. Refer to Note 20 for our subsequent events.
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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:
| | | | | | | | | | | | | | | | | | | | |
In thousands, except per share data | | 2022 | | 2021 | | 2020 |
Net income from continuing operations | | $ | 86,303 | | | $ | 78,666 | | | $ | 70,273 | |
Income from discontinued operations, net of tax | | — | | | — | | | 6,508 | |
Net income | | $ | 86,303 | | | $ | 78,666 | | | $ | 76,781 | |
Average common shares outstanding - basic | | 33,934 | | | 30,702 | | | 30,541 | |
Additional shares for stock-based compensation plans (See Note 8) | | 50 | | | 50 | | | 58 | |
Average common shares outstanding - diluted | | 33,984 | | | 30,752 | | | 30,599 | |
Earnings from continuing operations per share of common stock: | | | | | | |
Basic | | $ | 2.54 | | | $ | 2.56 | | | $ | 2.30 | |
Diluted | | 2.54 | | | 2.56 | | | 2.30 | |
Earnings from discontinued operations per share of common stock: | | | | | | |
Basic | | $ | — | | | $ | — | | | $ | 0.21 | |
Diluted | | — | | | — | | | 0.21 | |
Earnings per share of common stock: | | | | | | |
Basic | | $ | 2.54 | | | $ | 2.56 | | | $ | 2.51 | |
Diluted | | 2.54 | | | 2.56 | | | 2.51 | |
Additional information: | | | | | | |
Anti-dilutive shares | | 2 | | | 7 | | | 1 | |
|
| | | | | | | | | | | | |
In thousands, except per share data | | 2019 | | 2018 | | 2017 |
Net income from continuing operations | | $ | 65,311 |
| | $ | 67,311 |
| | $ | 72,073 |
|
Loss from discontinued operations, net of tax | | (3,576 | ) | | (2,742 | ) | | (127,696 | ) |
Net income (loss) | | $ | 61,735 |
| | $ | 64,569 |
| | $ | (55,623 | ) |
Average common shares outstanding - basic | | 29,786 |
| | 28,803 |
| | 28,669 |
|
Additional shares for stock-based compensation plans (See Note 8) | | 73 |
| | 70 |
| | 84 |
|
Average common shares outstanding - diluted | | 29,859 |
| | 28,873 |
| | 28,753 |
|
Earnings from continuing operations per share of common stock: | | | | | | |
Basic | | $ | 2.19 |
| | $ | 2.34 |
| | $ | 2.51 |
|
Diluted | | 2.19 |
| | 2.33 |
| | 2.51 |
|
Loss from discontinued operations per share of common stock: | | | | | | |
Basic | | $ | (0.12 | ) | | $ | (0.10 | ) | | $ | (4.45 | ) |
Diluted | | (0.12 | ) | | (0.09 | ) | | (4.44 | ) |
Earnings (loss) per share of common stock: | | | | | | |
Basic | | $ | 2.07 |
| | $ | 2.24 |
| | $ | (1.94 | ) |
Diluted | | 2.07 |
| | 2.24 |
| | (1.93 | ) |
Additional information: | | | | | | |
Anti-dilutive shares | | — |
| | 2 |
| | 13 |
|
4. SEGMENT INFORMATION
We primarily operate in 1one reportable business segment, which is NW Natural's local gas distribution business and is referred to as the NGD segment. During the second quarter of 2018, we moved forward with long-term strategic plans, which include a shift away from the California gas storage business, by entering into a Purchase and Sale Agreement that provides for the sale of all of the membership interests in Gill Ranch. As such, we reevaluated reportable segments and concluded that the remaining gas storage activities no longer meet the requirements of a reportable segment. Interstate Storage Services and asset management activities at the Mist gas storage facility are now reported as other under NW Natural. 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.
No individual customer accounts for over 10% of NW Holdings' or NW Natural's operating revenues.
Natural Gas Distribution
NW Natural's local gas distribution segment (NGD) 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. The NGD business is responsible for building and maintaining a safe and reliable pipeline distribution system, purchasing sufficient gas supplies from producers and marketers, contracting for firm and interruptible transportation of gas over interstate pipelines to bring gas from the supply basins into its service territory, and re-selling the gas to customers subject to rates, terms, and conditions approved by the OPUC or WUTC. NGD also includes taking customer-owned gas and transporting it from interstate pipeline connections, or city gates, to the customers’ end-use facilities for a fee, which is approved by the OPUC or WUTC. Approximately 89%88% of NGD customers are located in Oregon and 11%12% in Washington. On an annual basis, residential and commercial customers typically account for around 60% of total NGD volumes delivered and around 90% of NGD margin. Industrial customers largely account for the remaining volumes and NGD margin. A small amount of the margin is also derived from miscellaneous services, gains or losses from an incentive gas cost sharing mechanism, and other service fees.
Industrial sectors served by the NGD business include: pulp, paper, and other forest products; the manufacture of electronic, electrochemical and electrometallurgical products; the processing of farm and food products; the production of various mineral products; metal fabrication and casting; the production of machine tools, machinery, and textiles; the manufacture of asphalt, concrete, and rubber; printing and publishing; nurseries; and government and educational institutions.
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, and NWN Gas Reserves, which is a wholly-owned subsidiary of Energy Corp.Corp, and NW Natural RNG Holding Company, LLC, a holding company established to invest in the development and procurement of regulated renewable natural gas for NW Natural.
NW Natural
NW Natural's activities in Other include Interstate Storage Services and third-party asset management services for 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 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 pipeline capacity when not needed to serve NGD customers. Under the Oregon sharing mechanism, NW Natural retains 80% of the pre-tax income from these services when the costs of the capacity were not included in NGD rates, or 10% of the pre-tax income when the costs have been included in these rates. The remaining 20% and 90%, respectively, are recorded to a deferred regulatory account for crediting back to NGD customers.
NW Holdings
NW Holdings' activities in Other include all remaining activities not associated with NW Natural, specifically NWN Water, which consolidates the water and wastewater utility operations and is pursuing other investments in the water and wastewater sector through itself and wholly-owned subsidiaries; 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, which is pursuing development of a cross-Cascades transmission pipeline project (TWP); andTrail West Holdings, LLC (TWH) through August 6, 2020; other pipeline assets in NNG Financial.Financial; and NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities. For more information on TWP,the sale of TWH, see Note 14.13. Other also includes corporate revenues and expenses that cannot be allocated to other operations, including certain business development activities.
