UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X]☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedSeptember 30, 20182022
OR
[ ] ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to____________
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| NORTHWEST NATURAL HOLDING COMPANY | | NORTHWEST NATURAL GAS COMPANY | |
| (Exact name of registrant as specified in its charter) | | (Exact name of registrant as specified in its charter) | |
| Commission file number | 1-38681 | | Commission file number | 1-15973 | |
| Oregon | 82-4710680 | | Oregon | 93-0256722 | |
(State or other jurisdiction of
incorporation or organization) | (I.R.S. Employer
Identification No.) | | (State or other jurisdiction of
incorporation or organization) | (I.R.S. Employer
Identification No.) | |
| 250 SW Taylor Street | | | | | 250 SW Taylor Street | | | | |
| Portland | Oregon | 97204 | | Portland | Oregon | 97204 | |
| (Address of principal executive offices) | (Zip Code) | | (Address of principal executive offices) | (Zip Code) | |
| Registrant’s telephone number, including area code: | (503) | 226-4211 | | Registrant’s telephone number, including area code: | (503) | 226-4211 | |
| |
| Securities registered pursuant to Section 12(b) of the Act: | |
| Registrant | Title of each class | Trading Symbol | Name of each exchange on which registered | |
| NORTHWEST NATURAL HOLDING COMPANY | Common Stock | NWN | New York Stock Exchange | |
| NORTHWEST NATURAL GAS COMPANY | None | | | |
| |
| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | |
| NORTHWEST NATURAL HOLDING COMPANY | Yes | ☒ | No | ☐ | | NORTHWEST NATURAL GAS COMPANY | Yes | ☒ | No | ☐ | |
| |
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | |
| NORTHWEST NATURAL HOLDING COMPANY | Yes | ☒ | No | ☐ | | NORTHWEST NATURAL GAS COMPANY | Yes | ☒ | No | ☐ | |
| |
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. | |
| NORTHWEST NATURAL HOLDING COMPANY | | NORTHWEST NATURAL GAS COMPANY | |
| Large Accelerated Filer | ☒ | | | Large Accelerated Filer | ☐ | | |
| Accelerated Filer | ☐ | | | Accelerated Filer | ☐ | | |
| Non-accelerated Filer | ☐ | | | Non-accelerated Filer | ☒ | | |
| Smaller Reporting Company | ☐ | | | Smaller Reporting Company | ☐ | | |
| Emerging Growth Company | ☐ | | | Emerging Growth Company | ☐ | | |
| |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | |
| |
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | |
| NORTHWEST NATURAL HOLDING COMPANY | Yes | ☐ | No | ☒ | | NORTHWEST NATURAL GAS COMPANY | Yes | ☐ | No | ☒ | |
|
| | | | |
Commission file number 1-15973 | | Commission file number 1-38681 |
| | |
NORTHWEST NATURAL GAS COMPANY | | NORTHWEST NATURAL HOLDING COMPANY |
(Exact name of registrant as specified in its charter) | | (Exact name of registrant as specified in its charter) |
Oregon | 93-0256722 | | Oregon | 82-4710680 |
(State or other jurisdiction of
incorporation or organization)
| (I.R.S. Employer
Identification No.)
| | (State or other jurisdiction of
incorporation or organization)
| (I.R.S. Employer
Identification No.)
|
220 N.W. Second Avenue, Portland, Oregon 97209
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number: (503) 226-4211
| | 220 N.W. Second Avenue, Portland, Oregon 97209
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number: (503) 226-4211
|
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
NORTHWEST NATURAL GAS COMPANY Yes[ X ] No[ ] | | NORTHWEST NATURAL HOLDING COMPANY Yes[ X ] No[ ] |
|
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). |
NORTHWEST NATURAL GAS COMPANY Yes[ X ] No[ ] | | NORTHWEST NATURAL HOLDING COMPANY Yes[ X ] No[ ] |
|
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. |
NORTHWEST NATURAL GAS COMPANY | | NORTHWEST NATURAL HOLDING COMPANY |
Large Accelerated Filer [ ] | | Large Accelerated Filer [ X ] |
Accelerated Filer [ ] | | Accelerated Filer [ ] |
Non-accelerated Filer [ X ] | | Non-accelerated Filer [ ] |
Smaller Reporting Company [ ] | | Smaller Reporting Company [ ] |
Emerging Growth Company [ ] | | Emerging Growth Company [ ] |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ] |
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
NORTHWEST NATURAL GAS COMPANY Yes[ ] No[ X ] | | NORTHWEST NATURAL HOLDING COMPANY Yes[ ] No[ X ] |
At October 26, 2018, 28,844,68227, 2022, 35,099,161 shares of Northwest Natural Holding Company's Common Stock (the only class of Common Stock) were outstanding, and 28,844,190outstanding. All shares of Northwest Natural Gas Company's Common Stock (the only class of Common Stock) were outstanding all of which were held by Northwest Natural Holding Company.
This combined Form 10-Q is separately filed by Northwest Natural Holding Company and Northwest Natural Gas Company. Information contained in this document relating to Northwest Natural Gas Company is filed by Northwest Natural Holding Company and separately by Northwest Natural Gas Company. Northwest Natural Gas Company makes no representation as to information relating to Northwest Natural Holding Company or its subsidiaries, except as it may relate to Northwest Natural Gas Company and its subsidiaries.
NORTHWEST NATURAL GAS COMPANY
NORTHWEST NATURAL HOLDING COMPANY
For the Quarterly Period Ended September 30, 20182022
TABLE OF CONTENTS
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| PART 1. | FINANCIAL INFORMATION | Page |
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PART 1. | FINANCIAL INFORMATION | Page |
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| Unaudited Financial Statements: | |
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| PART II. | OTHER INFORMATION | |
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PART I. FINANCIAL INFORMATION
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, which are subject to the safe harbors created by such Act. Forward-looking statements can be identified by words such as anticipates, assumes, may, intends, plans, 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:
•plans, projections and predictions;
•objectives, goals, visions or strategies;
•assumptions, generalizations and estimates;
•ongoing continuation of past practices or patterns;
•future events or performance;
•trends;
•risks;
•uncertainties;
•timing and cyclicality;
•economic conditions, including impacts of inflation and interest rates, and general economic uncertainty;
•earnings and dividends;
•capital expenditures and allocation;
•capital markets or access to capital;
•capital or organizational structure, including restructuring as a holding company;structure;
•matters related to climate change and our role in decarbonization or a low-carbon future;
growth;•renewable natural gas, environmental attributes related thereto, and hydrogen;
•our strategy to reduce greenhouse gas emissions and the efficacy of communicating that strategy to shareholders, investors, stakeholders and communities;
•the policies and priorities of the current presidential administration and U.S. Congress;
•growth;
•customer rates;
•pandemic and related illness or quarantine, including COVID-19 and related variants and subvariants, and, economic conditions related thereto;
•labor relations and workforce succession;
•commodity costs;
•desirability and cost competitiveness of natural gas;
•gas reserves;
•operational and financial performance and costs;
•energy policy, infrastructure and preferences;
•public policy approach and involvement;
•efficacy of derivatives and hedges;
•liquidity, financial positions, and planned securities issuances;
•valuations;
•project and program development, expansion, or investment;
•business development efforts, including new business lines such as unregulated renewable natural gas, and acquisitions and integration thereof;
asset dispositions•implementation and outcomes thereof;execution of our water strategy;
•pipeline capacity, demand, location, and reliability;
•adequacy of property rights and headquarteroperations center development;
•technology implementation and cybersecurity practices;
•competition;
•procurement and development of gas (including renewable natural gas) and water supplies;
•estimated expenditures;expenditures, supply chain and third party availability and impairment;
•costs of compliance;compliance, and our ability to include those costs in rates;
•customers bypassing our infrastructure;
•credit exposures;
seasonality of gas utility earnings;•uncollectible account amounts;
•rate or regulatory outcomes, recovery or refunds;refunds, and the availability of public utility commissions to take action;
•impacts or changes of executive orders, laws, rules and regulations;regulations, or legal challenges related thereto;
•tax liabilities or refunds, including effects of tax reform and related timing variances;legislation;
•levels and pricing of gas storage contracts and gas storage markets;
•outcomes, timing and effects of potential claims, litigation, regulatory actions, and other administrative matters;
•projected obligations, expectations and treatment with respect to, and the impact of new legislation on, retirement plans;
•international, federal, state, and local efforts to regulate, in a variety of ways, greenhouse gas emissions, and the effects of those efforts;
•geopolitical factors, such as the Russia/Ukraine conflict;
•availability, adequacy, and shift in mix, of gas and water supplies;
•effects of new or anticipated changes in critical accounting policies or estimates;
•approval and adequacy of regulatory deferrals;
•effects and efficacy of regulatory mechanisms; and
•environmental, regulatory, litigation and insurance costs and recoveries, and timing thereof.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We therefore caution you against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future operational or financial performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in NW Holdings' and NW Natural's 20172021 Annual Report on Form 10-K, Part I, Item 1A “Risk Factors”“Risk Factors” and Part II, Item 7 and Item 7A, “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” and “Quantitative“Quantitative and Qualitative Disclosures about Market Risk”, respectively, and in Part I of this report, Items 2 and 3, “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” and “Quantitative“Quantitative and Qualitative Disclosures About Market Risk”Risk”, respectively of Part II of this report.respectively.
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.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
|
| | | | | | | | | | | | | | | | |
| |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands, except per share data | | 2018 | | 2017 | | 2018 | | 2017 |
| | | | | | | | | |
| Operating revenues | | $ | 91,239 |
| | $ | 86,213 |
| | $ | 479,441 |
| | $ | 516,413 |
|
| | | | | | | | | |
| Operating expenses: | | | | | | | | |
| Cost of gas | | 25,538 |
| | 27,239 |
| | 175,697 |
| | 223,855 |
|
| Operations and maintenance | | 37,569 |
| | 34,267 |
| | 115,120 |
| | 106,710 |
|
| Environmental remediation | | 1,022 |
| | 1,355 |
| | 7,528 |
| | 10,920 |
|
| General taxes | | 7,589 |
| | 7,540 |
| | 24,792 |
| | 23,423 |
|
| Revenue taxes | | 3,522 |
| | — |
| | 20,731 |
| | — |
|
| Depreciation and amortization | | 21,485 |
| | 20,352 |
| | 63,507 |
| | 60,529 |
|
| Other operating expenses | | 625 |
| | — |
| | 2,157 |
| | — |
|
| Total operating expenses | | 97,350 |
| | 90,753 |
| | 409,532 |
| | 425,437 |
|
| Income (loss) from operations | | (6,111 | ) | | (4,540 | ) | | 69,909 |
| | 90,976 |
|
| Other income (expense), net | | (312 | ) | | 139 |
| | (1,139 | ) | | (624 | ) |
| Interest expense, net | | 9,006 |
| | 9,208 |
| | 27,051 |
| | 28,311 |
|
| Income (loss) before income taxes | | (15,429 | ) | | (13,609 | ) | | 41,719 |
| | 62,041 |
|
| Income tax (benefit) expense | | (4,285 | ) | | (5,722 | ) | | 11,191 |
| | 24,456 |
|
| Net income (loss) from continuing operations | | (11,144 | ) | | (7,887 | ) | | 30,528 |
| | 37,585 |
|
| Loss from discontinued operations, net of tax | | (650 | ) | | (608 | ) | | (1,783 | ) | | (3,041 | ) |
| Net income (loss) | | (11,794 | ) | | (8,495 | ) | | 28,745 |
| | 34,544 |
|
| Other comprehensive income: | | | | | | | | |
| Amortization of non-qualified employee benefit plan liability, net of taxes of $55 and $98 for the three months ended and $166 and $275 for the nine months ended September 30, 2018 and 2017, respectively | | 154 |
| | 150 |
| | 461 |
| | 423 |
|
| Comprehensive income (loss) | | $ | (11,640 | ) | | $ | (8,345 | ) | | $ | 29,206 |
| | $ | 34,967 |
|
| Average common shares outstanding: | | | | | | | | |
| Basic | | 28,815 |
| | 28,678 |
| | 28,787 |
| | 28,653 |
|
| Diluted | | 28,815 |
| | 28,678 |
| | 28,846 |
| | 28,734 |
|
| Earnings (loss) from continuing operations per share of common stock: | | | | | | | | |
| Basic | | $ | (0.39 | ) | | $ | (0.28 | ) | | $ | 1.06 |
| | $ | 1.32 |
|
| Diluted | | (0.39 | ) | | (0.28 | ) | | 1.06 |
| | 1.31 |
|
| Loss from discontinued operations per share of common stock: | | | | | | | | |
| Basic | | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | (0.06 | ) | | $ | (0.11 | ) |
| Diluted | | (0.02 | ) | | (0.02 | ) | | (0.06 | ) | | (0.11 | ) |
| Earnings (loss) per share of common stock: | | | | | | | | |
| Basic | | $ | (0.41 | ) | | $ | (0.30 | ) | | $ | 1.00 |
| | $ | 1.21 |
|
| Diluted | | (0.41 | ) | | (0.30 | ) | | 1.00 |
| | 1.20 |
|
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands, except per share data | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| Operating revenues | | $ | 116,839 | | | $ | 101,447 | | | $ | 662,100 | | | $ | 566,310 | |
| | | | | | | | |
| Operating expenses: | | | | | | | | |
| Cost of gas | | 36,105 | | | 25,266 | | | 261,413 | | | 178,669 | |
| Operations and maintenance | | 50,745 | | | 47,329 | | | 161,405 | | | 149,567 | |
| Environmental remediation | | 980 | | | 806 | | | 7,950 | | | 6,092 | |
| General taxes | | 9,572 | | | 9,061 | | | 30,665 | | | 29,344 | |
| Revenue taxes | | 4,437 | | | 3,891 | | | 26,037 | | | 22,226 | |
| Depreciation | | 29,026 | | | 28,438 | | | 85,565 | | | 84,679 | |
| Other operating expenses | | 901 | | | 1,047 | | | 2,815 | | | 2,794 | |
| Total operating expenses | | 131,766 | | | 115,838 | | | 575,850 | | | 473,371 | |
| Income (loss) from operations | | (14,927) | | | (14,391) | | | 86,250 | | | 92,939 | |
| Other income (expense), net | | 1,636 | | | (2,216) | | | 908 | | | (8,355) | |
| Interest expense, net | | 13,054 | | | 11,175 | | | 36,156 | | | 33,329 | |
| Income (loss) before income taxes | | (26,345) | | | (27,782) | | | 51,002 | | | 51,255 | |
| Income tax expense (benefit) | | (6,758) | | | (7,127) | | | 12,635 | | | 13,117 | |
| | | | | | | | |
| | | | | | | | |
| Net income (loss) | | (19,587) | | | (20,655) | | | 38,367 | | | 38,138 | |
| Other comprehensive income (loss): | | | | | | | | |
| Amortization of non-qualified employee benefit plan liability, net of taxes of $73 and $80 for the three months ended and $215 and $240 for the nine months ended September 30, 2022 and 2021, respectively | | 202 | | | 234 | | | 596 | | | 676 | |
| | | | | | | | |
| Comprehensive income (loss) | | $ | (19,385) | | | $ | (20,421) | | | $ | 38,963 | | | $ | 38,814 | |
| Average common shares outstanding: | | | | | | | | |
| Basic | | 34,939 | | | 30,696 | | | 33,491 | | | 30,659 | |
| Diluted | | 34,939 | | | 30,696 | | | 33,539 | | | 30,708 | |
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| Earnings (loss) per share of common stock: | | | | | | | | |
| Basic | | $ | (0.56) | | | $ | (0.67) | | | $ | 1.15 | | | $ | 1.24 | |
| Diluted | | (0.56) | | | (0.67) | | | 1.14 | | | 1.24 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL HOLDING COMPANY NORTHWEST NATURAL GAS COMPANY CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
| | | | | | | | | | | | |
| | | September 30, | | September 30, | | December 31, |
| In thousands | | 2018 | | 2017 | | 2017 |
| | | | | | | |
| Assets: | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 29,965 |
| | $ | 15,780 |
| | $ | 3,472 |
|
| Accounts receivable | | 25,125 |
| | 21,930 |
| | 66,236 |
|
| Accrued unbilled revenue | | 16,351 |
| | 15,974 |
| | 62,381 |
|
| Allowance for uncollectible accounts | | (394 | ) | | (459 | ) | | (956 | ) |
| Regulatory assets | | 41,241 |
| | 49,504 |
| | 45,781 |
|
| Derivative instruments | | 2,871 |
| | 2,073 |
| | 1,735 |
|
| Inventories | | 53,064 |
| | 59,135 |
| | 47,577 |
|
| Gas reserves | | 16,916 |
| | 16,218 |
| | 15,704 |
|
| Other current assets | | 20,376 |
| | 17,285 |
| | 24,949 |
|
| Discontinued operations current assets (Note 16) | | 12,644 |
| | 2,106 |
| | 3,057 |
|
| Total current assets | | 218,159 |
| | 199,546 |
| | 269,936 |
|
| Non-current assets: | | | | | | |
| Property, plant, and equipment | | 3,370,388 |
| | 3,148,545 |
| | 3,204,635 |
|
| Less: Accumulated depreciation | | 996,994 |
| | 954,782 |
| | 960,477 |
|
| Total property, plant, and equipment, net | | 2,373,394 |
| | 2,193,763 |
| | 2,244,158 |
|
| Gas reserves | | 70,556 |
|
| 87,876 |
| | 84,053 |
|
| Regulatory assets | | 333,917 |
| | 345,352 |
| | 356,608 |
|
| Derivative instruments | | 861 |
| | 1,555 |
| | 1,306 |
|
| Other investments | | 65,113 |
| | 69,245 |
| | 66,363 |
|
| Goodwill | | 6,563 |
| | — |
| | — |
|
| Other non-current assets | | 12,844 |
| | 4,192 |
| | 6,505 |
|
| Discontinued operations non-current assets (Note 16) | | — |
| | 204,078 |
| | 10,817 |
|
| Total non-current assets | | 2,863,248 |
| | 2,906,061 |
| | 2,769,810 |
|
| Total assets | | $ | 3,081,407 |
| | $ | 3,105,607 |
| | $ | 3,039,746 |
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | September 30, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 |
| | | | | | |
| Assets: | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 108,556 | | | $ | 19,502 | | | $ | 18,559 | |
| | | | | | |
| Accounts receivable | | 50,850 | | | 39,209 | | | 101,495 | |
| Accrued unbilled revenue | | 16,857 | | | 16,809 | | | 82,169 | |
| Allowance for uncollectible accounts | | (2,171) | | | (2,702) | | | (2,018) | |
| Regulatory assets | | 104,830 | | | 80,638 | | | 72,391 | |
| Derivative instruments | | 62,710 | | | 105,175 | | | 48,130 | |
| Inventories | | 98,725 | | | 59,997 | | | 57,262 | |
| | | | | | |
| | | | | | |
| Other current assets | | 41,414 | | | 39,551 | | | 59,288 | |
| | | | | | |
| Total current assets | | 481,771 | | | 358,179 | | | 437,276 | |
| Non-current assets: | | | | | | |
| Property, plant, and equipment | | 4,207,328 | | | 3,919,096 | | | 3,997,243 | |
| Less: Accumulated depreciation | | 1,166,150 | | | 1,112,734 | | | 1,125,873 | |
| Total property, plant, and equipment, net | | 3,041,178 | | | 2,806,362 | | | 2,871,370 | |
| Regulatory assets | | 301,660 | | | 325,071 | | | 314,579 | |
| Derivative instruments | | 8,008 | | | 24,555 | | | 10,730 | |
| Other investments | | 96,569 | | | 76,027 | | | 89,278 | |
| Operating lease right of use asset, net | | 73,145 | | | 75,634 | | | 75,049 | |
| Assets under sales-type leases | | 135,480 | | | 140,189 | | | 138,995 | |
| Goodwill | | 74,732 | | | 69,789 | | | 70,570 | |
| Other non-current assets | | 88,169 | | | 53,419 | | | 56,757 | |
| | | | | | |
| Total non-current assets | | 3,818,941 | | | 3,571,046 | | | 3,627,328 | |
| Total assets | | $ | 4,300,712 | | | $ | 3,929,225 | | | $ | 4,064,604 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL HOLDING COMPANY NORTHWEST NATURAL GAS COMPANY CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
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| | | September 30, | | September 30, | | December 31, |
| In thousands | | 2018 | | 2017 | | 2017 |
| | | | | | | |
| Liabilities and equity: | | | | | | |
| Current liabilities: | | | | | | |
| Short-term debt | | $ | 100,500 |
| | $ | — |
| | $ | 54,200 |
|
| Current maturities of long-term debt | | 84,940 |
| | 21,995 |
| | 96,703 |
|
| Accounts payable | | 80,143 |
| | 87,123 |
| | 111,021 |
|
| Taxes accrued | | 13,074 |
| | 11,933 |
| | 18,883 |
|
| Interest accrued | | 9,453 |
| | 9,854 |
| | 6,773 |
|
| Regulatory liabilities | | 37,504 |
| | 34,659 |
| | 34,013 |
|
| Derivative instruments | | 8,828 |
| | 8,968 |
| | 18,722 |
|
| Other current liabilities | | 35,497 |
| | 27,218 |
| | 39,942 |
|
| Discontinued operations current liabilities (Note 16) | | 13,003 |
| | 1,201 |
| | 1,593 |
|
| Total current liabilities | | 382,942 |
| | 202,951 |
| | 381,850 |
|
| Long-term debt | | 724,654 |
| | 757,429 |
| | 683,184 |
|
| Deferred credits and other non-current liabilities: | | | | | | |
| Deferred tax liabilities | | 274,315 |
| | 572,293 |
| | 270,526 |
|
| Regulatory liabilities | | 606,175 |
| | 363,838 |
| | 586,093 |
|
| Pension and other postretirement benefit liabilities | | 212,249 |
| | 212,259 |
| | 223,333 |
|
| Derivative instruments | | 3,016 |
| | 3,926 |
| | 4,649 |
|
| Other non-current liabilities | | 140,475 |
| | 134,123 |
| | 135,292 |
|
| Discontinued operations - non-current liabilities (Note 16) | | — |
| | 12,106 |
| | 12,043 |
|
| Total deferred credits and other non-current liabilities | | 1,236,230 |
| | 1,298,545 |
| | 1,231,936 |
|
| Commitments and contingencies (Note 15) | |
|
| |
|
| |
|
|
| Equity: | | | | | | |
| Common stock - no par value; authorized 100,000 shares; issued and outstanding 28,844, 28,713, and 28,736 at September 30, 2018 and 2017, and December 31, 2017, respectively | | 455,499 |
| | 447,129 |
| | 448,865 |
|
| Retained earnings | | 290,059 |
| | 406,081 |
| | 302,349 |
|
| Accumulated other comprehensive loss | | (7,977 | ) | | (6,528 | ) | | (8,438 | ) |
| Total equity | | 737,581 |
| | 846,682 |
| | 742,776 |
|
| Total liabilities and equity | | $ | 3,081,407 |
| | $ | 3,105,607 |
| | $ | 3,039,746 |
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | September 30, | | December 31, |
| In thousands, including share information | | 2022 | | 2021 | | 2021 |
| | | | | | |
| Liabilities and equity: | | | | | | |
| Current liabilities: | | | | | | |
| Short-term debt | | $ | 141,000 | | | $ | 399,500 | | | $ | 389,500 | |
| Current maturities of long-term debt | | 50,614 | | | 278 | | | 345 | |
| Accounts payable | | 118,274 | | | 94,897 | | | 133,486 | |
| Taxes accrued | | 18,080 | | | 16,558 | | | 15,520 | |
| Interest accrued | | 11,086 | | | 9,315 | | | 7,503 | |
| Regulatory liabilities | | 111,551 | | | 164,168 | | | 112,281 | |
| Derivative instruments | | 19,594 | | | 9,818 | | | 10,402 | |
| Operating lease liabilities | | 1,361 | | | 1,213 | | | 1,296 | |
| Other current liabilities | | 39,796 | | | 39,218 | | | 54,432 | |
| | | | | | |
| Total current liabilities | | 511,356 | | | 734,965 | | | 724,765 | |
| Long-term debt | | 1,287,006 | | | 916,026 | | | 1,044,587 | |
| Deferred credits and other non-current liabilities: | | | | | | |
| Deferred tax liabilities | | 349,633 | | | 323,925 | | | 340,231 | |
| Regulatory liabilities | | 663,547 | | | 665,390 | | | 658,332 | |
| Pension and other postretirement benefit liabilities | | 160,196 | | | 202,287 | | | 166,684 | |
| Derivative instruments | | 18,824 | | | 268 | | | 412 | |
| Operating lease liabilities | | 78,469 | | | 79,789 | | | 79,468 | |
| Other non-current liabilities | | 110,825 | | | 115,114 | | | 114,979 | |
| | | | | | |
| Total deferred credits and other non-current liabilities | | 1,381,494 | | | 1,386,773 | | | 1,360,106 | |
| Commitments and contingencies (Note 16) | | | | | | |
| Equity: | | | | | | |
| Common stock - no par value; authorized 100,000 shares; issued and outstanding 35,098, 30,730, and 31,129 at September 30, 2022 and 2021, and December 31, 2021, respectively | | 786,094 | | | 573,578 | | | 590,771 | |
| Retained earnings | | 345,570 | | | 330,109 | | | 355,779 | |
| Accumulated other comprehensive loss | | (10,808) | | | (12,226) | | | (11,404) | |
| Total equity | | 1,120,856 | | | 891,461 | | | 935,146 | |
| Total liabilities and equity | | $ | 4,300,712 | | | $ | 3,929,225 | | | $ | 4,064,604 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) NORTHWEST NATURAL GAS COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) |
| | | | | | | | |
| | | Nine Months Ended September 30, |
| In thousands | | 2018 | | 2017 |
| | | | | |
| Operating activities: | | | | |
| Net income | | $ | 28,745 |
| | $ | 34,544 |
|
| Adjustments to reconcile net income to cash provided by operations: | | | | |
| Depreciation and amortization | | 63,507 |
| | 60,529 |
|
| Regulatory amortization of gas reserves | | 12,056 |
| | 12,036 |
|
| Deferred income taxes | | 3,954 |
| | 17,287 |
|
| Qualified defined benefit pension plan expense | | 4,450 |
| | 3,923 |
|
| Contributions to qualified defined benefit pension plans | | (11,690 | ) | | (15,400 | ) |
| Deferred environmental expenditures, net | | (10,547 | ) | | (10,468 | ) |
| Amortization of environmental remediation | | 7,528 |
| | 10,920 |
|
| Regulatory revenue deferral from the TCJA | | 6,983 |
| | — |
|
| Other | | 1,541 |
| | 2,522 |
|
| Changes in assets and liabilities: | | | | |
| Receivables, net | | 83,194 |
| | 90,311 |
|
| Inventories | | (5,134 | ) | | (5,372 | ) |
| Income taxes | | (5,809 | ) | | (216 | ) |
| Accounts payable | | (22,929 | ) | | (29,282 | ) |
| Interest accrued | | 2,680 |
| | 3,888 |
|
| Deferred gas costs | | 2,372 |
| | 13,419 |
|
| Other, net | | (3,588 | ) | | 28 |
|
| Discontinued operations | | 1,216 |
| | 4,187 |
|
| Cash provided by operating activities | | 158,529 |
| | 192,856 |
|
| Investing activities: | | | | |
| Capital expenditures | | (158,795 | ) | | (145,274 | ) |
| Other | | (1,661 | ) | | (1,131 | ) |
| Discontinued operations | | (619 | ) | | (167 | ) |
| Cash used in investing activities | | (161,075 | ) | | (146,572 | ) |
| Financing activities: | | | | |
| Repurchases related to stock-based compensation | | — |
| | (2,034 | ) |
| Proceeds from stock options exercised | | 1,368 |
| | 3,711 |
|
| Long-term debt issued | | 50,000 |
| | 100,000 |
|
| Long-term debt retired | | (22,000 | ) | | (40,000 | ) |
| Change in short-term debt | | 46,300 |
| | (53,300 | ) |
| Cash dividend payments on common stock | | (38,387 | ) | | (40,390 | ) |
| Stock purchases related to acquisitions | | (7,951 | ) | | — |
|
| Other | | (291 | ) | | (2,012 | ) |
| Cash provided by (used in) financing activities | | 29,039 |
| | (34,025 | ) |
| Increase in cash and cash equivalents | | 26,493 |
| | 12,259 |
|
| Cash and cash equivalents, beginning of period | | 3,472 |
| | 3,521 |
|
| Cash and cash equivalents, end of period | | $ | 29,965 |
| | $ | 15,780 |
|
| | | | | |
| Supplemental disclosure of cash flow information: | | | | |
| Interest paid, net of capitalization | | $ | 22,821 |
| | $ | 22,859 |
|
| Income taxes paid, net of refunds | | 22,047 |
| | 11,581 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands, except per share amounts | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Total shareholders' equity, beginning balances | | $ | 1,138,779 | | | $ | 922,826 | | | $ | 935,146 | | | $ | 888,733 | |
| | | | | | | | |
| Common stock: | | | | | | | | |
| Beginning balances | | 767,826 | | | 569,785 | | | 590,771 | | | 565,112 | |
| Stock-based compensation | | 463 | | | 527 | | | 2,695 | | | 2,973 | |
| Shares issued pursuant to equity based plans, net of shares withheld for taxes | | 954 | | | 1,159 | | | 1,958 | | | 3,386 | |
| Issuance of common stock, net of issuance costs | | 16,851 | | | 2,107 | | | 190,670 | | | 2,107 | |
| | | | | | | | |
| | | | | | | | |
| Ending balances | | 786,094 | | | 573,578 | | | 786,094 | | | 573,578 | |
| | | | | | | | |
| Retained earnings: | | | | | | | | |
| Beginning balances | | 381,963 | | | 365,501 | | | 355,779 | | | 336,523 | |
| Net income (loss) | | (19,587) | | | (20,655) | | | 38,367 | | | 38,138 | |
| Dividends on common stock | | (16,806) | | | (14,737) | | | (48,576) | | | (44,552) | |
| | | | | | | | |
| Ending balances | | 345,570 | | | 330,109 | | | 345,570 | | | 330,109 | |
| | | | | | | | |
| Accumulated other comprehensive income (loss): | | | | | | | | |
| Beginning balances | | (11,010) | | | (12,460) | | | (11,404) | | | (12,902) | |
| Other comprehensive income | | 202 | | | 234 | | | 596 | | | 676 | |
| | | | | | | | |
| Ending balances | | (10,808) | | | (12,226) | | | (10,808) | | | (12,226) | |
| | | | | | | | |
| Total shareholders' equity, ending balances | | $ | 1,120,856 | | | $ | 891,461 | | | $ | 1,120,856 | | | $ | 891,461 | |
| | | | | | | | |
| Dividends per share of common stock | | $ | 0.4825 | | | $ | 0.4800 | | | $ | 1.4475 | | | $ | 1.4400 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL HOLDING COMPANY NORTHWEST NATURAL HOLDING COMPANY CONSOLIDATED BALANCE SHEET (UNAUDITED)
|
| | | | |
| | | September 30, |
| In thousands, except share amounts | | 2018 |
| | | |
| Assets: | | |
| Current assets: | | |
| Cash and cash equivalents | | $ | 20,000 |
|
| Total current assets | | 20,000 |
|
| Total assets | | $ | 20,000 |
|
| | | |
| Equity: | | |
| Common stock - no par value; authorized 100,000,000 shares; 100 issued and outstanding at September 30, 2018 | | $ | 20,000 |
|
| Total equity | | $ | 20,000 |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| In thousands | | 2022 | | 2021 |
| Operating activities: | | | | |
| Net income | | $ | 38,367 | | | $ | 38,138 | |
| Adjustments to reconcile net income to cash provided by operations: | | | | |
| Depreciation | | 85,565 | | | 84,679 | |
| Regulatory amortization of gas reserves | | 4,527 | | | 11,606 | |
| Deferred income taxes | | 7,759 | | | 2,748 | |
| Qualified defined benefit pension plan expense | | 4,013 | | | 12,075 | |
| Contributions to qualified defined benefit pension plans | | — | | | (9,590) | |
| Deferred environmental expenditures, net | | (14,437) | | | (14,952) | |
| Environmental remediation expense | | 7,950 | | | 6,092 | |
| | | | |
| | | | |
| Asset optimization revenue sharing bill credits | | (41,102) | | | (9,053) | |
| Other | | 16,640 | | | 14,868 | |
| Changes in assets and liabilities: | | | | |
| Receivables, net | | 114,755 | | | 83,826 | |
| Inventories | | (41,463) | | | (17,307) | |
| Income and other taxes | | 19,447 | | | 19,620 | |
| Accounts payable | | (30,010) | | | (18,057) | |
| Deferred gas costs | | (1,785) | | | (33,379) | |
| Asset optimization revenue sharing | | 17,629 | | | 41,407 | |
| Decoupling mechanism | | 7,124 | | | (9,172) | |
| Cloud-based software | | (17,332) | | | (6,851) | |
| Other, net | | (11,686) | | | (14,974) | |
| Cash provided by operating activities | | 165,961 | | | 181,724 | |
| Investing activities: | | | | |
| Capital expenditures | | (251,842) | | | (212,376) | |
| Acquisitions, net of cash acquired | | (2,352) | | | (375) | |
| | | | |
| Proceeds from the sale of assets | | 539 | | | 2,712 | |
| Proceeds from sale of equity method investment | | — | | | 7,000 | |
| Other | | (3,349) | | | (482) | |
| Cash used in investing activities | | (257,004) | | | (203,521) | |
| Financing activities: | | | | |
| | | | |
| | | | |
| Proceeds from common stock issued, net | | 190,929 | | | 2,107 | |
| Long-term debt issued | | 290,000 | | | 55,000 | |
| Long-term debt retired | | — | | | (95,000) | |
| Proceeds from term loan due within one year | | — | | | 100,000 | |
| Repayment of commercial paper, maturities greater than three months | | — | | | (195,025) | |
| Changes in other short-term debt, net | | (248,500) | | | 190,000 | |
| Cash dividend payments on common stock | | (46,434) | | | (41,827) | |
| | | | |
| Other | | (1,802) | | | (1,240) | |
| Cash provided by financing activities | | 184,193 | | | 14,015 | |
| Increase (decrease) in cash, cash equivalents and restricted cash | | 93,150 | | | (7,782) | |
| Cash, cash equivalents and restricted cash, beginning of period | | 27,120 | | | 35,454 | |
| Cash, cash equivalents and restricted cash, end of period | | $ | 120,270 | | | $ | 27,672 | |
| | | | |
| Supplemental disclosure of cash flow information: | | | | |
| Interest paid, net of capitalization | | $ | 31,774 | | | $ | 30,910 | |
| Income taxes paid, net of refunds | | 2,106 | | | 6,980 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY NORTHWEST NATURAL HOLDING COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) |
| | | | |
| In thousands | | Inception through September 30, 2018 |
| | | |
| Financing activities: | | |
| Capital contributions | | $ | 20,000 |
|
| Cash provided by financing activities | | 20,000 |
|
| Increase in cash and cash equivalents | | 20,000 |
|
| Cash and cash equivalents, at inception | | — |
|
| Cash and cash equivalents, end of period | | $ | 20,000 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| Operating revenues | | $ | 110,426 | | | $ | 96,036 | | | $ | 647,301 | | | $ | 552,965 | |
| | | | | | | | |
| Operating expenses: | | | | | | | | |
| Cost of gas | | 36,164 | | | 25,322 | | | 261,584 | | | 178,837 | |
| Operations and maintenance | | 45,858 | | | 43,768 | | | 148,614 | | | 137,894 | |
| Environmental remediation | | 980 | | | 806 | | | 7,950 | | | 6,092 | |
| General taxes | | 9,467 | | | 8,999 | | | 30,328 | | | 29,041 | |
| Revenue taxes | | 4,375 | | | 3,838 | | | 25,907 | | | 22,143 | |
| Depreciation | | 28,201 | | | 27,719 | | | 83,166 | | | 82,418 | |
| Other operating expenses | | 675 | | | 669 | | | 2,370 | | | 2,368 | |
| Total operating expenses | | 125,720 | | | 111,121 | | | 559,919 | | | 458,793 | |
| Income (loss) from operations | | (15,294) | | | (15,085) | | | 87,382 | | | 94,172 | |
| Other income (expense), net | | 1,161 | | | (2,295) | | | 197 | | | (8,526) | |
| Interest expense, net | | 11,128 | | | 10,850 | | | 32,558 | | | 32,336 | |
| Income (loss) before income taxes | | (25,261) | | | (28,230) | | | 55,021 | | | 53,310 | |
| Income tax expense (benefit) | | (6,455) | | | (7,212) | | | 13,678 | | | 13,628 | |
| | | | | | | | |
| | | | | | | | |
| Net income (loss) | | (18,806) | | | (21,018) | | | 41,343 | | | 39,682 | |
| Other comprehensive income (loss): | | | | | | | | |
| Amortization of non-qualified employee benefit plan liability, net of taxes of $73 and $80 for the three months ended and $215 and $240 for the nine months ended September 30, 2022 and 2021, respectively | | 202 | | | 234 | | | 596 | | | 676 | |
| | | | | | | | |
| Comprehensive income (loss) | | $ | (18,604) | | | $ | (20,784) | | | $ | 41,939 | | | $ | 40,358 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | September 30, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 |
| | | | | | |
| Assets: | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 11,386 | | | $ | 9,697 | | | $ | 12,271 | |
| | | | | | |
| Accounts receivable | | 48,082 | | | 37,328 | | | 99,780 | |
| Accrued unbilled revenue | | 16,649 | | | 16,702 | | | 82,028 | |
| Receivables from affiliates | | 221 | | | 628 | | | 261 | |
| Allowance for uncollectible accounts | | (2,114) | | | (2,658) | | | (1,962) | |
| Regulatory assets | | 104,830 | | | 80,638 | | | 72,391 | |
| Derivative instruments | | 62,710 | | | 105,175 | | | 48,130 | |
| Inventories | | 97,633 | | | 59,641 | | | 56,752 | |
| | | | | | |
| | | | | | |
| Other current assets | | 32,605 | | | 29,075 | | | 47,378 | |
| | | | | | |
| Total current assets | | 372,002 | | | 336,226 | | | 417,029 | |
| Non-current assets: | | | | | | |
| Property, plant, and equipment | | 4,124,488 | | | 3,857,652 | | | 3,931,640 | |
| Less: Accumulated depreciation | | 1,157,400 | | | 1,106,901 | | | 1,119,361 | |
| Total property, plant, and equipment, net | | 2,967,088 | | | 2,750,751 | | | 2,812,279 | |
| Regulatory assets | | 301,596 | | | 325,031 | | | 314,539 | |
| Derivative instruments | | 8,008 | | | 24,555 | | | 10,730 | |
| Other investments | | 80,871 | | | 75,991 | | | 74,786 | |
| Operating lease right of use asset, net | | 73,046 | | | 75,565 | | | 74,987 | |
| Assets under sales-type leases | | 135,480 | | | 140,189 | | | 138,995 | |
| Other non-current assets | | 86,661 | | | 52,653 | | | 55,027 | |
| | | | | | |
| Total non-current assets | | 3,652,750 | | | 3,444,735 | | | 3,481,343 | |
| Total assets | | $ | 4,024,752 | | | $ | 3,780,961 | | | $ | 3,898,372 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | September 30, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 |
| | | | | | |
| Liabilities and equity: | | | | | | |
| Current liabilities: | | | | | | |
