[X]       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

Yes [ X ]     No  [   ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

 

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

At OctoberJuly 27, 2017, 28,713,0522018, 28,800,482 shares of the registrant’s Common Stock (the only class of Common Stock) were outstanding.

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

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

The accompanying consolidated financial statements represent the consolidated results of Northwest Natural Gas Company (NW Natural or the Company) and all companies we directly or indirectly control, either through majority ownership or otherwise. We have two core businesses: ourOur regulated local gas distribution business, referred to as the utility segment, whichis our core operating business and serves residential, commercial, and industrial customers in Oregon and southwest Washington; andWashington. The other category primarily includes the non-utility portion of our Mist gas storage businesses, referred to as the gas storage segment, whichfacility that provides storage services for utilities, gas marketers, electric generators, and large industrial users from facilities located in Oregon and California.Oregon. In addition, we have investments and other non-utility activities we aggregate and reportreported as other.

Our core utility business assets and operating activities are largely included in the parent company, NW Natural. Our direct and indirect wholly-owned subsidiaries include include:

Investments in corporate joint ventures and partnerships we do not directly or indirectly control, and for which we are not the primary beneficiary, areinclude NWN Energy's investment in Trail West Holdings, LLC (TWH), which is accounted for under the equity method, which includes NWN Energy’s investment in Trail West Holdings, LLC (TWH) and NNG Financial's investment in Kelso-Beaver (KB) Pipeline. NW Natural and its affiliated companies are collectively referred to herein as NW Natural. The consolidated financial statements are presented after elimination of all intercompany balances and transactions. In this report, the term “utility” is used to describe our regulated gas distribution business, and the term “non-utility” is used to describe the non-utility portion of our Mist gas storage businessesfacility and other non-utility investments and business activities.

Certain prior year balancesDuring the second quarter of 2018, we moved forward with our long-term strategic plans, which include a shift away from our merchant gas storage business. In June 2018, NWN Gas Storage, our wholly-owned subsidiary, entered into a Purchase and Sale Agreement that provides for the sale of all of the membership interests in our consolidated financial statementsits wholly-owned subsidiary, Gill Ranch, subject to various regulatory approvals and notesclosing conditions. We have concluded that the pending sale of Gill Ranch qualifies as assets and liabilities held for sale and discontinued operations. As such, for all periods presented, the results of Gill Ranch have been reclassifiedpresented as a discontinued operation on the consolidated statements of comprehensive income and cash flows, and the assets and liabilities associated with Gill Ranch have been classified as discontinued operations assets and liabilities on the consolidated balance sheets. See Note 15 for additional information. Additionally, we reevaluated our reportable segments and concluded that the remaining gas storage activities no longer meet the requirements to conform with the current presentation.be separately reported as a segment. The non-utility portion of our Mist gas storage facility is now reported as other, and all prior periods reflect this change. See Note 4, which provides segment information. These reclassifications had no effect on our prior year’syear's consolidated results of operations, financial condition, or cash flows.

Our significant accounting policies are described in Note 2 of the 20162017 Form 10-K. There were no material changes to those accounting policies during the ninesix months ended SeptemberJune 30, 2017.2018 other than those incorporated in Note 5 and Note 15 relating to revenue and discontinued operations, respectively. The following are current updates to certain critical accounting policy estimates and new accounting standards.

  

We consider the applicability and impact of all accounting standards updates (ASUs) issued by the Financial Accounting Standards Board (FASB). Accounting standards updatesASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position or results of operations.

Upon adoption, the ASU required that changes to the recently adopted accounting policies describedincome statement presentation of net periodic benefit cost be applied retrospectively, while changes to amounts capitalized must be applied prospectively. As such, the interest cost, expected return on assets, amortization of prior service costs, and other costs have been reclassified from operations and maintenance expense to other income (expense), net on our consolidated statement of comprehensive income for the three and six months ended June 30, 2017. We did not elect the practical expedient which would have allowed us to reclassify amounts disclosed previously in Note 2the pension and other postretirement benefits footnote disclosure as the basis for applying retrospective presentation. As mentioned above, on a prospective basis, the other components of net periodic benefit cost will not be eligible for capitalization, however, they will continue to be included in our pension regulatory balancing mechanism.