All prior period amounts have been retrospectively adjusted to reflect the change in reportable segments and the designation of Gill Ranch as a discontinued operation for NW Holdings, and the designation of subsidiaries previously owned by NW Natural that are now owned by NW Holdings as discontinued operations for NW Natural.
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 for continuing operations. See Note 1918 for information regarding discontinued operations for NW Holdings and NW Natural.Holdings.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In thousands | | NGD | | Other (NW Natural) | | NW Natural | | Other (NW Holdings) | | NW Holdings |
2022 | | | | | | | | | | |
Operating revenues | | $ | 989,752 | | | $ | 24,587 | | | $ | 1,014,339 | | | $ | 23,014 | | | $ | 1,037,353 | |
Depreciation | | 111,871 | | | 1,086 | | | 112,957 | | | 3,750 | | | 116,707 | |
Income (loss) from operations | | 152,839 | | | 16,535 | | | 169,374 | | | (1,897) | | | 167,477 | |
Net income (loss) from continuing operations | | 79,690 | | | 11,874 | | | 91,564 | | | (5,261) | | | 86,303 | |
Capital expenditures | | 315,979 | | | 2,707 | | | 318,686 | | | 19,916 | | | 338,602 | |
Total assets at December 31, 2022 | | 4,392,699 | | | 60,019 | | | 4,452,718 | | | 295,608 | | | 4,748,326 | |
2021 | | | | | | | | | | |
Operating revenues | | $ | 816,887 | | | $ | 26,170 | | | $ | 843,057 | | | $ | 17,343 | | | $ | 860,400 | |
Depreciation | | 109,475 | | | 1,029 | | | 110,504 | | | 3,030 | | | 113,534 | |
Income (loss) from operations | | 147,902 | | | 17,331 | | | 165,233 | | | (2,116) | | | 163,117 | |
Net income (loss) from continuing operations | | 68,988 | | | 12,184 | | | 81,172 | | | (2,506) | | | 78,666 | |
Capital expenditures | | 275,267 | | | 2,970 | | | 278,237 | | | 15,655 | | | 293,892 | |
Total assets at December 31, 2021 | | 3,846,112 | | | 52,260 | | | 3,898,372 | | | 166,232 | | | 4,064,604 | |
2020 | | | | | | | | | | |
Operating revenues | | $ | 741,072 | | | $ | 17,676 | | | $ | 758,748 | | | $ | 14,931 | | | $ | 773,679 | |
Depreciation | | 100,591 | | | 995 | | | 101,586 | | | 2,097 | | | 103,683 | |
Income (loss) from operations | | 137,724 | | | 9,916 | | | 147,640 | | | 711 | | | 148,351 | |
Net income (loss) from continuing operations | | 63,555 | | | 7,008 | | | 70,563 | | | (290) | | | 70,273 | |
Capital expenditures | | 263,777 | | | 2,271 | | | 266,048 | | | 6,968 | | | 273,016 | |
Total assets at December 31, 2020 | | 3,549,868 | | | 49,468 | | | 3,599,336 | | | 157,043 | | | 3,756,379 | |
|
| | | | | | | | | | | | | | | | | | | | |
In thousands | | NGD | | Other (NW Natural) | | NW Natural | | Other (NW Holdings) | | NW Holdings |
2019 | | | | | | | | | | |
Operating revenues | | $ | 720,528 |
| | $ | 19,416 |
| | $ | 739,944 |
| | $ | 6,428 |
| | $ | 746,372 |
|
Depreciation and amortization | | 89,415 |
| | 990 |
| | 90,405 |
| | 1,091 |
| | 91,496 |
|
Income (loss) from operations | | 135,918 |
| | 11,428 |
| | 147,346 |
| | (3,872 | ) | | 143,474 |
|
Net income (loss) from continuing operations | | 60,828 |
| | 8,146 |
| | 68,974 |
| | (3,663 | ) | | 65,311 |
|
Capital expenditures |
| 219,880 |
|
| 1,500 |
|
| 221,380 |
| | 2,091 |
| | 223,471 |
|
Total assets at December 31, 2019(1) | | 3,273,835 |
| | 47,652 |
| | 3,321,487 |
| | 91,833 |
| | 3,413,320 |
|
2018 | | | | | | | | | | |
Operating revenues | | $ | 680,648 |
| | $ | 24,923 |
| | $ | 705,571 |
| | $ | 572 |
| | $ | 706,143 |
|
Depreciation and amortization | | 83,732 |
| | 1,254 |
| | 84,986 |
| | 170 |
| | 85,156 |
|
Income (loss) from operations | | 118,095 |
| | 15,004 |
| | 133,099 |
| | (937 | ) | | 132,162 |
|
Net income (loss) from continuing operations | | 57,491 |
| | 10,558 |
| | 68,049 |
| | (738 | ) | | 67,311 |
|
Capital expenditures | | 212,323 |
| | 2,005 |
| | 214,328 |
| | 308 |
| | 214,636 |
|
Total assets at December 31, 2018(1) | | 3,141,969 |
| | 50,767 |
| | 3,192,736 |
| | 36,657 |
| | 3,229,393 |
|
2017 | | | | | | | | | | |
Operating revenues | | $ | 732,942 |
| | $ | 22,096 |
| | $ | 755,038 |
| | $ | — |
| | $ | 755,038 |
|
Depreciation and amortization | | 79,734 |
| | 1,290 |
| | 81,024 |
| | 29 |
| | 81,053 |
|
Income (loss) from operations(2) | | 138,450 |
| | 12,472 |
| | 150,922 |
| | (20 | ) | | 150,902 |
|
Net income from continuing operations | | 60,509 |
| | 11,211 |
| | 71,720 |
| | 353 |
| | 72,073 |
|
Capital expenditures | | 211,672 |
| | 1,653 |
| | 213,325 |
| | — |
| | 213,325 |
|
Total assets at December 31, 2017(1) | | 2,961,326 |
| | 50,471 |
| | 3,011,797 |
| | 14,075 |
| | 3,025,872 |
|
| |
(1)
| Total assets for NW Holdings exclude assets related to discontinued operations of $15.1 million, $13.3 million and $13.9 million as of December 31, 2019, 2018, and 2017, respectively. Total assets for NW Natural exclude assets related to discontinued operations of $31.9 million as of December 31, 2017.