| Short-term debt | | $ | 53,000 | | | $ | 370,500 | | | $ | 245,500 | |
| Current maturities of long-term debt | | 49,938 | | | — | | | — | |
| Accounts payable | | 115,066 | | | 91,947 | | | 131,475 | |
| Payables to affiliates | | 1,789 | | | 2,568 | | | 1,248 | |
| Taxes accrued | | 17,914 | | | 16,472 | | | 15,476 | |
| Interest accrued | | 10,533 | | | 9,258 | | | 7,296 | |
| Regulatory liabilities | | 111,526 | | | 164,168 | | | 112,281 | |
| Derivative instruments | | 19,594 | | | 9,818 | | | 10,402 | |
| Operating lease liabilities | | 1,298 | | | 1,184 | | | 1,273 | |
| Other current liabilities | | 38,998 | | | 38,642 | | | 53,591 | |
| | | | | | |
| Total current liabilities | | 419,656 | | | 704,557 | | | 578,542 | |
| Long-term debt | | 1,076,533 | | | 857,760 | | | 986,495 | |
| Deferred credits and other non-current liabilities: | | | | | | |
| Deferred tax liabilities | | 346,423 | | | 321,636 | | | 337,717 | |
| Regulatory liabilities | | 662,565 | | | 664,521 | | | 657,350 | |
| Pension and other postretirement benefit liabilities | | 160,196 | | | 202,287 | | | 166,684 | |
| Derivative instruments | | 18,824 | | | 268 | | | 412 | |
| Operating lease liabilities | | 78,436 | | | 79,752 | | | 79,431 | |
| Other non-current liabilities | | 109,304 | | | 114,438 | | | 113,934 | |
| | | | | | |
| Total deferred credits and other non-current liabilities | | 1,375,748 | | | 1,382,902 | | | 1,355,528 | |
| Commitments and contingencies (Note 16) | | | | | | |
| Equity: | | | | | | |
| Common stock | | 614,903 | | | 321,641 | | | 435,515 | |
| Retained earnings | | 548,720 | | | 526,327 | | | 553,696 | |
| Accumulated other comprehensive loss | | (10,808) | | | (12,226) | | | (11,404) | |
| Total equity | | 1,152,815 | | | 835,742 | | | 977,807 | |
| Total liabilities and equity | | $ | 4,024,752 | | | $ | 3,780,961 | | | $ | 3,898,372 | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| In thousands | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | | | |
| Total shareholder's equity, beginning balances | | $ | 1,173,676 | | | $ | 868,391 | | | $ | 977,807 | | | $ | 835,184 | | | | | | | |
| | | | | | | | | | | | | | |
| Common stock: | | | | | | | | | | | | | | |
| Beginning balances | | 601,032 | | | 319,506 | | | 435,515 | | | 319,506 | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Capital contributions from parent | | 13,871 | | | 2,135 | | | 179,388 | | | 2,135 | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Ending balances | | 614,903 | | | 321,641 | | | 614,903 | | | 321,641 | | | | | | | |
| | | | | | | | | | | | | | |
| Retained earnings: | | | | | | | | | | | | | | |
| Beginning balances | | 583,654 | | | 561,345 | | | 553,696 | | | 528,580 | | | | | | | |
| Net income (loss) | | (18,806) | | | (21,018) | | | 41,343 | | | 39,682 | | | | | | | |
| Dividends on common stock | | (16,128) | | | (14,000) | | | (46,319) | | | (41,935) | | | | | | | |
| | | | | | | | | | | | | | |
| Ending balances | | 548,720 | | | 526,327 | | | 548,720 | | | 526,327 | | | | | | | |
| | | | | | | | | | | | | | |
| Accumulated other comprehensive income (loss): | | | | | | | | | | | | | | |
| Beginning balances | | (11,010) | | | (12,460) | | | (11,404) | | | (12,902) | | | | | | | |
| Other comprehensive income | | 202 | | | 234 | | | 596 | | | 676 | | | | | | | |
| | | | | | | | | | | | | | |
| Ending balances | | (10,808) | | | (12,226) | | | (10,808) | | | (12,226) | | | | | | | |
| | | | | | | | | | | | | | |
| Total shareholder's equity, ending balances | | $ | 1,152,815 | | | $ | 835,742 | | | $ | 1,152,815 | | | $ | 835,742 | | | | | | | |
See Notes to Unaudited Consolidated Financial Statements
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| In thousands | | 2022 | | 2021 |
| | | | |
| Operating activities: | | | | |
| Net income | | $ | 41,343 | | | $ | 39,682 | |
| Adjustments to reconcile net income to cash provided by operations: | | | | |
| Depreciation | | 83,166 | | | 82,418 | |
| Regulatory amortization of gas reserves | | 4,527 | | | 11,606 | |
| Deferred income taxes | | 7,013 | | | 1,687 | |
| Qualified defined benefit pension plan expense | | 4,013 | | | 12,075 | |
| Contributions to qualified defined benefit pension plans | | — | | | (9,590) | |
| Deferred environmental expenditures, net | | (14,437) | | | (14,952) | |
| Environmental remediation expense | | 7,950 | | | 6,092 | |
| Asset optimization revenue sharing bill credits | | (41,102) | | | (9,053) | |
| | | | |
| Other | | 16,665 | | | 13,728 | |
| Changes in assets and liabilities: | | | | |
| Receivables, net | | 115,915 | | | 84,726 | |
| Inventories | | (40,881) | | | (17,317) | |
| Income and other taxes | | 17,412 | | | 5,175 | |
| Accounts payable | | (32,023) | | | (22,929) | |
| Deferred gas costs | | (1,785) | | | (33,379) | |
| Asset optimization revenue sharing | | 17,629 | | | 41,407 | |
| Decoupling mechanism | | 7,124 | | | (9,172) | |
| Cloud-based software | | (17,332) | | | (6,851) | |
| Other, net | | (12,604) | | | (13,525) | |
| | | | |
| Cash provided by operating activities | | 162,593 | | | 161,828 | |
| Investing activities: | | | | |
| Capital expenditures | | (236,467) | | | (199,399) | |
| | | | |
| Proceeds from the sale of assets | | 539 | | | 2,712 | |
| Other | | (3,349) | | | (482) | |
| | | | |
| Cash used in investing activities | | (239,277) | | | (197,169) | |
| Financing activities: | | | | |
| | | | |
| | | | |
| Cash contributions received from parent | | 179,388 | | | 2,135 | |
| Long-term debt issued | | 140,000 | | | — | |
| Long-term debt retired | | — | | | (60,000) | |
| Proceeds from term loan due within one year | | — | | | 100,000 | |
| Repayment of commercial paper, maturities greater than three months | | — | | | (195,025) | |
| Changes in other short-term debt, net | | (192,500) | | | 234,000 | |
| Cash dividend payments on common stock | | (46,319) | | | (41,935) | |
| Other | | (1,617) | | | (1,706) | |
| | | | |
| Cash provided by financing activities | | 78,952 | | | 37,469 | |
| Increase in cash, cash equivalents and restricted cash | | 2,268 | | | 2,128 | |
| Cash, cash equivalents and restricted cash, beginning of period | | 20,832 | | | 15,739 | |
| Cash, cash equivalents and restricted cash, end of period | | $ | 23,100 | | | $ | 17,867 | |
| | | | |
| Supplemental disclosure of cash flow information: | | | | |
| Interest paid, net of capitalization | | $ | 28,326 | | | $ | 29,920 | |
| Income taxes paid, net of refunds | | 5,990 | | | 23,035 | |
See Notes to Unaudited Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
On October 1, 2018, Northwest Natural Gas Company (NW Natural) and Northwest Natural Holding Company (NW Holdings) completed the reorganization into a holding company structure. NW Holdings is now the parent holding company of NW Natural, NW Natural Water Company, LLC (NWN Water) and other subsidiaries previously held by NW Natural. For further discussion, see Note 17. These financial statements and accompanying notes are for the period ending September 30, 2018 and reflect the organizational structure prior to the reorganization.
The accompanying consolidated financial statements represent the respective, consolidated financial results of NWNorthwest Natural Holding Company (NW Holdings) and Northwest Natural Gas Company (NW Natural) and all respective companies NW Naturalthat each registrant directly or indirectly controlled,controls, either through majority ownership or otherwise asotherwise. This is a combined report of September 30, 2018. NW Holdings and NW Natural, which includes separate consolidated financial statements for each registrant.
NW Natural's regulated localnatural gas distribution business, referred to asactivities are reported in the utilitynatural 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 category primarily includes the non-utility portion of the Mist gas storage facility that provides storage services for utilities, gas marketers, electric generators,activities, water businesses, and large industrial users from facilities located in Oregon. In addition, prior to the reorganizationother investments are aggregated and reported as other at their respective registrant.
NW Holdings and NW Natural held regulated water services, other investments, and other non-utility activities reported as other.
NW Natural's direct and indirect wholly-owned subsidiaries as of September 30, 2018 include:
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; |
Northwest Energy Corporation (Energy Corp);
| |
◦ | NWN Gas Reserves LLC (NWN Gas Reserves); |
NNG Financial Corporation (NNG Financial);
NW Natural Water Company, LLC (NWN Water);
| |
◦ | Falls Water Co., Inc. (Falls Water); |
| |
◦ | Cascadia Water, LLC (Cascadia); |
Northwest Natural Holding Company (NW Holdings); and
| |
◦ | NWN Merger Sub, Inc. (NWN Holdco Sub). |
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);
NW Natural Water Company, LLC (NWN Water);
| |
◦ | Falls Water Co., Inc. (Falls Water); |
| |
◦ | Salmon Valley Water Company; |
| |
◦ | Cascadia Water, LLC (Cascadia); |
| |
◦ | NW Natural Water of Oregon, LLC (NWN Water of Oregon); |
| |
◦ | NW Natural Water of Washington, LLC; and |
| |
◦ | NW Natural Water of Idaho, LLC. |
consolidate all entities in which they have a controlling financial interest. Investments in corporate joint ventures and partnerships that the registrantNW Holdings does not directly or indirectly control, and for which it is not the primary beneficiary, include NWN Energy'sNNG Financial's investment in Trail West Holdings, LLC (TWH)Kelso-Beaver Pipeline and NWN Water's investment in Avion Water Company, Inc., which isare accounted for under the equity method, and NNG Financial'smethod. NW Natural RNG Holding Company, LLC holds an investment in Kelso-Beaver Pipeline.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. In this report, the term “utility” is used to describe NW Natural's regulated gas distribution business, and the term “non-utility” is used to describe the non-utility portion of the Mist gas storage facility and other non-utility investments and business activities.
Information presented in these interim consolidated financial statements is unaudited, but includes all material adjustments management considers necessary for a fair statement of the results for each period reported including normal recurring accruals. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in NW Holdings' and NW Natural's 2017combined 2021 Annual Report on Form 10-K (2017(2021 Form 10-K), taking into consideration the changes mentioned below in this Note 1 and in Notes 4 and 15, as reflected in Exhibit 99.1 to the Current Report on Form 8-K (Form 8-K) filed on September 24, 2018.. A significant part of NW Holdings' and NW Natural's business is of a seasonal nature; therefore, NW Holdings and NW Natural results of operations for interim periods are not necessarily indicative of full year results.
During Seasonality affects the second quartercomparability of 2018, we moved forward with NW Natural's 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, entered into a Purchase and Sale Agreement that provides for the sale of all of the membership interests in its wholly-owned subsidiary, Gill Ranch, subject to various regulatory approvals and closing 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 presented 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 discontinuedother operations assets and liabilities on theacross quarters but not across years.
consolidated balance sheets. See Note 16 for additional information. Additionally, we reevaluated reportable segments and concluded that the remaining gas storage activities no longer meet the requirements to be separately reported as a segment. The non-utility portion of the 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 the prior year's consolidated results of operations, financial condition, or cash flows.
NW Holdings was formed on March 7, 2018. The accompanying financial statements for NW Holdings are provided in accordance with Exchange Act Rules 13a-13 and 15d-13. There was no income statement activity for NW Holdings during the period ended September 30, 2018 and thus no income statement is provided for NW Holdings. Prior to completing the reorganization, NW Holdings received a $20.0 million capital contribution.
Notes to the consolidated financial statements reflect the activity of continuing operationsfor both NW Holdings and NW Natural for all periods presented, unless otherwise noted. Note 16 providesCertain reclassifications have been made to conform prior period information regarding discontinued operations.to the current presentation. The reclassifications did not have a material effect on our consolidated financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
Significant accounting policies are described in Note 2 of the 20172021 Form 10-K. There were no material changes to those accounting policies during the nine months ended September 30, 20182022 other than those incorporatedset forth in this Note 5, Note 13, and Note 16 relating to revenue, business combinations and goodwill, and discontinued operations, respectively.2. The following are current updates to certain critical accounting policy estimates and new accounting standards.
Industry Regulation
In applying regulatory accounting principles, NW Holdings and NW Natural capitalizescapitalize or defersdefer certain costs and revenues as regulatory assets and liabilities pursuant to orders of the Oregon Public Utilities Commission (OPUC), Washington Utilities and Transportation Commission (WUTC) or, Idaho Public Utilities Commission (IPUC) or Public Utility Commission of Texas (PUCT), as applicable, which provide for the recovery of revenues or expenses from, or refunds to, utility customers in future periods, including a return or a carrying charge in certain cases.
Amounts deferred as regulatory assets and liabilities for NW Holdings and NW Natural were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Regulatory Assets |
| | September 30, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 |
| NW Natural: | | | | | | |
| Current: | | | | | | |
Unrealized loss on derivatives(1) | | $ | 19,594 | | | $ | 9,818 | | | $ | 10,402 | |
| Gas costs | | 52,115 | | | 39,622 | | | 35,641 | |
Environmental costs(2) | | 9,461 | | | 7,068 | | | 6,694 | |
Decoupling(3) | | 114 | | | 1,628 | | | 969 | |
Pension balancing(4) | | 7,131 | | | 7,131 | | | 7,131 | |
| Income taxes | | 2,399 | | | 2,939 | | | 2,568 | |
Other(5) | | 14,016 | | | 12,432 | | | 8,986 | |
| Total current | | $ | 104,830 | | | $ | 80,638 | | | $ | 72,391 | |
| Non-current: | | | | | | |
Unrealized loss on derivatives(1) | | $ | 18,824 | | | $ | 268 | | | $ | 412 | |
Pension balancing(4) | | 34,928 | | | 40,176 | | | 38,302 | |
| Income taxes | | 11,168 | | | 13,912 | | | 12,609 | |
| Pension and other postretirement benefit liabilities | | 107,722 | | | 155,077 | | | 116,440 | |
Environmental costs(2) | | 82,667 | | | 83,969 | | | 94,636 | |
| Gas costs | | 3,369 | | | 2,858 | | | 15,477 | |
Decoupling(3) | | — | | | 118 | | | — | |
Other(5) | | 42,918 | | | 28,653 | | | 36,663 | |
| Total non-current | | $ | 301,596 | | | $ | 325,031 | | | $ | 314,539 | |
| Other (NW Holdings) | | 64 | | | 40 | | | 40 | |
| Total non-current - NW Holdings | | $ | 301,660 | | | $ | 325,071 | | | $ | 314,579 | |
| | | | | | | | | | | | | | | | | | | | |
| | Regulatory Liabilities |
| | September 30, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 |
| NW Natural: | | | | | | |
| Current: | | | | | | |
| Gas costs | | $ | 944 | | | $ | 847 | | | $ | 70 | |
Unrealized gain on derivatives(1) | | 62,882 | | | 105,175 | | | 48,130 | |
Decoupling(3) | | 13,272 | | | 4,484 | | | 4,475 | |
| Income taxes | | 7,318 | | | 8,217 | | | 8,192 | |
| Asset optimization revenue sharing | | 23,461 | | | 43,883 | | | 45,124 | |
Other(5) | | 3,649 | | | 1,562 | | | 6,290 | |
| Total current - NW Natural | | $ | 111,526 | | | $ | 164,168 | | | $ | 112,281 | |
| Other (NW Holdings) | | 25 | | | — | | | — | |
| Total current - NW Holdings | | $ | 111,551 | | | $ | 164,168 | | | $ | 112,281 | |
| Non-current: | | | | | | |
| Gas costs | | $ | 50 | | | $ | — | | | $ | 250 | |
Unrealized gain on derivatives(1) | | 8,008 | | | 24,555 | | | 10,730 | |
Decoupling(3) | | 884 | | | 214 | | | 3,412 | |
Income taxes(6) | | 179,319 | | | 186,429 | | | 181,404 | |
Accrued asset removal costs(7) | | 460,666 | | | 440,410 | | | 445,952 | |
| Asset optimization revenue sharing | | — | | | — | | | 1,810 | |
Other(5) | | 13,638 | | | 12,913 | | | 13,792 | |
| Total non-current - NW Natural | | $ | 662,565 | | | $ | 664,521 | | | $ | 657,350 | |
| Other (NW Holdings) | | 982 | | | 869 | | | 982 | |
| Total non-current - NW Holdings | | $ | 663,547 | | | $ | 665,390 | | | $ | 658,332 | |
(1)Unrealized gains or losses on derivatives are non-cash items and therefore do not earn a rate of return or a carrying charge. These amounts are recoverable through NGD rates as part of the annual Purchased Gas Adjustment (PGA) mechanism when realized at settlement.
(2)Refer to the Environmental Cost Deferral and Recovery table in Note 16 for a description of environmental costs.
|
| | | | | | | | | | | | |
|
| Regulatory Assets |
| | | September 30, | | December 31, |
| In thousands | | 2018 | | 2017 | | 2017 |
| Current: | | | | | | |
Unrealized loss on derivatives(1) | | $ | 8,828 |
| | $ | 8,887 |
| | $ | 18,712 |
|
| Gas costs | | 461 |
| | 1,851 |
| | 154 |
|
Environmental costs(2) | | 5,633 |
| | 6,362 |
| | 6,198 |
|
Decoupling(3) | | 11,990 |
| | 15,663 |
| | 11,227 |
|
| Income taxes | | 2,217 |
| | 4,378 |
| | 2,218 |
|
Other(4) | | 12,112 |
| | 12,363 |
| | 7,272 |
|
| Total current | | $ | 41,241 |
| | $ | 49,504 |
| | $ | 45,781 |
|
| Non-current: | | | | | | |
Unrealized loss on derivatives(1) | | $ | 3,016 |
| | $ | 3,926 |
| | $ | 4,649 |
|
Pension balancing(5) | | 72,291 |
| | 57,599 |
| | 60,383 |
|
| Income taxes | | 19,267 |
| | 36,591 |
| | 19,991 |
|
| Pension and other postretirement benefit liabilities | | 165,741 |
| | 172,687 |
| | 179,824 |
|
Environmental costs(2) | | 63,464 |
| | 63,339 |
| | 72,128 |
|
| Gas costs | | 14 |
| | 48 |
| | 84 |
|
Decoupling(3) | | 829 |
| | 1,025 |
| | 3,970 |
|
Other(4) | | 9,295 |
| | 10,137 |
| | 15,579 |
|
| Total non-current | | $ | 333,917 |
| | $ | 345,352 |
| | $ | 356,608 |
|
(4)Balance represents deferred net periodic benefit costs as approved by the OPUC. |
| | | | | | | | | | | | |
| | | Regulatory Liabilities |
| | | September 30, | | December 31, |
| In thousands | | 2018 | | 2017 | | 2017 |
| Current: | | | | | | |
| Gas costs | | $ | 20,716 |
| | $ | 16,459 |
| | $ | 14,886 |
|
Unrealized gain on derivatives(1) | | 2,862 |
| | 2,020 |
| | 1,674 |
|
Decoupling(3) | | 1,697 |
| | 314 |
| | 322 |
|
Other(4) | | 12,229 |
| | 15,866 |
| | 17,131 |
|
| Total current | | $ | 37,504 |
| | $ | 34,659 |
| | $ | 34,013 |
|
| Non-current: | | | | | | |
| Gas costs | | $ | 1,409 |
| | $ | 1,015 |
| | $ | 4,630 |
|
Unrealized gain on derivatives(1) | | 861 |
| | 1,555 |
| | 1,306 |
|
Decoupling(3) | | 119 |
| | — |
| | 957 |
|
Income taxes(6) | | 223,841 |
| | — |
| | 213,306 |
|
Accrued asset removal costs(7) | | 375,257 |
| | 356,106 |
| | 360,929 |
|
Other(4) | | 4,688 |
| | 5,162 |
| | 4,965 |
|
| Total non-current | | $ | 606,175 |
| | $ | 363,838 |
| | $ | 586,093 |
|
| |
(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 utility rates as part of the annual Purchased Gas Adjustment (PGA) mechanism when realized at settlement. |
| |
(2)
| Refer to footnote (3) per the Deferred Regulatory Asset table in Note 15 for a description of environmental costs. |
| |
(3)
| This deferral represents the margin adjustment resulting from differences between actual and expected volumes. |
| |
(4)
| Balances consist of deferrals and amortizations under approved regulatory mechanisms and typically earn a rate of return or carrying charge. |
| |
(5)
| Refer to footnote (1) of the Net Periodic Benefit Cost table in Note 8 for information regarding the deferral of pension expenses. |
| |
(6)
| This balance represents estimated amounts associated with the Tax Cuts and Jobs Act. See Note 9. |
| |
(7)
| Estimated costs of removal on certain regulated properties are collected through rates. |
(6)Balance represents excess deferred income tax benefits subject to regulatory flow-through.
(7)Estimated costs of removal on certain regulated properties are collected through rates.
We believe all costs incurred and deferred at September 30, 20182022 are prudent. All regulatory assets and liabilities are reviewed annually for recoverability, or more often if circumstances warrant. If we should determine that all or a portion of these regulatory assets or liabilities no longer meet the criteria for continued application of regulatory accounting, then NW Holdings and NW Natural would be required to write-off the net unrecoverable balances in the period such determination is made.
Supplemental Cash Flow Information
Restricted cash is primarily comprised of funds from public purpose charges for programs that assist low-income customers with bill payments or energy efficiency.
The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Holdings as of September 30, 2022 and 2021 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 |
| Cash and cash equivalents | | $ | 108,556 | | | $ | 19,502 | | | $ | 18,559 | |
| Restricted cash included in other current assets | | 11,714 | | | 8,170 | | 8,561 |
| Cash, cash equivalents and restricted cash | | $ | 120,270 | | | $ | 27,672 | | | $ | 27,120 | |
The following table provides a reconciliation of the cash, cash equivalents and restricted cash balances at NW Natural as of September 30, 2022 and 2021 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 |
| Cash and cash equivalents | | $ | 11,386 | | | $ | 9,697 | | | $ | 12,271 | |
| Restricted cash included in other current assets | | 11,714 | | | 8,170 | | 8,561 |
| Cash, cash equivalents and restricted cash | | $ | 23,100 | | | $ | 17,867 | | | $ | 20,832 | |
Accounts Receivable and Allowance for Uncollectible Accounts
Accounts receivable consist primarily of amounts due for natural gas sales and transportation services to NGD customers, plus amounts due for gas storage services. NW Holdings and NW Natural establish allowances for uncollectible accounts (allowance) for trade receivables, including accrued unbilled revenue, based on the aging of receivables, collection experience of past due account balances including payment plans, and historical trends of write-offs as a percent of revenues. A specific allowance is established and recorded for large individual customer receivables when amounts are identified as unlikely to be partially or fully recovered. Inactive accounts are written-off against the allowance after they are 120 days past due or when deemed uncollectible. Differences between the estimated allowance and actual write-offs will occur based on a number of factors, including changes in economic conditions, customer creditworthiness, and natural gas prices. The allowance for uncollectible accounts is adjusted quarterly, as necessary, based on information currently available.
Allowance for Trade Receivables
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 third quarter 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 quarter for Oregon accounts in the following categories: closed or inactive accounts aged less than 120 days, accounts on 24-month 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. We'll 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 Contentswhich is related to NW Natural's accounts receivable:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of | | | | As of |
| December 31, 2021 | | Nine Months Ended September 30, 2022 | | September 30, 2022 |
| In thousands | Beginning Balance | | Provision recorded, net of adjustments | | Write-offs recognized, net of recoveries | | Ending Balance |
| Allowance for uncollectible accounts: | | | | | | | |
| Residential | $ | 1,460 | | | $ | 896 | | | $ | (871) | | | $ | 1,485 | |
| Commercial | 178 | | | 375 | | | (272) | | | 281 | |
| Industrial | 67 | | | 173 | | | (62) | | | 178 | |
| Accrued unbilled and other | 313 | | | 84 | | | (170) | | | 227 | |
| Total | $ | 2,018 | | | $ | 1,528 | | | $ | (1,375) | | | $ | 2,171 | |
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.
COVID-19 Impact
During 2020, our regulated utilities received approval in their respective jurisdictions to defer certain financial impacts associated with COVID-19 such as bad debt expense, financing costs to secure liquidity, lost revenues related to late fees and reconnection fees, and other COVID-19 related costs, net of offsetting direct expense reductions associated with COVID-19. As of September 30, 2022 and 2021, we had a regulatory asset of approximately $15.1 million and $7.4 million, respectively, for incurred costs associated with COVID-19 that we believe are recoverable. As part of the 2022 Oregon general rate case, we received approval from the OPUC to recover the 2020 and 2021 COVID-19 deferral totaling $10.9 million over two years starting November 1, 2022.
Cloud Computing Arrangements (CCA)
Implementation costs associated with its CCA are capitalized consistent with costs capitalized for internal-use software. Capitalized CCA implementation costs are included in other assets in the consolidated balance sheets. The CCA implementation costs are amortized over the term of the related hosting agreement, including renewal periods that are reasonably certain to be exercised. Amortization expense of CCA implementation costs are recorded as operations and maintenance expenses in the consolidated statements of comprehensive income. The CCA implementation costs are included within operating activities in the consolidated statements of cash flows.
New Accounting Standards
WeNW Natural and NW Holdings consider the applicability and impact of all accounting standards updates (ASUs) issued by the Financial Accounting Standards Board (FASB). ASUs not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on NW Natural's consolidated financial position or results of operations.
Recently Adopted Accounting Pronouncements
STOCK COMPENSATION. On May 10, 2017,LEASES. In July 2021, the FASB issued ASU 2017-09, "Stock Compensation2021-05, "Leases (Topic 842), Lessors - Scope of Modification Accounting.Certain Leases with Variable Lease Payments." The purpose of the amendment is to provide clarity, reduce diversity in practice, and reduce the cost and complexity when applying the guidance in Topic 718, relatedrequire lessors to a change to the terms or conditions of a share-based payment award. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification.account for certain lease transactions that contain variable lease payments as operating leases. The amendments in this update wereASU 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 NW Natural beginningon January 1, 2018,2022 and will be applied prospectively to any award modified on or after the adoption date. The adoption did not have a material impact to financial statements or disclosures.
RETIREMENT BENEFITS. On March 10, 2017, the FASB issued ASU 2017-07, "Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost." The ASU requires entities to disaggregate current service cost from the other components of net periodic benefit cost and present it with other current compensation costs for related employees in the income statement. Additionally, the other components of net periodic benefit costs are to be presented elsewhere in the income statement and outside of income from operations, if that subtotal is presented. Only the service cost component of the net periodic benefit cost is eligible for capitalization. The amendments in this update were effective for us beginning January 1, 2018.
Upon adoption, the ASU required that changes to the income 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 the consolidated statement of comprehensive income for the three and nine months ended September 30, 2017. NW Natural did not elect the practical expedient which would have allowed us to reclassify amounts disclosed previously in the pension and other postretirement benefits footnote disclosure as the basis for applying retrospective presentation. As mentioned above, onadopted using 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 the pension regulatory balancing mechanism.
The retrospective presentation requirement related to the other components of net periodic benefit cost affected the operations and maintenance expense and other income (expense), net lines on the consolidated statement of comprehensive income. For the three and nine months ended September 30, 2017, $1.4 million and $4.0 million of expense was reclassified from operations and maintenance expense and included in other income (expense), net, respectively.
GOODWILL. On January 26, 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." 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 exceeds the fair value of the reporting unit. The amendments in this standard are effective for us beginning January 1, 2020 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 third quarter ended September 30, 2018.approach. The adoption of this ASU did not materially affect the financial statements and disclosures.disclosures of NW Holdings or NW Natural.
STATEMENT OF CASH FLOWS. On August 26, 2016, the FASB issued ASU 2016-15, "Classification of Certain Cash Receipts and Cash Payments." The ASU adds guidance pertaining to the classification of certain cash receipts and payments on the statement of cash flows. The purpose of the amendment is to clarify issues that have been creating diversity in practice. The amendments in this standard were effective for us beginning January 1, 2018, and the adoption did not have a material impact to financial statements or disclosures as NW Natural's historical practices and presentation were consistent with the directives of this ASU.
FINANCIAL INSTRUMENTS. On January 5, 2016, the FASB issued ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The ASU enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation, and disclosure. The new standard was effective for us beginning January 1, 2018, and the adoption did not materially impact financial statements or disclosures.
REVENUE RECOGNITION. On May 28, 2014, the FASB issued ASU 2014-09 "Revenue From Contracts with Customers." The underlying principle of the guidance requires entities to recognize revenue depicting the transfer of goods or services to customers at amounts the entity is expected to be entitled to in exchange for those goods or services. The ASU also prescribes a five-step approach to revenue recognition: (1) identify the contract(s) with the customer; (2) identify the separate performance obligations in the contract(s); (3) determine the transaction price; (4) allocate the transaction price to separate performance obligations; and (5) recognize revenue when, or as, each performance obligation is satisfied. The guidance also requires additional disclosures, both qualitative and quantitative, regarding the nature, amount, timing and uncertainty of revenue and cash flows.
The new accounting standard and all related amendments were effective for us beginning January 1, 2018. NW Natural applied the accounting standard to all contracts using the modified retrospective method. The new standard is primarily reflected in the consolidated statement of comprehensive income and Note 5. The implementation of the new revenue standard did not result in changes to how NW Natural currently recognizes revenue, and therefore, no cumulative effect or adjustment to the opening balance of retained earnings was required. The implementation did result in changes to the disclosures and presentation of revenue and expenses. The comparative information for prior years has not been restated. There is no material impact to financial results and no significant changes to NW Natural's control environment due to the adoption of the new revenue standard on an ongoing basis.
As previously discussed, the adoption of the new revenue standard did not impact the consolidated balance sheet or statement of cash flows but did result in changes to the presentation of the consolidated statements of comprehensive income. Had the adoption of the new revenue standard not occurred, operating revenues for the three and nine months ended September 30, 2018 would have been $87.7 million and $458.7 million, compared to the reported amounts of $91.2 million and $479.4 million under the new revenue standard, respectively. Similarly, absent the impact of the new revenue standard, operating expenses would have been $93.9 million and $388.8 million, compared to the reported amounts of $97.4 million and $409.5 million under the new revenue standard for the three and nine months ended September 30, 2018, respectively. The effect of the change was an increase in both operating revenues and operating expenses of $3.5 million and $20.7 million for the three and nine months ended September 30, 2018, respectively, due to the change in presentation of revenue taxes. As part of the adoption of the new revenue standard, we evaluated the presentation of revenue taxes under the new guidance and across NW Natural's peer group and concluded that the gross presentation of revenue taxes provides the greatest level of consistency and transparency. Prior to the adoption of the new revenue standard, a portion of revenue taxes was presented net in operating revenues and a portion was recorded directly on the balance sheet. During the three and nine months ended September 30, 2018, NW Natural recognized $3.5 million and $20.7 million in revenue taxes in operating revenues and operating expenses, respectively. In comparison, for the three and nine months ended September 30, 2017, NW Natural recognized $3.7 million and $23.0 million in revenue taxes, of which $2.3 million and $13.3 million were recorded in operating revenues and $1.4 million and $9.7 million were recorded on the balance sheet, respectively. The change in presentation of revenue taxes had no impact on utility margin, net income or earnings per share.
Recently Issued Accounting Pronouncements
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. The amended guidance can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently assessing the effect of this standard on financial statements and disclosures.
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 are currently assessing the effect of this standard on disclosures.
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. We are currently assessing the effect of this standard on disclosures.
ACCUMULATED OTHER COMPREHENSIVE INCOME. On February 14, 2018, 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 period 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 adjustment of deferred taxes due to the new corporate income tax rate enacted through the Tax Cuts and Jobs Act (TCJA) 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 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. The amendments in this update are effective for us beginning January 1, 2019, and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the federal corporate income tax rate in the TCJA is recognized. The
reclassification allowed in this update is elective, and we are currently assessing whether NW Natural will make the reclassification. This update is not expected to have a material impact on financial condition.
DERIVATIVES AND HEDGING. On August 28, 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities." The purpose of the amendment is to more closely align hedge accounting with companies’ risk management strategies. The ASU amends the accounting for risk component hedging, the hedged item in fair value hedges of interest 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. The amendments in this update are effective for us beginning January 1, 2019. Early adoption is permitted. The amended presentation and disclosure guidance is required prospectively. We are currently assessing the effect of this standard on financial statements and disclosures.