We primarily operate in twoone reportable business segments:segment, which is our local gas distribution business and which is referred to as the utility segment. During the second quarter of 2018, we moved forward with our long-term strategic plans, which include a shift away from our merchant gas storage.storage business, by entering into a Purchase and Sale Agreement that provides for the sale of all of the membership interests in Gill Ranch, subject to various regulatory approvals and closing conditions. As such, we reevaluated our reportable segments and concluded that the gas storage activities no longer meet the requirements of a reportable segment. Our ongoing, non-utility gas storage activities, which include our interstate storage and optimization activities at our Mist gas storage facility, are now reported as other. We also have other investments and business activities not specifically related to one of these two reporting segments,our utility segment, which are aggregated and reported as other. We refer to our local gas distribution business as the utility and all other activities as non-utility.

Our local gas distribution segment is a regulated utility principally engaged in the purchase, sale, and delivery of natural gas and related services to customers in Oregon and southwest Washington. As a regulated utility, we are 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 our service territory, and re-selling the gas storage segmentto customers subject to rates, terms, and conditions approved by the OPUC or WUTC.

Gas distribution also includes taking customer-owned gas and transporting it from interstate pipeline connections, or city gates, to the customers’ end-use facilities for a fee, which is approved by the OPUC or WUTC. As of December 31, 2017, approximately 89% of our customers are located in Oregon and 11% in Washington. On an annual basis, residential and commercial customers typically account for around 60% of our utility’s total volumes delivered and 90% of our utility’s margin. Industrial customers largely account for the remaining volumes and utility margin. A small amount of utility margin is also derived from miscellaneous services, gains or losses from an incentive gas cost sharing mechanism, and other as non-utility. Ourservice fees.

We have non-utility investments and other business activities, which are aggregated and reported as other. Other includes NWN Gas Storage, which is a wholly-owned subsidiary of NWN Energy, Gill Ranch, which is a wholly-owned subsidiary of NWN Gas Storage,and the non-utility portion of our Mist facility in Oregon and all third-party

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

Other also includes NNG Financial, non-utility appliance retail center operations, NWN Water, which is pursuing investments in the water sector itself and through its wholly-owned subsidiaries FWC Merger Sub, Inc. and Cascadia, NWN Energy's equity investment in TWH, which is pursuing development of a cross-Cascades transmission pipeline project. See Note 4project and NWN Holding, which is pursuing the holding company reorganization of NW Natural through its wholly-owned subsidiary NWN Holdco Sub.

All prior period amounts have been retrospectively adjusted to reflect the change in our reportable segments and the 2016 Form 10-K for further discussiondesignation of our segments.Gill Ranch as a discontinued operation.

Inter-segment transactions were immaterial for the periods presented. The following table presents summary financial information concerning the reportable segments:segments of our continuing operations. See Note 15 for information regarding our discontinued operation, Gill Ranch Storage.

Utility margin is a financial measure used by our chief operating decision maker (CODM) consisting of utility operating revenues, which are reduced by revenue taxes, the associated cost of gas, and environmental recovery revenues.revenues, and revenue taxes. The cost of gas purchased for utility customers is generally a pass-through cost in the amount of revenues billed to regulated utility customers. Environmental recovery revenues represent collections received from customers through our environmental recovery mechanism in Oregon. These collections are offset by the amortization of environmental liabilities, which is presented as environmental remediation expense in our operating expenses. Revenue taxes are collected from our utility customers and remitted to our taxing authorities. The collections from customers are offset by the expense recognition of the obligation to the taxing authority. By subtracting cost of gas, and environmental remediation expense, and revenue taxes from utility operating revenues, utility margin provides a key metric used by our chief operating decision makerCODM in assessing the performance of the utility segment. The gas storage segment and other emphasize growth in operating revenues as opposed to margin because they do not incur a product cost (i.e. cost of gas sold) like the utility and, therefore, use operating revenues and net income to assess performance.