|
| |
(2)
| Includes $1.0 million of tax expense in NGD, $4.0 million of tax benefit in Other (NW Natural), and $0.4 million of tax benefit in Other (NW Holdings) from the TCJA remeasurement for the year ended December 31, 2017. |
Natural Gas Distribution Margin
NGD marginNW Natural's local gas distribution segment (NGD) is a financial measure used by the 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 costregulated utility principally engaged in the amountpurchase, sale, and delivery of revenues billednatural gas and related services to regulated NGD customers. Environmental remediation expense represents collections received from customers through environmental recovery mechanisms in Oregon and Washington as well as adjustmentssouthwest Washington. The NGD business is responsible for building and maintaining a safe and reliable pipeline distribution system, purchasing sufficient gas supplies from producers and marketers, contracting for firm and interruptible transportation of gas over interstate pipelines to bring gas from the supply basins into its service territory, and re-selling the gas to customers subject to rates, terms, and conditions approved by the OPUC or WUTC. NGD also includes taking customer-owned gas and transporting it from interstate pipeline connections, or city gates, to the customers’ end-use facilities for a fee, which is approved by the OPUC or WUTC. Approximately 88% of NGD customers are located in Oregon and 12% in Washington. On an annual basis, residential and commercial customers typically account for around 60% of total NGD volumes delivered and around 90% of NGD margin. Industrial customers largely account for the Oregon environmental earnings test when applicable. Thisremaining volumes and NGD margin. A small amount of the margin is offsetalso derived from miscellaneous services, gains or losses from an incentive gas cost sharing mechanism, and other service fees.
Industrial sectors served by environmental remediation expense presented in operating expenses. Revenue taxes are collected fromthe NGD business include: pulp, paper, and other forest products; the manufacture of electronic, electrochemical and electrometallurgical products; the processing of farm and food products; the production of various mineral products; metal fabrication and casting; the production of machine tools, machinery, and textiles; the manufacture of asphalt, concrete, and rubber; printing and publishing; nurseries; and government and educational institutions.
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 remittedNW Natural RNG Holding Company, LLC, a holding company established to taxing authorities. The collectionsinvest in the development and procurement of regulated renewable natural gas for NW Natural.
NW Natural
NW Natural's activities in Other include Interstate Storage Services and third-party asset management services for 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 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, are offset byfrom management of NGD assets at Mist and upstream pipeline capacity when not needed to serve NGD customers. Under the expense recognitionOregon sharing mechanism, NW Natural retains 80% of the obligation topre-tax income from these services when 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 performancecosts of the capacity were not included in NGD segment.rates, or 10% of the pre-tax income when the costs have been included in these rates. The remaining 20% and 90%, respectively, are recorded to a deferred regulatory account for crediting back to NGD customers.
NW Holdings
NW Holdings' activities in Other include all remaining activities not associated with NW Natural, specifically NWN Water, which consolidates the water and wastewater utility operations and is pursuing other investments in the water and wastewater sector through itself and wholly-owned subsidiaries; 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 Trail West Holdings, LLC (TWH) through August 6, 2020; other pipeline assets in NNG Financial; and NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities. For more information on the sale of TWH, see Note 13. 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 additional segmentsummary financial information concerning NGD margin:the reportable segment and other for continuing operations. See Note 18 for information regarding discontinued operations for NW Holdings.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In thousands | | NGD | | Other (NW Natural) | | NW Natural | | Other (NW Holdings) | | NW Holdings |
2022 | | | | | | | | | | |
Operating revenues | | $ | 989,752 | | | $ | 24,587 | | | $ | 1,014,339 | | | $ | 23,014 | | | $ | 1,037,353 | |
Depreciation | | 111,871 | | | 1,086 | | | 112,957 | | | 3,750 | | | 116,707 | |
Income (loss) from operations | | 152,839 | | | 16,535 | | | 169,374 | | | (1,897) | | | 167,477 | |
Net income (loss) from continuing operations | | 79,690 | | | 11,874 | | | 91,564 | | | (5,261) | | | 86,303 | |
Capital expenditures | | 315,979 | | | 2,707 | | | 318,686 | | | 19,916 | | | 338,602 | |
Total assets at December 31, 2022 | | 4,392,699 | | | 60,019 | | | 4,452,718 | | | 295,608 | | | 4,748,326 | |
2021 | | | | | | | | | | |
Operating revenues | | $ | 816,887 | | | $ | 26,170 | | | $ | 843,057 | | | $ | 17,343 | | | $ | 860,400 | |
Depreciation | | 109,475 | | | 1,029 | | | 110,504 | | | 3,030 | | | 113,534 | |
Income (loss) from operations | | 147,902 | | | 17,331 | | | 165,233 | | | (2,116) | | | 163,117 | |
Net income (loss) from continuing operations | | 68,988 | | | 12,184 | | | 81,172 | | | (2,506) | | | 78,666 | |
Capital expenditures | | 275,267 | | | 2,970 | | | 278,237 | | | 15,655 | | | 293,892 | |
Total assets at December 31, 2021 | | 3,846,112 | | | 52,260 | | | 3,898,372 | | | 166,232 | | | 4,064,604 | |
2020 | | | | | | | | | | |
Operating revenues | | $ | 741,072 | | | $ | 17,676 | | | $ | 758,748 | | | $ | 14,931 | | | $ | 773,679 | |
Depreciation | | 100,591 | | | 995 | | | 101,586 | | | 2,097 | | | 103,683 | |
Income (loss) from operations | | 137,724 | | | 9,916 | | | 147,640 | | | 711 | | | 148,351 | |
Net income (loss) from continuing operations | | 63,555 | | | 7,008 | | | 70,563 | | | (290) | | | 70,273 | |
Capital expenditures | | 263,777 | | | 2,271 | | | 266,048 | | | 6,968 | | | 273,016 | |
Total assets at December 31, 2020 | | 3,549,868 | | | 49,468 | | | 3,599,336 | | | 157,043 | | | 3,756,379 | |
|
| | | | | | | | | | | |
In thousands | 2019 | | 2018 | | 2017 |
NGD margin calculation: | | | | | |
NGD operating revenues | $ | 720,528 |
| | $ | 680,648 |
| | $ | 732,942 |
|
Less: NGD cost of gas | 255,135 |
| | 255,743 |
| | 325,019 |
|
Environmental remediation expense | 12,337 |
| | 11,127 |
| | 15,291 |
|
Revenue taxes(1) | 30,325 |
| | 30,082 |
| | — |
|
NGD margin | $ | 422,731 |
| | $ | 383,696 |
| | $ | 392,632 |
|
| |
(1)
| The change in presentation of revenue taxes was a result of the adoption of ASU 2014-09 "Revenue From Contracts with Customers" and all related amendments on January 1, 2018. This change had no impact on NGD margin results as revenue taxes were previously presented net in NGD operating revenue. For additional information, see Note 2. |
5. COMMON STOCK
As of December 31, 2019 and 2018, NW Holdings had 100 million shares of common stock authorized. As of December 31, 2019, NW Holdings had 206,560 shares reserved for issuance of common stock under the Employee Stock Purchase Plan (ESPP) and 340,133 shares reserved for issuance under the Dividend Reinvestment and Direct Stock Purchase Plan (DRPP). At NW Holdings' election, shares sold through the DRPP may be purchased in the open market or through original issuance of shares reserved for issuance under the DRPP.