LEASES. On February 25, 2016, the FASB issued ASU 2016-02, "Leases," which revises the existing lease accounting guidance. Pursuant to the new standard, lessees will be 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 NW Natural's leasing activities. On November 29, 2017, the FASB proposed an additional practical expedient that would allow entities to apply the transition requirements on the effective date of the standard. Additionally, on January 25, 2018, the FASB issued ASU 2018-01, "Land Easement Practical Expedient for Transition to Topic 842", to address the costs and complexity of applying the transition provisions of the new lease standard to land easements. This ASU provides an optional practical expedient to not evaluate existing or expired land easements that were not previously accounted for as leases under the current lease guidance. The standard and associated ASUs are effective for us beginning January 1, 2019. We are currently assessing NW Natural's lease population and material contracts to determine the effect of this standard on financial statements and disclosures. Refer to Note 14 of the 2017 Form 10-K for NW Natural's current lease commitments.
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. AntidilutiveAnti-dilutive stock awards are excluded from the calculation of diluted earnings or loss per common share.
DilutedNW Holdings' diluted earnings (loss) from continuing operationsor loss per share are calculated as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands, except per share data | | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| | | | | | | | |
| Net income (loss) | | (19,587) | | | (20,655) | | | 38,367 | | | 38,138 | |
| Average common shares outstanding - basic | | 34,939 | | | 30,696 | | | 33,491 | | | 30,659 | |
| Additional shares for stock-based compensation plans (See Note 8) | | — | | | — | | | 48 | | | 49 | |
| Average common shares outstanding - diluted | | 34,939 | | | 30,696 | | | 33,539 | | | 30,708 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Earnings (loss) per share of common stock: | | | | | | | | |
| Basic | | $ | (0.56) | | | $ | (0.67) | | | $ | 1.15 | | | $ | 1.24 | |
| Diluted | | $ | (0.56) | | | $ | (0.67) | | | $ | 1.14 | | | $ | 1.24 | |
| Additional information: | | | | | | | | |
| Anti-dilutive shares | | 85 | | | 51 | | | — | | | 6 | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands, except per share data | | 2018 | | 2017 | | 2018 | | 2017 |
| Net income (loss) from continuing operations | | $ | (11,144 | ) | | $ | (7,887 | ) | | $ | 30,528 |
| | $ | 37,585 |
|
| Average common shares outstanding - basic | | 28,815 |
| | 28,678 |
| | 28,787 |
| | 28,653 |
|
| Additional shares for stock-based compensation plans (See Note 6) | | — |
| | — |
| | 59 |
| | 81 |
|
| Average common shares outstanding - diluted | | 28,815 |
| | 28,678 |
| | 28,846 |
| | 28,734 |
|
| Earnings (loss) from continuing operations per share of common stock - basic | | $ | (0.39 | ) | | $ | (0.28 | ) | | $ | 1.06 |
| | $ | 1.32 |
|
| Earnings (loss) from continuing operations per share of common stock - diluted | | $ | (0.39 | ) | | $ | (0.28 | ) | | $ | 1.06 |
| | $ | 1.31 |
|
| Additional information: | | | | | | | | |
| Antidilutive shares | | 73 |
| | 96 |
| | 4 |
| | 15 |
|
4. SEGMENT INFORMATION
We primarily operate in one reportable business segment, which is NW Natural's local gas distribution business and is referred to as the utilityNGD 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, subject to various regulatory approvals and closing conditions. As such, we reevaluated reportable segments and concluded that the gas storage activities no longer meet the requirements of a reportable segment. Ongoing, non-utility gas storage activities, which include interstate storage and asset management activities at the Mist gas storage facility, are now reported as other. NW Natural and NW Holdings also has regulated water operations, otherhave investments and
business activities not specifically related to the utilityNGD segment, which are aggregated and reported as other. We refer to NW Natural's local gas distribution business as the utilityother and all other activities as non-utility.described below for each entity.
LocalNatural Gas Distribution
NW Natural's local gas distribution segment is a regulated utility principally engaged in the purchase, sale, and delivery of natural gas and related services to customers in Oregon and southwest Washington. As a regulated utility, NW Natural 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. 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 NW Natural's customers are located in Oregon and 11% in Washington. On an annual basis, residential and commercial customers typically account for around 60% of utility total volumes delivered and 90% of utility 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 service fees.
Industrial sectors served by NW Natural 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; government and educational institutions; and electric generation.
In addition to NW Natural's local gas distribution business, the utilityNGD segment also includes the utility 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.
OtherNW Natural
Regulated water operations, non-utility investments,NW Natural's activities in Other include Interstate Storage Services and other business activities are aggregated and reported as other. Other includes NWN Gas Storage, a wholly-owned subsidiary of NWN Energy, and the non-utility portion ofthird-party asset management services for the Mist facility in Oregon, appliance retail center operations, and third-party asset management services. corporate operating and non-operating revenues and expenses that cannot be allocated to NGD operations.
Earnings from non-utilityInterstate Storage Services assets at the Mist facility are primarily related to firm storage capacity revenues. Earnings from the Mist facility also include revenue, net of amounts shared with utilityNGD customers, from management of utilityNGD assets at Mist and upstream pipeline capacity when not needed to serve utilityNGD customers. Under the Oregon sharing mechanism, NW Natural retains 80% of the pre-tax income from these services when the costs of the capacity havewere not been included in utilityNGD rates, or 33%10% of the pre-tax income when the costs have been included in utilitythese rates. The remaining 20% and 67%90%, respectively, are recorded to a deferred regulatory account for crediting back to utilityNGD customers.
NW Holdings
NW Holdings' activities in Other also includes NNG Financial, non-utility appliance retail center operations,include all remaining activities not associated with NW Natural, specifically: NWN Water, which consolidates the regulated water and wastewater utility operations and is pursuing other investments in the water sector through itself and through its wholly-owned subsidiaries Falls Water and Cascadia,subsidiaries; NWN Energy'sWater's equity investment in TWH, which is pursuing developmentAvion Water Company, Inc.; NWN Gas Storage, a wholly-owned subsidiary of a cross-Cascades transmissionNWN Energy; other pipeline projectassets in NNG Financial; and NW Holdings, which was used in effecting the holding company reorganization of NW Natural throughRenewables Holdings, LLC and its wholly-owned subsidiary NWN Holdco Sub. See Note 1 for information regarding changesnon-regulated renewable natural gas activities. Other also includes corporate revenues and expenses that cannot be allocated to NW Natural's organizational structure subsequent to September 30, 2018.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.
Segment Information Summary
Inter-segment transactions were immaterial for the periods presented. The following table presents summary financial information concerning the reportable segments of continuing operations. See Note 16 for information regarding the discontinued operation, Gill Ranch.segment and other.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| In thousands | NGD | | Other
(NW Natural) | | | | NW Natural | | Other
(NW Holdings) | | NW Holdings |
| 2022 | | | | | | | | | | | |
| Operating revenues | $ | 103,295 | | | $ | 7,131 | | | | | $ | 110,426 | | | $ | 6,413 | | | $ | 116,839 | |
| Depreciation | 27,937 | | | 264 | | | | | 28,201 | | | 825 | | | 29,026 | |
| Income (loss) from operations | (20,910) | | | 5,616 | | | | | (15,294) | | | 367 | | | (14,927) | |
| Net income (loss) | (23,016) | | | 4,210 | | | | | (18,806) | | | (781) | | | (19,587) | |
| Capital expenditures | 79,847 | | | 431 | | | | | 80,278 | | | 3,868 | | | 84,146 | |
| 2021 | | | | | | | | | | | |
| Operating revenues | $ | 91,042 | | | $ | 4,994 | | | | | $ | 96,036 | | | $ | 5,411 | | | $ | 101,447 | |
| Depreciation | 27,462 | | | 257 | | | | | 27,719 | | | 719 | | | 28,438 | |
| Income (loss) from operations | (18,288) | | | 3,203 | | | | | (15,085) | | | 694 | | | (14,391) | |
| Net income (loss) | (23,297) | | | 2,279 | | | | | (21,018) | | | 363 | | | (20,655) | |
| Capital expenditures | 72,822 | | | 1,410 | | | | | 74,232 | | | 8,036 | | | 82,268 | |
|
| | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| In thousands | | Utility | | Other | | Total |
| 2018 | | | | | | |
| Operating revenues | | $ | 85,077 |
| | $ | 6,162 |
| | $ | 91,239 |
|
| Depreciation and amortization | | 21,127 |
| | 358 |
| | 21,485 |
|
| Income (loss) from operations | | (9,780 | ) | | 3,669 |
| | (6,111 | ) |
| Net income (loss) from continuing operations | | (11,983 | ) | | 839 |
| | (11,144 | ) |
| Capital expenditures | | 55,914 |
| | 511 |
| | 56,425 |
|
| 2017 | | | | | | |
| Operating revenues | | $ | 81,126 |
| | $ | 5,087 |
| | $ | 86,213 |
|
| Depreciation and amortization | | 20,023 |
| | 329 |
| | 20,352 |
|
| Income (loss) from operations | | (8,624 | ) | | 4,084 |
| | (4,540 | ) |
| Net income (loss) from continuing operations | | (10,349 | ) | | 2,462 |
| | (7,887 | ) |
| Capital expenditures | | 50,009 |
| | 932 |
| | 50,941 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| In thousands | | NGD | | Other
(NW Natural) | | | | NW Natural | | Other
(NW Holdings) | | NW Holdings |
| 2022 | | | | | | | | | | | | |
| Operating revenues | | $ | 629,327 | | | $ | 17,974 | | | | | $ | 647,301 | | | $ | 14,799 | | | $ | 662,100 | |
| Depreciation | | 82,372 | | | 794 | | | | | 83,166 | | | 2,399 | | | 85,565 | |
| Income (loss) from operations | | 75,328 | | | 12,054 | | | | | 87,382 | | | (1,132) | | | 86,250 | |
| Net income (loss) | | 32,531 | | | 8,812 | | | | | 41,343 | | | (2,976) | | | 38,367 | |
| Capital expenditures | | 235,249 | | | 1,218 | | | | | 236,467 | | | 15,375 | | | 251,842 | |
| Total assets at September 30, 2022 | | 3,968,040 | | | 56,712 | | | | | 4,024,752 | | | 275,960 | | | 4,300,712 | |
| 2021 | | | | | | | | | | | | |
| Operating revenues | | $ | 531,994 | | | $ | 20,971 | | | | | $ | 552,965 | | | $ | 13,345 | | | $ | 566,310 | |
| Depreciation | | 81,648 | | | 770 | | | | | 82,418 | | | 2,261 | | | 84,679 | |
| Income (loss) from operations | | 79,530 | | | 14,642 | | | | | 94,172 | | | (1,233) | | | 92,939 | |
| Net income (loss) | | 29,247 | | | 10,435 | | | | | 39,682 | | | (1,544) | | | 38,138 | |
| Capital expenditures | | 197,190 | | | 2,209 | | | | | 199,399 | | | 12,977 | | | 212,376 | |
| Total assets at September 30, 2021 | | 3,730,595 | | | 50,366 | | | | | 3,780,961 | | | 148,264 | | | 3,929,225 | |
| Total assets at December 31, 2021 | | 3,846,112 | | | 52,260 | | | | | 3,898,372 | | | 166,232 | | | 4,064,604 | |
|
| | | | | | | | | | | | |
| | | Nine Months Ended September 30, |
| In thousands | | Utility | | Other | | Total |
| 2018 | | | | | | |
| Operating revenues | | $ | 461,525 |
| | $ | 17,916 |
| | $ | 479,441 |
|
| Depreciation and amortization | | 62,436 |
| | 1,071 |
| | 63,507 |
|
| Income from operations | | 59,521 |
| | 10,388 |
| | 69,909 |
|
| Net income from continuing operations | | 24,930 |
| | 5,598 |
| | 30,528 |
|
| Capital expenditures |
| 156,609 |
|
| 2,186 |
|
| 158,795 |
|
Total assets at September 30, 2018(1) | | 2,972,066 |
| | 96,697 |
| | 3,068,763 |
|
| 2017 | | | | | |
|
|
| Operating revenues | | $ | 503,947 |
| | $ | 12,466 |
| | $ | 516,413 |
|
| Depreciation and amortization | | 59,541 |
| | 988 |
| | 60,529 |
|
| Income from operations | | 81,661 |
| | 9,315 |
| | 90,976 |
|
| Net income from continuing operations | | 31,980 |
| | 5,605 |
| | 37,585 |
|
| Capital expenditures | | 143,128 |
| | 2,146 |
| | 145,274 |
|
Total assets at September 30, 2017(1) | | 2,835,860 |
| | 63,563 |
| | 2,899,423 |
|
Total assets at December 31, 2017(1) | | 2,961,326 |
| | 64,546 |
| | 3,025,872 |
|
| |
(1)
| Total assets exclude assets related to discontinued operations of $12.6 million, $206.2 million, and $13.9 million as of September 30, 2018, September 30, 2017, and December 31, 2017, respectively. |
UtilityNatural Gas Distribution Margin
UtilityNGD margin is athe primary financial measure used by the chief operating decision makerChief Operating Decision Maker (CODM), consisting of utilityNGD operating revenues, reduced by the associated cost of gas, environmental recovery revenues,remediation expense, and revenue taxes. The cost of gas purchased for utilityNGD customers is generally a pass-through cost in the amount of revenues billed to regulated utilityNGD customers. Environmental recovery revenues representremediation expense represents collections received from customers through the environmental recovery mechanismmechanisms in Oregon. These collections areOregon and Washington as well as adjustments for the Oregon environmental earnings test when applicable. This is offset by the amortization of environmental liabilities, which is presented as environmental remediation expense presented in operating expenses. Revenue taxes are collected from utilityNGD 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 utilityNGD operating revenues, utilityNGD margin provides a key metric used by the CODM in assessing the performance of the utilityNGD segment.
The following table presents additional segment information concerning utilityNGD margin:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 |
| NGD margin calculation: | | | | | | | | |
| NGD distribution revenues | | $ | 98,391 | | | $ | 86,271 | | | $ | 614,605 | | | $ | 517,673 | |
| Other regulated services | | 4,904 | | | 4,771 | | | 14,722 | | | 14,321 | |
| Total NGD operating revenues | | 103,295 | | | 91,042 | | | 629,327 | | | 531,994 | |
| Less: NGD cost of gas | | 36,258 | | | 25,322 | | | 261,678 | | | 178,837 | |
| Environmental remediation | | 975 | | | 806 | | | 7,945 | | | 6,092 | |
| Revenue taxes | | 4,375 | | | 3,838 | | | 25,907 | | | 22,143 | |
| NGD margin | | $ | 61,687 | | | $ | 61,076 | | | $ | 333,797 | | | $ | 324,922 | |
5. COMMON STOCK
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands | | 2018 | | 2017 | | 2018 | | 2017 |
| Utility margin calculation: | | | | | | | | |
| Utility operating revenues | | $ | 85,077 |
| | $ | 81,126 |
| | $ | 461,525 |
| | $ | 503,947 |
|
| Less: Utility cost of gas | | 25,593 |
| | 27,239 |
| | 175,864 |
| | 223,855 |
|
| Environmental remediation expense | | 1,022 |
| | 1,355 |
| | 7,528 |
| | 10,920 |
|
Revenue taxes(1) | | 3,522 |
| | — |
| | 20,731 |
| | — |
|
| Utility margin | | $ | 54,940 |
| | $ | 52,532 |
| | $ | 257,402 |
| | $ | 269,172 |
|
| | |
(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 utility margin results as revenue taxes were previously presented net in utility operating revenue. For additional information, see Note 2. |
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 three months ended September 30, 2022, NW Holdings issued and sold 327,221 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $16.7 million, net of fees and commissions paid to agents of $0.3 million. During the nine months ended September 30, 2022, NW Holdings issued and sold 1,005,322 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $51.9 million, net of fees and commissions paid to agents of $1.0 million. As of September 30, 2022, NW Holdings had $129.2 million of equity available for issuance under the program. The ATM equity program was initiated to raise funds for general corporate purposes, including equity contributions to NW Holdings’ subsidiaries, NW Natural and NW Natural Water. Contributions to NW Natural and NW Natural Water will be used for general corporate purposes. 5.
On April 1, 2022, NW Holdings issued and sold 2,875,000 shares of its common stock pursuant to a registration statement on Form S-3 and related prospectus supplement. NW Holdings received net offering proceeds, after deducting the underwriter's discounts and commissions and expenses payable by NW Holdings, of approximately $138.6 million. The proceeds were 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.
6. REVENUE
The following table presentstables present disaggregated revenue from continuing operations:revenue:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| In thousands | | NGD | | Other
(NW Natural) | | NW Natural | | Other
(NW Holdings) | | NW Holdings |
| 2022 | | | | | | | | | | |
| Natural gas sales | | $ | 95,784 | | | $ | — | | | $ | 95,784 | | | $ | — | | | $ | 95,784 | |
| Gas storage revenue, net | | — | | | 2,882 | | | 2,882 | | | — | | | 2,882 | |
| Asset management revenue, net | | — | | | 3,047 | | | 3,047 | | | — | | | 3,047 | |
| Appliance retail center revenue | | — | | | 1,202 | | | 1,202 | | | — | | | 1,202 | |
| Other revenue | | 624 | | | — | | | 624 | | | 6,413 | | | 7,037 | |
| Revenue from contracts with customers | | 96,408 | | | 7,131 | | | 103,539 | | | 6,413 | | | 109,952 | |
| | | | | | | | | | |
| Alternative revenue | | 2,589 | | | — | | | 2,589 | | | — | | | 2,589 | |
| Leasing revenue | | 4,298 | | | — | | | 4,298 | | | — | | | 4,298 | |
| Total operating revenues | | $ | 103,295 | | | $ | 7,131 | | | $ | 110,426 | | | $ | 6,413 | | | $ | 116,839 | |
| | | | | | | | | | |
| 2021 | | | | | | | | | | |
| Natural gas sales | | $ | 83,947 | | | $ | — | | | $ | 83,947 | | | $ | — | | | $ | 83,947 | |
| Gas storage revenue, net | | — | | | 2,794 | | | 2,794 | | | — | | | 2,794 | |
| Asset management revenue, net | | — | | | 1,012 | | | 1,012 | | | — | | | 1,012 | |
| Appliance retail center revenue | | — | | | 1,188 | | | 1,188 | | | — | | | 1,188 | |
| Other revenue | | 403 | | | — | | | 403 | | | 5,411 | | | 5,814 | |
| Revenue from contracts with customers | | 84,350 | | | 4,994 | | | 89,344 | | | 5,411 | | | 94,755 | |
| | | | | | | | | | |
| Alternative revenue | | 2,307 | | | — | | | 2,307 | | | — | | | 2,307 | |
| Leasing revenue | | 4,385 | | | — | | | 4,385 | | | — | | | 4,385 | |
| Total operating revenues | | $ | 91,042 | | | $ | 4,994 | | | $ | 96,036 | | | $ | 5,411 | | | $ | 101,447 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| In thousands | | NGD | | Other
(NW Natural) | | NW Natural | | Other
(NW Holdings) | | NW Holdings |
| 2022 | | | | | | | | | | |
| Natural gas sales | | $ | 623,121 | | | $ | — | | | $ | 623,121 | | | $ | — | | | $ | 623,121 | |
| Gas storage revenue, net | | — | | | 8,678 | | | 8,678 | | | — | | | 8,678 | |
| Asset management revenue, net | | — | | | 4,941 | | | 4,941 | | | — | | | 4,941 | |
| Appliance retail center revenue | | — | | | 4,355 | | | 4,355 | | | — | | | 4,355 | |
| Other revenue | | 1,882 | | | — | | | 1,882 | | | 14,799 | | | 16,681 | |
| Revenue from contracts with customers | | 625,003 | | | 17,974 | | | 642,977 | | | 14,799 | | | 657,776 | |
| | | | | | | | | | |
| Alternative revenue | | (8,571) | | | — | | | (8,571) | | | — | | | (8,571) | |
| Leasing revenue | | 12,895 | | | — | | | 12,895 | | | — | | | 12,895 | |
| Total operating revenues | | $ | 629,327 | | | $ | 17,974 | | | $ | 647,301 | | | $ | 14,799 | | | $ | 662,100 | |
| | | | | | | | | | |
| 2021 | | | | | | | | | | |
| Natural gas sales | | $ | 503,769 | | | $ | — | | | $ | 503,769 | | | $ | — | | | $ | 503,769 | |
| Gas storage revenue, net | | — | | | 8,094 | | | 8,094 | | | — | | | 8,094 | |
| Asset management revenue, net | | — | | | 8,757 | | | 8,757 | | | — | | | 8,757 | |
| Appliance retail center revenue | | — | | | 4,120 | | | 4,120 | | | — | | | 4,120 | |
| Other revenue | | 1,217 | | | — | | | 1,217 | | | 13,345 | | | 14,562 | |
| Revenue from contracts with customers | | 504,986 | | | 20,971 | | | 525,957 | | | 13,345 | | | 539,302 | |
| | | | | | | | | | |
| Alternative revenue | | 13,843 | | | — | | | 13,843 | | | — | | | 13,843 | |
| Leasing revenue | | 13,165 | | | — | | | 13,165 | | | — | | | 13,165 | |
| Total operating revenues | | $ | 531,994 | | | $ | 20,971 | | | $ | 552,965 | | | $ | 13,345 | | | $ | 566,310 | |
|
| | | | | | | | | | | | |
| | | Three months ended September 30, 2018 |
| In thousands | | Utility | | Other | | Total |
| Local gas distribution revenue | | $ | 82,358 |
| | $ | — |
| | $ | 82,358 |
|
| Gas storage revenue, net | | — |
| | 2,415 |
| | 2,415 |
|
| Asset management revenue, net | | — |
| | 2,714 |
| | 2,714 |
|
| Appliance retail center revenue | | — |
| | 1,033 |
| | 1,033 |
|
| Revenue from contracts with customers | | 82,358 |
| | 6,162 |
| | 88,520 |
|
| | | | | | | |
| Alternative revenue | | 1,994 |
| | — |
| | 1,994 |
|
| Leasing revenue | | 725 |
| | — |
| | 725 |
|
| Total operating revenues | | $ | 85,077 |
| | $ | 6,162 |
| | $ | 91,239 |
|
|
| | | | | | | | | | | | |
| | | Nine months ended September 30, 2018 |
| In thousands | | Utility | | Other | | Total |
| Local gas distribution revenue | | $ | 455,312 |
| | $ | — |
| | $ | 455,312 |
|
| Gas storage revenue, net | | — |
| | 7,189 |
| | 7,189 |
|
| Asset management revenue, net | | — |
| | 6,974 |
| | 6,974 |
|
| Appliance retail center revenue | | — |
| | 3,753 |
| | 3,753 |
|
| Revenue from contracts with customers | | 455,312 |
| | 17,916 |
| | 473,228 |
|
| | | | | | | |
| Alternative revenue | | 5,285 |
| | — |
| | 5,285 |
|
| Leasing revenue | | 928 |
| | — |
| | 928 |
|
| Total operating revenues | | $ | 461,525 |
| | $ | 17,916 |
| | $ | 479,441 |
|
RevenueNW 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 we expectexpected to receivebe received in exchange for transferring goods or providing services. Revenue from contracts with customers containcontains 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 perby 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 NW Naturalwe will collect substantially all of the consideration to which it is entitled to receive.we are entitled. We evaluated the probability of collection in accordance with the current expected credit losses standard.
NW Holdings and NW Natural doesdo 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 doesdo not have any material contract liabilities.
Revenue-based taxes are primarily franchise taxes, which are collected from utility customers and remitted to taxing authorities. Beginning January 1, 2018, revenueRevenue taxes are included in operating revenues with an equal and offsetting expense recognized in operating expenses in the consolidated statementstatements of comprehensive income. Revenue-based taxes are primarily franchise taxes, which are collected from NGD customers and remitted to taxing authorities.
Natural Gas Distribution
Utility Segment
Local gas distribution revenue. NW Natural's primary source of revenue is providing natural gas to customers in itsthe NGD service territory, which includeincludes residential, commercial, industrial and transportation customers. Gas distributionNGD 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.
NW NaturalWe applied the significant financing practical expedient and hashave not adjusted the consideration itNW Natural expects to receive from utilityNGD 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, NW Natural doeswe do not disclose the value of unsatisfied performance obligations as of September 30, 2018.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. 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 forfrom small leases of utility-owned property owned by NW Natural to third parties. The majority of these transactions are accounted for as operating leases and the revenue is recognized on a straight-line basis over the term of the lease agreement. Lease revenue is excluded from revenue from contracts with customers. See Note 7 for additional information.
NW Natural Other
Gas storage revenue. Storage Revenue
NW Natural's other revenue includes gas storage activity, which includes the non-utility portion of the Mist facility, which isInterstate Storage Services used to store natural gas for customers. Gas storage revenue is generally recognized over time as the gas storage service is provided to the customer and the amount of consideration received and recognized as revenue is dependent on set rates defined per the storage agreements. Noncash consideration in the form of dekatherms of natural gas is received as consideration for providing gas injection services to gas storage customers. This noncash consideration is measured at fair value using the average spot rate. Customer accounts are generally paid in full each month, and there is no right of return or warranty for services provided. Revenues include firm and interruptible storage services, net of the profit sharing amount refunded to utilityNGD customers.
Asset Management Revenue
Revenues include the optimization of third-party storage assets and pipeline capacity and are provided net of the profit sharing amount refunded to NGD customers. Certain asset management revenue. Asset management revenue is generallyrevenues 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. Revenues include the optimization of the storage assets and pipeline capacity provided, net of the profit sharing amount refunded to utility customers. AssetAdditionally, other asset management revenues may be based on a fixed rate. Generally, asset management accounts are settled on a monthly basis.
As of September 30, 2018, unrecognized2022, unrecognized revenue for the fixed component of the transaction price related to gas storage and asset management revenue was approximately $43.8approximately $84.4 million. Of this amount, approximately $5.1$5.3 million will be recognized during the remainder of 2018, $11.92022, $18.6 million in 2019, $9.22023, $15.6 million in 2020, $8.32024, $13.5 million in 2021, $4.62025, $9.4 million in 20222026 and $4.7$22.0 million thereafter. The amounts presented here are calculated using current contracted rates. On October 12, 2018, NW Natural filed a rate petition with FERC for revised maximum cost-based rates, which incorporated the new federal corporate income tax rate as well as an updated depreciation study. NW Natural does not expect the new FERC rates to have a significant financial impact.
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.
6. NW Holdings' primary source of other revenue is providing water and wastewater services to customers. Water and wastewater service revenue is generally recognized over time upon delivery of the water commodity or service to the customer, and the amount of consideration received and recognized as revenue is dependent on the tariffs established in the states we operate. Customer accounts are to be paid in full each month or bi-monthly, and there is no right of return or warranty for services provided.
We applied the significant financing practical expedient and have not adjusted the consideration we expect to receive from water distribution and wastewater collection customers for the effects of a significant financing component as all payment arrangements are settled annually. Due to the election of the right to invoice practical expedient, we do not disclose the value of unsatisfied performance obligations.
7. LEASES
Lease Revenue
Leasing revenue primarily consists of NW Natural's North Mist natural gas storage agreement with Portland General Electric (PGE), which is billed under an OPUC-approved rate schedule and includes an initial 30-year term beginning May 2019 with options to extend, totaling up to an additional 50 years upon mutual agreement of the parties. Under U.S. GAAP, this agreement is classified as a sales-type lease and qualifies for regulatory accounting deferral treatment. The investment in the storage facility is included in rate base under a separately established cost-of-service tariff, with revenues recognized according to the tariff schedule. As such, the selling profit that was calculated upon commencement as part of the sale-type lease recognition was deferred and will be amortized over the lease term. Billing rates under the cost-of-service tariff will be updated annually to reflect current information including depreciable asset levels, forecasted operating expenses, and the results of regulatory proceedings, as applicable, and revenue received under this agreement is recognized as operating revenue on the consolidated statements of comprehensive income. There are no variable payments or residual value guarantees. The lease does not contain an option to purchase the underlying assets.
NW Natural also maintains a sales-type lease for specialized compressor facilities to provide high pressure compressed natural gas (CNG) services. Lease payments are outlined in an OPUC-approved rate schedule over a 10-year term. There are no variable payments or residual value guarantees. The selling profit computed upon lease commencement was not significant.
Our lessor portfolio also contains small leases of property owned by NW Natural and NW Holdings to third parties. These transactions are accounted for as operating leases and the revenue is recognized over the term of the lease agreement.
The components of lease revenue at NW Natural were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 |
| Lease revenue | | | | | | | | |
| Operating leases | | $ | 19 | | | $ | 18 | | | $ | 56 | | | $ | 61 | |
| Sales-type leases | | 4,279 | | | 4,367 | | | 12,839 | | | 13,104 | |
| Total lease revenue | | $ | 4,298 | | | $ | 4,385 | | | $ | 12,895 | | | $ | 13,165 | |
Additionally, lease revenue of $0.3 million and $0.1 million was recognized for the three months ended September 30, 2022 and 2021, respectively, and lease revenue of $0.4 million was recognized for the nine months ended September 30, 2022 and 2021 related to operating leases associated with non-utility property rentals. Lease revenue related to these leases was presented in other income (expense), net on the consolidated statements of comprehensive income as it is non-operating income.
Total future minimum lease payments to be received under non-cancelable leases at September 30, 2022 are as follows:
| | | | | | | | | | | | | | | | | | | | |
| In thousands | | Operating | | Sales-Type | | Total |
| NW Natural: | | | | | | |
| Remainder of 2022 | | $ | 145 | | | $ | 4,217 | | | $ | 4,362 | |
| 2023 | | 76 | | | 16,557 | | | 16,633 | |
| 2024 | | 76 | | | 15,867 | | | 15,943 | |
| 2025 | | 67 | | | 15,306 | | | 15,373 | |
| 2026 | | 36 | | | 14,901 | | | 14,937 | |
| Thereafter | | 22 | | | 236,820 | | | 236,842 | |
| Total minimum lease payments | | $ | 422 | | | $ | 303,668 | | | $ | 304,090 | |
| Less: imputed interest | | | | 168,188 | | | |
| Total leases receivable | | | | $ | 135,480 | | | |
| | | | | | |
| Other (NW Holdings): | | | | | | |
| Remainder of 2022 | | $ | 13 | | | $ | — | | | $ | 13 | |
| 2023 | | 51 | | | — | | | 51 | |
| 2024 | | 52 | | | — | | | 52 | |
| 2025 | | 53 | | | — | | | 53 | |
| 2026 | | 56 | | | — | | | 56 | |
| Thereafter | | 914 | | | — | | | 914 | |
| Total minimum lease payments | | $ | 1,139 | | | $ | — | | | $ | 1,139 | |
| | | | | | |
| NW Holdings: | | | | | | |
| Remainder of 2022 | | $ | 158 | | | $ | 4,217 | | | $ | 4,375 | |
| 2023 | | 127 | | | 16,557 | | | 16,684 | |
| 2024 | | 128 | | | 15,867 | | | 15,995 | |
| 2025 | | 120 | | | 15,306 | | | 15,426 | |
| 2026 | | 92 | | | 14,901 | | | 14,993 | |
| Thereafter | | 936 | | | 236,820 | | | 237,756 | |
| Total minimum lease payments | | $ | 1,561 | | | $ | 303,668 | | | $ | 305,229 | |
| Less: imputed interest | | | | 168,188 | | | |
| Total leases receivable | | | | $ | 135,480 | | | |
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 $5.0 million, $4.6 million and $4.7 million at September 30, 2022 and 2021 and December 31, 2021, respectively, and is included in assets under sales-type leases on the consolidated balance sheets. Additionally, under regulatory accounting, the revenues and expenses associated with these agreements are presented on the consolidated statements of comprehensive income such that their presentation aligns with similar regulated activities at NW Natural.
Lease Expense
Operating Leases
We have operating leases for land, buildings and equipment. Our primary lease is for NW Natural's headquarters and operations center. Our leases have remaining lease terms of 2 months to 18 years. Many of our lease agreements include options to extend the lease, which we do not include in our minimum lease terms unless they are reasonably certain to be exercised. Short-term leases with a term of 12 months or less are not recorded on the balance sheet. As most of our leases do not provide an implicit rate and are entered into by NW Natural, we use an estimated discount rate representing the rate we would have incurred to finance the funds necessary to purchase the leased asset and is based on information available at the lease commencement date in determining the present value of lease payments.
The components of lease expense, a portion of which is capitalized, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 |
| NW Natural: | | | | | | | | |
| Operating lease expense | | $ | 1,767 | | | $ | 1,735 | | | $ | 5,235 | | | $ | 5,123 | |
| Short-term lease expense | | $ | 105 | | | $ | 499 | | | $ | 684 | | | $ | 1,068 | |
| | | | | | | | |
| Other (NW Holdings): | | | | | | | | |
| Operating lease expense | | $ | 7 | | | $ | 14 | | | $ | 22 | | | $ | 50 | |
| | | | | | | | |
| | | | | | | | |
| NW Holdings: | | | | | | | | |
| Operating lease expense | | $ | 1,774 | | | $ | 1,749 | | | $ | 5,257 | | | $ | 5,173 | |
| Short-term lease expense | | $ | 105 | | | $ | 499 | | | $ | 684 | | | $ | 1,068 | |
Supplemental balance sheet information related to operating leases as of September 30, 2022 and 2021 and December 31, 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| In thousands | | September 30, | | December 31, |
| | 2022 | | 2021 | | 2021 |
| NW Natural: | | | | | | |
| Operating lease right of use asset | | $ | 73,046 | | | $ | 75,565 | | | $ | 74,987 | |
| | | | | | |
| Operating lease liabilities - current liabilities | | $ | 1,298 | | | $ | 1,184 | | | $ | 1,273 | |
| Operating lease liabilities - non-current liabilities | | 78,436 | | | 79,752 | | | 79,431 | |
| Total operating lease liabilities | | $ | 79,734 | | | $ | 80,936 | | | $ | 80,704 | |
| | | | | | |
| Other (NW Holdings): | | | | | | |
| Operating lease right of use asset | | $ | 99 | | | $ | 69 | | | $ | 62 | |
| | | | | | |
| Operating lease liabilities - current liabilities | | $ | 63 | | | $ | 29 | | | $ | 23 | |
| Operating lease liabilities - non-current liabilities | | 33 | | | 37 | | | 37 | |
| Total operating lease liabilities | | $ | 96 | | | $ | 66 | | | $ | 60 | |
| | | | | | |
| NW Holdings: | | | | | | |
| Operating lease right of use asset | | $ | 73,145 | | | $ | 75,634 | | | $ | 75,049 | |
| | | | | | |
| Operating lease liabilities - current liabilities | | $ | 1,361 | | | $ | 1,213 | | | $ | 1,296 | |
| Operating lease liabilities - non-current liabilities | | 78,469 | | | 79,789 | | | 79,468 | |
| Total operating lease liabilities | | $ | 79,830 | | | $ | 81,002 | | | $ | 80,764 | |
The weighted-average remaining lease terms and weighted-average discount rates for the operating leases at NW Natural were as follows:
| | | | | | | | | | | | | | | | | | | | |
| In thousands | | September 30, | | December 31, |
| | 2022 | | 2021 | | 2021 |
| Weighted-average remaining lease term (years) | | 17.5 | | 18.4 | | 18.2 |
| Weighted-average discount rate | | 7.3 | % | | 7.2 | % | | 7.2 | % |
Headquarters and Operations Center Lease
NW Natural commenced a 20-year operating lease agreement in March 2020 for a new headquarters and operations center in Portland, Oregon. There is an option to extend the term of the lease for two additional periods of seven years. There is a material timing difference between the minimum lease payments and expense recognition as calculated under operating lease accounting rules. OPUC issued an order allowing us to align our expense recognition with cash payments for ratemaking purposes. We recorded the difference between the minimum lease payments and the aggregate of the imputed interest on the finance lease obligation and amortization of the right-of-use asset as a deferred regulatory asset on our balance sheet. The balance of the regulatory asset was $6.6 million, $5.3 million and $5.7 million as of September 30, 2022 and 2021 and December 31, 2021, respectively.