The following table presents additional segment information concerning utility margin:

Our stock-based compensation plans are designed to promote stock ownership in NW Natural by employees and officers. These compensation plans include a Long Term Incentive Plan (LTIP), an Employee Stock Purchase Plan (ESPP), and a Restated Stock Option Plan. For additional information on our stock-based compensation plans, see Note 6 in the 20162017 Form 10-K and the updates provided below.

LTIP performance shares incorporate a combination of market, performance, and service-based factors. During the ninesix months ended SeptemberJune 30, 2017, 34,3402018, no performance-based shares were granted under the LTIP based on target-level awards withfor accounting purposes. In February 2018, the 2018 LTIP was awarded to participants; however, the agreement allows for one of the performance factors to remain variable until the first quarter of the third year of the award period. As the performance factor will not be approved until the first quarter of 2020, there is not a weighted-averagemutual understanding of the award’s key terms and conditions between the Company and the participants as of June 30, 2018 and therefore no expense was recognized for the 2018 award. We will calculate the grant date fair value of $57.05 per share. Awardand recognize expense once the final performance factor has been approved.

For the 2018 LTIP, award share payouts range from a threshold of 0% to a maximum of 200% based on achievement of EPS andpre-established goals. The performance criteria for the 2018 performance shares consists of a three-year Return on Invested Capital (ROIC) factors,threshold that must be satisfied and a cumulative EPS factor, which can be modified by a total shareholder return factor (TSR factor)modifier) relative to the performance of the Russell 2500 Utilities Index over the three-year performance period and a growth modifier based on a cumulative EBITDA measure. Fair valueperiod. If the target was achieved for the 2018 award, we would grant 34,702 shares granted duringin the nine months ended September 30, 2017 was estimated asfirst quarter of the date of grant using a Monte-Carlo option pricing model based on the following assumptions:2020.

As of SeptemberJune 30, 2017,2018, there was $2.5$2.1 million of unrecognized compensation cost fromassociated with the 2016 and 2017 LTIP grants, which is expected to be recognized through 2019.

During the ninesix months ended SeptemberJune 30, 2017, 32,1682018, 26,087 RSUs were granted under the LTIP with a weighted-average grant date fair value of $60.51$55.16 per share. Generally, the RSUs awarded are forfeitable and include a performance-based threshold as well as a vesting period of four years from the grant date. AGenerally, an RSU obligates us, upon vesting, to issue the RSU holder one share of common stock plus a cash payment equal to the total amount of dividends paid per share between the grant date and vesting date of that portion of the RSU. The fair value of an RSU is equal to the closing market price of our common stock on the grant date. As of SeptemberJune 30, 2017,2018, there was $3.3 million of unrecognized compensation cost from grants of RSUs, which is expected to be recognized over a period extending through 2022.

At SeptemberJune 30, 2017,2018, we had no outstanding short-term debt.debt of $47.1 million, which was comprised entirely of commercial paper. The carrying cost of our commercial paper approximates fair value using Level 2 inputs. See Note 2 in the 2017 Form 10-K for a description of the fair value hierarchy. At June 30, 2018, our commercial paper had a maximum remaining maturity of 12 days and average remaining maturity of 7 days.

At SeptemberJune 30, 2017,2018, we had long-term debt of $779.4$758.7 million, which included $7.3$6.0 million of unamortized debt issuance costs. Utility long-term debt consists of first mortgage bonds (FMBs) with maturity dates ranging from 2018 through 2047, interest rates ranging from 1.545% to 9.05%, and a weighted-averageweighted average coupon rate of 4.780%4.728%. In August 2017,March 2018, we retired $40$22.0 million of FMBs with a coupon rate of 7.00%, and in September 2017, we issued $100 million of FMBs. The FMBs issued in September 2017, consisted of $25 million at 2.822%, due in 2027 and $75 million at 3.685%, due in 2047.6.60%.

Our outstanding debt does not trade in active markets. We estimate the fair value of our long-term debt using utility companies with similar credit ratings, terms, and remaining maturities to our long-term debt that actively trade in public markets. These valuations are based on Level 2 inputs as defined in the fair value hierarchy. See Note 2 in the 20162017 Form 10-K for a description of the fair value hierarchy.

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