The Restated Stock Option Plan (SOP) was terminated with respect to new grants in 2012; however, options granted before the Restated SOP was terminated remain outstanding until the earlier of their expiration, forfeiture, or exercise. Options are now exercisable for shares of NW Holdings common stock. There were 10,938 options outstanding at December 31, 2019, which were granted prior to termination of the plan.
On June 7, 2019, NW Holdings completed the issuance of 1,437,500 shares of common stock, inclusive of the overallotment option granted to the underwriters, which was exercised in full. All shares were issued on June 7, 2019 at an offering price of $67.00 per share. The issuance resulted in proceeds to NW Holdings of $93.0 million, net of discounts and expenses. The issuance was executed to raise funds for general corporate purposes, including for equity contributions to NW Holdings’ subsidiaries, that are reflected as equity transfers on occurrence. Contributions received by NW Natural were also used, in part, to repay short-term indebtedness.
Stock Repurchase Program
NW Holdings has a share repurchase program under which it may purchase its common shares on the open market or through privately negotiated transactions. NW Holdings currently has Board authorization through May 2022to repurchase up to an aggregate of the greater of 2.8 million shares or $100 million. NaN shares of common stock were repurchased pursuant to this program during the year ended December 31, 2019. Since the plan’s inception in 2000 under NW Natural, a total of 2.1 million shares have been repurchased at a total cost of $83.3 million.
The following table summarizes the changes in the number of shares of NW Holdings' common stock issued and outstanding:
|
| | | |
In thousands | | Shares |
Balance, December 31, 2016 | | 28,630 |
|
Sales to employees under ESPP | | 18 |
|
Stock-based compensation | | 88 |
|
Balance, December 31, 2017 | | 28,736 |
|
Sales to employees under ESPP | | 19 |
|
Stock-based compensation | | 64 |
|
Sales to shareholders under DRPP | | 61 |
|
Balance, December 31, 2018 | | 28,880 |
|
Sales to employees under ESPP | | 18 |
|
Stock-based compensation | | 83 |
|
Equity Issuance | | 1,438 |
|
Sales to shareholders under DRPP | | 53 |
|
Balance, December 31, 2019 | | 30,472 |
|
6. REVENUE
The following table presents disaggregated revenue from continuing operations:
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2019 |
In thousands | | NGD | | Other (NW Natural) | | NW Natural | | Other (NW Holdings) | | NW Holdings |
Natural gas sales | | $ | 729,296 |
| | $ | — |
| | $ | 729,296 |
| | $ | — |
| | $ | 729,296 |
|
Gas storage revenue, net | | — |
| | 10,240 |
| | 10,240 |
| | — |
| | 10,240 |
|
Asset management revenue, net | | — |
| | 3,705 |
| | 3,705 |
| | — |
| | 3,705 |
|
Appliance retail center revenue | | — |
| | 5,471 |
| | 5,471 |
| | — |
| | 5,471 |
|
Other revenue | | 847 |
| | — |
| | 847 |
| | 6,428 |
| | 7,275 |
|
Revenue from contracts with customers | | 730,143 |
| | 19,416 |
| | 749,559 |
| | 6,428 |
| | 755,987 |
|
| | | | | | | | | | |
Alternative revenue | | (20,984 | ) | | — |
| | (20,984 | ) | | — |
| | (20,984 | ) |
Leasing revenue | | 11,369 |
| | — |
| | 11,369 |
| | — |
| | 11,369 |
|
Total operating revenues | | $ | 720,528 |
| | $ | 19,416 |
| | $ | 739,944 |
| | $ | 6,428 |
| | $ | 746,372 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2018 |
In thousands | | NGD | | Other (NW Natural) | | NW Natural | | Other (NW Holdings) | | NW Holdings |
Natural gas sales | | $ | 670,662 |
| | $ | — |
| | $ | 670,662 |
| | $ | — |
| | $ | 670,662 |
|
Gas storage revenue, net | | — |
| | 10,780 |
| | 10,780 |
| | — |
| | 10,780 |
|
Asset management revenue, net | | — |
| | 8,548 |
| | 8,548 |
| | — |
| | 8,548 |
|
Appliance retail center revenue | | — |
| | 5,595 |
| | 5,595 |
| | — |
| | 5,595 |
|
Other revenue | | — |
| | — |
| | — |
| | 572 |
| | 572 |
|
Revenue from contracts with customers | | 670,662 |
| | 24,923 |
| | 695,585 |
| | 572 |
| | 696,157 |
|
| | | | | | | | | | |
Alternative revenue | | 8,989 |
| | — |
| | 8,989 |
| | — |
| | 8,989 |
|
Leasing revenue | | 997 |
| | — |
| | 997 |
| | — |
| | 997 |
|
Total operating revenues | | $ | 680,648 |
| | $ | 24,923 |
| | $ | 705,571 |
| | $ | 572 |
| | $ | 706,143 |
|
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.