Maturities of operating lease liabilities at September 30, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | |
| In thousands | | NW Natural | | Other
(NW Holdings) | | NW Holdings |
| Remainder of 2022 | | $ | 1,752 | | | $ | 8 | | | $ | 1,760 | |
| 2023 | | 7,046 | | | 26 | | | 7,072 | |
| 2024 | | 7,183 | | | 27 | | | 7,210 | |
| 2025 | | 7,185 | | | 20 | | | 7,205 | |
| 2026 | | 7,353 | | | 6 | | | 7,359 | |
| Thereafter | | 116,431 | | | 18 | | | 116,449 | |
| Total lease payments | | 146,950 | | | 105 | | | 147,055 | |
| Less: imputed interest | | 67,216 | | | 9 | | | 67,225 | |
| Total lease obligations | | 79,734 | | | 96 | | | 79,830 | |
| Less: current obligations | | 1,298 | | | 63 | | | 1,361 | |
| Long-term lease obligations | | $ | 78,436 | | | $ | 33 | | | $ | 78,469 | |
As of September 30, 2022, there were no finance lease liabilities at NW Natural.
Supplemental cash flow information related to leases was as follows:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 |
| NW Natural: | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | |
| Operating cash flows from operating leases | | $ | 1,759 | | | $ | 1,727 | | | $ | 5,225 | | | $ | 5,113 | |
| Finance cash flows from finance leases | | $ | 92 | | | $ | 123 | | | $ | 474 | | | $ | 801 | |
| Right of use assets obtained in exchange for lease obligations | | | | | | | | |
| Operating leases | | $ | — | | | $ | — | | | $ | — | | | $ | 154 | |
| Finance leases | | $ | 6 | | | $ | 75 | | | $ | 226 | | | $ | 169 | |
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| Other (NW Holdings): | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | |
| Operating cash flows from operating leases | | $ | 12 | | | $ | 18 | | | $ | 24 | | | $ | 51 | |
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| Right of use assets obtained in exchange for lease obligations | | | | | | | | |
| Operating leases | | $ | 61 | | | $ | — | | | $ | 61 | | | $ | — | |
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| NW Holdings: | | | | | | | | |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | | | |
| Operating cash flows from operating leases | | $ | 1,771 | | | $ | 1,745 | | | $ | 5,249 | | | $ | 5,164 | |
| Finance cash flows from finance leases | | $ | 92 | | | $ | 123 | | | $ | 474 | | | $ | 801 | |
| Right of use assets obtained in exchange for lease obligations | | | | | | | | |
| Operating leases | | $ | 61 | | | $ | — | | | $ | 61 | | | $ | 154 | |
| Finance leases | | $ | 6 | | | $ | 75 | | | $ | 226 | | | $ | 169 | |
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Finance Leases
NW Natural also leases building storage spaces for use as a gas meter room in order to provide natural gas to multifamily or mixed use developments. These contracts are accounted for as finance leases and typically involve a one-time upfront payment with no remaining liability. The right of use assets for finance leases were $2.3 million, $1.9 million and $2.1 million at September 30, 2022 and 2021 and at December 31, 2021, respectively.
8. STOCK-BASED COMPENSATION
Stock-based compensation plans are designed to promote stock ownership in NW Natural, and after October 1, 2018, NW Holdings by employees, and officers of NW Natural and certain approved affiliates.including officers. These compensation plans include a Long Term Incentive Plan (LTIP), and an Employee Stock Purchase Plan (ESPP), and a Restated Stock Option Plan.. For additional information on stock-based compensation plans, see Note 68 in the 20172021 Form 10-K and the updates provided below.
Long Term Incentive Plan
Performance Shares
LTIP performance shares incorporate a combination of market, performance, and service-based factors. During the nine months ended September 30, 2018, no2022, the final performance factor under the 2020 LTIP was approved and 31,830 performance-based shares were granted under the 2020 LTIP for accounting purposes. As such, NW Natural and other subsidiaries began recognizing compensation expense. In February 2018, the 20182021 and 2022, LTIP wasshares were awarded to participants; however, the agreement allowsagreements allow for one of the performance factors to remain variable until the first quarter of the third year of the award period. As the performance factor will not be approved until the first quarterquarters of 2020,2023 and 2024, respectively, there is not a mutual understanding of the award’sawards' key terms and conditions between NW NaturalHoldings and the participants as of September 30, 2018,2022, and therefore, no expense was recognized for the 2018 award.2021 and 2022 awards. NW NaturalHoldings will calculate the grant date fair value and NW Natural will recognize expense over the remaining service period for each award once the final performance factor has been approved.
For the 20182021 and 2022 LTIP awardawards, share payouts range from a threshold of 0% to a maximum of 200% based on achievement of pre-established goals. The performance criteria for the 20182021 and 2022 performance shares consists of a three-year Return on Invested Capital (ROIC) threshold that must be satisfied and a cumulative EPS factor, which can be modified by a total shareholder return factor (TSR modifier) relative to the performance of the Russell 2500 Utilities Indexpeer group companies over the three-year performance period.period of three years for each respective award. If the target wastargets were achieved for the 2018 award,2021 and 2022 awards, NW Holdings would grant 34,702for accounting purposes 55,250 and 55,870 shares in the first quarterquarters of 2020.2023 and 2024, respectively.
As of September 30, 2018,2022, there was $1.3was $0.1 million of unrecognized compensation cost associated with the 2016 and 20172020 LTIP grants, which is expected to be recognized through 2019.2022.
Restricted Stock Units
During the nine months ended September 30, 2018, 31,4902022, 46,812 RSUs were granted under the LTIP with a weighted-average grant date fair value of $57.37$46.60 per share. Generally, the RSUs awarded are forfeitable and include a performance-based threshold as well as a vesting period of four years from the grant date. Generally, anThe majority of our RSU obligates us,grants obligate NW Holdings, upon vesting, to issue the RSU holder one share of common stock plusstock. The grant may also include a cash payment equal to the total amount of dividends paid per share between the grant date and vesting date of that portion of the RSU.RSU depending on the structure of the award agreement. The fair value of an RSU is equal to the closing market price of NW Holdings' common stock on the grant date. As of September 30, 2018,2022, there was $3.4$3.8 million of unrecognized compensation cost from grants of RSUs, which is expected to be recognized over a period extending through 2023.2026.
7.9. DEBT
Short-Term Debt
At September 30, 2018,2022, NW Holdings and NW Natural had short-term debt outstanding of $100.5$141.0 million which was comprised entirelyand $53.0 million, respectively. NW Holdings' short-term debt consisted of commercial paper. The carrying cost$88.0 million of balances outstanding under the credit agreement at NW Holdings and $53.0 million of commercial paper approximates fair value using Level 2 inputs. See Note 2 inoutstanding at NW Natural. The weighted average interest rate on the 2017 Form 10-K for a descriptioncredit agreement at September 30, 2022 was 4.7% at NW Holdings. The weighted average interest rate of the fair value hierarchy.commercial paper at September 30, 2022 was 3.3% at NW Natural. At September 30, 2018,2022, NW Natural's commercial paper had a maximum remaining maturity of 1218 days and an average remaining maturity of 79 days.
Long-Term Debt
At September 30, 2018,2022, NW Holdings and NW Natural had long-term debt outstanding of $809.6$1,337.6 million and $1,126.5 million, respectively, which included $5.9$8.3 million and $8.2 million of unamortized debt issuance costs. Utilitycosts at NW Holdings and NW Natural, respectively. NW Natural's long-term debt consists of first mortgage bonds (FMBs) with maturity dates ranging from 20182023 through 2048,2052, interest rates ranging from 1.545%2.8% to 9.05%7.9%, and a weighted average couponinterest rate of 4.690%4.5%.
$50.0 million of long-term debt is scheduled to mature over the next twelve months as of September 30, 2022 at NW Natural.
In September 2022, NW Holdings entered into an 18-month credit agreement for $100.0 million and borrowed the full amount. The loan carried an interest rate of 4.1% at September 30, 2022, which is based on the Secured Overnight Financing Rate. The loan is due and payable on March 2018,15, 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 September 30, 2022.
In September 2022, NWN Water entered into an 18-month credit agreement for $50.0 million and borrowed the full amount. The loan carried an interest rate of 4.1% at September 30, 2022, which is based on the Secured Overnight Financing Rate. 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 September 30, 2022.
In July 2022, NW Natural retired $22.0entered into a Bond Purchase Agreement between NW Natural and the institutional investors named as purchasers therein (the Bond Purchase Agreement). The Bond Purchase Agreement provides for the issuance of $140.0 million aggregate principal amount of FMBsNW Natural's First Mortgage Bonds due in 2052 (the Bonds). The Bonds were issued on September 30, 2022. The Bonds bear interest at the rate of 4.8% 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 June 2021, NWN Water entered into a five-year term loan credit agreement for $55.0 million and borrowed the full amount. The loan carried an interest rate of 3.5% at September 30, 2022, which is based upon the one-month LIBOR rate. The loan is guaranteed by NW Holdings and requires NW Holdings to maintain a consolidated indebtedness to total capitalization ratio of 70% or less. Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and accelerate the maturity of all amounts outstanding. NW Holdings was in compliance with this covenant at September 30, 2022, with a coupon rateconsolidated indebtedness to total capitalization ratio of 6.60%, and in September 2018, NW Natural issued $50.0 million of FMBs with a coupon rate of 4.110%, due in 2048.56.9%.
Fair Value of Long-Term Debt
NW Holdings' and NW Natural's outstanding debt does not trade in active markets. NW Natural estimates theThe fair value of long-term debt is estimated using utilitythe value of outstanding debt at natural gas distribution companies with similar credit ratings, terms, and remaining maturities to NW Holdings' and NW Natural's long-term debt that actively trade in public markets. Substantially all outstanding debt at NW Holdings is comprised of NW Natural debt. These valuations are based on Level 2 inputs as defined in the fair value hierarchy. See Note 2 in the 20172021 Form 10-K for a description of the fair value hierarchy.
The following table provides an estimate of the fair value of long-term debt, including current maturities of long-term debt, using market prices in effect on the valuation date:
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| | September 30, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 |
| NW Natural: | | | | | | |
| Gross long-term debt | | $ | 1,134,700 | | | $ | 864,700 | | | $ | 994,700 | |
| Unamortized debt issuance costs | | (8,229) | | | (6,940) | | | (8,205) | |
| Carrying amount | | $ | 1,126,471 | | | $ | 857,760 | | | $ | 986,495 | |
Estimated fair value(1) | | $ | 927,372 | | | $ | 978,613 | | | $ | 1,110,741 | |
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| NW Holdings: | | | | | | |
| Gross long-term debt | | $ | 1,345,968 | | | $ | 923,355 | | | $ | 1,053,241 | |
| Unamortized debt issuance costs | | (8,348) | | | (7,051) | | | (8,309) | |
| Carrying amount | | $ | 1,337,620 | | | $ | 916,304 | | | $ | 1,044,932 | |
Estimated fair value(1) | | $ | 1,133,087 | | | $ | 1,042,705 | | | $ | 1,174,500 | |
|
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| | | September 30, | | December 31, |
| In thousands | | 2018 | | 2017 | | 2017 |
| Gross long-term debt | | $ | 815,534 |
| | $ | 786,700 |
| | $ | 786,700 |
|
| Unamortized debt issuance costs | | (5,940 | ) | | (7,276 | ) | | (6,813 | ) |
| Carrying amount | | $ | 809,594 |
| | $ | 779,424 |
| | $ | 779,887 |
|
Estimated fair value(1) | | $ | 833,962 |
| | $ | 847,068 |
| | $ | 853,339 |
|
(1) Estimated fair value does not include unamortized debt issuance costs.
8.10. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS
NW Natural recognizes themaintains a qualified non-contributory defined benefit pension plan (Pension Plan), non-qualified supplemental pension plans for eligible executive officers and other key employees, and other postretirement employee benefit plans. NW Natural also has a qualified defined contribution plan (Retirement K Savings Plan) for all eligible employees. The Pension Plan and Retirement K Savings Plan have plan assets, which are held in qualified trusts to fund retirement benefits.
The service cost component of net periodic benefit cost for theNW Natural pension and other postretirement benefit plans is recognized in operations and maintenance expense in the consolidated statements of comprehensive income. The other non-service cost components are recognized in other income (expense), net in the consolidated statements of comprehensive income.
The following table provides the components of net periodic benefit cost (credit) for the pension and other postretirement benefit plans:
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| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | Pension Benefits | | Other Postretirement
Benefits | | Pension Benefits | | Other
Postretirement Benefits |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| Service cost | | $ | 1,022 | | | $ | 1,717 | | | $ | 34 | | | $ | 69 | | | $ | 4,450 | | | $ | 5,145 | | | $ | 145 | | | $ | 180 | |
| Interest cost | | 4,260 | | | 3,316 | | | 213 | | | 180 | | | 10,945 | | | 10,001 | | | 543 | | | 510 | |
| Expected return on plan assets | | (7,076) | | | (5,802) | | | — | | | — | | | (19,274) | | | (18,000) | | | — | | | — | |
| Amortization of prior service credit | | — | | | — | | | (15) | | | (119) | | | — | | | — | | | (249) | | | (353) | |
| Amortization of net actuarial loss | | (1,542) | | | 5,515 | | | 57 | | | 226 | | | 9,459 | | | 16,516 | | | 319 | | | 488 | |
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| Net periodic benefit cost (credit) | | (3,336) | | | 4,746 | | | 289 | | | 356 | | | 5,580 | | | 13,662 | | | 758 | | | 825 | |
| Amount allocated to construction | | (496) | | | (759) | | | (14) | | | (27) | | | (1,965) | | | (2,228) | | | (57) | | | (70) | |
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| Net periodic benefit cost (credit) charged to expense | | (3,832) | | | 3,987 | | | 275 | | | 329 | | | 3,615 | | | 11,434 | | | 701 | | | 755 | |
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| Amortization of regulatory balancing account | | 675 | | | 675 | | | — | | | — | | | 4,757 | | | 4,757 | | | — | | | — | |
| Net amount charged to expense | | $ | (3,157) | | | $ | 4,662 | | | $ | 275 | | | $ | 329 | | | $ | 8,372 | | | $ | 16,191 | | | $ | 701 | | | $ | 755 | |
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| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | Pension Benefits | | Other Postretirement Benefits | | Pension Benefits | | Other Postretirement Benefits |
| In thousands | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Service cost | | $ | 1,757 |
| | $ | 1,881 |
| | $ | 80 |
| | $ | 98 |
| | $ | 5,371 |
| | $ | 5,621 |
| | $ | 239 |
| | $ | 295 |
|
| Interest cost | | 4,336 |
| | 4,484 |
| | 241 |
| | 274 |
| | 12,702 |
| | 13,428 |
| | 723 |
| | 822 |
|
| Expected return on plan assets | | (5,143 | ) | | (5,112 | ) | | — |
| | — |
| | (15,444 | ) | | (15,337 | ) | | — |
| | — |
|
| Amortization of prior service costs | | 11 |
| | 32 |
| | (117 | ) | | (117 | ) | | 32 |
| | 95 |
| | (351 | ) | | (351 | ) |
| Amortization of net actuarial loss | | 5,650 |
| | 3,656 |
| | 110 |
| | 138 |
| | 14,697 |
| | 10,899 |
| | 332 |
| | 415 |
|
| Net periodic benefit cost | | 6,611 |
| | 4,941 |
| | 314 |
| | 393 |
| | 17,358 |
| | 14,706 |
| | 943 |
| | 1,181 |
|
| Amount allocated to construction | | (659 | ) | | (1,581 | ) | | (27 | ) | | (136 | ) | | (2,026 | ) | | (4,660 | ) | | (82 | ) | | (403 | ) |
Amount deferred to regulatory balancing account(1) | | (3,878 | ) | | (1,484 | ) | | — |
| | — |
| | (9,381 | ) | | (4,519 | ) | | — |
| | ��� |
|
| Net amount charged to expense | | $ | 2,074 |
| | $ | 1,876 |
| | $ | 287 |
| | $ | 257 |
| | $ | 5,951 |
| | $ | 5,527 |
| | $ | 861 |
| | $ | 778 |
|
| |
(1)
| The deferral of defined benefit pension plan expenses above or below the amount set in rates was approved by the OPUC, with recovery of these deferred amounts through the implementation of a balancing account. On October 26, 2018 the OPUC ordered that the balancing account be frozen as of October 31, 2018, with recovery subject to future proceedings. Effective November 1, 2018 the OPUC authorized an additional $8.1 million to be included in rates for defined benefit pension plan expenses. Deferred pension expense balances include accrued interest at the utility’s authorized rate of return, with the equity portion of the interest recognized when amounts are collected in rates. See Note 2 in the 2017 Form 10-K. |
Net periodic benefit costs are reduced by amounts capitalized to NGD plant. In addition, net periodic benefit costs were recorded to a regulatory balancing account as approved by the OPUC and amortized accordingly.
The following table presents amounts recognized in accumulated other comprehensive loss (AOCL) and the changes in AOCL related to non-qualified employee benefit plans:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 |
| Beginning balance | | $ | (11,010) | | | $ | (12,460) | | | $ | (11,404) | | | $ | (12,902) | |
| | | | | | | | |
| Amounts reclassified from AOCL: | | | | | | | | |
| Amortization of actuarial losses | | 275 | | | 314 | | | 811 | | | 916 | |
| | | | | | | | |
| Total reclassifications before tax | | 275 | | | 314 | | | 811 | | | 916 | |
| Tax benefit | | (73) | | | (80) | | | (215) | | | (240) | |
| Total reclassifications for the period | | 202 | | | 234 | | | 596 | | | 676 | |
| Ending balance | | $ | (10,808) | | | $ | (12,226) | | | $ | (10,808) | | | $ | (12,226) | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands | | 2018 | | 2017 | | 2018 | | 2017 |
| Beginning balance | | $ | (8,131 | ) | | $ | (6,678 | ) | | $ | (8,438 | ) | | $ | (6,951 | ) |
| Amounts reclassified from AOCL: | | | | | | | | |
| Amortization of actuarial losses | | 209 |
| | 248 |
| | 627 |
| | 698 |
|
| Total reclassifications before tax | | 209 |
| | 248 |
| | 627 |
| | 698 |
|
| Tax (benefit) expense | | (55 | ) | | (98 | ) | | (166 | ) | | (275 | ) |
| Total reclassifications for the period | | 154 |
| | 150 |
| | 461 |
| | 423 |
|
| Ending balance | | $ | (7,977 | ) | | $ | (6,528 | ) | | $ | (7,977 | ) | | $ | (6,528 | ) |
Employer Contributions to Company-Sponsored Defined Benefit Pension Plans
ForNW Natural made no cash contributions to its qualified defined benefit pension plans during the nine months ended September 30, 2018,2022 compared to $9.6 million for the same period in 2021. NW Natural made cash contributions totaling $11.7 milliondoes not expect to qualified defined benefit pension plans. NW Natural expects furthermake any plan contributions of $3.9 million during the remainder of 2018.2022 as a result of adopting the American Rescue Plan Act.
Defined Contribution Plan
TheNW Natural's Retirement K Savings Plan is a qualified defined contribution plan under Internal Revenue Code Sections 401(a) and 401(k). EmployerNW Natural contributions totaled $5.0$7.4 million and $4.1$6.7 million for the nine months ended September 30, 20182022 and 2017,2021, respectively.
See Note 810 in the 20172021 Form 10-K for more information concerning these retirement and other postretirement benefit plans.
11. INCOME TAX
An estimate of annual income tax expense is made each interim period using estimates for annual pre-tax income, regulatory flow-through adjustments, tax credits, and other items. The estimated annual effective tax rate is applied to year-to-date, pre-tax income to determine income tax expense for the interim period consistent with the annual estimate. Discrete events are recorded in the interim period in which they occur or become known.
The effective income tax rate varied from the combined federal and state statutory tax ratesrate due to the following: |
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| Dollars in thousands | | 2018 | | 2017 | | 2018 |
| 2017 |
| Income taxes at statutory rates (federal and state) | | $ | (4,136 | ) | | $ | (5,440 | ) | | $ | 11,097 |
| | $ | 24,472 |
|
| Increase (decrease): | | | | | | | | |
|
| Differences required to be flowed-through by regulatory commissions | | (266 | ) | | (302 | ) | | 569 |
| | 1,282 |
|
| Other, net | | 117 |
| | 20 |
| | (475 | ) | | (1,298 | ) |
| Total provision (benefit) for income taxes on continuing operations | | $ | (4,285 | ) | | $ | (5,722 | ) | | $ | 11,191 |
| | $ | 24,456 |
|
| Effective tax rate for continuing operations | | 27.8 | % | | 42.0 | % | | 26.8 | % | | 39.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | NW Holdings | | NW Natural |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 |
| Income tax at statutory rate (federal) | | $ | (5,533) | | | $ | (5,834) | | | $ | (5,305) | | | $ | (5,928) | |
| State income tax | | (2,376) | | | (2,599) | | | (2,306) | | | (2,618) | |
| Increase (decrease): | | | | | | | | |
| Differences required to be flowed-through by regulatory commissions | | 1,232 | | | 1,318 | | | 1,232 | | | 1,318 | |
| Other, net | | (81) | | | (12) | | | (76) | | | 16 | |
| Total provision for income taxes | | $ | (6,758) | | | $ | (7,127) | | | $ | (6,455) | | | $ | (7,212) | |
| Effective income tax rate | | 25.7 | % | | 25.7 | % | | 25.6 | % | | 25.5 | % |
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| | | | | | | | |
| | Nine Months Ended September 30, |
| | NW Holdings | | NW Natural |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 |
| Income tax at statutory rate (federal) | | $ | 10,710 | | | $ | 10,764 | | | $ | 11,554 | | | $ | 11,195 | |
| State income tax | | 4,298 | | | 4,660 | | | 4,497 | | | 4,748 | |
| Increase (decrease): | | | | | | | | |
| Differences required to be flowed-through by regulatory commissions | | (2,003) | | | (2,266) | | | (2,003) | | | (2,266) | |
| Other, net | | (370) | | | (41) | | | (370) | | | (49) | |
| Total provision for income taxes | | $ | 12,635 | | | $ | 13,117 | | | $ | 13,678 | | | $ | 13,628 | |
| Effective income tax rate | | 24.8 | % | | 25.6 | % | | 24.9 | % | | 25.6 | % |
The NW Holdings and NW Natural effective income tax raterates for the three and nine months ended September 30, 20182022 compared to the same periodsperiod in 2017 decreased2021 changed primarily as a result of the TCJA and lowerchanges in pre-tax income. See "U.S. Federal TCJA Matters" below and Note 911 in the 20172021 Form 10-K for more detail on income taxes and effective tax rates.
The IRS Compliance Assurance Process (CAP) examination of the 20162020 tax year was completed during the first quarter of 2018.2022. There were no material changes to the return as filed. The 20172021 and 2022 tax year isyears are subject to examination under CAP and the 2018 tax year CAP application has been accepted by the IRS.
U.S. Federal TCJA Matters
On December 22, 2017, the TCJA was enacted and permanently lowered the U.S. federal corporate income tax rate to 21% from the previous maximum rate of 35%, effective for the tax year beginning January 1, 2018. The TCJA includes specific provisions related to regulated public utilities that provide for the continued deductibility of interest expense and the elimination of bonus depreciation on a prospective basis.
Under pre-TCJA law, business interest expense was generally deductible in the determination of taxable income. The TCJA imposes a new limitation on the deductibility of net business interest expense in excess of approximately 30% of adjusted taxable income beginning January 1, 2018. Taxpayers operating in the trade or business of public regulated utilities are excluded from these new interest expense limitations. There is ongoing uncertainty with regards to the application of the new interest expense limitation to non-regulated operations, primarily with respect to the allocation of interest between regulated and non-regulated trades or businesses. See Note 9 in the 2017 Form 10-K.
The TCJA generally provides for immediate full expensing for qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. This would generally provide for accelerated cost recovery for capital investments. However, the definition of qualified property excludes property used in the trade or business of a public regulated utility. The definition of utility trade or business is the same as that used by the TCJA with respect to the imposition of the net interest expense limitation discussed above. As a result, ongoing uncertainty exists with respect to the application of full expensing to non-regulated activities. See Note 9 in the 2017 Form 10-K.
NW Natural had an estimated regulatory liability of $216.6 million and $213.3 million for the change in regulated utility deferred taxes as a result of the TCJA as of September 30, 2018 and December 31, 2017, respectively. These balances included a gross-up for income taxes of $57.4 million and $56.5 million, respectively. It is possible that this estimated balance may increase or decrease in the future as additional authoritative interpretation of the TCJA becomes available, or as a result of regulatory guidance from the OPUC or WUTC. NW Natural anticipates 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 utility rate base which is a component of customer rates. It is not yet certain when the final resolution of these regulatory proceedings will occur, and as result, this regulatory liability is classified as long-term.
As noted in the 2017 Form 10-K, Note 9, the determination to exclude all assets placed in service after September 27, 2017 from bonus depreciation was provisional as provided for under Staff Accounting Bulletin (SAB) 118. During the third quarter, the Internal Revenue Service and Treasury issued Proposed Regulations addressing additional first year tax depreciation under the TCJA. These Proposed Regulations, while not definitive, indicate the IRS' initial interpretation that additional first year bonus depreciation was available for regulated utility assets placed in service after September 27, 2017 but before January 1, 2018. On the basis of these proposed regulations, NW Natural revised the provisional estimate of deferred taxes and income taxes payable. NW Natural recognized increases to prepaid income tax of $7.3 million, deferred income tax liability of $4.0 million, and regulatory liability of $3.3 million during the third quarter of 2018.
Utility rates in effect include an allowance to provide for the recovery of the anticipated provision for income taxes incurred as a result of providing regulated services. As a result of the newly enacted 21% federal corporate income tax rate, NW Natural recorded an additional regulatory liability in 2018 reflecting the estimated net reduction in the provision for income taxes. This revenue deferral is based on the estimated net benefit to customers using forecasted regulated utility earnings, considering
CAP.
average weather and associated volumes, and includes a gross-up for income taxes. As of September 30, 2018, a regulatory liability of $7.2 million, including accrued interest, was recorded to reflect this estimated revenue deferral.
10.12. PROPERTY, PLANT, AND EQUIPMENT
The following table sets forth the major classifications of property, plant, and equipment and accumulated depreciation of continuing operations:depreciation:
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 |
| NW Natural: | | | | | | |
| NGD plant in service | | $ | 3,888,092 | | | $ | 3,663,699 | | | $ | 3,721,939 | |
| NGD construction work in progress | | 161,658 | | | 120,412 | | | 135,398 | |
| Less: Accumulated depreciation | | 1,135,965 | | | 1,086,510 | | | 1,098,715 | |
| NGD plant, net | | 2,913,785 | | | 2,697,601 | | | 2,758,622 | |
| Other plant in service | | 69,626 | | | 66,314 | | | 69,332 | |
| Other construction work in progress | | 5,112 | | | 7,228 | | | 4,971 | |
| Less: Accumulated depreciation | | 21,435 | | | 20,392 | | | 20,646 | |
| Other plant, net | | 53,303 | | | 53,150 | | | 53,657 | |
| Total property, plant, and equipment, net | | $ | 2,967,088 | | | $ | 2,750,751 | | | $ | 2,812,279 | |
| | | | | | |
| Other (NW Holdings): | | | | | | |
| Other plant in service | | $ | 66,208 | | | $ | 53,175 | | | $ | 57,184 | |
| Other construction work in progress | | 16,632 | | | 8,268 | | | 8,419 | |
| Less: Accumulated depreciation | | 8,750 | | | 5,832 | | | 6,512 | |
| Other plant, net | | $ | 74,090 | | | $ | 55,611 | | | $ | 59,091 | |
| | | | | | |
| NW Holdings: | | | | | | |
| Total property, plant, and equipment, net | | $ | 3,041,178 | | | $ | 2,806,362 | | | $ | 2,871,370 | |
| | | | | | |
| NW Natural: | | | | | | |
| Capital expenditures in accrued liabilities | | $ | 43,954 | | | $ | 33,968 | | | $ | 37,537 | |
| | | | | | |
| NW Holdings: | | | | | | |
| Capital expenditures in accrued liabilities | | $ | 45,374 | | | $ | 35,955 | | | $ | 38,333 | |
|
| | | | | | | | | | | | |
| | | September 30, | | December 31, |
| In thousands | | 2018 | | 2017 | | 2017 |
| Utility plant in service | | $ | 3,068,234 |
| | $ | 2,934,424 |
| | $ | 2,975,217 |
|
| Utility construction work in progress | | 227,200 |
| | 145,148 |
| | 159,924 |
|
| Less: Accumulated depreciation | | 978,446 |
| | 937,498 |
| | 942,879 |
|
| Utility plant, net | | 2,316,988 |
| | 2,142,074 |
| | 2,192,262 |
|
| Other plant in service | | 69,449 |
| | 64,929 |
| | 65,372 |
|
| Other construction work in progress | | 5,505 |
| | 4,044 |
| | 4,122 |
|
| Less: Accumulated depreciation | | 18,548 |
| | 17,284 |
| | 17,598 |
|
Other plant, net (1) | | 56,406 |
| | 51,689 |
| | 51,896 |
|
| Total property, plant, and equipment | | $ | 2,373,394 |
| | $ | 2,193,763 |
| | $ | 2,244,158 |
|
| | | | | | | |
Capital expenditures in accrued liabilities (2) | | $ | 27,692 |
| | $ | 41,675 |
| | $ | 34,761 |
|
| |
(1)
| Previously reported non-utility balances were restated due to the assets and liabilities associated with Gill Ranch now being classified as discontinued operations assets and liabilities on the consolidated balance sheets. See Note 16 for further discussion. |
| |
(2)
| Previously reported capital expenditures in accrued liabilities were restated due to the assets and liabilities associated with Gill Ranch now being classified as discontinued operations assets and liabilities on the consolidated balance sheets. Capital expenditures in accrued liabilities related to Gill Ranch were approximately $0.3 million, $0.1 million, and $0.2 million as of September 30, 2018, September 30, 2017, and December 31, 2017, respectively. |
Other plant balances include non-utility gas storage assets at the Mist facility and other long-lived assets not related to NGD.
NW Holdings
Other plant balances include long-lived assets associated with water and wastewater operations and non-regulated activities.
Build-to-suit Assets
In October 2017,activities not held by NW Natural entered into a 20-year operating lease agreement commencing in 2020 for the new headquarters location in Portland, Oregon. NW Natural's existing headquarters lease expires in 2020. The search and evaluation process focused on seismic preparedness, safety, reliability, least cost to customers, and a continued commitment to employees and the communities we serve. The lease was analyzed in consideration of build-to-suit lease accounting guidance, and we concluded that NW Natural is the accounting owner of the asset during construction. As a result, NW Natural recognized $16.0 million and $0.5 million in property, plant and equipment and an obligation in other non-current liabilities for the same amount in the consolidated balance sheet at September 30, 2018 and December 31, 2017, respectively. In 2019, pursuant to the new lease standard issued by the FASB, NW Natural expects to de-recognize the associated build-to-suit asset and liability. See Note 14 in the 2017 Form 10-K.or its subsidiaries.
11. GAS RESERVES
NW Natural has invested approximately $188 million through the gas reserves program in the Jonah Field located in Wyoming as of September 30, 2018. Gas reserves are stated at cost, net of regulatory amortization, with the associated deferred tax benefits recorded as liabilities in the consolidated balance sheets. The investment in gas reserves provides long-term price protection for utility customers through the original agreement with Encana Oil & Gas (USA) Inc. under which NW Natural invested approximately $178 million and the amended agreement with Jonah Energy LLC under which an approximate additional $10 million was invested.
The cost of gas, including a carrying cost for the rate base investment, is included in the annual Oregon PGA filing, which allows NW Natural to recover these costs through customer rates. The investment under the original agreement, less accumulated amortization and deferred taxes, earns a rate of return.
Gas produced from the additional wells is included in the Oregon PGA at a fixed rate of $0.4725 per therm, which approximates the 10-year hedge rate plus financing costs at the inception of the investment.
13. INVESTMENTS
The following table outlines net gas reserves investment: |
| | | | | | | | | | | | |
| | | September 30, | | December 31, |
| In thousands | | 2018 | | 2017 | | 2017 |
| Gas reserves, current | | $ | 16,916 |
| | $ | 16,218 |
| | $ | 15,704 |
|
| Gas reserves, non-current | | 170,391 |
| | 171,318 |
| | 171,832 |
|
| Less: Accumulated amortization | | 99,835 |
| | 83,442 |
| | 87,779 |
|
Total gas reserves(1) | | 87,472 |
| | 104,094 |
| | 99,757 |
|
| Less: Deferred taxes on gas reserves | | 19,377 |
| | 29,298 |
| | 22,712 |
|
| Net investment in gas reserves | | $ | 68,095 |
| | $ | 74,796 |
| | $ | 77,045 |
|
| | |
(1)
| The net investment in additional wells included in total gas reserves was $5.0 million, $6.0 million and $5.8 million at September 30, 2018 and 2017 and December 31, 2017, respectively. |
The investment is included in the consolidated balance sheets underInvestments include gas reserves, with a maximum loss exposure limited to the investment balance.
12. INVESTMENTS
Investmentsfinancial investments in Gas Pipeline
Trail West Pipeline, LLC (TWP), a wholly-owned subsidiary of TWH, is pursuing the development of a new gas transmission pipeline that would provide an interconnection with NW Natural's utility distribution system. NWN Energy, then a wholly-owned subsidiary of NW Natural, owns 50% of TWH,life insurance policies, and 50% is owned by TransCanada American Investments Ltd., an indirect wholly-owned subsidiary of TransCanada Corporation.
Variable Interest Entity (VIE) Analysis
TWH is a VIE, with NW Natural's investment in TWP reported under equity method accounting. We have determined that NW Natural is not the primary beneficiary of TWH’s activities as it only has a 50% share of the entity, and there are no stipulations that allow a disproportionate influence over it. Investmentsinvestments. The following table summarizes other investments:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| NW Holdings | | NW Natural |
| September 30, | | December 31, | | September 30, | | December 31, |
| In thousands | 2022 | | 2021 | | 2021 | | 2022 | | 2021 | | 2021 |
| Investments in life insurance policies | $ | 49,043 | | | $ | 47,970 | | | $ | 48,178 | | | $ | 49,043 | | | $ | 47,970 | | | $ | 48,178 | |
| Investments in gas reserves, non-current | 23,770 | | | 28,021 | | | 26,608 | | | 23,770 | | | 28,021 | | | 26,608 | |
| Investment in unconsolidated affiliates | 23,756 | | | 36 | | | 14,492 | | | 8,058 | | | — | | | — | |
| Total other investments | $ | 96,569 | | | $ | 76,027 | | | $ | 89,278 | | | $ | 80,871 | | | $ | 75,991 | | | $ | 74,786 | |
Investment in TWH and TWP are included in other investments in the balance sheet. If we do not develop this investment, the maximum loss exposure related to TWH is limited to the equity investment balance, less its share of any cash or other assets available as a 50% owner. The investment balance in TWH was $13.4 million at September 30, 2018 and 2017 and December 31, 2017. See Note 12 in the 2017 Form 10-K.
Other InvestmentsLife Insurance Policies
Other investments include financial investments in life insurance policies, which are accounted for at cash surrender value, net of policy loans. See Note 1213 in the 20172021 Form 10-K.
13.NW Natural has invested $188 million through the gas reserves program in the Jonah Field located in Wyoming as of September 30, 2022. Gas reserves are stated at cost, net of regulatory amortization, with the associated deferred tax benefits of $5.5 million, $7.8 million, and $6.9 million, which are recorded as liabilities in the September 30, 2022, September 30, 2021, and December 31, 2021 consolidated balance sheets, respectively. NW Natural's investment is included in NW Holdings' and NW Natural's consolidated balance sheets under other current assets and other investments (non-current portion) with the maximum loss exposure limited to the investment balance. The amount of gas reserves included in other current assets was $3.7 million, $6.3 million, and $5.4 million as of September 30, 2022, September 30, 2021, and December 31, 2021, respectively. See Note 13 in the 2021 Form 10-K.
Investments in Unconsolidated Affiliates
In December 2021, NW Natural Water purchased a 37.3% ownership stake in Avion Water Company, Inc. (Avion Water), an investor-owned water utility for $14.5 million. In July 2022, NW Natural Water increased its ownership stake in Avion Water to 40.3% for an additional $1.0 million. Avion Water operates in Bend, Oregon and the surrounding communities, serving approximately 15,000 customer connections and employing 35 people. The carrying value of the equity method investment is $10.6 million higher than the underlying equity in the net assets of the investee at September 30, 2022 due to equity method goodwill. NW Natural Water's share in the earnings (loss) of Avion Water is included in other income (expense), net.