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-based taxes are primarily franchise taxes, which are collected from NGD customers and remitted to taxing authorities. Beginning January 1, 2018, revenue taxes are included in operating revenues with an equal and offsetting expense recognized in operating expenses in the consolidated statements of comprehensive income.
Natural Gas Distribution
NW Natural's local gas distribution segment (NGD) 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. The NGD business is responsible for building and maintaining a safe and reliable pipeline distribution system, purchasing sufficient gas supplies from producers and marketers, contracting for firm and interruptible transportation of gas over interstate pipelines to bring gas from the supply basins into its service territory, and re-selling the gas to customers subject to rates, terms, and conditions approved by the OPUC or WUTC. NGD also includes taking customer-owned gas and transporting it from interstate pipeline connections, or city gates, to the customers’ end-use facilities for a fee, which is approved by the OPUC or WUTC. Approximately 88% of NGD customers are located in Oregon and 12% in Washington. On an annual basis, residential and commercial customers typically account for around 60% of total NGD volumes delivered and around 90% of NGD margin. Industrial customers largely account for the remaining volumes and NGD margin. A small amount of the margin is also derived from miscellaneous services, gains or losses from an incentive gas cost sharing mechanism, and other service fees.
Industrial sectors served by the NGD business include: pulp, paper, and other forest products; the manufacture of electronic, electrochemical and electrometallurgical products; the processing of farm and food products; the production of various mineral products; metal fabrication and casting; the production of machine tools, machinery, and textiles; the manufacture of asphalt, concrete, and rubber; printing and publishing; nurseries; and government and educational institutions.
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 sales.for NW Natural.
NW Natural
NW Natural's activities in Other include Interstate Storage Services and third-party asset management services for 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 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 pipeline capacity when not needed to serve NGD customers. Under the Oregon sharing mechanism, NW Natural retains 80% of the pre-tax income from these services when the costs of the capacity were not included in NGD rates, or 10% of the pre-tax income when the costs have been included in these rates. The remaining 20% and 90%, respectively, are recorded to a deferred regulatory account for crediting back to NGD customers.
NW Holdings
NW Holdings' activities in Other include all remaining activities not associated with NW Natural, specifically NWN Water, which consolidates the water and wastewater utility operations and is pursuing other investments in the water and wastewater sector through itself and wholly-owned subsidiaries; 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 Trail West Holdings, LLC (TWH) through August 6, 2020; other pipeline assets in NNG Financial; and NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities. For more information on the sale of TWH, see Note 13. 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 for continuing operations. See Note 18 for information regarding discontinued operations for NW Holdings.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
In thousands | | NGD | | Other (NW Natural) | | NW Natural | | Other (NW Holdings) | | NW Holdings |
2022 | | | | | | | | | | |
Operating revenues | | $ | 989,752 | | | $ | 24,587 | | | $ | 1,014,339 | | | $ | 23,014 | | | $ | 1,037,353 | |
Depreciation | | 111,871 | | | 1,086 | | | 112,957 | | | 3,750 | | | 116,707 | |
Income (loss) from operations | | 152,839 | | | 16,535 | | | 169,374 | | | (1,897) | | | 167,477 | |
Net income (loss) from continuing operations | | 79,690 | | | 11,874 | | | 91,564 | | | (5,261) | | | 86,303 | |
Capital expenditures | | 315,979 | | | 2,707 | | | 318,686 | | | 19,916 | | | 338,602 | |
Total assets at December 31, 2022 | | 4,392,699 | | | 60,019 | | | 4,452,718 | | | 295,608 | | | 4,748,326 | |
2021 | | | | | | | | | | |
Operating revenues | | $ | 816,887 | | | $ | 26,170 | | | $ | 843,057 | | | $ | 17,343 | | | $ | 860,400 | |
Depreciation | | 109,475 | | | 1,029 | | | 110,504 | | | 3,030 | | | 113,534 | |
Income (loss) from operations | | 147,902 | | | 17,331 | | | 165,233 | | | (2,116) | | | 163,117 | |
Net income (loss) from continuing operations | | 68,988 | | | 12,184 | | | 81,172 | | | (2,506) | | | 78,666 | |
Capital expenditures | | 275,267 | | | 2,970 | | | 278,237 | | | 15,655 | | | 293,892 | |
Total assets at December 31, 2021 | | 3,846,112 | | | 52,260 | | | 3,898,372 | | | 166,232 | | | 4,064,604 | |
2020 | | | | | | | | | | |
Operating revenues | | $ | 741,072 | | | $ | 17,676 | | | $ | 758,748 | | | $ | 14,931 | | | $ | 773,679 | |
Depreciation | | 100,591 | | | 995 | | | 101,586 | | | 2,097 | | | 103,683 | |
Income (loss) from operations | | 137,724 | | | 9,916 | | | 147,640 | | | 711 | | | 148,351 | |
Net income (loss) from continuing operations | | 63,555 | | | 7,008 | | | 70,563 | | | (290) | | | 70,273 | |
Capital expenditures | | 263,777 | | | 2,271 | | | 266,048 | | | 6,968 | | | 273,016 | |
Total assets at December 31, 2020 | | 3,549,868 | | | 49,468 | | | 3,599,336 | | | 157,043 | | | 3,756,379 | |
Natural Gas Distribution Margin
NGD margin is the primary financial measure used by the 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 environmental recovery 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.
The following table presents additional segment information concerning NGD margin:
| | | | | | | | | | | | | | | | | |
In thousands | 2022 | | 2021 | | 2020 |
NGD margin calculation: | | | | | |
NGD operating revenues | $ | 970,124 | | | $ | 797,800 | | | $ | 721,950 | |
Other regulated services | 19,628 | | | 19,087 | | | 19,122 | |
Total NGD operating revenues | 989,752 | | | 816,887 | | | 741,072 | |
Less: NGD cost of gas | 429,861 | | | 292,538 | | | 262,980 | |
Environmental remediation expense | 12,389 | | | 9,938 | | | 9,691 | |
Revenue taxes | 41,627 | | | 34,600 | | | 30,291 | |
NGD margin | $ | 505,875 | | | $ | 479,811 | | | $ | 438,110 | |
5. COMMON STOCK
As of December 31, 2022 and 2021, NW Holdings had 100 million shares of common stock authorized. As of December 31, 2022, NW Holdings had 319,777 shares reserved for issuance of common stock under the Employee Stock Purchase Plan (ESPP) and 394,102 shares reserved for issuance under the Dividend Reinvestment and Direct Stock Purchase Plan (DRPP). At NW Holdings' election, shares sold through the DRPP may be purchased in the open market or through original issuance of shares reserved for issuance under the DRPP.
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 year ended December 31, 2022, NW Holdings issued and sold 1,381,728 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $69.7 million, net of fees and commissions paid to agents of $1.4 million. As of December 31, 2022, NW Holdings had $111.1 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.
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 estimated expenses payable by NW Holdings, of approximately $138.6 million. The proceeds are to be used for general corporate purposes, including repayment of its short-term indebtedness and/or making equity contributions to NW Holdings' subsidiaries, NW Natural, NW Natural Water and NW Natural Renewables. Contributions to NW Natural, NW Natural Water and NW Natural Renewables are to be used for general corporate purposes. Of the contributions received by NW Natural, $130.0 million was used to repay its short-term indebtedness.
Stock Repurchase Program
NW Holdings has a share repurchase program under which it may purchase its common shares on the open market or through privately negotiated transactions. NW Holdings currently has Board authorization to repurchase up to an aggregate of the greater of 2.8 million shares or $100 million. No shares of common stock were repurchased pursuant to this program during the year ended December 31, 2022. Since the plan’s inception in 2000 under NW Natural, a total of 2.1 million shares have been repurchased at a total cost of $83.3 million.
The following table summarizes the changes in the number of shares of NW Holdings' common stock issued and outstanding:
| | | | | | | | |
In thousands | | Shares |
Balance, December 31, 2019 | | 30,472 | |
Sales to employees under ESPP | | 3 | |
Stock-based compensation | | 46 | |
| | |
Sales to shareholders under DRPP | | 68 | |
Balance, December 31, 2020 | | 30,589 | |
Sales to employees under ESPP | | 48 | |
Stock-based compensation | | 49 | |
Equity issuance | | 376 | |
Sales to shareholders under DRPP | | 67 | |
Balance, December 31, 2021 | | 31,129 | |
Sales to employees under ESPP | | 36 | |
Stock-based compensation | | 42 | |
Equity issuance | | 4,257 | |
Sales to shareholders under DRPP | | 61 | |
| | |
| | |
Balance, December 31, 2022 | | 35,525 | |
6. REVENUE
The following table presents disaggregated revenue from continuing operations:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2022 |
In thousands | | NGD | | Other (NW Natural) | | NW Natural | | Other (NW Holdings) | | NW Holdings |
Natural gas sales | | $ | 989,654 | | | $ | — | | | $ | 989,654 | | | $ | — | | | $ | 989,654 | |
Gas storage revenue, net | | — | | | 11,792 | | | 11,792 | | | — | | | 11,792 | |
Asset management revenue, net | | — | | | 6,965 | | | 6,965 | | | — | | | 6,965 | |
Appliance retail center revenue | | — | | | 5,830 | | | 5,830 | | | — | | | 5,830 | |
Other revenue | | 2,510 | | | — | | | 2,510 | | | 23,014 | | | 25,524 | |
Revenue from contracts with customers | | 992,164 | | | 24,587 | | | 1,016,751 | | | 23,014 | | | 1,039,765 | |
| | | | | | | | | | |
Alternative revenue | | (19,605) | | | — | | | (19,605) | | | — | | | (19,605) | |
Leasing revenue | | 17,193 | | | — | | | 17,193 | | | — | | | 17,193 | |
Total operating revenues | | $ | 989,752 | | | $ | 24,587 | | | $ | 1,014,339 | | | $ | 23,014 | | | $ | 1,037,353 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2021 |
In thousands | | NGD | | Other (NW Natural) | | NW Natural | | Other (NW Holdings) | | NW Holdings |
Natural gas sales | | $ | 783,027 | | | $ | — | | | $ | 783,027 | | | $ | — | | | $ | 783,027 | |
Gas storage revenue, net | | — | | | 10,830 | | | 10,830 | | | — | | | 10,830 | |
Asset management revenue, net | | — | | | 9,387 | | | 9,387 | | | — | | | 9,387 | |
Appliance retail center revenue | | — | | | 5,953 | | | 5,953 | | | — | | | 5,953 | |
Other revenue | | 1,615 | | | — | | | 1,615 | | | 17,343 | | | 18,958 | |
Revenue from contracts with customers | | 784,642 | | | 26,170 | | | 810,812 | | | 17,343 | | | 828,155 | |
| | | | | | | | | | |
Alternative revenue | | 14,694 | | | — | | | 14,694 | | | — | | | 14,694 | |
Leasing revenue | | 17,551 | | | — | | | 17,551 | | | — | | | 17,551 | |
Total operating revenues | | $ | 816,887 | | | $ | 26,170 | | | $ | 843,057 | | | $ | 17,343 | | | $ | 860,400 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2020 |
In thousands | | NGD | | Other (NW Natural) | | NW Natural | | Other (NW Holdings) | | NW Holdings |
Natural gas sales | | $ | 710,422 | | | $ | — | | | $ | 710,422 | | | $ | — | | | $ | 710,422 | |
Gas storage revenue, net | | — | | | 9,759 | | | 9,759 | | | — | | | 9,759 | |
Asset management revenue, net | | — | | | 2,532 | | | 2,532 | | | — | | | 2,532 | |
Appliance retail center revenue | | — | | | 5,385 | | | 5,385 | | | — | | | 5,385 | |
Other revenue | | 1,337 | | | — | | | 1,337 | | | 14,931 | | | 16,268 | |
Revenue from contracts with customers | | 711,759 | | | 17,676 | | | 729,435 | | | 14,931 | | | 744,366 | |
| | | | | | | | | | |
Alternative revenue | | 10,870 | | | — | | | 10,870 | | | — | | | 10,870 | |
Leasing revenue | | 18,443 | | | — | | | 18,443 | | | — | | | 18,443 | |
Total operating revenues | | $ | 741,072 | | | $ | 17,676 | | | $ | 758,748 | | | $ | 14,931 | | | $ | 773,679 | |
NW Natural's revenue represents substantially all of NW Holdings' revenue and is recognized for both registrants when the obligation to customers is satisfied and in the amount expected to be received in exchange for transferring goods or providing services. Revenue from contracts with customers contains one performance obligation that is generally satisfied over time, using the output method based on time elapsed, due to the continuous nature of the service provided. The transaction price is determined by a set price agreed upon in the contract or dependent on regulatory tariffs. Customer accounts are settled on a monthly basis or paid at time of sale and based on historical experience. It is probable that we will collect substantially all of the consideration to which we are entitled. We evaluated the probability of collection in accordance with the current expected credit losses standard.