In 2020, NW Natural began a partnership with BioCarbN to invest in up to four separate RNG development projects that will access biogas derived from water treatment at Tyson Foods’ processing plants, subject to approval by all parties. During the construction phase of the projects, NW Natural determined it is the primary beneficiary and fully consolidates each entity.
In 2022, commissioning of the first project, Lexington Renewable Energy LLC (Lexington), was completed and NW Natural determined it was no longer the primary beneficiary and deconsolidated the variable interest entity and recorded the investment in Lexington as an equity method investment. NW Natural accounts for its interest in Lexington using the equity method of accounting because NW Natural does not control but has the ability to exercise significant influence over Lexington's operations after commissioning. There was no gain or loss recognized upon deconsolidation. NW Natural determined the fair value of the investment approximated the carrying value which was primarily comprised of cash and property, plant and equipment. As of September 30, 2022, NW Natural had an investment balance in Lexington of $8.1 million. NW Natural's share in the earnings (loss) of Lexington is included in cost of gas.
14. BUSINESS COMBINATIONS
On2022 Business Combinations
During the nine months ended September 13, 2018, NWN Water, then a wholly-owned subsidiary of NW Natural, completed the acquisition of Falls Water Co., Inc., a privately-owned water utility in the Pacific Northwest for preliminary non-cash consideration of $8.5 million, subject to closing adjustments, in the form of 125,000 shares of NW Natural common stock. Falls Water became a wholly-owned subsidiary of30, 2022, NWN Water and marked its first acquisition insubsidiaries completed three acquisitions qualifying as business combinations. The aggregate fair value of the regulated water utility sector. This acquisition alignspreliminary consideration transferred for these acquisitions was $4.2 million, most of which was preliminarily allocated to property, plant and equipment and goodwill. These transactions align with ourNW Holdings' water sector strategy as the acquisition providesit continues to expand its water and wastewater service territories and included:
•Belle Oaks Water and Sewer Co., Inc was acquired by NWN Water entry into Idaho, expands service area, and opens further opportunity for growth. Fallsof Texas in May 2022
•Northwest Water is based in Idaho Falls, Idaho and serves approximately 5,300 connections.
Through the purchase of all of the outstanding shares of Falls Water,Services, LLC was acquired by NWN Water of Washington in August 2022
•Aquarius Utilities, LLC was acquired the net assets and 100% controlby NWN Water of Falls Water. We determined that the Falls Water acquisitionWashington in August 2022
As each of these acquisitions met the criteria of a business combination, and as such performed a preliminary allocation of the consideration to the acquired net assets and assumed liabilities based on their estimated fair value as of the acquisition date the majoritywas performed. The allocation for each of which was allocated to goodwill. The allocationthese
business combinations is considered preliminary as of September 30, 2022. In accordance with U.S. GAAP, the fair value determination involves management judgment in determining the significant estimates and assumptions used and was made using existing regulatory conditions for net assets associated with Belle Oaks Water and Sewer Co., Northwest Water Services, LLC, and Aquarius Utilities, LLC. These allocations are considered preliminary as of September 30, 2022, as facts and circumstances that existed as of the acquisition date may be discovered as we continue to evaluate working capitalintegrate the acquired businesses. As a result, subsequent adjustments certainto the preliminary valuation of tangible assets, contract assets and liabilities, tax positions, and goodwill. We dogoodwill may be required. Subsequent adjustments are not expect any subsequent adjustmentsexpected to be significant, and expect any such adjustments are expected to be completed within the one-year measurement period.period for all acquisitions described above.
2021 Business Combinations
During 2021, NWN Water and its subsidiaries completed four acquisitions qualifying as business combinations. The acquisition costsaggregate fair value of the preliminary consideration transferred for these acquisitions were insignificantnot material and were expensed as incurred. Theare not significant to NW Holdings' results of Falls Water are not material to the consolidated financial results.operations.
Preliminary goodwill of $6.6 million was recognized from this acquisition and is attributable to Falls Water's regulated service territory and experienced workforce as well as the strategic benefits expected from this high-growth service territory. Goodwill
NW Natural has included this goodwill in other for segment reporting purposes, and it is not deductible for income tax purposes. No intangible assets aside from goodwill were acquired.
We allocateHoldings allocates goodwill to reporting units based on the expected benefit from the business combination. We perform an annual impairment assessment of goodwill at the reporting unit level, or more frequently if events and circumstances indicate that goodwill might be impaired. An impairment loss is recognized if the carrying value of a reporting unit’s goodwill exceeds its fair value.
An impairment analysis has not been performedall acquisitions completed, total goodwill was $74.7 million, $69.8 million, and $70.6 million as of September 30, 2022, September 30, 2021, and December 31, 2021, respectively. All of our goodwill is related to water and wastewater acquisitions and is included in the current year, since all goodwill was acquired in the Falls Water acquisition, which closed in the third quarter of 2018. We anticipate that another category for segment reporting purposes. The annual impairment assessment of goodwill will occuroccurs in the fourth quarter of each year, beginning in the fourth quarter of 2018.year. There have been no impairments recognized to date.
14.15. DERIVATIVE INSTRUMENTS
NW Natural enters into financial derivative contracts to hedge a portion of the utility’sNGD segment's natural gas sales requirements. These contracts include swaps, options, and combinations of option contracts. These derivative financial instruments are primarily used to manage commodity price variability. A small portion of theNW Natural's derivative hedging strategy involves foreign currency exchangeforward contracts.
NW Natural enters into these financial derivatives, up to prescribed limits, primarily to hedge price variability related to term physical gas supply contracts as well as to hedge spot purchases of natural gas. The foreign currency forward contracts are used to hedge the fluctuation in foreign currency exchange rates for pipeline demand charges paid in Canadian dollars.
In the normal course of business, NW Natural also enters into indexed-price physical forward natural gas commodity purchase contracts and options to meet the requirements of utilityNGD customers. These contracts qualify for regulatory deferral accounting treatment.
NW Natural also enters into exchange contracts related to the third-party asset management of its gas portfolio, some of which are derivatives that do not qualify for hedge accounting or only partial regulatory deferral, but are subject to NW Natural's regulatory sharing agreement. These derivatives are recognized in operating revenues, net of amounts shared with utilityNGD customers.
Notional Amounts
The following table presents the absolute notional amounts related to open positions on NW Natural derivative instruments:
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 |
| Natural gas (in therms): | | | | | | |
| Financial | | 1,006,665 | | | 749,595 | | | 618,815 | |
| Physical | | 672,350 | | | 613,524 | | | 431,628 | |
| Foreign exchange | | $ | 9,905 | | | $ | 6,299 | | | $ | 6,268 | |
|
| | | | | | | | | | | | |
| | | September 30, | | December 31, |
| In thousands | | 2018 | | 2017 | | 2017 |
| Natural gas (in therms): | | | | | | |
| Financial | | 513,850 |
| | 521,080 |
| | 429,100 |
|
| Physical | | 760,925 |
| | 750,650 |
| | 520,268 |
|
| Foreign exchange | | $ | 7,184 |
| | $ | 6,933 |
| | $ | 7,669 |
|
Purchased Gas Adjustment (PGA)
DerivativesUnder the PGA mechanism in Oregon, derivatives entered into by the utilityNW Natural for the procurement or hedging of natural gas for future gas years generally receive regulatory deferral accounting treatment. In general, commodity hedging for the current gas year is completed prior to the start of the gas year, and hedge prices are reflected in the weighted-average cost of gas in the PGA filing. Hedge contracts entered into prior to the PGA filing were included in the PGA for the 2022-23 gas year. Hedge contracts entered into after the start of the PGA period are subject to the PGA incentive sharing mechanism in Oregon. Under the PGA mechanism in Washington, NW Natural entered the 2017-18incorporates risk-responsive hedging strategies and 2016-17receives regulatory deferral accounting treatment for its Washington gas year withsupplies.
As of September 30, 2022, NW Natural's forecasted sales volumesvolume was hedged at 49% and 48%approximately 80% in total for the 2022-23 gas year. The total hedged for Oregon was also approximately 80%, including 63% in financial swaphedges and option contracts, and 26% and 27%17% in physical gas supplies, respectively. Hedge contracts entered into prior to the PGA filing,supplies. The total hedged for Washington was approximately 79%, including 66% in September 2017, were includedfinancial hedges and 13% in the PGA for the 2017-18physical gas year. Hedge contracts entered into after the PGA filing, and related to subsequent gas years, may be included in future PGA filings and qualify for regulatory deferral.supplies.
Unrealized and Realized Gain/Loss
The following table reflects the income statement presentation for the unrealized gains and losses from derivative instruments:
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| | | 2018 | | 2017 |
| In thousands | | Natural gas commodity | | Foreign exchange | | Natural gas commodity | | Foreign exchange |
| Benefit (expense) to cost of gas | | $ | 4,473 |
| | $ | 210 |
| | $ | (2,566 | ) | | $ | 51 |
|
| Operating revenues | | (286 | ) | | — |
| | 28 |
| | — |
|
Amounts deferred to regulatory accounts on balance sheet | | (4,285 | ) | | (210 | ) | | 2,548 |
| | (51 | ) |
| Total gain (loss) in pre-tax earnings | | $ | (98 | ) | | $ | — |
| | $ | 10 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, |
| | | 2018 | | 2017 |
| In thousands | | Natural gas commodity | | Foreign exchange | | Natural gas commodity | | Foreign exchange |
| Benefit (expense) to cost of gas | | $ | 1,384 |
| | $ | — |
| | $ | (19,081 | ) | | $ | 275 |
|
| Operating revenues | | (122 | ) | | — |
| | (1,249 | ) | | — |
|
Amounts deferred to regulatory accounts on balance sheet | | (1,305 | ) | | — |
| | 19,895 |
| | (275 | ) |
| Total gain (loss) in pre-tax earnings | | $ | (43 | ) | | $ | — |
| | $ | (435 | ) | | $ | — |
|
UNREALIZED GAIN/LOSS.NW Natural's outstandingderivative instruments, which also represents all derivative instruments at NW Holdings:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
| In thousands | | Natural gas commodity | | Foreign exchange | | Natural gas commodity | | Foreign exchange |
| Benefit (expense) to cost of gas | | $ | (11,626) | | | $ | (455) | | | $ | 69,239 | | | $ | (106) | |
| Operating revenues (expense) | | — | | | — | | | — | | | — | |
| Amounts deferred to regulatory accounts on balance sheet | | 11,626 | | | 455 | | | (69,239) | | | 106 | |
| Total gain (loss) in pre-tax earnings | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
| In thousands | | Natural gas commodity | | Foreign exchange | | Natural gas commodity | | Foreign exchange |
| Benefit (expense) to cost of gas | | $ | 32,827 | | | $ | (528) | | | $ | 106,044 | | | $ | (74) | |
| Operating revenues (expense) | | — | | | — | | | (26) | | | — | |
| Amounts deferred to regulatory accounts on balance sheet | | (32,827) | | | 528 | | | (106,022) | | | 74 | |
| Total gain (loss) in pre-tax earnings | | $ | — | | | $ | — | | | $ | (4) | | | $ | — | |
Unrealized Gain/Loss
Outstanding derivative instruments related to regulated utilityNGD operations are deferred in accordance with regulatory accounting standards. The cost of foreign currency forward and natural gas derivative contracts are recognized immediately in the cost of gas; however, costs above or below the amount embedded in the current year PGA are subject to a regulatory deferral tariff and therefore, are recorded as a regulatory asset or liability.
REALIZED GAIN/LOSS. Realized Gain/Loss
NW Natural realized net lossesnet gains of $1.9$16.9 million and $15.6$74.0 million for the three and nine months ended September 30, 2018,2022, respectively, from the settlement of natural gas financial derivative contracts. Whereas,contracts, whereas, net gains of $1.0$6.1 million and $15.4 million were realized for the three and nine months ended September 30, 2017.2021, respectively. Realized gains and losses are recorded inoffset the higher or lower cost of gas deferred through regulatory accounts, and amortized through customer ratespurchased, resulting in the following year.no incremental amounts to collect or refund to customers.
Credit Risk Management of Financial Derivatives Instruments
No collateral was posted with or by NW Natural counterparties as of September 30, 20182022 or 2017.2021. NW Natural attempts to minimize the potential exposure to collateral calls by diversifying counterparties and using credit limits to manage liquidity risk. Counterparties generally allow a certain credit limit threshold before requiring usNW Natural to post collateral against unrealized loss positions. Given NW Natural's credit ratings, counterparty credit limits and portfolio diversification, it was not subject to collateral calls in 20182022 or 2017.2021. The collateral call exposure is set forth under credit support agreements, which generally contain credit limits. NW Natural could also be subject to collateral call exposure where it has agreed to provide adequate assurance, which is not specific as to the amount of credit limit allowed, but could potentially require additional collateral posting by NW Natural in the event of a material adverse change.
Based upon current commodity financial swap and option contracts outstanding, which reflect unrealized losses of $9.7 million at September 30, 2018, we have estimated the level of collateral demands, with and without potential adequate assurance calls, using current gas prices and various credit downgrade rating scenarios for NW Natural as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | Credit Rating Downgrade Scenarios |
| In thousands | | (Current Ratings) A+/A3 | | BBB+/Baa1 | | BBB/Baa2 | | BBB-/Baa3 | | Speculative |
| With Adequate Assurance Calls | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (2,587 | ) | | $ | (7,023 | ) |
| Without Adequate Assurance Calls | | — |
| | — |
| | — |
| | (2,587 | ) | | (4,730 | ) |
NW Natural's financial derivative instruments are subject to master netting arrangements; however, they are presented on a gross basis in the consolidated balance sheets. NW Natural and its counterparties have the ability to set-off obligations to each other under specified circumstances. Such circumstances may include a defaulting party, a credit change due to a merger affecting either party, or any other termination event.
NW Natural's current commodity financial swap and option contracts outstanding reflect unrealized gains of $35.1 million and $132.2 million at September 30, 2022 and 2021. If netted by counterparty, NW Natural's physical and financial derivative position would result in an asset of $1.9$40.8 million and a liability of $10.1$8.5 million as of September 30, 2022, an asset of $124.5 million and a liability of $4.9 million as of September 30, 2018,2021, and an asset of $3.3$51.8 million and a liability of $12.6 million as of September 30, 2017, and an asset of $2.9 million and a liability of $23.3$3.8 million as of December 31, 2017.2021.
NW Natural is exposed to derivative credit and liquidity risk primarily through securing fixed price natural gas commodity swaps with financial counterparties. NW Natural utilizes master netting arrangements through International Swaps and Derivatives Association contracts to hedge theminimize this risk along with collateral support agreements with counterparties based on their credit ratings. Additionally, NW Natural uses counterparty, industry sector and country diversification to minimize credit risk. In certain cases, NW Natural may require counterparties to post collateral, guarantees, or letters of price increases for natural gas purchases made on behalf of customers.credit to maintain its minimum credit requirement standards. See Note 1315 in the 20172021 Form 10-K for additional information.
Fair Value
In accordance with fair value accounting, NW Natural includes non-performance risk in calculating fair value adjustments. This includes a credit risk adjustment based on the credit spreads of NW Natural counterparties when in an unrealized gain position, or on NW Natural's own credit spread when it is in an unrealized loss position. The inputs in our valuation models include natural gas futures, volatility, credit default swap spreads and interest rates. Additionally, the assessment of non-performance risk is generally derived from the credit default swap market and from bond market credit spreads. The impact of the credit risk adjustments for all financial derivatives outstanding derivatives was immaterial to the fair value calculation at September 30, 2018. Using significant other observable or Level 2 inputs, the2022. The net fair value was a liabilityan asset of $8.1$32.3 million, $9.3 an asset of $119.6 million, and $20.3an asset of $48.0 million as of September 30, 20182022 and 2017,2021, and December 31, 2017,2021, respectively. No Level 3 inputs were used in our derivative valuations and there
were no transfers between Level 1 or Level 2 during the nine months ended September 30, 20182022 and 2017.2021. See Note 2 in the 20172021 Form 10-K.
15.16. ENVIRONMENTAL MATTERS
NW Natural owns, or previously owned, properties that may require environmental remediation or action. NW Natural estimates theThe range of loss for environmental liabilities is estimated based on current remediation technology, enacted laws and regulations, industry experience gained at similar sites, and an assessment of the probable level of involvement and financial condition of other potentially responsible parties (PRPs). When amounts are prudently expended related to site remediation of those sites described herein, NW Natural has a recovery mechanismmechanisms in place to collect 96.68%96.7% of remediation costs fromallocable to Oregon customers and is allowed3.3% of costs allocable to defer environmental remediation costs allocated to customers in Washington annually until they are reviewed for prudence at a subsequent proceeding.customers.
These sites are subject to the remediation process prescribed by the Environmental Protection Agency (EPA) and the Oregon Department of Environmental Quality (ODEQ). The process begins with a remedial investigation (RI) to determine the nature and extent of contamination and then a risk assessment (RA) to establish whether the contamination at the site poses unacceptable risks to humans and the environment. Next, a feasibility study (FS) or an engineering evaluation/cost analysis (EE/CA) evaluates various remedial alternatives. It is at this point in the process when NW Natural is able to estimate a range of remediation costs and record a reasonable potential remediation liability, or make an adjustment to the existing liability. From this study, the regulatory agency selects a remedy and issues a Record of Decision (ROD). After a ROD is issued, NW Natural would seek to negotiate a consent decree or consent judgment for designing and implementing the remedy. NW Natural would have the ability to further refine estimates of remediation liabilities at that time.
Remediation may include treatment of contaminated media such as sediment, soil and groundwater, removal and disposal of media, institutional controls such as legal restrictions on future property use, or natural recovery. Following construction of the remedy, the EPA and ODEQ also have requirements for ongoing maintenance, monitoring and other post-remediation care that may continue for many years. Where appropriate and reasonably known, NW Natural will provide for these costs in the remediation liabilities described below.
Due to the numerous uncertainties surrounding the course of environmental remediation and the preliminary nature of several site investigations, in some cases, NW Natural may not be able to reasonably estimate the high end of the range of possible loss. In those cases, the nature of the possible loss has been disclosed, as has the fact that the high end of the range cannot be reasonably estimated where a range of potential loss is available. Unless there is an estimate within the range of possible losses that is more likely than other cost estimates within that range, NW Natural records the liability at the low end of this range. It is likely changes in these estimates and ranges will occur throughout the remediation process for each of these sites due to the continued evaluation and clarification concerning responsibility, the complexity of environmental laws and regulations and the determination by regulators of remediation alternatives. In addition to remediation costs, NW Natural could also be subject to Natural Resource Damages (NRD) claims. NW Natural will assess the likelihood and probability of each claim and recognize a liability if deemed appropriate. Refer to "Other"Other Portland Harbor"Harbor" below.
Environmental Sites
The following table summarizes information regarding liabilities related to environmental sites, which are recorded in other current liabilities and other noncurrent liabilities in theNW Natural's balance sheet:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Current Liabilities | | Non-Current Liabilities |
| | September 30, | | December 31, | | September 30, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 | | 2022 | | 2021 | | 2021 |
| Portland Harbor site: | | | | | | | | | | | | |
| Gasco/Siltronic Sediments | | $ | 5,556 | | | $ | 6,925 | | | $ | 7,582 | | | $ | 40,740 | | | $ | 40,929 | | | $ | 42,076 | |
| Other Portland Harbor | | 2,430 | | | 2,392 | | | 2,592 | | | 8,135 | | | 6,222 | | | 9,570 | |
| Gasco/Siltronic Upland site | | 8,367 | | | 9,720 | | | 15,711 | | | 33,354 | | | 37,408 | | | 36,215 | |
| | | | | | | | | | | | |
| Front Street site | | 201 | | | 1,002 | | | 1,100 | | | 868 | | | 893 | | | 811 | |
| Oregon Steel Mills | | — | | | — | | | — | | | 179 | | | 179 | | | 179 | |
| Total | | $ | 16,554 | | | $ | 20,039 | | | $ | 26,985 | | | $ | 83,276 | | | $ | 85,631 | | | $ | 88,851 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Current Liabilities | | Non-Current Liabilities |
| | | September 30, | | December 31, | | September 30, | | December 31, |
| In thousands | | 2018 | | 2017 | | 2017 | | 2018 | | 2017 | | 2017 |
| Portland Harbor site: | | | | | | | | | | | | |
| Gasco/Siltronic Sediments | | $ | 2,471 |
| | $ | 860 |
| | $ | 2,683 |
| | $ | 44,410 |
| | $ | 43,796 |
| | $ | 45,346 |
|
| Other Portland Harbor | | 1,392 |
| | 1,379 |
| | 1,949 |
| | 3,540 |
| | 3,618 |
| | 4,163 |
|
| Gasco/Siltronic Upland site | | 8,847 |
| | 7,537 |
| | 13,422 |
| | 44,310 |
| | 48,758 |
| | 47,835 |
|
| Central Service Center site | | 25 |
| | 31 |
| | 25 |
| | — |
| | — |
| | — |
|
| Front Street site | | 6,011 |
| | 846 |
| | 1,009 |
| | 5,342 |
| | 10,788 |
| | 10,757 |
|
| Oregon Steel Mills | | — |
| | — |
| | — |
| | 179 |
| | 179 |
| | 179 |
|
| Total | | $ | 18,746 |
|
| $ | 10,653 |
| | $ | 19,088 |
| | $ | 97,781 |
| | $ | 107,139 |
| | $ | 108,280 |
|
Portland Harbor Site
PORTLAND HARBOR SITE.The Portland Harbor is an EPA listed Superfund site that is approximately 10 miles long on the Willamette River and is adjacent to NW Natural's Gasco uplands site. NW Natural is one of over one hundred PRPs, toeach jointly and severally liable, at the Superfund site. In January 2017, the EPA issued its Record of Decision, which selects the remedy for the clean-up of the
Portland Harbor site (Portland Harbor ROD). The Portland Harbor ROD estimates the present value total cost at approximately $1.05 billion with an accuracy between -30% and +50% of actual costs.
TheNW Natural's potential liability is a portion of the costs of the remedy for the entire Portland Harbor Superfund site. The cost of that remedy is expected to be allocated among more than 100one hundred PRPs. In addition, NW Natural is actively pursuing clarification and flexibility under the ROD in order to better understand its obligation under the clean-up. NW Natural is also participating in a non-binding allocation process with the other PRPs in an effort to resolve its potential liability. The Portland Harbor ROD does not provide any additional clarification around allocation of costs among PRPs and, as a result of issuance of the Portland Harbor ROD,PRPs; accordingly, NW Natural has not modified any of the recorded liabilities at this time.time as a result of the issuance of the Portland Harbor ROD.
NW Natural manages theits liability related to the Superfund site as two distinct remediation projects,projects: the Gasco/SiltronicGasco Sediments Site and Other Portland Harbor projects.
Gasco/Siltronic Sediments.GASCO SEDIMENTS. In 2009, NW Natural and Siltronic Corporation entered into a separate Administrative Order on Consent with the EPA to evaluate and design specific remedies for sediments adjacent to the Gasco uplands and Siltronic uplands sites. NW Natural submitted a draft EE/CA to the EPA in May 2012 to provide the estimated cost of potential remedial alternatives for this site. AtIn March 2020, NW Natural and the EPA amended the Administrative Order on Consent to include additional remedial design activities downstream of the Gasco sediments site and in the navigation channel. Siltronic Corporation is not a party to the amended order. In the second quarter of 2021, NW Natural began preliminary design discussions with the EPA for the Gasco sediments site. These preliminary design discussions did not include a cost estimate for cleanup. No design alternatives are more likely than the EE/CA alternatives at this time, and NW Natural expects further design discussion and iteration with the EPA.
The estimated costs for the various sediment remedy alternatives in the draft EE/CA, for the additional studies and design work needed before the cleanup can occur, and for regulatory oversight throughout the clean-upcleanup range from $46.9$46.3 million to $350 million. NW Natural has recorded a liability of $46.9$46.3 million for the Gasco sediment clean-up, which reflects the low end of the range. At this time, NW Natural believeswe believe sediments at thisthe Gasco sediments site represent the largest portion of itsNW Natural's liability related to the Portland Harbor site discussed above.
Other Portland Harbor.OTHER PORTLAND HARBOR.While NW Natural still believeswe believe liabilities associated with the Gasco/SiltronicGasco sediments site represent itsNW Natural's largest exposure, it does havethere are other potential exposures associated with the Portland Harbor ROD, including NRD costs and harborwide clean-upremedial design and cleanup costs (including downstream petroleum contamination), for which allocations among the PRPs have not yet been determined.
NW Natural and other parties have signed a cooperative agreement with the Portland Harbor Natural Resource Trustee council to participate in a phased NRD assessment to estimate liabilities to support an early restoration-based settlement of NRD claims. One member of this Trustee council, the Yakama Nation, withdrew from the council in 2009, and in 2017, filed suit against NW Natural and 29 other parties seeking remedial costs and NRD assessment costs associated with the Portland Harbor site, set forth in the complaint. The complaint seeks recovery of alleged costs totaling $0.3 million in connection with the selection of a remedial action for the Portland Harbor site as well as declaratory judgment for unspecified future remedial action costs and for costs to assess the injury, loss or destruction of natural resources resulting from the release of hazardous substances at and from the Portland Harbor site. The Yakama Nation has filed two amended complaints addressing certain pleading defects and dismissing the State of Oregon. On the motion of NW Natural and certain other defendants, the federal court has stayed the case pending the outcome of the non-binding allocation proceeding discussed above. NW Natural has recorded a liability for NRD
claims which is at the low end of the range of the potential liability; the high end of the range cannot be reasonably estimated at this time. The NRD liability is not included in the aforementioned range of costs provided in the Portland Harbor ROD.
GASCO UPLANDS SITE.Gasco Uplands Site
A predecessor of NW Natural, Portland Gas and Coke Company, owned a former gas manufacturing plant that was closed in 1958 (Gasco site) and is adjacent to the Portland Harbor site described above. The Gasco site has been under investigation by NW Natural for environmental contamination under the ODEQ Voluntary Clean-UpCleanup Program (VCP). It is not included in the range of remedial costs for the Portland Harbor site noted above. The Gasco site is managed in two parts, the uplands portion and the groundwater source control action.
NW Natural submitted a revised Remedial Investigation Report for the uplands to ODEQ in May 2007. In March 2015, ODEQ approved the RA,Risk Assessment (RA) for this site, enabling commencement of work on the FS in 2016. NW Natural has recognized a liability for the remediation of the uplands portion of the site which is at the low end of the range of potential liability; the high end of the range cannot be reasonably estimated at this time.
In October 2016, ODEQ and NW Natural agreed to amend their VCP agreement for the Gasco uplands to incorporate a portion of the Siltronic property formerly owned by Portland Gas & Coke between 1939 and 1960 into the Gasco RA and FS. Previously, NW Natural was conducting an investigation of manufactured gas plant constituents on the entire Siltronic uplands for ODEQ. Siltronic will be working with ODEQ directly on environmental impacts to the remainder of its property.
In September 2013, NW Natural completed construction of a groundwater source control system, including a water treatment station, at the Gasco site. NW Natural has estimated the cost associated with the ongoing operation of the system and has recognized a liability which is at the low end of the range of potential cost. NW Natural cannot estimate the high end of the range at this time due to the uncertainty associated with the duration of running the water treatment station, which is highly dependent on the remedy determined for both the upland portion as well as the final remedy for the Gasco sediment exposure.sediments site.
OTHER SITES. Other Sites
In addition to those sites above, NW Natural has environmental exposures at three other sites: Central Service Center, Front Street and Oregon Steel Mills. NW Natural may have exposure at other sites that have not been identified at this time. Due to the uncertainty of the design of remediation, regulation, timing of the remediation and in the case of the Oregon Steel Mills site, pending litigation, liabilities for each of these sites have been recognized at their respective low end of the range of potential liability; the high end of the range could not be reasonably estimated at this time.
Central Service Center site.NW Natural is currently performing an environmental investigation of the property under ODEQ's Independent Cleanup Pathway. This site is on ODEQ's list of sites with confirmed releases of hazardous substances, and cleanup is necessary.
Front Street site.FRONT STREET SITE.The Front Street site was the former location of a gas manufacturing plant NW Natural operated (the former Portland Gas Manufacturing site, or PGM). At ODEQ’s request, itNW Natural conducted a sediment and source control investigation and provided findings to ODEQ. In December 2015, an FS on the former Portland Gas Manufacturing site was completed.
In July 2017, ODEQ issued the PGM ROD. The ROD specifies the selected remedy, which requires a combination of dredging, capping, treatment, and natural recovery. In addition, the selected remedy also requires institutional controls and long-term inspection and maintenance. NW Natural revisedConstruction of the liabilityremedy began in July 2020 and was completed in October 2020. The first year of post-construction monitoring was completed in 2021 and demonstrated that the second quarter of 2017 to incorporate the estimated undiscounted cost of approximately $10.5 million for the selected remedy. Further,cap was intact and performing as designed. NW Natural has recognized an additional liability of $0.9$1.1 million for additional studies andcosts associated with the discovery during construction of World War II-era munitions, design costs, as well as regulatory oversight throughout the clean-up. and permitting issues, and post-construction work.
OREGON STEEL MILLS SITE. Refer to "Legal Proceedings" below.
Environmental Cost Deferral and Recovery
NW Natural planshas authorizations in Oregon and Washington to complete the remedial design in 2018defer costs related to remediation of properties that are owned or early 2019 and expects to construct the remedy during 2019.
were previously owned by NW Natural. In Oregon, Steel Mills site. Refer to the “Legal Proceedings,” below.
a Site Remediation and Recovery Mechanism (SRRM)
NW Natural has an SRRM through which it tracks and has the ability is currently in place to recover past deferred and future prudently incurred environmental remediation costs allocable to Oregon customers, subject to an earnings test,test. On October 21, 2019, the WUTC authorized an Environmental Cost Recovery Mechanism (ECRM) for those sites identified therein.recovery of prudently incurred costs allocable to Washington customers beginning November 1, 2019. See Note 1517 in the 20172021 Form 10-K for a description of the SRRM and ECRM collection process.processes.
The following table presents information regarding the total regulatory asset deferred:
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| In thousands | | 2022 | | 2021 | | 2021 |
Deferred costs and interest (1) | | $ | 47,011 | | | $ | 45,019 | | | $ | 45,122 | |
Accrued site liabilities (2) | | 99,795 | | | 105,607 | | | 115,773 | |
| Insurance proceeds and interest | | (54,678) | | | (59,589) | | | (59,564) | |
Total regulatory asset deferral(1) | | $ | 92,128 | | | $ | 91,037 | | | $ | 101,331 | |
Current regulatory assets(3) | | 9,461 | | | 7,068 | | | 6,694 | |
Long-term regulatory assets(3) | | 82,667 | | | 83,969 | | | 94,636 | |
|
| | | | | | | | | | | | |
| | | September 30, | | December 31, |
| In thousands | | 2018 | | 2017 | | 2017 |
Deferred costs and interest (1) | | $ | 40,578 |
| | $ | 52,888 |
| | $ | 45,546 |
|
Accrued site liabilities (2) | | 116,150 |
| | 117,388 |
| | 126,950 |
|
| Insurance proceeds and interest | | (87,631 | ) | | (100,575 | ) | | (94,170 | ) |
Total regulatory asset deferral(1) | | $ | 69,097 |
| | $ | 69,701 |
| | $ | 78,326 |
|
Current regulatory assets(3) | | 5,633 |
| | 6,362 |
| | 6,198 |
|
Long-term regulatory assets(3) | | 63,464 |
| | 63,339 |
| | 72,128 |
|
| |
(1)
| Includes pre-review and post-review deferred costs, amounts currently in amortization, and interest, net of amounts collected from customers. |
| |
(2)
| Excludes 3.32% of the Front Street site liability, or $0.4 million in 2018 and $0.3 million in 2017, as the OPUC only allows recovery of 96.68% of costs for those sites allocable to Oregon, including those that historically served only Oregon customers. |
| |
(3)
| Environmental costs relate to specific sites approved for regulatory deferral by the OPUC and WUTC. In Oregon, NW Natural earns a carrying charge on cash amounts paid, whereas amounts accrued but not yet paid do not earn a carrying charge until expended. It also accrues a carrying charge on insurance proceeds for amounts owed to customers. In Washington, a carrying charge related to deferred amounts will be determined in a future proceeding. Current environmental costs represent remediation costs management expects to collect from customers in the next 12 months. Amounts included in this estimate are still subject to a prudence and earnings test review by the OPUC and do not include the $5.0 million tariff rider. The amounts allocable to Oregon are recoverable through utility rates, subject to an earnings test. |
(1) Includes pre-review and post-review deferred costs, amounts currently in amortization, and interest, net of amounts collected from customers.
ENVIRONMENTAL EARNINGS TEST. (2) Excludes 3.3% of the Front Street site liability as the OPUC only allows recovery of 96.7% of costs for those sites allocable to Oregon, including those that historically served only Oregon customers. Amounts excluded from regulatory assets were $34 thousand at September 30, 2022, $62 thousand at September 30, 2021, and $62 thousand at December 31, 2021.
(3) Environmental costs relate to specific sites approved for regulatory deferral by the OPUC and WUTC. In Oregon, NW Natural earns a carrying charge on cash amounts paid, whereas amounts accrued but not yet paid do not earn a carrying charge until expended. It also accrues a carrying charge on insurance proceeds for amounts owed to customers. In Washington, neither the cash paid for insurance proceeds received accrue a carrying charge. Current environmental costs represent remediation costs management expects to collect from customers in the next 12 months. Amounts included in this estimate are still subject to a prudence and earnings test review by the OPUC and do not include the $5.0 million tariff rider. The amounts allocable to Oregon are recoverable through NGD rates, subject to an earnings test.
Environmental Earnings Test
To the extent the utilityNW Natural earns at or below its authorized Return on Equity (ROE), as defined by the SRRM, remediation expenses and interest in excess of the $5.0 million tariff rider and $5.0 million insurance proceeds are recoverable through the SRRM. To the extent the utilityNW Natural earns more than its authorized ROE in a year, the utilityit is required to cover environmental expenses and interest on expenses greater than the $10.0 million with those earnings that exceed its authorized ROE.
Under the 2015 Order, the OPUC stated they would revisit the deferral and amortization of future remediation expenses, as well as the treatment of remaining insurance proceeds three years from the original Order, or earlier if NW Natural gains greater certainty about future remediation costs, to consider whether adjustments to the mechanism may be appropriate. NW Natural filed an update with the OPUC in March 2018 and recommended no changes.
WASHINGTON DEFERRAL. In Washington, cost recovery and carrying charges on amounts deferred for costs associated with services provided to Washington customers will be determined in a future proceeding.
Legal Proceedings
NW Holdings is not currently party to any direct claims or litigation, though in the future it may be subject to claims and litigation arising in the ordinary course of business.
NW Natural is subject to claims and litigation arising in the ordinary course of business.business including the matters discussed above. Although the final outcome of any of these legal proceedings cannot be predicted with certainty, including the matter describedrelating to the Oregon Steel Mills site referenced below, NW Natural doesand NW Holdings do not expect that the ultimate disposition of any of these matters will have a material effect on their financial condition, results of operations or cash flows. See also Part II, Item 1, “Legal Proceedings".
30Oregon Steel Mills Site
OREGON STEEL MILLS SITE.See Note 1517 in the 20172021 Form 10-K.
For additional information regarding other commitments and contingencies, see Note 1416 in the 20172021 Form 10-K.
16. DISCONTINUED OPERATIONS
On June 20, 2018, NWN Gas Storage, then a wholly owned subsidiary of NW Natural, entered into a Purchase and Sale Agreement (the Agreement) that provides for the sale by NWN Gas Storage of all of the membership interests in Gill Ranch. Gill Ranch owns a 75% interest in the natural gas storage facility located near Fresno, California known as the Gill Ranch Gas Storage Facility. Pacific Gas and Electric Company (PG&E) owns the remaining 25% interest in the Gill Ranch Gas Storage Facility.
The Agreement provides for an initial cash purchase price of $25.0 million (subject to a working capital adjustment), plus potential additional payments to NWN Gas Storage of up to $26.5 million in the aggregate if Gill Ranch achieves certain economic performance levels for the first three full gas storage years (April 1 of one year through March 31 of the following year) occurring after the closing and the remaining portion of the gas storage year during which the closing occurs.
NW Natural expects the transaction to close within 12 months of signing and in 2019. The closing of the transaction is subject to approval by the California Public Utilities Commission (CPUC) and other customary closing conditions. In July 2018, Gill Ranch filed an application with the CPUC for approval of this transaction.
As a result of NW Natural's strategic shift away from the California gas storage market and the significance of Gill Ranch's financial results in 2017, NW Natural has 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, net of tax, as discontinued operations from the results of continuing operations for all periods presented. The expenses included in the results of discontinued operations are the direct operating expenses incurred by Gill Ranch that may be reasonably segregated from the costs of continuing operations.
The following table presents the carrying amounts of the major components of Gill Ranch that are classified as discontinued operations assets and liabilities on the consolidated balance sheets:
|
| | | | | | | | | | | | |
| | | September 30, | | December 31, |
| In thousands | | 2018 | | 2017 | | 2017 |
| Assets: | | | | | | |
| Accounts receivable | | $ | 395 |
| | $ | 1,520 |
| | $ | 2,126 |
|
| Inventories | | 661 |
| | 415 |
| | 396 |
|
| Other current assets | | 107 |
| | 171 |
| | 535 |
|
| Property, plant, and equipment | | 11,241 |
| | 235,578 |
| | 10,816 |
|
| Less: Accumulated depreciation | | 7 |
| | 31,551 |
| | — |
|
| Other non-current assets | | 247 |
| | 51 |
| | 1 |
|
Discontinued operations - current assets (1) | | 12,644 |
| | 2,106 |
| | 3,057 |
|
Discontinued operations - non-current assets (1) | | — |
| | 204,078 |
| | 10,817 |
|
| Total discontinued operations assets | | $ | 12,644 |
| | $ | 206,184 |
| | $ | 13,874 |
|
| | | | | | | |
| Liabilities: | | | | | | |
| Accounts payable | | $ | 751 |
| | $ | 353 |
| | $ | 1,287 |
|
| Other current liabilities | | 405 |
| | 848 |
| | 306 |
|
| Other non-current liabilities | | 11,847 |
| | 12,106 |
| | 12,043 |
|
Discontinued operations - current liabilities (1) | | 13,003 |
| | 1,201 |
| | 1,593 |
|
Discontinued operations - non-current liabilities (1) | | — |
| | 12,106 |
| | 12,043 |
|
| Total discontinued operations liabilities | | $ | 13,003 |
| | $ | 13,307 |
| | $ | 13,636 |
|
| | |
(1)
| The total assets and liabilities of Gill Ranch are classified as current as of September 30, 2018 because it is probable that the sale will be completed within one year. |
In October 2022, NW Natural Water completed the acquisition of the water and wastewater utilities of Far West Water & Sewer, Inc. for approximately $88 million in cash consideration, subject to closing adjustments. Located in Yuma, Arizona, these utilities serve approximately 25,000 connections in the Foothills area and employ approximately 40 people. Going forward, the utilities will be doing business as Foothills Utilities.
The preliminary allocation of consideration to the acquired assets and assumed liabilities based on their fair value is not yet complete as valuation procedures are pending. Acquisition costs were insignificant and were expensed as incurred.
The following table presents the operating results of Gill Ranch, which was reported within the gas storage segment historically, and is presented net of tax on the consolidated statements of comprehensive income:
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| In thousands, except per share data | | 2018 | | 2017 | | 2018 | | 2017 |
| Revenues | | $ | 748 |
| | $ | 1,977 |
| | $ | 2,831 |
| | $ | 5,338 |
|
| Expenses: | | | | | | | | |
| Operations and maintenance | | 1,549 |
| | 1,248 |
| | 4,139 |
| | 5,169 |
|
| Depreciation and amortization | | 106 |
| | 1,131 |
| | 324 |
| | 3,394 |
|
| Other expenses and interest | | (24 | ) | | 603 |
| | 790 |
| | 1,799 |
|
| Total expenses | | 1,631 |
| | 2,982 |
| | 5,253 |
| | 10,362 |
|
| Loss from discontinued operations before income taxes | | (883 | ) | | (1,005 | ) | | (2,422 | ) | | (5,024 | ) |
| Income tax benefit | | 233 |
| | 397 |
| | 639 |
| | 1,983 |
|
| Loss from discontinued operations, net of tax | | $ | (650 | ) | | $ | (608 | ) | | $ | (1,783 | ) | | $ | (3,041 | ) |
| | |
|
| |
|
| | | | |
| Loss from discontinued operations per share of common stock: | | | | | | | | |
| Basic | | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | (0.06 | ) | | $ | (0.11 | ) |
| Diluted | | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | (0.06 | ) | | $ | (0.11 | ) |
17. SUBSEQUENT EVENTS
Holding Company
On October 1, 2018, NW Holdings and NW Natural completed a reorganization into a holding company structure. NW Holdings is now the parent holding company of NW Natural, NWN Water, NWN Gas Storage and other subsidiaries previously held by NW Natural.
This reorganization was approved by NW Holdings’ and NW Natural’s boards of directors, the Oregon, Washington and California public utility commissions, and NW Natural’s shareholders prior to the reorganization.
As part of this reorganization, NW Natural shareholders automatically become shareholders of NW Holdings on a one-for-one share basis with the same number of shares and same relative ownership percentage as shareholders held immediately prior to the reorganization.
Credit Agreements
On October 2, 2018, NW Holdings entered into a $100.0 million credit agreement, with a feature that allows NW Holdings to request increases in the total commitment amount, up to a maximum of $150.0 million. The maturity date of the agreement is October 2, 2023. The credit agreement permits the issuance of letters of credit in an aggregate amount of up to $40.0 million.
On October 2, 2018, NW Natural entered into a new multi-year credit agreement for unsecured revolving loans totaling $300.0 million, up to a maximum of $450.0 million, with a maturity date of October 2, 2023 and an available extension of commitments for two additional one-year periods, subject to lender approval (New Credit Agreement). The prior credit agreement was terminated upon the closing of this new agreement. The New Credit Agreement permits the issuance of letters of credit in an aggregate amount of up to $60.0 million.
The principal amount of borrowings under the credit agreements are due and payable on the maturity date. The credit agreements require NW Holdings and 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.
The agreements also require NW Holdings and NW Natural to maintain credit ratings with Standard & Poor's (S&P) and Moody's Investors Service, Inc. (Moody’s) and notify the lenders of any change in the respective companies' senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies, provided, however that in the event NW Holdings does not have a credit rating, its debt rating will be determined by a formula using NW Natural's credit rating. A change in 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.
Sunriver Agreement
On October 12, 2018, NWN Water of Oregon entered into, and NW Holdings guaranteed, an agreement with Sunriver Resort LP to acquire Sunriver Water, LLC and Sunriver Environmental, LLC (Sunriver Acquisition), which are a water utility and wastewater treatment company providing a current combined 9,400 connections at the Sunriver Resort community in Central Oregon.
The transaction is expected to close in the first half of 2019. The closing of the transaction is subject to approval by the Public Utility Commission of Oregon and other customary closing conditions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s assessment of Northwest Natural Gas Company’s (NW Natural)NW Holdings' and NW Natural's financial condition, including the principal factors that affect results of operations. The discussion refers to NW Natural'sthe consolidated results from continuing operations for the three and nine months ended September 30, 20182022 and 2017.2021 of NW Holdings, the substantial majority of which consist of the operating results of NW Natural. When significant activity exists at NW Holdings that does not exist at NW Natural, additional disclosure has been provided. References in this discussion to "Notes" are to the Notes to Unaudited Consolidated Financial Statements in this report. A significant portion of the business results are seasonal in nature, and, as such, the results of operations for the three month periods areperiod is not necessarily indicative of expected fiscal year results. Therefore, this discussion should be read in conjunction with NW Holdings' and NW Natural's 20172021 Annual Report on Form 10-K, (2017as applicable (2021 Form 10-K), taking into consideration the changes mentioned in Notes 1, 4 and 15, as reflected in Exhibit 99.1 to .
NW Natural's Current Report on Form 8-K (Form 8-K) filed on September 24, 2018.
As of September 30, 2018, the consolidated financial statements included NW Natural and its direct and indirect wholly-owned subsidiaries including:
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; |
Northwest Energy Corporation (Energy Corp);
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◦ | NWN Gas Reserves LLC (NWN Gas Reserves); |
NNG Financial Corporation (NNG Financial);
NW Natural Water Company, LLC (NWN Water);
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◦ | Falls Water Co., Inc. (Falls Water); |
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◦ | Cascadia Water, LLC (Cascadia); |
Northwest Natural Holding Company (NW Holdings); and
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◦ | NWN Merger Sub, Inc. (NWN Holdco Sub). |
On October 1, 2018, we completed our holding company restructuring. NW Holdings and its subsidiaries, considered together, now hold all of the assets and have all of the liabilities that NW Natural and its subsidiaries had immediately prior to the restructuring. Each of NW Holdings' subsidiaries is a separate legal entity with its own assets and liabilities. NW Natural continues to hold all of the assets and liabilities it had immediately prior to the restructuring except that, as described herein, certain subsidiaries of NW Natural have been transferred to NW Holdings andnatural gas distribution activities are no longer subsidiaries of NW Natural and NW Natural's obligations under certain stock compensation plans have been assumed by NW Holdings.
The completion of the holding company restructuring has resultedreported in the following:
former holders of outstanding shares of NW Natural common stock hold shares of NW Holdings common stock;
NW Holdings owns all of the outstanding shares of NW Natural common stock, and NW Natural continues to own NWN Energy and its wholly owned subsidiary,natural gas distribution (NGD) segment. The NGD segment also includes NWN Gas Reserves, which comprise partis a wholly-owned subsidiary of Energy Corp, the NGD-portion of NW Natural's regulated gas utility business (Utility Subsidiaries);
all of the subsidiaries formerly owned by NW Natural, except the Utility Subsidiaries, are owned by NW Holdings;
the outstanding first mortgage bonds of NW Natural will continue to be obligations of NW Natural and will not be direct obligations of, or guaranteed by, NW Holdings; and
stock options, restricted stock units and similar securities issued under executive compensation and other employee benefit plans will be satisfied with an equal number of shares of NW Holdings common stock and the plans were modified to relate to NW Holdings common stock.
On October 10, 2018, NW Holdings formed three additional subsidiaries of NWN Water: NW Natural Water ofMist storage facility in Oregon, LLC., NW Natural Water of Washington, LLC., and NW Natural Water of Idaho,RNG Holding Company, LLC. For additional information, see "Holding Company" below.
As of the filing date of this report, the company structure included NW Holdings and its direct and indirect wholly-owned subsidiaries including:
Northwest Natural Gas Company (NW Natural);
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◦ | Northwest Energy Corporation (Energy Corp); |
NWN Gas Reserves LLC (NWN Gas Reserves);
NW Natural RNG Holding Company, LLC holds an investment in Lexington Renewable 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);
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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◦ | Cascadia Water, LLC (Cascadia); |
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◦ | NW Natural Water of Oregon, LLC (NWN Water of Oregon); |
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◦ | NW Natural Water of Washington, LLC; and |
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◦ | NW Natural Water of Idaho, LLC. |
We primarily operate in one reportable business segment, which is NW Natural's local gas distribution business and which is referred to asaccounted for under the utility 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, subject to various regulatory approvals and closing conditions. As such, we reevaluated our reportable segments and concluded that the gas storageequity method. Other activities no longer meet the requirements of a
reportable segment. NW Natural's ongoing, non-utility gas storage activities, which include the interstate storage and asset management activities at our Mist gas storage facility, are now reported as other. We also have our regulated water operations, other investments, and business activities not specifically related to our utility segment, which are aggregated and reported as other. We referother at NW Natural include the non-NGD storage activity at Mist as well as asset management services and the appliance retail center operations. Other activities aggregated and reported as other at NW Holdings include NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline) and NWN Water's investment in Avion Water Company, Inc., which are accounted for under the equity method, NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities; and NWN Water, which through itself or its subsidiaries, owns and continues to NW Natural's local gas distribution business aspursue investments in the utility and all other activities as non-utility.water sector. See Note 4 for further discussion of our business segment and other, as well as our direct and indirect wholly-owned subsidiaries.
NON-GAAP FINANCIAL MEASURES. In addition to presenting the results of operations and earnings amounts in total, certain financial measures are expressed in cents per share, which are non-GAAP financial measures. Non-GAAP financial measures are expressed in cents per share as these amounts reflect factors that directly impact earnings, including income taxes. All references in this section to EPSearnings per share (EPS) are on the basis of diluted shares (see Note 3).shares. We use such non-GAAP financial measures to analyze our financial performance because we believe they provide useful information to our investors, analysts and creditors in evaluating our financial condition and results of operations. Our non-GAAP financial measures should not be considered a substitute for, or superior to, measures calculated in accordance with U.S. GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than how such measures are calculated in this report, limiting the usefulness of those measures for comparative purposes. A reconciliation of each non-GAAP financial measure to the most directly comparable GAAP financial measure is provided below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Earnings (loss) per share of common stock (diluted) - Total | | $ | (0.56) | | | $ | (0.67) | | | $ | 1.14 | | | $ | 1.24 | |
Diluted earnings (loss) per share - NGD segment(1) | | (0.66) | | | (0.76) | | | 0.97 | | | 0.95 | |
Diluted earnings per share - NW Holdings - other(1) | | 0.10 | | | 0.09 | | | 0.17 | | | 0.29 | |
(1) Non-GAAP financial measure
EXECUTIVE SUMMARY
Current financial results and strategic initiatives withhighlights include:
•Reported a long-term viewnet loss of providing natural gas service safely and reliably$19.6 million or $0.56 per share (diluted) for the third quarter of 2022, compared to customers, working with regulators on key policy initiatives, and remaining focused on growing our business. See "2018 Outlook"net loss of $20.7 million or $0.67 per share (diluted) in the 2017 Form 10-Kprior year;
•Reported net income of $38.4 million or $1.14 per share (diluted) for more information. Current operational highlights include:the first nine months of 2022, compared to net income of $38.1 million or $1.24 per share (diluted) in the prior year;
added over 12,500 customers•Added nearly 8,800 meters during the past twelve months for a growth rate of 1.7%1.1% at September 30, 2018;2022;
invested $158.8•Invested over $250 million in the distribution system and facilities for growth, safety, and reliability;
resolved the majority of itemsour utility systems in the first nine months of 2022 in an effort to achieve greater reliability and resiliency;
•Received Oregon general rate case withorder providing a revenue requirement increaseincrease of $23.4 million or 3.72% effective November 1, 2018;approximately $59.4 million;
•Received approval in Oregon and Washington for new rates related to the Purchased Gas Adjustment (PGA) mechanism, which includes estimated gas costs for the upcoming winter heating season;
advanced our water strategy with plans to acquire•Closed two water and wastewater businesses at the Sunriver Resortacquisitions near our existing service territory in Oregon, completed the acquisition of Falls Water Company in Idaho Falls, Idaho in the third quarter of 2018,Washington state and closed three otherour largest water acquisitionsand wastewater acquisition to date in Yuma, Arizona, increasing our water sector customer base by approximately 70%; and
•Increased our dividend for the fourth quarter67th consecutive year to an annual indicated dividend rate of 2018.$1.94 per share.
Key quarter-to-date financial highlights for NW Holdings include:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2022 | | 2021 | | QTD |
| In thousands, except per share data | | Amount | Per Share | | Amount | Per Share | | Change |
| Consolidated net loss | | $ | (19,587) | | $ | (0.56) | | | $ | (20,655) | | $ | (0.67) | | | $ | 1,068 | |
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| | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | |
| | | 2018 | | 2017 | | $ |
| In thousands, except per share data | | Amount | Per Share | | Amount | Per Share | | Change |
| Net income (loss) from continuing operations | | $ | (11,144 | ) | $ | (0.39 | ) | | $ | (7,887 | ) | $ | (0.28 | ) | | $ | (3,257 | ) |
| Loss from discontinued operations, net of tax | | (650 | ) | (0.02 | ) | | (608 | ) | (0.02 | ) | | (42 | ) |
| Consolidated net income (loss) | | $ | (11,794 | ) | $ | (0.41 | ) | | $ | (8,495 | ) | $ | (0.30 | ) | | $ | (3,299 | ) |
| Utility margin | | $ | 54,940 |
| | | $ | 52,532 |
| | | $ | 2,408 |
|
Key quarter-to-date financial highlights for NW Natural include:
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | |
| | 2022 | | 2021 | | QTD |
| In thousands | | Amount | | Amount | | Change |
| Consolidated net loss | | $ | (18,806) | | | $ | (21,018) | | | $ | 2,212 | |
| Natural gas distribution margin | | $ | 61,687 | | | $ | 61,076 | | | $ | 611 | |
THREE MONTHS ENDED SEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. Net2021.
Consolidated net loss from continuing operations increased $3.3decreased $2.2 million at NW Natural primarily due to the following factors:
a $3.3•$3.5 million increase in other income, net primarily due to lower pension costs;
•$2.1 million increase in asset management revenues; partially offset by
•$2.1 million increase in operations and maintenance expense largely from payroll and benefitsexpenses primarily due to additional headcountamortization expense related to cloud computing arrangements, professional service fees, and general salary increases;higher contract labor; and
a $1.4 million decrease in income tax benefit due to the decline of the U.S. federal corporate income tax rate to 21% in 2018 from 35% in the prior period. See additional discussion regarding "TCJA Timing Variance" below; partially offset by,
a $2.4•$1.0 million increase in utility margin driven by a change in the revenue deferral associated with the decrease in the federal tax ratedepreciation expense and customer growth.general taxes due to additional capital investments.
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| | | Nine Months Ended September 30, | | |
| | | 2018 | | 2017 | | $ |
| In thousands, except per share data | | Amount | Per Share | | Amount | Per Share | | Change |
| Net income from continuing operations | | $ | 30,528 |
| $ | 1.06 |
| | $ | 37,585 |
| $ | 1.31 |
| | $ | (7,057 | ) |
| Loss from discontinued operations, net of tax | | (1,783 | ) | (0.06 | ) | | (3,041 | ) | (0.11 | ) | | 1,258 |
|
| Consolidated net income | | $ | 28,745 |
| $ | 1.00 |
| | $ | 34,544 |
| $ | 1.20 |
| | $ | (5,799 | ) |
| Utility margin | | $ | 257,402 |
| | | $ | 269,172 |
| | | $ | (11,770 | ) |
NINE MONTHS ENDEDSEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. Net income from continuing operationsConsolidated net loss decreased $7.1$1.1 million at NW Holdings primarily due to the following factors:
a $11.8•$2.2 milliondecrease in utility marginconsolidated net loss at NW Natural as discussed above; partially offset by
•$1.1 million decrease in other net income primarily reflecting higher interest expense at the holding company.
Key year-to-date financial highlights for NW Holdings include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2022 | | 2021 | | YTD |
| In thousands, except per share data | | Amount | | Per Share | | Amount | | Per Share | | Change |
| | | | | | | | | | |
| | | | | | | | | | |
| Consolidated net income | | $ | 38,367 | | | $ | 1.14 | | | $ | 38,138 | | | $ | 1.24 | | | $ | 229 | |
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Key year-to-date financial highlights for NW Natural include:
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| | 2022 | | 2021 | | YTD |
| In thousands | | Amount | | Amount | | Change |
| Consolidated net income | | $ | 41,343 | | | $ | 39,682 | | | $ | 1,661 | |
| Natural gas distribution margin | | $ | 333,797 | | | $ | 324,922 | | | $ | 8,875 | |
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.
Consolidated net income increased $1.7 million at NW Natural primarily due to the regulatory revenue deferral of $7.0following factors:
•$8.9 million for the declineincrease in taxNGD segment margin driven by customer growth, new rates during the interim period in 2018 before customer rates could be reset, as well as warmer than average weatherWashington, and higher usage by non-decoupled customers; and
•$8.7 million increase in the current period comparedother income, net primarily due to the prior period,lower pension costs; partially offset by customer growth; and
a $8.4•$10.7 million increase in operations and maintenance expense largely from payroll and benefitsexpenses due to additional headcount and general salary increases as well as higher contract labor, amortization expense related to cloud computing arrangements, professional service fees, and information technology costs; partially offset by
a $13.3•$3.2 million decrease in income tax expenseasset management revenue primarily due to lower pre-taxthe February 2021 cold weather event discussed below that did not recur in the current year; and
•$2.0 million increase in depreciation expense and general taxes due to additional capital investments.
Consolidated net income increased $0.2 million at NW Holdings primarily due to the following factors:
•$1.7 million increase in consolidated net income at NW Natural as discussed above; partially offset by
•$1.4 million decrease in other net income primarily reflecting costs associated with non-regulated renewable natural gas activities and higher interest expense at the holding company.
2021 COLD WEATHER EVENT.In February 2021, Portland, Oregon and the declinesurrounding region, like much of the U.S. federal corporate income tax ratecountry, 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 21%a regulatory asset for recovery in 2018 from 35%future rates. The result was approximately $2 million of lower natural gas utility margin in the prior period. See additional discussion regarding "TCJA Timing Variance" below.
TCJA Timing Variance
As previously reported, results during 2018 have been affected by a timing difference between the revenue deferral associated with tax reform and the effect on tax expense from the lower federal tax rate. For the first ninethree months of 2018,2021. The higher commodity costs were offset by approximately $39 million of asset management revenue, of which approximately $33 million was deferred to a regulatory liability for the deferralbenefit of customers.
CURRENT ECONOMIC CONDITIONS.We are evaluating and tax benefit largely offset; however, theremonitoring current economic conditions, geopolitical uncertainty, which include but are not limited to: inflation, rising interest rates and commodity costs, heightened cybersecurity awareness, and supply chain disruptions. We have beenenhanced cybersecurity monitoring in response to reports that cybersecurity attacks have and will 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 variances each quarter. In the first quarter of 2018, the utility segment benefited from this timingplacing 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 that benefit reversed in the second and third quarters. As of November 1, 2018, Oregon rates have been reset and a revenue deferral for tax savings is no longer necessary. Therefore,not us, we do not anticipate significant timing variances going forward.
HOLDING COMPANY
On October 1, 2018, NW Natural completed the formation of a holding company structure to best position itself to beand are not able to respondquantify the number of new meters affected at this time. We are continuing to opportunitiesactively monitor, and risks in a manner that serves the best interests of its shareholdershave formulated and customers. The structure involves placing a non-operating corporate entity over the existing consolidated structure, and “ring-fencing” NW Natural to insulate the gas utility from the operations of the holding company and its other direct and indirect subsidiaries. At the completion of the reorganization, NW Natural became a wholly-owned subsidiary of NW Holdings, with the NW Holdings common stock being listed and traded on the New York Stock Exchange. NW Natural common stock was converted into the same relative percentages of NW Holdings that each shareholder owned of NW Natural immediately prior to the reorganization. Our management continuously looks for growth opportunities that would build on core competencies and match the risk profile that NW Natural has and our shareholders seek. We believe a holding company structure is a more agile and efficient platform from which to pursue, finance and oversee new business growth opportunities, such as in the water sector. Following the formation of the holding company, NW Natural will continue to operateevaluate contingency plans as a gas utility subject tonecessary.
See the jurisdiction of the OPUC and the WUTC. The regulatory approvals for the formation of a holding company require NW Natural and NW Holdings to enter into and file an agreement with the OPUC and the WUTC, which includes a number of “ring-fencing” conditions. The ring-fencing conditions are designed to operate the gas utility conservatively and insulate the gas utility from risks associated with the operations of NW Holdings and its other direct and indirect subsidiaries that are not subsidiaries of NW Natural. For more information regarding the holding company structure and ring-fencing provisions, see Part I, Item 1A "Risk Factorsdiscussion in "and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Holding Company” in NW Natural's 2017 Form 10-K.
", "Regulatory Matters" and "Financial Condition" below for additional detail regarding all significant activity that occurred during the third quarter of 2022.
DIVIDENDS
Dividend highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD
Change | | YTD Change |
| Per common share | | 2022 | | 2021 | | 2022 | | 2021 | | |
| Dividends paid | | $ | 0.4825 | | | $ | 0.4800 | | | $ | 1.4475 | | | $ | 1.4400 | | | $ | 0.0025 | | | $ | 0.0075 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| Per common share | | 2018 | | 2017 | | 2018 | | 2017 | | QTR Change | | YTD Change |
| Dividends paid | | $ | 0.4725 |
| | $ | 0.4700 |
| | $ | 1.4175 |
| | $ | 1.4100 |
| | $ | 0.0025 |
| | $ | 0.0075 |
|
In October 2018,2022, the Board of Directors of NW Holdings declared a quarterly dividend on NW Holdings common stock of $0.4750$0.4850 per share, an increase from the prior quarter's NW Natural dividend.share. The dividend is payable on November 15, 2018,2022 to shareholders of record on October 31, 2018,2022, reflecting an annual indicated dividend rate of $1.90$1.94 per share.
RESULTS OF OPERATIONS
Regulatory Matters
Business Segment - Natural Gas Distribution (NGD)
NGD margin results are primarily affected by customer growth, revenues from rate-base additions, and, to a certain extent, by changes in delivered volumes due to weather and customers’ gas usage patterns. In Oregon, NW Natural has a conservation tariff (also called the decoupling mechanism), which adjusts margin up or down each month through a deferred regulatory accounting adjustment designed to offset changes resulting from increases or decreases in average use by residential and commercial customers. NW Natural also has a weather normalization tariff in Oregon, WARM, which adjusts customer bills up or down to offset changes in margin resulting from above- or below-average temperatures during the winter heating season. Both mechanisms are designed to reduce, but not eliminate, the volatility of customer bills and natural gas distribution earnings. For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" Matters—Rate Mechanisms" in NW Natural's 20172021 Form 10-K.
In addition to NW Natural's local gas distribution business, the NGD segment also includes the portion of the Mist underground storage facility used to serve NGD customers, the North Mist gas storage expansion, NWN Gas Reserves, which is a wholly owned subsidiary of Energy Corp., and NW Natural RNG Holding Company, LLC.
The NGD business is primarily seasonal in nature due to higher gas usage by residential and commercial customers during the cold winter heating months. Other categories of customers experience seasonality in their usage but to a lesser extent. Seasonality affects the comparability of the results of operations of the NGD business across quarters but not across years.
NGD segment highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands, except EPS data | | 2022 | | 2021 | | 2022 | | 2021 | | |
| NGD net income (loss) | | $ | (23,016) | | | $ | (23,297) | | | $ | 32,531 | | | $ | 29,247 | | | $ | 281 | | | $ | 3,284 | |
| Diluted EPS - NGD segment | | $ | (0.66) | | | $ | (0.76) | | | $ | 0.97 | | | $ | 0.95 | | | $ | 0.10 | | | $ | 0.02 | |
| Gas sold and delivered (in therms) | | 158,561 | | | 161,229 | | | 855,500 | | | 806,063 | | | (2,668) | | | 49,437 | |
NGD margin(1) | | $ | 61,687 | | | $ | 61,076 | | | $ | 333,797 | | | $ | 324,922 | | | $ | 611 | | | $ | 8,875 | |
(1) See Natural Gas Distribution Margin Table below for additional detail.
THREE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. The primary factors contributing to the $0.3 million, or $0.10 per share, decrease in NGD net loss were as follows:
•$3.1 million increase in other income, net driven by lower pension non-service costs; and
•$0.6 millionincrease in NGD margin due to:
•$0.4 million increase due to new customer rates from the 2021 Washington rate case that went into effect on November 1, 2021; and
•$0.3 million increase driven by customer growth; partially offset by
•$2.3 million increase in NGD operating and maintenance expenses due primarily to amortization expense related to cloud computing arrangements, professional service fees, and higher contract labor; and
•$1.0 million increase in depreciation expense and general taxes due to additional capital investments in the distribution system. In addition, we placed two significant information technology projects into service in September 2022.
For the three months ended September 30, 2022, total NGD volumes sold and delivered decreased 2% over the same period in 2021 primarily due to lower usage by industrial transportation and residential customers.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. The primary factors contributing to the $3.3 million increase in NGD net income were as follows:
•$8.9 millionincrease in NGD margin due to:
•$3.9 million increase driven by customer growth;
•$2.8 million increase due to new customer rates from the 2021 Washington rate case that went into effect on November 1, 2021;
•$2.4 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; and
•$8.3 million increase in other income, net driven by lower pension non-service costs; partially offset by
•$11.2 million increase in NGD operations and maintenance expenses due to higher contract labor, amortization expense related to cloud computing arrangements, professional service fees, and information technology costs; and
•$2.0 million increase in depreciation expense and general taxes as we continue to invest in our natural gas utility system.
For the nine months ended September 30, 2022, total NGD volumes sold and delivered increased 6% over the same period in 2021 primarily due to 3% warmer than average weather in the first nine months of 2022 compared to 12% warmer than average weather in the prior period.
NATURAL GAS DISTRIBUTION MARGIN TABLE. The following table summarizes the composition of NGD gas volumes, revenues, and cost of sales:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Favorable/
(Unfavorable) |
| In thousands, except degree day and customer data | | 2022 | | 2021 | | 2022 | | 2021 | | QTD Change | | YTD Change |
| NGD volumes (therms) | | | | | | | | | | | | |
| Residential and commercial sales | | 53,929 | | | 55,597 | | | 495,303 | | | 455,888 | | | (1,668) | | | 39,415 | |
| Industrial sales and transportation | | 104,632 | | | 105,632 | | | 360,197 | | | 350,175 | | | (1,000) | | | 10,022 | |
| Total NGD volumes sold and delivered | | 158,561 | | | 161,229 | | | 855,500 | | | 806,063 | | | (2,668) | | | 49,437 | |
| Operating Revenues | | | | | | | | | | | | |
| Residential and commercial sales | | $ | 78,459 | | | $ | 71,979 | | | $ | 552,858 | | | $ | 470,923 | | | $ | 6,480 | | | $ | 81,935 | |
| Industrial sales and transportation | | 19,581 | | | 14,000 | | | 60,380 | | | 45,472 | | | 5,581 | | | 14,908 | |
| Other distribution revenues | | 351 | | | 292 | | | 1,367 | | | 1,278 | | | 59 | | | 89 | |
| Other regulated services | | 4,904 | | | 4,771 | | | 14,722 | | | 14,321 | | | 133 | | | 401 | |
| Total operating revenues | | 103,295 | | | 91,042 | | | 629,327 | | | 531,994 | | | 12,253 | | | 97,333 | |
| Less: Cost of gas | | 36,258 | | | 25,322 | | | 261,678 | | | 178,837 | | | (10,936) | | | (82,841) | |
| Less: Environmental remediation expense | | 975 | | | 806 | | | 7,945 | | | 6,092 | | | (169) | | | (1,853) | |
| Less: Revenue taxes | | 4,375 | | | 3,838 | | | 25,907 | | | 22,143 | | | (537) | | | (3,764) | |
| NGD margin | | $ | 61,687 | | | $ | 61,076 | | | $ | 333,797 | | | $ | 324,922 | | | $ | 611 | | | $ | 8,875 | |
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Margin(1) | | | | | | | | | | | | |
| Residential and commercial sales | | $ | 49,799 | | | $ | 49,302 | | | $ | 296,462 | | | $ | 288,974 | | | $ | 497 | | | $ | 7,488 | |
| Industrial sales and transportation | | 7,067 | | | 7,295 | | | 24,058 | | | 23,456 | | | (228) | | | 602 | |
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| Loss from gas cost incentive sharing | | (420) | | | (546) | | | (2,868) | | | (3,032) | | | 126 | | | 164 | |
| Other margin | | 339 | | | 256 | | | 1,427 | | | 1,208 | | | 83 | | | 219 | |
| Other regulated services | | 4,902 | | | 4,769 | | | 14,718 | | | 14,316 | | | 133 | | | 402 | |
| NGD Margin | | $ | 61,687 | | | $ | 61,076 | | | $ | 333,797 | | | $ | 324,922 | | | $ | 611 | | | $ | 8,875 | |
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Degree days(2) | | | | | | | | | | | | |
Average(3) | | 9 | | | 9 | | | 1,640 | | | 1,640 | | | — | | | — | |
| Actual | | — | | | 4 | | | 1,591 | | | 1,447 | | | (100) | % | | 10 | % |
Percent warmer than average weather(4) | | NM | | NM | | (3) | % | | (12) | % | | | | |
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| | As of September 30, | | | | | | | | |
| | 2022 | | 2021 | | Change | | Growth | | | | |
| NGD Meters - end of period: | | | | | | | | | | | | |
| Residential meters | | 720,846 | | | 712,335 | | | 8,511 | | | 1.2% | | | | |
| Commercial meters | | 68,587 | | | 68,414 | | | 173 | | | 0.3% | | | | |
| Industrial meters | | 1,078 | | | 978 | | | 100 | | | 10.2% | | | | |
| Total number of meters | | 790,511 | | | 781,727 | | | 8,784 | | | 1.1% | | | | |
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(1) Amounts reported as NGD margin for each category of meters are operating revenues less cost of gas, environmental remediation expense and revenue taxes, subject to earnings test considerations, as applicable.
(2) Heating degree days are units of measure reflecting temperature-sensitive consumption of natural gas, calculated by subtracting the average of a day's high and low temperatures from 59 degrees Fahrenheit.
(3) Average weather represents the 25-year average of heating degree days. Beginning November 1, 2020, average weather is calculated over the period June 1, 1994 through May 31, 2019, as determined in NW Natural’s 2020 Oregon general rate case.
(4) NM indicates that the calculated value is not meaningful.
Residential and Commercial Sales
Residential and commercial sales highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | |
| Volumes (therms) | | | | | | | | | | | | |
| Residential sales | | 28,394 | | | 30,391 | | | 304,739 | | | 286,228 | | | (1,997) | | | 18,511 | |
| Commercial sales | | 25,535 | | | 25,206 | | | 190,564 | | | 169,660 | | | 329 | | | 20,904 | |
| Total volumes | | 53,929 | | | 55,597 | | | 495,303 | | | 455,888 | | | (1,668) | | | 39,415 | |
| Operating revenues | | | | | | | | | | | | |
| Residential sales | | $ | 50,160 | | | $ | 47,091 | | | $ | 374,635 | | | $ | 325,203 | | | $ | 3,069 | | | $ | 49,432 | |
| Commercial sales | | 28,299 | | | 24,888 | | | 178,223 | | | 145,720 | | | 3,411 | | | 32,503 | |
| Total operating revenues | | $ | 78,459 | | | $ | 71,979 | | | $ | 552,858 | | | $ | 470,923 | | | $ | 6,480 | | | $ | 81,935 | |
| NGD margin | | | | | | | | | | | | |
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| Residential NGD margin | | $ | 34,620 | | | $ | 34,292 | | | $ | 214,498 | | | $ | 209,101 | | | $ | 328 | | | $ | 5,397 | |
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| Commercial NGD margin | | 15,179 | | | 15,010 | | | 81,964 | | | 79,873 | | | 169 | | | 2,091 | |
| Total NGD margin | | $ | 49,799 | | | $ | 49,302 | | | $ | 296,462 | | | $ | 288,974 | | | $ | 497 | | | $ | 7,488 | |
THREE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Residential and commercial margin increased $0.5 million compared to the prior period. The increase was primarily driven by 1.2% growth in residential meters, and new customer rates in Washington that took effect on November 1, 2021. Volumes decreased 1.7 million therms due to lower usage by residential customers. The majority of these customers are decoupled, thus mitigating the impact to margin.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Residential and commercial margin increased $7.5 million compared to the prior period. The increase was primarily driven by 1.2% growth in residential meters, new customer rates in Washington that took effect on November 1, 2021, and higher usage from non-decoupled customers. Volumes increased 39.4 million therms due to higher usage driven by comparatively colder weather.