NW Holdings and NW Natural do not have any material contract assets, as net accounts receivable and accrued unbilled revenue balances are unconditional and only involve the passage of time until such balances are billed and collected. NW Holdings and NW Natural do not have any material contract liabilities.
Revenue taxes are included in operating revenues with an equal and offsetting expense recognized in operating expenses in the consolidated statements of comprehensive income. Revenue-based taxes are primarily franchise taxes, which are collected from NGD customers and remitted to taxing authorities.
Natural Gas Distribution
Natural Gas Sales
NW Natural's primary source of revenue is providing natural gas to customers in the NGD service territory, which includes residential, commercial, industrial and transportation customers. NGD revenue is generally recognized over time upon delivery of the gas commodity or service to the customer, and the amount of consideration received and recognized as revenue is dependent on the Oregon and Washington tariffs. Customer accounts are to be paid in full each month, and there is no right of return or warranty for services provided. Revenues include firm and interruptible sales and transportation services, franchise taxes recovered from the customer, late payment fees, service fees, and accruals for gas delivered but not yet billed (accrued unbilled revenue). The accrued unbilled revenue balance is based on estimates of deliveries during the period from the last meter reading and management judgment is required for a number of factors used in this calculation, including customer use and weather factors.
We applied the significant financing practical expedient and have not adjusted the consideration NW Natural expects to receive from NGD customers for the effects of a significant financing component as all payment arrangements are settled annually. Due to the election of the right to invoice practical expedient, we do not disclose the value of unsatisfied performance obligations as of December 31, 2019.
obligations.
Alternative revenue. Revenue
Weather normalization (WARM) and decoupling mechanisms are considered to be alternative revenue programs. Alternative revenue programs are considered to be contracts between NW Natural and its regulator and are excluded from revenue from contracts with customers.
Leasing Revenue
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 7.7 for additional information.
NW Natural Other
Gas storage revenue. Storage Revenue
NW Natural's other revenue includes gas storage activity, which includes Mist 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 regulatoryprofit sharing amount refunded to NGD customers.
Asset Management Revenue
Asset management revenue.Revenues include the optimization of the 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 December 31, 2019,2022, unrecognized revenue for the fixed component of the transaction price related to gas storage and asset management revenue was approximately $73.4$81.4 million. Of this amount, approximately $16.0$20.3 million will be recognized in 2020, $18.2 million in 2021, $14.5 million in 2022, $11.6 million in 2023, $7.8$16.2 million in 2024, $13.5 million in 2025, $9.4 million in 2026, and $5.3$22.0 million thereafter. The amounts presented here are calculated using current contracted rates.
Appliance retail center revenue. Retail Center Revenue
NW Natural owns and operates an appliance store that is open to the public, where customers can purchase natural gas home appliances. Revenue from the sale of appliances is recognized at the point in time in which the
appliance is transferred to the third party responsible for delivery and installation services and when the customer has legal title to the appliance. It is required that the sale be paid for in full prior to transfer of legal title. The amount of consideration received and recognized as revenue varies with changes in marketing incentives and discounts offered to customers.
NW Holdings Other
NW Holdings' primary source of other revenue is providing water and wastewater services to customers. Water distribution and wastewater collectionservice revenue is generally recognized over time upon delivery of the water commodity or wastewater collection service to the customer, and the amount of consideration received and recognized as revenue is dependent on the water customer rates set bytariffs established in the applicable state public utility commission and contractual rates for wastewater customers.we operate. Customer accounts are to be paid in full each month, 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 as of December 31, 2019.obligations.
7. LEASES
Lease Revenue
Leasing revenue primarily consists of NW Natural's North Mist natural gas storage agreement with PGE which is billed under an OPUC-approved rate schedule and includes an initial 30-year term beginning May 2019 with options to extend, totaling up to an additional 50 years upon mutual agreement of the parties. Under U.S. GAAP, this agreement is classified as a sales-type lease and qualifies for regulatory accounting deferral treatment. The investment in the storage facility is included in rate base under a separately established cost-of-service tariff, with revenues recognized according to the tariff schedule. As such, the selling profit that was calculated upon commencement as part of the sale-type lease recognition was deferred and will be amortized over the lease term. Billing rates under the cost-of-service tariff will be updated annually to reflect current information including depreciable asset levels, forecasted operating expenses, and the results of regulatory proceedings, as applicable, and revenue received under this agreement is recognized as operating revenue on the consolidated statements of comprehensive income. There are 0no variable payments or residual value guarantees. The lease does not contain an option to purchase the underlying assets.
NW Natural also maintains a sales-type lease for specialized compressor facilities to provide high pressure compressed natural gas (CNG) services. Lease payments are outlined in an OPUC-approved rate schedule over a 10-year term. There are 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 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:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
In thousands | | 2022 | | 2021 | | 2020 |
Lease revenue | | | | | | |
Operating leases | | $ | 74 | | | $ | 80 | | | $ | 88 | |
Sales-type leases | | 17,119 | | | 17,471 | | | 18,355 | |
Total lease revenue | | $ | 17,193 | | | $ | 17,551 | | | $ | 18,443 | |
|
| | | | |
In thousands | | Year ended December 31, 2019 |
Lease revenue | | |
Operating leases | | $ | 171 |
|
Sales-type leases | | 11,198 |
|
Total lease revenue | | $ | 11,369 |
|
Additionally, lease revenue of $0.6 million, $0.5 million and $0.5 million was recognized for each of the years ended December 31, 2022, 2021, and 2020, respectively, related to operating leases associated with non-utility property rentals. Lease revenue related to these leases was presented in other income (expense), net on the consolidated statements of comprehensive income as it is non-operating income.