Industrial Sales and Transportation
Industrial sales and transportation highlights include:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | |
| Volumes (therms) | | | | | | | | | | | | |
| Firm and interruptible sales | | 22,606 | | | 18,353 | | | 75,795 | | | 64,598 | | | 4,253 | | | 11,197 | |
| Firm and interruptible transportation | | 82,026 | | | 87,279 | | | 284,402 | | | 285,577 | | | (5,253) | | | (1,175) | |
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| Total volumes - sales and transportation | | 104,632 | | | 105,632 | | | 360,197 | | | 350,175 | | | (1,000) | | | 10,022 | |
| NGD margin | | | | | | | | | | | | |
| Firm and interruptible sales | | $ | 2,671 | | | $ | 2,735 | | | $ | 9,561 | | | $ | 9,033 | | | $ | (64) | | | $ | 528 | |
| Firm and interruptible transportation | | 4,396 | | | 4,560 | | | 14,497 | | | 14,423 | | | (164) | | | 74 | |
| Total margin - sales and transportation | | $ | 7,067 | | | $ | 7,295 | | | $ | 24,058 | | | $ | 23,456 | | | $ | (228) | | | $ | 602 | |
THREE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Industrial sales and transportation margin decreased $0.2 million compared to the prior period. Volumes decreased 1.0 million therms primarily due to lower usage from multiple customers, most notably in the plastic manufacturing and food processing industries, partially offset by higher usage from customers in the primary metals industry.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Industrial sales and transportation margin increased $0.6 million compared to the prior period. Volumes increased 10.0 million therms 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.
Cost of Gas
Cost of gas highlights include:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | |
| Cost of gas | | $ | 36,258 | | | $ | 25,322 | | | $ | 261,678 | | | $ | 178,837 | | | $ | 10,936 | | | $ | 82,841 | |
Volumes sold (therms)(1) | | 76,535 | | | 73,950 | | | 571,098 | | | 520,486 | | | 2,585 | | | 50,612 | |
| Average cost of gas (cents per therm) | | $ | 0.47 | | | $ | 0.34 | | | $ | 0.46 | | | $ | 0.34 | | | $ | 0.13 | | | $ | 0.12 | |
Loss from gas cost incentive sharing(2) | | $ | (420) | | | $ | (546) | | | $ | (2,868) | | | $ | (3,032) | | | $ | 126 | | | $ | 164 | |
(1)This calculation excludes volumes delivered to industrial transportation customers.
(2) For additional information regarding NW Natural's gas cost incentive sharing mechanism, see Part II, Item 7 "Results of Operations—Regulatory Matters—Rate Mechanisms—Gas Reserves" in NW Natural's 2021 Form 10-K.
THREE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Cost of gas increased $10.9 million primarily due to a 38% increase in average cost of gas with the majority of these higher gas costs embedded in the PGA, and customer growth. Volumes sold increased 2.6 million therms driven by higher usage from industrial sales customers.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Cost of gas increased $82.8 million primarily due to a 35% increase in average cost of gas with the majority of these higher gas costs embedded in the PGA, and customer growth. Volumes sold increased 50.6 million therms driven by 3% warmer than average weather in the first nine months of 2022 compared to 12% warmer than average weather in the prior period.
Other Regulated Services Margin
Other regulated services margin highlights include:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | |
| North Mist storage services | | $ | 4,858 | | | $ | 4,716 | | | $ | 14,573 | | | $ | 14,147 | | | $ | 142 | | | $ | 426 | |
| Other services | | 44 | | | 53 | | | 145 | | | 169 | | | (9) | | | (24) | |
| Total other regulated services | | $ | 4,902 | | | $ | 4,769 | | | $ | 14,718 | | | $ | 14,316 | | | $ | 133 | | | $ | 402 | |
THREE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Other regulated services margin was relatively flat when compared to the prior period. The North Mist expansion facility did not experience any significant fluctuations in storage service revenue. See Note 7 for information regarding North Mist expansion lease accounting.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Other regulated services margin increased $0.4 million compared to the prior period due to scheduled rate increases in storage service revenue.
Other
Other activities aggregated and reported as other at NW Holdings include NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities; NWN Water, which owns and continues to pursue investments in the water sector; and NWN Water's investment in Avion Water Company, Inc. (Avion Water). Other activities aggregated and reported as other at NW Natural include the non-NGD storage activity at Mist as well as asset management services and the appliance retail center operations. See Note 4 for further discussion of our business segment and other, as well as our direct and indirect wholly-owned subsidiaries. See Note 13 for information on our Avion Water investment.
The following table presents the results of activities aggregated and reported as other for both NW Holdings and NW Natural:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands, except EPS data | | 2022 | | 2021 | | 2022 | | 2021 | | |
| NW Natural other - net income | | $ | 4,210 | | | $ | 2,279 | | | $ | 8,812 | | | $ | 10,435 | | | $ | 1,931 | | | $ | (1,623) | |
| Other NW Holdings activity | | (781) | | | 363 | | | (2,976) | | | (1,544) | | | (1,144) | | | (1,432) | |
| NW Holdings other - net income | | $ | 3,429 | | | $ | 2,642 | | | $ | 5,836 | | | $ | 8,891 | | | $ | 787 | | | $ | (3,055) | |
| Diluted EPS - NW Holdings - other | | $ | 0.10 | | | $ | 0.09 | | | $ | 0.17 | | | $ | 0.29 | | | $ | 0.01 | | | $ | (0.12) | |
THREE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Other net income increased $0.8 million at NW Holdings and $1.9 million at NW Natural. The increase at NW Natural was primarily due to an increase in asset management revenues. The increase at NW Holdings was driven by the increase at NW Natural, partially offset by higher interest expense at the holding company.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Other net income decreased $1.6 million at NW Natural and $3.1 million at NW Holdings. The decrease at NW Natural was primarily due to lower asset management revenue mainly related to the 2021 cold weather event that did not recur in the current year. The decrease at NW Holdings was driven by the decrease at NW Natural, higher interest expense at the holding company, and costs associated with non-regulated renewable natural gas activities.
Consolidated Operations
Operations and Maintenance
Operations and maintenance highlights include:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural | | $ | 45,858 | | | $ | 43,768 | | | $ | 148,614 | | | $ | 137,894 | | | $ | 2,090 | | | $ | 10,720 | |
| Other NW Holdings operations and maintenance | | 4,887 | | | 3,561 | | | 12,791 | | | 11,673 | | | 1,326 | | | 1,118 | |
| NW Holdings | | $ | 50,745 | | | $ | 47,329 | | | $ | 161,405 | | | $ | 149,567 | | | $ | 3,416 | | | $ | 11,838 | |
THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Operations and maintenance expense increased$3.4 million at NW Holdings and $2.1 million at NW Natural. The increase at NW Natural was driven by the following:
•$0.9 million increase in amortization expense related to cloud computing arrangements;
•$0.5 million increase in professional service fees; and
•$0.4 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects.
The $1.3 million increase in other NW Holdings operations and maintenance expense primarily reflects costs associated with non-regulated renewable natural gas activities and higher business development costs at the holding company.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Operations and maintenance expense increased$11.8 million at NW Holdings and $10.7 million at NW Natural. The increase at NW Natural was driven by the following:
•$4.1 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects;
•$2.3 million increase in amortization expense related to cloud computing arrangements;
•$1.5 million increase in professional service fees;
•$1.2 million increase in information technology maintenance and support; and
•$1.0 million increase related to employee expenses.
The $1.1 million increase in other NW Holdings operations and maintenance expense primarily reflects costs associated with non-regulated renewable natural gas activities.
Depreciation
Depreciation highlights include:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural | | $ | 28,201 | | | $ | 27,719 | | | $ | 83,166 | | | $ | 82,418 | | | $ | 482 | | | $ | 748 | |
| Other NW Holdings depreciation | | 825 | | | 719 | | | 2,399 | | | 2,261 | | | 106 | | | 138 | |
| NW Holdings | | $ | 29,026 | | | $ | 28,438 | | | $ | 85,565 | | | $ | 84,679 | | | $ | 588 | | | $ | 886 | |
THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Depreciation expense increased $0.6 million and $0.5 million at NW Holdings and NW Natural, respectively, primarily due to additional capital investments in the distribution system and Mist storage, as well as renovation and construction of resource and operations service centers. In addition, we placed two significant information technology projects into service in September 2022. The increase was partially offset by the amortization of cloud computing arrangements, which are recorded within operations and maintenance expenses beginning in 2022.
NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Depreciation expense increased $0.9 million and $0.7 million at NW Holdings and NW Natural, respectively, primarily due to additional capital investments in the distribution system, Mist storage, and information technology systems, as well as renovation and construction of resource and operations service centers. The increase was partially offset by the amortization of cloud computing arrangements, which are recorded within operations and maintenance expenses beginning in 2022.
Other Income (Expense), Net
Other income (expense), net highlights include:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural other income (expense), net | | $ | 1,161 | | | $ | (2,295) | | | $ | 197 | | | $ | (8,526) | | | $ | 3,456 | | | $ | 8,723 | |
| Other NW Holdings activity | | 475 | | | 79 | | | 711 | | | 171 | | | 396 | | | 540 | |
| NW Holdings other income (expense), net | | $ | 1,636 | | | $ | (2,216) | | | $ | 908 | | | $ | (8,355) | | | $ | 3,852 | | | $ | 9,263 | |
THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Other income (expense), net changed $3.9 million and $3.5 million at NW Holdings and NW Natural, respectively, primarily due to lower pension non-service costs. Costs related to our defined benefit pension plan for 2022 are expected to decrease compared to the prior year due to changes in assumptions and gains on plan assets. The change at other NW Holdings was driven by the change at NW Natural. Other income (expense), net primarily consists of regulatory interest, pension and other postretirement non-service costs, gains from company-owned life insurance, and donations.
NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Other income (expense), net changed $9.3 million and $8.7 million at NW Holdings and NW Natural, respectively, primarily due to lower pension non-service costs. Costs related to our defined benefit pension plan for 2022 are expected to decrease compared to the prior year due to changes in assumptions and gains on plan assets. The change at other NW Holdings was driven by the change at NW Natural.
Interest Expense, Net
Interest expense, net highlights include:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural | | $ | 11,128 | | | $ | 10,850 | | | $ | 32,558 | | | $ | 32,336 | | | $ | 278 | | | $ | 222 | |
| Other NW Holdings interest expense, net | | 1,926 | | | 325 | | | 3,598 | | | 993 | | | 1,601 | | | 2,605 | |
| NW Holdings | | $ | 13,054 | | | $ | 11,175 | | | $ | 36,156 | | | $ | 33,329 | | | $ | 1,879 | | | $ | 2,827 | |
THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Interest expense, net increased $1.9 million and $0.3 million at NW Holdings and NW Natural, respectively. Interest expense, net at NW Natural increased $1.2 million due to higher interest expense on short and long-term debt, partially offset by $0.9 million of higher Allowance for Funds Used During Construction (AFUDC) debt interest income. The increase at NW Holdings is primarily due to higher interest expense on the Holdings' credit facility as a result of higher balances outstanding and higher interest rates.
NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Interest expense, net increased $2.8 million and $0.2 million at NW Holdings and NW Natural, respectively. Interest expense, net at NW Natural increased $2.1 million due to higher interest expense on short and long-term debt, partially offset by $1.9 million of higher AFUDC debt interest income. The increase at NW Holdings is primarily due to higher interest expense on Holdings' credit facility as a result of higher balances outstanding and higher interest rates.
Income Tax Expense (Benefit)
Income tax expense (benefit) highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural income tax expense (benefit) | | $ | (6,455) | | | $ | (7,212) | | | $ | 13,678 | | | $ | 13,628 | | | $ | 757 | | | $ | 50 | |
| NW Holdings income tax expense (benefit) | | $ | (6,758) | | | $ | (7,127) | | | $ | 12,635 | | | $ | 13,117 | | | $ | 369 | | | $ | (482) | |
THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Income tax expense increased $0.8 million at NW Natural and $0.4 million at NW Holdings. The increase in income tax expense is primarily due to a higher pre-tax income in the current period compared to the prior year.
NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Income tax expense increased $0.1 million at NW Natural and decreased $0.5 million at NW Holdings. The decrease in income tax expense at NW Holdings is primarily due to a decrease in pre-tax income in the current period compared to the prior year.
Regulatory Matters
For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the 2021 Form 10-K.
Regulation and Rates
UTILITY.NATURAL GAS DISTRIBUTION.NW Natural's utilitynatural gas distribution business is subject to regulation by the OPUC WUTC, and FERCWUTC with respect to, among other matters, rates and terms of service. The OPUC and WUTC also regulate the systemservice, systems of accounts, and issuanceissuances of securities by NW Natural. In 2017,At September 30, 2022, approximately 89%88% of NW Natural's utility gasNGD customers were located in Oregon, with the remaining 11%12% in Washington. Earnings and cash flows from utilitynatural 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, legislation and policy, customer preferences and NW Natural's ability to remain price competitive, control expenses, and obtain reasonable and timely regulatory recovery of its utility-relatednatural gas distribution-related costs, including operating expenses and investment costs in utility plant and other regulatory assets. See "Most Recent Completed General Rate Cases" below.
MIST INTERSTATE GAS STORAGE. NW Natural's interstate storage activity at Mist is subject to regulation by the OPUC, WUTC, and FERCthe Federal Energy Regulatory Commission (FERC) with respect to, among other matters, rates and terms of service. The OPUC also regulates the issuance of securities, system of accounts, and regulates intrastate storage services. Theservices at Mist, while FERC regulates the interstate storage services.services at Mist. The FERC uses a maximum cost of service model which allows for gas storage prices to be set at or below the cost of service as approved by each agency in their last regulatory filing. The OPUC Schedule 80 rates are tied to the FERC rates, and are updated whenever we modify ourNW Natural modifies FERC maximum rates.
In 2017, approximately 70%OTHER. The wholly owned regulated water businesses of storage revenues were derived from FERC, Oregon, and Washington regulated operations and approximately 30% from California operations.
OTHER. In June 2018,NWN Water, a wholly owned subsidiary of NW Natural 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, which isHoldings, are subject to approvalregulation by the CPUCutility commissions in the states in which they are located, which currently includes Oregon, Washington, Idaho, and other customary closing conditions. See Note 16 for more information.Texas.
Most Recent Completed General Rate Cases
OREGON.Effective November 1, 2012,On December 17, 2021, NW Natural filed a request for a general rate case (Rate Case) with the OPUC. On May 31, 2022, NW Natural, the OPUC authorizedstaff, the Oregon Citizens' Utility Board (CUB), the Alliance of Western Energy Consumers (AWEC), and the Small Business Utility Advocates (SBUA), which comprise some of the parties to the Rate Case, filed a stipulation with the OPUC addressing a number of issues in the Rate Case as well as a second docket, which was consolidated with the Rate Case (First Stipulation).
The First Stipulation provided for a total revenue requirement increase of $62.65 million over revenues from existing rates, subject to NW Naturaladjustment for capital additions and revenues related to new customers added in the test year and completion of capital projects identified as being placed into service prior to the rate effective date. The revenue requirement is based on an ROE of 9.5%, an overall rate of return of 7.78%, and a capitalthe following assumptions:
•Capital structure of 50% common equity and 50% long-term debt.debt;
•Return on equity (ROE) of 9.4%;
Effective•Cost of capital of 6.836%; and
•Average rate base of $1.77 billion or an increase of $337 million compared to the last rate case.
On June 29, 2022, NW Natural, the OPUC staff, the Oregon CUB, AWEC, and the Coalition of Communities of Color, Climate Solutions, Verde, Columbia Riverkeeper, Oregon Environmental Council, Community Energy Project, and Sierra Club, which comprise some of the parties to the Rate Case, filed a second stipulation with the OPUC addressing a number of issues in the Rate Case that were not addressed in the First Stipulation (Second Stipulation). The Second Stipulation addressed the following:
•Elimination of deposits for new residential customers;
•Updates to the Oregon low-income energy efficiency program; and
•Recovery of the COVID-19 deferral over two years starting November 1, 2018,2022.
On August 19, 2022, NW Natural, the OPUC Staff, Oregon CUB, and AWEC, which comprise some of the parties to the Rate Case, filed a third stipulation with the OPUC addressing the amortization period, interest accrual rate, and certain proposed tax adjustments related to NW Natural’s Lexington renewable natural gas (RNG) project (Third Stipulation and together with the First Stipulation and Second Stipulation, the Rate Case Stipulations).
On October 24, 2022, the OPUC issued an order approving the Rate Case Stipulations. After adjustments provided in the order and compliance with the First Stipulation, 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 also ordered an adjustment 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 costs NW Natural 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 1st, with a mechanism for NW Natural to defer the difference between forecasted and actual RNG costs, subject to an earnings test that includes deadbands at 50 basis points below and above NW Natural’s authorized ROE.
New rates authorized by the OPUC order were effective November 1, 2022.
From November 1, 2020 through October 31, 2022, the OPUC authorized rates to customers based on an ROE of 9.4%, an overall rate and a cost of returncapital of 7.317%, and6.965% with a capital structure of 50% common equity and 50% long-term debt. ForThe 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 earnings due to reductions in sales volumes.
WASHINGTON.On October 21, 2021, the WUTC issued an order concluding NW Natural's general rate case filed in December 2020 (WUTC Order). The WUTC Order provides for an annual revenue requirement increase over two years, consisting of a 6.4% or $5.0 million increase in the first year beginning November 1, 2021 (Year One), and up to a 3.5% or $3.0 million increase in the second year beginning November 1, 2022 (Year Two). The increase is based on the following assumptions:
•Cost of capital of 6.814%; and
•Average rate base of $194.7 million, an increase of $20.9 million since the last rate case for capital expenditures already expended at the time of filing, with an additional information, see "Regulatory Proceeding Updates" below.
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.
WASHINGTON. Effective January
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, 2009,2021.
From November 1, 2019 through October 31, 2021, the WUTC authorized rates to customers based on an ROE of 10.1%9.4% and an overall rate of return of 8.4%7.161% with a capital structure of 51% common equity, 5%50.0% long-term debt, 1.0% short-term debt, and 44% long-term debt.49.0% common equity. The WUTC also authorized the recovery of environmental remediation expenses allocable to Washington customers through an Environmental Cost Recovery Mechanism (ECRM) and directed NW Natural to provide federal tax reform benefits to customers. See "Rate Mechanisms - Environmental Cost Deferral and Recovery - Washington ECRM" below.
FERC.NW Natural is required under its Mist interstate storage certificate authority and rate approval orders to file every five years either a petition for rate approval or a cost and revenue study to change or justify maintaining the existing rates for its interstate storage services. In December 2013, NW Natural filed a rate petition, which was approved in 2014, and allows for the maximum cost-based rates for its interstate gas storage services. These rates were effective January 1, 2014. In January 2018, various state parties filed a request with the FERC to adjust the revenue requirements of public utilities to reflect the recent reduction in the federal corporate income tax rate and other impacts resulting from the TCJA. In July 2018, the FERC issued an order finalizing its regulations regarding the effect of the TCJA. The new regulations required NW Natural to file a petition for rate approval or a cost and revenue study to reflect the new federal corporate income tax rate within thirty days of the rate effective date of our Oregon rate case. This is approximately the same timeframe when a new cost and revenue study would be required under FERC's pre-existing requirements. 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. We expect minimal impact to our earnings from this filing.The revised rates were effective beginning November 1, 2018.
NW Natural continuously monitors the utility and evaluates the need for rate cases in its jurisdictions. NW Natural is currently evaluating the need for a Washington rate case filing in late 2018 or early 2019.
Rate Mechanisms
During 2018,2022 and 2021, NW Natural's key approved rates and recovery mechanisms for each service area included:
| | | | | | | | | | | | | | | | | | | | |
| Oregon | | Washington |
| 2020 Rate Case (effective 11/1/2020) | 2022 Rate Case (effective 11/1/2022) | | 2019 Rate Case (effective 11/1/2019) | | 2021 Rate Case (effective 11/1/2021) |
| Authorized Rate Structure: | | | | | | |
| Return on Equity | 9.4% | 9.4% | | 9.4% | | ** |
| Rate of Return | 7.0% | 6.8% | | 7.2% | | 6.8% |
| Debt/Equity Ratio | 50%/50% | 50%/50% | | 51%/49% | | ** |
| | | | | | |
| Key Regulatory Mechanisms: | | | | | | |
| Purchased Gas Adjustment (PGA) | X | X | | X | | X |
| Gas Cost Incentive Sharing | X | X | | | | |
| Decoupling | X | X | | | | |
| Weather Normalization (WARM) | X | X | | | | |
| Environmental Cost Recovery | X | X | | X | | X |
| Interstate Storage and Asset Management Sharing | X | X | | X | | X |
|
| | | | |
| | Oregon | | Washington |
| | 2012 Rate Case | 2018 Rate Case (effective 11/1/2018) | | 2009 Rate Case |
| Authorized Rate Structure: | | | | |
| ROE | 9.5% | 9.4% | | 10.1% |
| ROR | 7.8% | 7.3% | | 8.4% |
| Debt/Equity Ratio | 50%/50% | 50%/50% | | 49%/51% |
| | | | | |
| Key Regulatory Mechanisms: | | | | |
| PGA | X | X | | X |
| Gas Cost Incentive Sharing | X | X | | |
| Decoupling | X | X | | |
| WARM | X | X | | |
| Environmental Cost Deferral | X | X | | X |
| SRRM | X | X | | |
| Pension Balancing | X | | | |
| Interstate Storage and Asset Management Sharing | X | X | | X |
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. This includesThe 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, temporary rate adjustments, which amortize balances of deferred regulatory accounts, and the removal of temporary rate adjustments effective for the previous year.
EachEach year, NWNW Natural typically hedges gas prices on a portion of NW Natural's annual sales requirement based on normal weather, including both physical and financial hedges. As of September 30, 2022, NW Natural entered the 2017-18 gas year with itsNatural's forecasted sales volumesvolume was hedged at 49%approximately 80% in total for the 2022-23 gas year. The total hedged for Oregon was also approximately 80%, including 63% in financial swaphedges and option contracts and 26%17% in physical gas supplies.
As of September 30, 2018, The total hedged for Washington was approximately 79%, including 66% in financial hedges and 13% in physical gas supplies. During 2021 and 2022, there was increased volatility and pricing in the current and forward gas markets. In response to higher than normal volatility in forward gas markets in 2022, we are planning to hedge at higher levels for the 2022-23 gas year. In 2021, NW Natural increased its hedging level for the 2021-22 PGA year in Oregon to 82% compared to 74% in the 2020-21 PGA year.
NW Natural is also hedged in future gas years at approximately 66% for the 2018-19 gas yearbetween 20% and between 2% and 17%80% for annual requirements over the subsequent fivethree gas years.years, which consists of between 23% and 80% in Oregon and between 0% and 79% 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 utility.Company plans for the 2022-23 gas year, gas price volatility has remained high with current and forward gas prices increasing substantially in 2022. We will continue to monitor gas prices as we begin to fill storage and look at hedging plans for future gas years. Gas purchases and hedges entered into for the coming winter are included in the Company’s PGA filings in Oregon and Washington.
In September 2018,2022, NW Natural filed its annual PGA and received OPUC and WUTC approval in October 2018.2022.
Included in the 2022-23 PGA, the OPUC and WUTC approved a new temporary bill credit for NW Natural’s residential customers, beginning November 1, 2022. As a result, NW Natural will defer some of the rate impact to warmer months when customers typically see lower bills. PGA rate changes arewere effective November 1, 2018.2022. Rates may vary between states can vary due to different rate structures, rate mechanisms and mechanisms. In addition, as required with the Washington PGA filing, NW Natural provided the WUTC with a full strategy implementation plan to incorporate risk-responsive hedging strategies in its natural gas procurement process. NW Natural expects to begin implementing risk-responsive hedging strategies for the 2019-20 PGA. Also effective November 1 are a number of conditions under the agreement with the OPUC and the WUTC related to the formation of a holding company structure. One of the conditions is that, for three years, NW Natural will be required to provide an annual $500,000 credit to Oregon customers and a $55,000 credit to Washington customers. The first-year credit to both Oregon and Washington customers will be given in conjunction with the PGA filings, with the rate adjustments commencing on November 1, 2018.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 2018-192022-23 and 2017-182021-22 gas year,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 utilityNGD business is earning above its authorized ROE threshold. If utilityNGD 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 itNW Natural retains all of its earnings up to 150 basis points above the currently authorized ROE. If NW Natural selects the 90% deferral option, then it retains all of its earnings up to 100 basis points above the currently authorized ROE. For the 2016-17
2020-21 and 2017-182021-22 gas years, NW Natural selected the 90% deferral option. The ROE threshold is subject to adjustment annually based on movements in long-term interest rates. For calendar year 2017,2021, the ROE threshold was 10.66%10.40%. NW Natural filed the 20172021 earnings test in May 2018,April 2022 indicating no customer refund adjustment, and itthe filing was approved by the Commission in July 2018. As a result,2022. NW Natural wasdoes not subject toexpect a customer refund adjustment for 2017.2022 based on results.
GAS RESERVES. In 2011, the OPUC approved the Encana gas reserves transaction to provide long-term gas price protection for utilityNGD business customers and determined the costs under the agreement would be recovered on an ongoing basis through NW Natural'sthe 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 NW Natural's 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. NW Natural'sThe 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 NW Natural'sthe amended proportionate working interest for each well in which itNW 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 didhas not participateparticipated in additional wells during the nine months ended September 30, 2018.since 2014.
DECOUPLING. In Oregon, NW Natural has a decoupling mechanism covering all residential, small commercial and mid-size commercial sales customers.mechanism. Decoupling is intended to break the link between utility earnings and the quantity of gas consumed by customers, removing any financial incentive by the utility to discourage customers’ efforts to conserve energy. The Oregon decoupling mechanism was reauthorized and the baseline expected usage per customer was setreset in the 20182020 Oregon general rate case. The Order in the 2020 Oregon general rate case also approved extending NW Natural’s decoupling calculation for the months of November and May to the month of April. This mechanism employs a use-per-customer decoupling calculation, which adjusts margin revenues to account for the difference between actual and expected customer volumes. The margin adjustment resulting from differences between actual and expected volumes under the decoupling component is recorded to a deferral account, which is included in the annual PGA filing. In Washington, customer use is not covered by such a tariff.
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 Maymid-May of each heating season. The mechanism adjusts the margin component of customers’ rates to reflect average weather, which uses the 25-year average temperature for each day of the billing period. Daily average temperatures and 25-year average temperatures are based on a set point temperature of 59 degrees Fahrenheit for residential customers and 58 degrees Fahrenheit for commercial customers. The collections of any unbilled WARM amounts due to tariff caps and floors are deferred and earn a carrying charge until collected, or returned, in the PGA the following year. This weather normalization mechanism was reauthorized in the 2018 Oregon general rate case without an expiration date. Residential and small commercial customers in
Oregon are allowed to opt out of the weather normalization mechanism, and as of September 30, 2018, 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 SegmentsSegment—LocalNatural Gas Distribution Utility Operations"Distribution" below.
INDUSTRIAL TARIFFS. The OPUC and WUTC have approved tariffs covering utilityNGD service to NW Natural's major industrial customers, which are intended to give NW Natural certainty in the level of gas supplies it needs to acquireneeded 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 SRRM. RECOVERY. NW Natural has an SRRM through which it tracksauthorizations in Oregon and has the abilityWashington 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 past deferred and future prudently incurred environmental remediation costs allocable to Oregon customers, subject to an earnings test. Effective beginning November 1, 2019, the WUTC authorized an Environmental Cost Recovery Mechanism (ECRM) for recovery of prudently incurred costs allocable to Washington customers.
Oregon SRRM
Under the Oregon SRRM collection process there are three types of deferred environmental remediation expense:
•Pre-review - This class of costs represents remediation spend that has not yet been deemed prudent by the OPUC. Carrying costs on these remediation expenses are recorded at NW Natural's authorized cost of capital. NW Natural anticipates the prudence review for annual costs and approval of the earnings test prescribed by the OPUC to occur by the third quarter of the following year.
•Post-review - This class of costs represents remediation spend that has been deemed prudent and allowed after applying the earnings test, but is not yet included in amortization. NW Natural earns a carrying cost on these amounts at a rate equal to the five-year treasury rate plus 100 basis points.
•Amortization - This class of costs represents amounts included in current customer rates for collection and is 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 $6.1 million, $7.4$6.3 million and $10.0$4.2 million of deferred remediation expense approved by the OPUC for collection during the 2018-19, 2017-182021-22 and 2016-172020-21 PGA years, respectively.
In addition, the SRRM also provides for the annual collection of $5.0 million from Oregon customers through a tariff rider. As NW Naturalit collects amounts from customers, itNW Natural recognizes these collections as revenue net of any earnings test adjustments and separately amortizes an equal and offsetting amount of itsthe deferred regulatory asset balance through the environmental remediation operating expense line shown separately in the operating expenseexpenses section of the Consolidated StatementStatements of Comprehensive Income.Income (Loss). For additional information, see Note 1517 in NW Natural's 2017the 2021 Form 10-K.
The SRRM earnings test is an annual review of NW Natural's adjusted utilityNGD ROE compared to its authorized utilityNGD ROE. For 2018, the first ten months will be weighted at 9.5% and the last two months 9.4%, reflecting the ROE change from NW Natural's most recent rate case effective November 1, 2018. To apply the earnings test first NW Natural must first determine what if any costs are subject to the test through the following calculation:
| | |
| Annual spend |
Annual spend |
| Less: $5.0 million base rate rider |
Prior year carry-over(1) |
| $5.0 million insurance + interest on insurance |
| Total deferred annual spend subject to earnings test |
| Less: over-earnings adjustment, if any |
Add: deferred interest on annual spend(2) |
| Total amount transferred to post-review |
| |
(1)
| Prior year carry-over results when the prior year amount transferred to post-review is negative. The negative amount is carried over to offset annual spend in the following year. |
| |
(2)
| Deferred interest is added to annual spend to the extent the spend is recoverable. |
(1) Prior year carry-over results when the prior year amount transferred to post-review is negative. The negative amount is carried over to offset annual spend in the following year.
(2) Deferred interest is added to annual spend to the extent the spend is recoverable.
To the extent the utilityNGD business earns at or below NW Natural'sits authorized ROE as defined in the SRRM, the total amount transferred to post-review is recoverable through the SRRM. To the extent the utility earns more than its authorized ROE is earned in a year, the amount transferred to post-review would be reduced by those earnings that exceed its authorized ROE.
NW Natural concluded there was no earnings test adjustment for 20172021 based on the environmental earnings test that was submitted in May 2018 and approvedApril 2022.
Washington ECRM
The ECRM established by the Commission in July 2018.
The WUTC has also previously authorized the deferralorder effective November 1, 2019 permits NW Natural’s recovery of environmental costs, if any, that are appropriately allocatedremediation expenses allocable to Washington customers. This Order was effective in January 2011 with cost recovery and carrying charges on the amount deferred forThese expenses represent 3.32% of costs associated with services providedremediation 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 customersthrough application of insurance proceeds and collections from customers. Prudently incurred costs that were deferred from the initial deferral authorization in February 2011 through June 2019 were fully offset with insurance proceeds, with any remaining insurance proceeds to be determinedamortized 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 future proceeding. 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 meetparticular year the criteria for continued application of regulatory accounting, then it would be requiredrequest to write-off the net unrecoverable balances against earnings in the period such a determination was made.
PENSION COST DEFERRAL AND PENSION BALANCING ACCOUNT. Prior to November 1, 2018, the OPUC permitted NW Natural to defer annual pension expenses above the amount set in rates, with recovery of thesecollect deferred amounts through a balancing account, which includedexceeds one percent of Washington normalized revenues, then the expectation of higher and lower pension expenses in future years. The recovery of these deferred balances included accrued interest on the account balance at the utility’s authorized rate of return.excess will be collected over three years with interest.
On October 26, 2018, the OPUC issued an order in NW Natural's Oregon general rate case. This order freezes NW Natural's pension balancing account as of October 31, 2018 and beginning on November 1, 2018, permits NW Natural to recover the test year FAS 87 pension expense in base rates, resulting in an expected increase of approximately $8.1 million to NW Natural’s revenue requirement. NW Natural has implemented this order. The order directs NW Natural and other parties to the rate case to engage in further regulatory proceedings extending the Oregon general rate case to resolve open issues with respect to the recovery of the pension balancing account. The OPUC has ordered the parties to conclude these additional proceedings by February 1, 2019. For additional information, see "Regulatory Proceeding Updates—Oregon General Rate Case" below.
Pension expense deferrals, excluding interest, were $9.4 million and $4.5 million during the nine months ended September 30, 2018 and 2017, respectively.
INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING.On an annual basis, NW Natural credits amounts to Oregon and Washington utility customers as part of itsa regulatory incentive sharing mechanism related to net revenues earned from Mist gas storage and asset management activities. Generally,Previously, amounts arewere credited to Oregon customers in June, while creditsJune. Starting in 2021, Oregon customers received this credit in February per the 2020 Oregon rate case order. Credits are given to customers in Washington throughas reductions in rates through the annual PGA filing in November.
In 2018,During the first quarter of 2022, NW Natural received regulatory approval to refundrefunded an interstate storage and asset management sharing credit of $11.7approximately $41.1 million to its Oregon utility customers. Ofcustomers over three equal installments in January, February and March. This includes revenue generated for the November 2020 through October 2021 PGA year. A majority of this amount, $10.2revenue is from the cold weather event in February 2021 disclosed above. Credits are given to customers in Washington as reductions in rates through the annual PGA filing in November. Credits to Oregon and Washington customers in 2021 were approximately $9.1 million was reflected in customers' June bills with the remainder to be credited to their bills in the third quarter. The 2017 interstate storage credit was approximately $11.7 million.and $3.1 million, respectively.
Industrial Sales and Transportation
Industrial sales and transportation highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | |
| Volumes (therms) | | | | | | | | | | | | |
| Firm and interruptible sales | | 22,606 | | | 18,353 | | | 75,795 | | | 64,598 | | | 4,253 | | | 11,197 | |
| Firm and interruptible transportation | | 82,026 | | | 87,279 | | | 284,402 | | | 285,577 | | | (5,253) | | | (1,175) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total volumes - sales and transportation | | 104,632 | | | 105,632 | | | 360,197 | | | 350,175 | | | (1,000) | | | 10,022 | |
| NGD margin | | | | | | | | | | | | |
| Firm and interruptible sales | | $ | 2,671 | | | $ | 2,735 | | | $ | 9,561 | | | $ | 9,033 | | | $ | (64) | | | $ | 528 | |
| Firm and interruptible transportation | | 4,396 | | | 4,560 | | | 14,497 | | | 14,423 | | | (164) | | | 74 | |
| Total margin - sales and transportation | | $ | 7,067 | | | $ | 7,295 | | | $ | 24,058 | | | $ | 23,456 | | | $ | (228) | | | $ | 602 | |
THREE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Industrial sales and transportation margin decreased $0.2 million compared to the prior period. Volumes decreased 1.0 million therms primarily due to lower usage from multiple customers, most notably in the plastic manufacturing and food processing industries, partially offset by higher usage from customers in the primary metals industry.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Industrial sales and transportation margin increased $0.6 million compared to the prior period. Volumes increased 10.0 million therms 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.
Cost of Gas
Cost of gas highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | |
| Cost of gas | | $ | 36,258 | | | $ | 25,322 | | | $ | 261,678 | | | $ | 178,837 | | | $ | 10,936 | | | $ | 82,841 | |
Volumes sold (therms)(1) | | 76,535 | | | 73,950 | | | 571,098 | | | 520,486 | | | 2,585 | | | 50,612 | |
| Average cost of gas (cents per therm) | | $ | 0.47 | | | $ | 0.34 | | | $ | 0.46 | | | $ | 0.34 | | | $ | 0.13 | | | $ | 0.12 | |
Loss from gas cost incentive sharing(2) | | $ | (420) | | | $ | (546) | | | $ | (2,868) | | | $ | (3,032) | | | $ | 126 | | | $ | 164 | |
(1)This calculation excludes volumes delivered to industrial transportation customers.
(2) For additional information regarding NW Natural's gas cost incentive sharing mechanism, see Part II, Item 7 "Results of Operations—Regulatory Proceeding UpdatesMatters—Rate Mechanisms—Gas Reserves" in NW Natural's 2021 Form 10-K.
During 2018,
THREE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Cost of gas increased $10.9 million primarily due to a 38% increase in average cost of gas with the majority of these higher gas costs embedded in the PGA, and customer growth. Volumes sold increased 2.6 million therms driven by higher usage from industrial sales customers.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Cost of gas increased $82.8 million primarily due to a 35% increase in average cost of gas with the majority of these higher gas costs embedded in the PGA, and customer growth. Volumes sold increased 50.6 million therms driven by 3% warmer than average weather in the first nine months of 2022 compared to 12% warmer than average weather in the prior period.