Total future minimum lease payments to be received under non-cancelable leases at NW Natural at December 31, 20192022 are as follows:
| | | | | | | | | | | | | | | | | | | | |
In thousands | | Operating | | Sales-Type | | Total |
NW Natural: | | | | | | |
2023 | | $ | 621 | | | $ | 16,557 | | | $ | 17,178 | |
2024 | | 612 | | | 15,867 | | | 16,479 | |
2025 | | 603 | | | 15,306 | | | 15,909 | |
2026 | | 36 | | | 14,901 | | | 14,937 | |
2027 | | 22 | | | 14,521 | | | 14,543 | |
Thereafter | | — | | | 222,299 | | | 222,299 | |
Total minimum lease payments | | $ | 1,894 | | | $ | 299,451 | | | $ | 301,345 | |
Less: imputed interest | | | | 165,272 | | | |
Total leases receivable | | | | $ | 134,179 | | | |
Other NW Holdings: | | | | | | |
2023 | | $ | 51 | | | $ | — | | | $ | 51 | |
2024 | | 52 | | | — | | | 52 | |
2025 | | 53 | | | — | | | 53 | |
2026 | | 56 | | | — | | | 56 | |
2027 | | 57 | | | — | | | 57 | |
Thereafter | | 857 | | | — | | | 857 | |
Total minimum lease payments | | $ | 1,126 | | | $ | — | | | $ | 1,126 | |
NW Holdings: | | | | | | |
2023 | | $ | 672 | | | $ | 16,557 | | | $ | 17,229 | |
2024 | | 664 | | | 15,867 | | | 16,531 | |
2025 | | 656 | | | 15,306 | | | 15,962 | |
2026 | | 92 | | | 14,901 | | | 14,993 | |
2027 | | 79 | | | 14,521 | | | 14,600 | |
Thereafter | | 857 | | | 222,299 | | | 223,156 | |
Total minimum lease payments | | $ | 3,020 | | | $ | 299,451 | | | $ | 302,471 | |
Less: imputed interest | | | | 165,272 | | | |
Total leases receivable | | | | $ | 134,179 | | | |
|
| | | | | | | | | | | | |
In thousands | | Operating | | Sales-Type | | Total |
2020 | | $ | 65 |
| | $ | 18,228 |
| | $ | 18,293 |
|
2021 | | 49 |
| | 17,518 |
| | 17,567 |
|
2022 | | 45 |
| | 17,026 |
| | 17,071 |
|
2023 | | 45 |
| | 16,557 |
| | 16,602 |
|
2024 | | 45 |
| | 15,867 |
| | 15,912 |
|
Thereafter | | 93 |
| | 264,740 |
| | 264,833 |
|
Total lease revenue | | $ | 342 |
| | $ | 349,936 |
| | $ | 350,278 |
|
Less: imputed interest | | | | 202,319 |
| | |
Total leases receivable | | | | $ | 147,617 |
| | |
The total leases receivable above is reported under the NGD segment and the short- and long-term portions are included within other current assets and assets under sales-type leases on the consolidated balance sheets, respectively. The total amount of unguaranteed residual assets was $5.1 million and $4.7 million at December 31, 2019 was $4.0 million2022 and 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.
Additionally, future minimum lease payments of $0.5 million for each of the years ending 2020, 2021 and 2022 are to be received under non-cancelable operating leases associated with non-utility property rentals. For the year ended December 31, 2019, approximately $0.5 million of lease revenue is presented in other income (expense), net on the consolidated statements of comprehensive income as it is non-operating income.
Lease Expense
Operating Leases
We have operating leases for land, buildings and equipment. Our primary lease is for NW Natural's headquarters and operations center. Our leases have remaining lease terms of one yearnine months to 1117 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 NW Natural's incremental borrowingan 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:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2022 |
In thousands | | NW Natural | | Other (NW Holdings) | | NW Holdings |
Operating lease expense | | $ | 7,003 | | | $ | 31 | | | $ | 7,034 | |
Short-term lease expense | | 880 | | | — | | | 880 | |
|
| | | | | | | | | | | | |
| | Year ended December 31, 2019 |
In thousands | | NW Natural | | Other (NW Holdings) | | NW Holdings |
Operating lease expense | | $ | 4,620 |
| | $ | 191 |
| | $ | 4,811 |
|
Short-term lease expense | | 1,146 |
| | — |
| | 1,146 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2021 |
In thousands | | NW Natural | | Other (NW Holdings) | | NW Holdings |
Operating lease expense | | $ | 6,859 | | | $ | 58 | | | $ | 6,917 | |
Short-term lease expense | | 1,220 | | | — | | | 1,220 | |
| | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2020 |
In thousands | | NW Natural | | Other (NW Holdings) | | NW Holdings |
Operating lease expense | | $ | 4,381 | | | $ | 125 | | | $ | 4,506 | |
Short-term lease expense | | 1,010 | | | — | | | 1,010 | |
Supplemental balance sheet information related to operating leases as of December 31, 20192022 is as follows:
| | | | | | | | | | | | | | | | | | | | |
In thousands | | NW Natural | | Other (NW Holdings) | | NW Holdings |
Operating lease right of use assets | | $ | 72,720 | | | $ | 709 | | | $ | 73,429 | |
| | | | | | |
Operating lease liabilities - current liabilities | | $ | 1,363 | | | $ | 151 | | | $ | 1,514 | |
Operating lease liabilities - non-current liabilities | | 78,345 | | | 620 | | | 78,965 | |
Total operating lease liabilities | | $ | 79,708 | | | $ | 771 | | | $ | 80,479 | |
|
| | | | | | | | | | | | |
In thousands | | NW Natural | | Other (NW Holdings) | | NW Holdings |
Operating lease right of use assets | | $ | 2,760 |
| | $ | 190 |
| | $ | 2,950 |
|
| | | | | | |
Operating lease liabilities - current liabilities | | $ | 1,979 |
| | $ | 122 |
| | $ | 2,101 |
|
Operating lease liabilities - non-current liabilities | | 772 |
| | 69 |
| | 841 |
|
Total operating lease liabilities | | $ | 2,751 |
| | $ | 191 |
| | $ | 2,942 |
|