Other Regulated Services Margin
Other regulated services margin highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | |
| North Mist storage services | | $ | 4,858 | | | $ | 4,716 | | | $ | 14,573 | | | $ | 14,147 | | | $ | 142 | | | $ | 426 | |
| Other services | | 44 | | | 53 | | | 145 | | | 169 | | | (9) | | | (24) | |
| Total other regulated services | | $ | 4,902 | | | $ | 4,769 | | | $ | 14,718 | | | $ | 14,316 | | | $ | 133 | | | $ | 402 | |
THREE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Other regulated services margin was relatively flat when compared to the prior period. The North Mist expansion facility did not experience any significant fluctuations in storage service revenue. See Note 7 for information regarding North Mist expansion lease accounting.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Other regulated services margin increased $0.4 million compared to the prior period due to scheduled rate increases in storage service revenue.
Other
Other activities aggregated and reported as other at NW Holdings include NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas activities; NWN Water, which owns and continues to pursue investments in the water sector; and NWN Water's investment in Avion Water Company, Inc. (Avion Water). Other activities aggregated and reported as other at NW Natural include the non-NGD storage activity at Mist as well as asset management services and the appliance retail center operations. See Note 4 for further discussion of our business segment and other, as well as our direct and indirect wholly-owned subsidiaries. See Note 13 for information on our Avion Water investment.
The following table presents the results of activities aggregated and reported as other for both NW Holdings and NW Natural:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands, except EPS data | | 2022 | | 2021 | | 2022 | | 2021 | | |
| NW Natural other - net income | | $ | 4,210 | | | $ | 2,279 | | | $ | 8,812 | | | $ | 10,435 | | | $ | 1,931 | | | $ | (1,623) | |
| Other NW Holdings activity | | (781) | | | 363 | | | (2,976) | | | (1,544) | | | (1,144) | | | (1,432) | |
| NW Holdings other - net income | | $ | 3,429 | | | $ | 2,642 | | | $ | 5,836 | | | $ | 8,891 | | | $ | 787 | | | $ | (3,055) | |
| Diluted EPS - NW Holdings - other | | $ | 0.10 | | | $ | 0.09 | | | $ | 0.17 | | | $ | 0.29 | | | $ | 0.01 | | | $ | (0.12) | |
THREE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Other net income increased $0.8 million at NW Holdings and $1.9 million at NW Natural. The increase at NW Natural was involvedprimarily due to an increase in asset management revenues. The increase at NW Holdings was driven by the increase at NW Natural, partially offset by higher interest expense at the holding company.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Other net income decreased $1.6 million at NW Natural and $3.1 million at NW Holdings. The decrease at NW Natural was primarily due to lower asset management revenue mainly related to the 2021 cold weather event that did not recur in the current year. The decrease at NW Holdings was driven by the decrease at NW Natural, higher interest expense at the holding company, and costs associated with non-regulated renewable natural gas activities.
Consolidated Operations
Operations and Maintenance
Operations and maintenance highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural | | $ | 45,858 | | | $ | 43,768 | | | $ | 148,614 | | | $ | 137,894 | | | $ | 2,090 | | | $ | 10,720 | |
| Other NW Holdings operations and maintenance | | 4,887 | | | 3,561 | | | 12,791 | | | 11,673 | | | 1,326 | | | 1,118 | |
| NW Holdings | | $ | 50,745 | | | $ | 47,329 | | | $ | 161,405 | | | $ | 149,567 | | | $ | 3,416 | | | $ | 11,838 | |
THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Operations and maintenance expense increased$3.4 million at NW Holdings and $2.1 million at NW Natural. The increase at NW Natural was driven by the following:
•$0.9 million increase in amortization expense related to cloud computing arrangements;
•$0.5 million increase in professional service fees; and
•$0.4 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects.
The $1.3 million increase in other NW Holdings operations and maintenance expense primarily reflects costs associated with non-regulated renewable natural gas activities and higher business development costs at the holding company.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Operations and maintenance expense increased$11.8 million at NW Holdings and $10.7 million at NW Natural. The increase at NW Natural was driven by the following:
•$4.1 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects;
•$2.3 million increase in amortization expense related to cloud computing arrangements;
•$1.5 million increase in professional service fees;
•$1.2 million increase in information technology maintenance and support; and
•$1.0 million increase related to employee expenses.
The $1.1 million increase in other NW Holdings operations and maintenance expense primarily reflects costs associated with non-regulated renewable natural gas activities.
Depreciation
Depreciation highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural | | $ | 28,201 | | | $ | 27,719 | | | $ | 83,166 | | | $ | 82,418 | | | $ | 482 | | | $ | 748 | |
| Other NW Holdings depreciation | | 825 | | | 719 | | | 2,399 | | | 2,261 | | | 106 | | | 138 | |
| NW Holdings | | $ | 29,026 | | | $ | 28,438 | | | $ | 85,565 | | | $ | 84,679 | | | $ | 588 | | | $ | 886 | |
THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Depreciation expense increased $0.6 million and $0.5 million at NW Holdings and NW Natural, respectively, primarily due to additional capital investments in the distribution system and Mist storage, as well as renovation and construction of resource and operations service centers. In addition, we placed two significant information technology projects into service in September 2022. The increase was partially offset by the amortization of cloud computing arrangements, which are recorded within operations and maintenance expenses beginning in 2022.
NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Depreciation expense increased $0.9 million and $0.7 million at NW Holdings and NW Natural, respectively, primarily due to additional capital investments in the distribution system, Mist storage, and information technology systems, as well as renovation and construction of resource and operations service centers. The increase was partially offset by the amortization of cloud computing arrangements, which are recorded within operations and maintenance expenses beginning in 2022.
Other Income (Expense), Net
Other income (expense), net highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural other income (expense), net | | $ | 1,161 | | | $ | (2,295) | | | $ | 197 | | | $ | (8,526) | | | $ | 3,456 | | | $ | 8,723 | |
| Other NW Holdings activity | | 475 | | | 79 | | | 711 | | | 171 | | | 396 | | | 540 | |
| NW Holdings other income (expense), net | | $ | 1,636 | | | $ | (2,216) | | | $ | 908 | | | $ | (8,355) | | | $ | 3,852 | | | $ | 9,263 | |
THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Other income (expense), net changed $3.9 million and $3.5 million at NW Holdings and NW Natural, respectively, primarily due to lower pension non-service costs. Costs related to our defined benefit pension plan for 2022 are expected to decrease compared to the prior year due to changes in assumptions and gains on plan assets. The change at other NW Holdings was driven by the change at NW Natural. Other income (expense), net primarily consists of regulatory activities discussed below. interest, pension and other postretirement non-service costs, gains from company-owned life insurance, and donations.
NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021.Other income (expense), net changed $9.3 million and $8.7 million at NW Holdings and NW Natural, respectively, primarily due to lower pension non-service costs. Costs related to our defined benefit pension plan for 2022 are expected to decrease compared to the prior year due to changes in assumptions and gains on plan assets. The change at other NW Holdings was driven by the change at NW Natural.
Interest Expense, Net
Interest expense, net highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural | | $ | 11,128 | | | $ | 10,850 | | | $ | 32,558 | | | $ | 32,336 | | | $ | 278 | | | $ | 222 | |
| Other NW Holdings interest expense, net | | 1,926 | | | 325 | | | 3,598 | | | 993 | | | 1,601 | | | 2,605 | |
| NW Holdings | | $ | 13,054 | | | $ | 11,175 | | | $ | 36,156 | | | $ | 33,329 | | | $ | 1,879 | | | $ | 2,827 | |
THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Interest expense, net increased $1.9 million and $0.3 million at NW Holdings and NW Natural, respectively. Interest expense, net at NW Natural increased $1.2 million due to higher interest expense on short and long-term debt, partially offset by $0.9 million of higher Allowance for Funds Used During Construction (AFUDC) debt interest income. The increase at NW Holdings is primarily due to higher interest expense on the Holdings' credit facility as a result of higher balances outstanding and higher interest rates.
NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Interest expense, net increased $2.8 million and $0.2 million at NW Holdings and NW Natural, respectively. Interest expense, net at NW Natural increased $2.1 million due to higher interest expense on short and long-term debt, partially offset by $1.9 million of higher AFUDC debt interest income. The increase at NW Holdings is primarily due to higher interest expense on Holdings' credit facility as a result of higher balances outstanding and higher interest rates.
Income Tax Expense (Benefit)
Income tax expense (benefit) highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural income tax expense (benefit) | | $ | (6,455) | | | $ | (7,212) | | | $ | 13,678 | | | $ | 13,628 | | | $ | 757 | | | $ | 50 | |
| NW Holdings income tax expense (benefit) | | $ | (6,758) | | | $ | (7,127) | | | $ | 12,635 | | | $ | 13,117 | | | $ | 369 | | | $ | (482) | |
THREE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Income tax expense increased $0.8 million at NW Natural and $0.4 million at NW Holdings. The increase in income tax expense is primarily due to a higher pre-tax income in the current period compared to the prior year.
NINE MONTHS ENDED SEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Income tax expense increased $0.1 million at NW Natural and decreased $0.5 million at NW Holdings. The decrease in income tax expense at NW Holdings is primarily due to a decrease in pre-tax income in the current period compared to the prior year.
Regulatory Matters
For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the 2021 Form 10-K.
Regulation and Rates
NATURAL GAS DISTRIBUTION.NW Natural's 2017 Form 10-K.
INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING. NW Natural received an Order fromnatural gas distribution business is subject to regulation by the OPUC and WUTC with respect to, among other matters, rates and terms of service, systems of accounts, and issuances of securities by NW Natural. At September 30, 2022, approximately 88% of NGD customers were located in March 2015 on their review of the current revenue sharing arrangement that allocates a portion of the net revenues generated from non-utility Mist storage services and third-party asset management services to utility customers. The Order required a third-party cost study to be performed. In 2017, a third-party consultant completed a cost study and their final report was filedOregon, with the OPUCremaining 12% in February 2018. The OPUC concluded on this matterWashington. 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 Oregon general rate case proceeding. For additional information, seeresidential, commercial, and industrial markets, legislation and policy, 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 "Oregon GeneralMost Recent Completed Rate Case"Cases" below.
HOLDING COMPANY APPLICATION. In February 2017,MIST INTERSTATE GAS STORAGE. NW Natural filed applications withNatural's interstate storage activity at Mist is subject to regulation by the OPUC, WUTC, and CPUCthe 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 approvalgas storage prices to reorganize underbe set at or below the cost of service as approved by each agency in their last regulatory filing. The OPUC Schedule 80 rates are tied to the FERC rates, and are updated whenever NW Natural modifies FERC maximum rates.
OTHER. The wholly owned regulated water businesses of NWN Water, a holding company structure. In 2017, the OPUC and WUTC approvedwholly owned subsidiary of NW Natural's applicationsHoldings, are subject to certain restrictions or "ring-fencing" provisions applicable toregulation by the utility commissions in the states in which they are located, which currently includes Oregon, Washington, Idaho, and Texas.
Most Recent Completed Rate Cases
OREGON.On December 17, 2021, NW Natural filed a request for a general rate case (Rate Case) with the OPUC. On May 31, 2022, NW Natural, the entity that currently,OPUC staff, the Oregon Citizens' Utility Board (CUB), the Alliance of Western Energy Consumers (AWEC), and would continuethe Small Business Utility Advocates (SBUA), which comprise some of the parties to house our utility operations. During the second quarter of 2018, NW Natural received approval from the CPUC. On October 1, 2018 we completed the reorganization toRate Case, filed a holding company structure.
TAX REFORM DEFERRAL. In December 2017, NW Natural filed applicationsstipulation with the OPUC and WUTC to deferaddressing a number of issues in the overall net benefit associatedRate Case as well as a second docket, which was consolidated with the TCJA that was enacted on December 22, 2017 withRate Case (First Stipulation).
The First Stipulation provided for a January 1, 2018total revenue requirement increase of $62.65 million over revenues from existing rates, subject to adjustment for capital additions and revenues related to new customers added in the test year and completion of capital projects identified as being placed into service prior to the rate effective date. ThroughThe revenue requirement is based on the following assumptions:
•Capital structure of 50% common equity and 50% long-term debt;
•Return on equity (ROE) of 9.4%;
•Cost of capital of 6.836%; and
•Average rate base of $1.77 billion or an increase of $337 million compared to the last rate case.
On June 29, 2022, NW Natural, the OPUC staff, the Oregon generalCUB, AWEC, and the Coalition of Communities of Color, Climate Solutions, Verde, Columbia Riverkeeper, Oregon Environmental Council, Community Energy Project, and Sierra Club, which comprise some of the parties to the Rate Case, filed a second stipulation with the OPUC addressing a number of issues in the Rate Case that were not addressed in the First Stipulation (Second Stipulation). The Second Stipulation addressed the following:
•Elimination of deposits for new residential customers;
•Updates to the Oregon low-income energy efficiency program; and
•Recovery of the COVID-19 deferral over two years starting November 1, 2022.
On August 19, 2022, NW Natural, the OPUC Staff, Oregon CUB, and AWEC, which comprise some of the parties to the Rate Case, filed a third stipulation with the OPUC addressing the amortization period, interest accrual rate, case,and certain proposed tax adjustments related to NW Natural’s Lexington renewable natural gas (RNG) project (Third Stipulation and together with the First Stipulation and Second Stipulation, the Rate Case Stipulations).
On October 24, 2022, the OPUC issued an order directingapproving the Rate Case Stipulations. After adjustments provided in the order and compliance with the First Stipulation, 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 also ordered an adjustment 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 costs NW Natural 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 1st, with a mechanism for NW Natural to defer the other partiesdifference between forecasted and actual RNG costs, subject to an earnings test that includes deadbands at 50 basis points below and above NW Natural’s authorized ROE.
New rates authorized by the rate caseOPUC order were effective November 1, 2022.
From November 1, 2020 through October 31, 2022, the OPUC authorized rates to engage in further regulatory proceedings, includingcustomers based on an ROE of 9.4% and a cost of capital of 6.965% with a capital structure of 50% common equity and 50% long-term debt. The OPUC also authorized NW Natural to recover the extended general rate case, to resolve open issues with respect to the treatment of the 10-month deferral period of benefitsexpense associated with the TCJA. TheOregon Corporate Activity Tax (CAT) as a component of base rates. See "Corporate Activity Tax" in the 2021 Form 10-K. In addition, the OPUC has orderedapproved the parties to conclude these additional proceedings by February 1, 2019. NW Natural expects these proceedings to also determine the appropriatenessapplication of NW Natural's remeasurement of the regulated utility historical excess deferred income taxes pursuant to TCJA and the return of those excess historical deferred income taxes to customers directly or by using themNatural’s decoupling calculation for the customers' benefit. NW Natural expectsmonths of November and May to work with the WUTC regarding the Washington deferral for the TCJAmonth of April. The decoupling mechanism is intended to encourage customers to conserve energy without adversely affecting earnings due to reductions in a future regulatory or rate case filing and is currently deferring all amounts for the benefit of Washington customers.sales volumes.
WATER BUSINESS. Since we initiated our water strategy in December 2017, we have entered into the following agreements:
Salmon Valley Water Company — based in Welches, Oregon, NWN Water signed an agreement with this privately-owned water utility in December 2017 and received regulatory approval for the acquisition in September 2018. The transaction closed on November 1, 2018.
Falls Water Company — based in Idaho Falls, Idaho, NWN Water signed an agreement with this privately-owned water utility in December 2017. We received regulatory approval in July 2018 from the Idaho Commission and closed the transaction in September 2018.
Lehman Enterprises, Inc. and Sea View Water LLC — both based on Whidbey Island near Seattle, Washington, NWN Water signed an agreement with these two privately-owned water utilities in May 2018 and received regulatory approval from the WUTC in October 2018. These transactions closed on November 2, 2018.
Sunriver Water, LLC and Sunriver Environmental, LLC — both based in Central Oregon, Sunriver Water, LLC is a water utility and Sunriver Environmental, LLC is a wastewater treatment company. WASHINGTON.On October 12, 2018, NWN Water of Oregon entered into, and NW Holdings guaranteed, an agreement with Sunriver Resort LP to acquire these two entities, providing a current combined 9,400 connections at21, 2021, the Sunriver Resort community in Central Oregon. The transaction is expected to close in the first half of 2019. In October 2018, NWN Water of Oregon filed its application with the OPUC for these acquisitions and continues to work with the OPUC and anticipates receiving approvals in 2019. The closing of the transaction is subject to approval by the OPUC and other customary closing conditions.
These acquisitions described above will, upon the closing of the Sunriver transaction, represent approximately $67 million of aggregate investment.
OREGON GENERAL RATE CASE.On October 26, 2018, the OPUCWUTC issued an order regardingconcluding NW Natural's general rate case originally filed in December 2017 and approved2020 (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 following items effectivefirst year beginning November 1, 2018:2021 (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:
Annual revenue requirement increase of $23.4 million or 3.72% over NW Natural's revenue from existing rates, which includes approximately $12.1 million that would otherwise be recovered under the conservation tariff deferral;
Capital structure of 50% debt and 50% equity;
Return on equity of 9.4%;
•Cost of capital of 7.317%6.814%; and
Rate•Average rate base of $1.186 billion, or$194.7 million, an increase of $300$20.9 million since the last rate case in 2012;
Pension expenses will be recovered through ratesfor capital expenditures already expended at the time of filing, with an additional expected $31.2 million increase of $8.1in Year One, and an additional expected $21.4 million increase in Year Two, with the increases in Year One and Year Two relating to revenue requirement; andexpected capital expenditures in those years.
The sharingWUTC Order does not specify the underlying inputs to the cost of asset management revenues relatedcapital, 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 utility pipelinecustomers based on an ROE of 9.4% and storage assets will be 90%/10%an overall rate of return of 7.161% with 90% being crediteda 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. Previously customers received 67%See "Rate Mechanisms - Environmental Cost Deferral and Recovery - Washington ECRM" below.
FERC.NW Natural is required under its Mist interstate storage certificate authority and rate approval orders to file every five years either a petition for rate approval or a cost and revenue study to change or justify maintaining the existing rates for its interstate storage services. On October 12, 2018, NW Natural filed a rate petition with FERC for revised cost-based maximum rates, which incorporated the new federal corporate income tax rate. The revised rates were effective beginning November 1, 2018.
NW Natural continuously evaluates the need for rate cases in its jurisdictions.
Rate Mechanisms
During 2022 and 2021, NW Natural's key approved rates and recovery mechanisms for each service area included:
| | | | | | | | | | | | | | | | | | | | |
| Oregon | | Washington |
| 2020 Rate Case (effective 11/1/2020) | 2022 Rate Case (effective 11/1/2022) | | 2019 Rate Case (effective 11/1/2019) | | 2021 Rate Case (effective 11/1/2021) |
| Authorized Rate Structure: | | | | | | |
| Return on Equity | 9.4% | 9.4% | | 9.4% | | ** |
| Rate of Return | 7.0% | 6.8% | | 7.2% | | 6.8% |
| Debt/Equity Ratio | 50%/50% | 50%/50% | | 51%/49% | | ** |
| | | | | | |
| Key Regulatory Mechanisms: | | | | | | |
| Purchased Gas Adjustment (PGA) | X | X | | X | | X |
| Gas Cost Incentive Sharing | X | X | | | | |
| Decoupling | X | X | | | | |
| Weather Normalization (WARM) | X | X | | | | |
| Environmental Cost Recovery | X | X | | X | | X |
| Interstate Storage and Asset Management Sharing | X | X | | X | | X |
** The WUTC Order does not specify the underlying inputs to the cost of these revenues.capital, including capital structure and return on equity.
The ratePURCHASED GAS ADJUSTMENT. Rate changes lowered residential customer rates by 2.1%are established for NW Natural each year under PGA mechanisms in Oregon and 7.2%Washington to reflect changes in Washingtonthe expected cost of natural gas commodity purchases. The PGA filings include gas costs under spot purchases as well as contract supplies, gas cost hedges, gas costs from the withdrawal of storage inventories, the production of gas reserves, interstate pipeline demand costs, temporary rate adjustments, which amortize balances of deferred regulatory accounts, and the removal of temporary rate adjustments effective for the upcomingprevious year.
Each year, NW Natural hedges gas prices on a portion of NW Natural's annual sales requirement based on normal weather, including both physical and financial hedges. As of September 30, 2022, NW Natural's forecasted sales volume was hedged at approximately 80% in total for the 2022-23 gas year. The total hedged for Oregon was also approximately 80%, including 63% in financial hedges and 17% in physical gas supplies. The total hedged for Washington was approximately 79%, including 66% in financial hedges and 13% in physical gas supplies. During 2021 and 2022, there was increased volatility and pricing in the current and forward gas markets. In response to higher than normal volatility in forward gas markets in 2022, we are planning to hedge at higher levels for the 2022-23 gas year. In 2021, NW Natural increased its hedging level for the 2021-22 PGA year in Oregon to 82% compared to 74% in the 2020-21 PGA year.
NW Natural is also hedged between 20% and 80% for annual requirements over the subsequent three gas years, which consists of between 23% and 80% in Oregon and between 0% and 79% in Washington. Hedge levels are subject to change based on actual load volumes, which depend to a certain extent on weather, economic conditions, and estimated gas reserve production. Also, gas storage inventory levels may increase or decrease with storage expansion, changes in storage contracts with third parties, variations in the heat content of the gas, and/or storage recall by NW Natural. As the Company plans for the 2022-23 gas year, gas price volatility has remained high with current and forward gas prices increasing substantially in 2022. We will continue to monitor gas prices as we begin to fill storage and look at hedging plans for future gas years. Gas purchases and hedges entered into for the coming winter heating seasonare included in the Company’s PGA filings in Oregon and Washington.
In September 2022, NW Natural filed its annual PGA and received OPUC and WUTC approval in October 2022.
Included in the 2022-23 PGA, the OPUC and WUTC approved a new temporary bill credit for NW Natural’s residential customers, beginning November 1, 2022. As a result, NW Natural will defer some of the rate impact to warmer months when customers typically see lower bills. PGA rate changes were effective November 1, 2022. Rates may vary between states due to different rate structures, rate mechanisms and hedging policies.
Under the current PGA mechanism in Oregon, there is an incentive sharing provision whereby NW Natural is required to select each year an 80% deferral or a 90% deferral of higher or lower actual gas costs compared to estimated PGA prices, such that the impact on NW Natural's current earnings from the combined effectincentive sharing is either 20% or 10% of the difference between actual and estimated gas costs, respectively. For the 2022-23 and 2021-22 gas years, NW Natural selected the 90% deferral option. Under the Washington PGA mechanism, NW Natural defers 100% of the higher or lower actual gas costs, and those gas cost differences are passed on to customers through the annual PGA rate adjustment.
EARNINGS TEST REVIEW. NW Natural is subject to an annual earnings review in Oregon to determine if the NGD business is earning above its authorized ROE threshold. If NGD business earnings exceed a specific ROE level, then 33% of the amount above that level is required to be deferred or refunded to customers. Under this provision, if NW Natural selects the 80% deferral gas cost option, then NW Natural retains all earnings up to 150 basis points above the currently authorized ROE. If NW Natural selects the 90% deferral option, then it retains all earnings up to 100 basis points above the currently authorized ROE. For the
2020-21 and 2021-22 gas years, NW Natural selected the 90% deferral option. The ROE threshold is subject to adjustment annually based on movements in long-term interest rates. For calendar year 2021, the ROE threshold was 10.40%. NW Natural filed the 2021 earnings test in April 2022 indicating no customer refund adjustment, and the filing was approved in July 2022. NW Natural does not expect a customer refund adjustment for 2022 based on results.
GAS RESERVES. In 2011, the OPUC approved the Encana gas reserves transaction to provide long-term gas price protection for NGD business customers and determined costs under the agreement would be recovered on an ongoing basis through the annual PGA mechanism. Gas produced from NW Natural's interests is sold at then prevailing market prices, and revenues from such sales, net of associated operating and production costs and amortization, are included in cost of gas. The cost of gas, including a carrying cost for the rate base investment made under the original agreement, is included in NW Natural's annual Oregon PGA filing, which allows NW Natural to recover these costs through customer rates. The net investment under the original agreement earns a rate of return.
In 2014, NW Natural amended the original gas reserves agreement in response to Encana's sale of its interest in the Jonah field located in Wyoming to Jonah Energy. Under the amended agreement with Jonah Energy, NW Natural has the option to invest in additional wells on a well-by-well basis with drilling costs and resulting gas volumes shared at the amended proportionate working interest for each well in which NW Natural invests. Volumes produced from the additional wells drilled after the amended agreement are included in NW Natural's Oregon PGA at a fixed rate of $0.4725 per therm. NW Natural has not participated in additional wells since 2014.
DECOUPLING. In Oregon, NW Natural has a decoupling mechanism. Decoupling is intended to break the link between earnings and the quantity of gas consumed by customers, removing any financial incentive to discourage customers’ efforts to conserve energy. The Oregon decoupling baseline usage per customer was reset in the 2020 Oregon general rate case. The Order adopted two components ofin the Second Settlement and rejected the remainder. First, the Order freezes NW Natural’s pension balancing account as of October 31, 2018. Second, beginning on November 1, 2018, NW Natural is authorized to increase the amount of FAS 87 pension expense included in base rates by $8.1 million.
The Order directs NW Natural and the other parties to the rate case to engage in further regulatory proceedings extending the2020 Oregon general rate case docket to resolve open issues with respectalso approved extending NW Natural’s decoupling calculation for the months of November and May to the recoverymonth of April. This mechanism employs a use-per-customer decoupling calculation, which adjusts margin revenues to account for the difference between actual and expected customer volumes. The margin adjustment resulting from differences between actual and expected volumes under the decoupling component is recorded to a deferral account, which is included in the annual PGA filing.
WARM.In Oregon, NW Natural has an approved weather normalization mechanism (WARM), which is applied to residential and small commercial customer bills. This mechanism is designed to help stabilize the collection of fixed costs by adjusting residential and small commercial customer billings based on temperature variances from average weather, with rate decreases when the weather is colder than average and rate increases when the weather is warmer than average. The mechanism is applied to bills from December through mid-May of each heating season. The mechanism adjusts the margin component of customers’ rates to reflect average weather, which uses the 25-year average temperature for each day of the pension balancing account,billing period. Daily average temperatures and treatment25-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 10-month deferral period benefits associated with the TCJA. weather normalization mechanism, and as of September 30, 2022, 7% of total eligible customers had opted out. NW Natural does not have a weather normalization mechanism approved for Washington customers, which account for about 12% of total customers. See "Business Segment—Natural Gas Distribution" below.
INDUSTRIAL TARIFFS. The OPUC has ordered the partiesand WUTC have approved tariffs covering NGD service to conclude these additional proceedings by February 1, 2019.major industrial customers, which are intended to give NW Natural expects these proceedingscertainty in the level of gas supplies needed to also determineserve 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 appropriatenessterm of their service election under NW Natural’s remeasurementNatural's annual PGA tariff.
ENVIRONMENTAL COST DEFERRAL AND RECOVERY. NW Natural has authorizations in Oregon and Washington to defer costs related to remediation of the regulated utility historical excess deferred income taxes pursuantproperties that are owned or were previously owned by NW Natural. In Oregon, a Site Remediation and Recovery Mechanism (SRRM) is currently in place to TCJA and the return of these excess historical deferred income taxesrecover prudently incurred costs allocable to Oregon customers, directly or by using them for the customers’ benefit.
All the rate case changes were effective and implementedsubject to an earnings test. Effective beginning November 1, 2018.2019, the WUTC authorized an Environmental Cost Recovery Mechanism (ECRM) for recovery of prudently incurred costs allocable to Washington customers.
INTEGRATED RESOURCE PLAN (IRP). 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 files a full IRP bienniallyanticipates the prudence review for Oregonannual costs and Washington withapproval 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 WUTC, respectively.allowed after applying the earnings test, but is not yet included in amortization. NW Natural filed its 2018 Oregonearns 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 Washington IRPs on August 24, 2018 and anticipates acknowledgment fromis calculated as one-fifth of the post-review deferred balance. NW Natural earns a carrying cost equal to the amortization rate determined annually by the OPUC, which approximates a short-term borrowing rate. NW Natural included $6.3 million and notice$4.2 million of deferred remediation expense approved by the OPUC for collection during the 2021-22 and 2020-21 PGA years, respectively.
In addition, the SRRM also provides for the annual collection of $5.0 million from Oregon customers through a tariff rider. As it collects amounts from customers, NW Natural recognizes these collections as revenue net of any earnings test adjustments and separately amortizes an equal and offsetting amount of the deferred regulatory asset balance through the environmental remediation operating expense line shown separately in the operating expenses section of the Consolidated Statements of Comprehensive Income (Loss). For additional information, see Note 17 in the 2021 Form 10-K.
The SRRM earnings test is an annual review of adjusted NGD ROE compared to authorized NGD ROE. To apply the earnings test NW Natural must first determine what if any costs are subject to the test through the following calculation:
| | |
| Annual spend |
| Less: $5.0 million base rate rider |
Prior year carry-over(1) |
| $5.0 million insurance + interest on insurance |
| Total deferred annual spend subject to earnings test |
| Less: over-earnings adjustment, if any |
Add: deferred interest on annual spend(2) |
| Total amount transferred to post-review |
(1) Prior year carry-over results when the prior year amount transferred to post-review is negative. The negative amount is carried over to offset annual spend in the following year.
(2) Deferred interest is added to annual spend to the extent the spend is recoverable.
To the extent the NGD business earns at or below its authorized ROE as defined in the SRRM, the total amount transferred to post-review is recoverable through the SRRM. To the extent more than authorized ROE is earned in a year, the amount transferred to post-review would be reduced by those earnings that exceed its authorized ROE.
NW Natural concluded there was no earnings test adjustment for 2021 based on the environmental earnings test that was submitted in April 2022.
Washington ECRM
The ECRM established by the WUTC of the filings during the first quarter of 2019. The IRPs 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.
DEPRECIATION STUDY. Under OPUC regulations, NW Natural is required to file a depreciation study every five years to update or justify maintaining the existing depreciation rates. In December 2016, NW Natural filed the required depreciation study with the Commission. In September 2017, the parties to the docket filed a settlement with the Commission requesting approval of updated depreciation rates negotiated with the parties. In January 2018, OPUC issued an order adopting the stipulation. A corresponding docket was filed and approved in Washington for the same depreciation rates. The new depreciation rates were effective and implemented as of November 1, 2018 for2019 permits NW Natural’s recovery of environmental remediation expenses allocable to Washington customers. These expenses represent 3.32% of costs associated with remediation of sites that historically served both Oregon and Washington customers. The depreciation rates includedorder allows for recovery of past deferred and future prudently incurred remediation costs allocable to Washington through application of insurance proceeds and collections from customers. Prudently incurred costs that were deferred from the initial deferral authorization in February 2011 through June 2019 were fully offset with insurance proceeds, with any remaining insurance proceeds to be amortized over a 10.5 year period. On an annual basis NW Natural will file for a prudence determination and a request to recover remediation expenditures in excess of insurance amortizations in the stipulation do not materially change NW Natural's current depreciation rates, and their incorporation into NW Natural's rate recovery mechanisms remove any material impactfollowing year's customer rates. After insurance proceeds are fully amortized, if in a particular year the request to financial results.collect deferred amounts exceeds one percent of Washington normalized revenues, then the excess will be collected over three years with interest.
Business Segments - Local Gas Distribution Utility Operations
Utility 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 because a significant portion of utility margin is derived from natural gas sales to residential and commercial customers. In Oregon,INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING.On an annual basis, NW Natural has a conservation tariff (also called the decoupling mechanism), which adjusts utility margin up or down each month through a deferred regulatory accounting adjustment designedcredits amounts to offset changes resulting from increases or decreases in average use by residentialOregon 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 utility margin resulting from above- or below-average temperatures during the winter heating season. Both mechanisms are designed to reduce, but not eliminate, the volatility of customer bills and NW Natural's utility’s earnings. For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters—Rate Mechanisms" in NW Natural's 2017 Form 10-K.
Utility segment highlights include:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTR Change | | YTD Change |
| Dollars and therms in thousands, except EPS data | | 2018 | | 2017 | | 2018 | | 2017 | | |
| Utility net income (loss) | | $ | (11,983 | ) | | $ | (10,349 | ) | | $ | 24,930 |
| | $ | 31,980 |
| | $ | (1,634 | ) | | $ | (7,050 | ) |
| EPS - utility segment | | $ | (0.42 | ) | | $ | (0.36 | ) | | $ | 0.86 |
| | $ | 1.11 |
| | $ | (0.06 | ) | | $ | (0.25 | ) |
| Gas sold and delivered (in therms) | | 162,098 |
| | 163,621 |
| | 786,444 |
| | 865,903 |
| | (1,523 | ) | | (79,459 | ) |
Utility margin(1) | | $ | 54,940 |
| | $ | 52,532 |
| | $ | 257,402 |
| | $ | 269,172 |
| | $ | 2,408 |
| | $ | (11,770 | ) |
(1) See Utility Margin Table below for a reconciliation and additional detail.
THREE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. The primary factors contributing to the $1.6 million, or $0.06 per share, increase in utility net loss were as follows:
a $2.4 million increase in operations and maintenance expense largely from payroll and benefits due to additional headcount and general salary increases;
a $1.1 million increase in depreciation expense as a result of higher utility plant balances; partially offset by
a $2.4 million increase in utility margin primarily due to:
a $2.2 million increase due to a change in the revenue deferral associated with the decrease in the federal tax rate; and
a $0.8 million increase from customer growth.
For the three months ended September 30, 2018, total utility volumes sold and delivered decreased 1% over the same period in 2017.
NINE MONTHS ENDEDSEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. The primary factors contributing to the $7.1 million, or $0.25 per share, decrease in utility net income were as follows:
a $11.8 milliondecrease in utility margin due to:
a $7.0 million decrease due to a regulatory revenue deferral associated with the decline of the U.S. federal corporate income tax rate to 21% in 2018 from 35% in the prior period until customer rates can be reset to reflect the lower tax rate; partially offset by
a $3.2 million increase from customer growth.
The majority of the remaining decrease was due to 24% colder than average weather in the prior period compared to the current period.
a $6.1 million increase in operations and maintenance expense largely from payroll and benefits due to additional headcount and general salary increases as well as higher professional service costs; and
a $1.8 million net increase in other expenses and income primarilyincentive sharing mechanism related to higher depreciationnet revenues earned from Mist gas storage and property taxes; partially offset by
a $12.6 million decreaseasset management activities. Previously, amounts were credited to Oregon customers in income tax expense dueJune. Starting in 2021, Oregon customers received this credit in February per the 2020 Oregon rate case order. Credits are given to lower pre-tax income and the decline of the U.S. federal corporate income tax rate to 21% in 2018 compared to 35% in the prior period.
For the nine months ended September 30, 2018, total utility volumes sold and delivered decreased 9% over the same period in 2017 due to 11% warmer than average weather in 2018, compared to 24% colder than average weather in 2017.
Overall, the TCJA increased utility net income for the first nine months of 2018 by approximately $0.1 million as a result of a $5.2 million tax expense benefit substantially offset by the $5.1 million revenue deferral on an after-tax basis. Results during 2018 have been affected by a timing difference between the revenue deferral associated with tax reform and the tax expense benefit from the lower federal tax rate. For the first nine months of 2018, the deferral and tax benefit largely offset; however, there have been timing variances each quarter.
See "Regulatory Matters - Tax Reform Deferral and Oregon General Rate Case" above. The revenue deferral is primarily based on the estimated net benefit of the TCJA to customers for the year using forecasted regulated utility earnings, considering average weather and associated volumes. Additionally, during 2018, we expect the lower tax rate will increase the seasonality of gas utility earnings as the lower rate improves earnings in the heating season and reduces the tax benefit associated with losses in the non-heating periods.
UTILITY MARGIN TABLE. The following table summarizes the composition of utility gas volumes, revenues, and cost of sales:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Favorable/ (Unfavorable) |
| In thousands, except degree day and customer data | | 2018 | | 2017 | | 2018 | | 2017 | | QTR Change | | YTD Change |
| Utility volumes (therms): | | | | | | | | | | | | |
| Residential and commercial sales | | 57,368 |
| | 54,557 |
| | 439,024 |
| | 495,949 |
| | 2,811 |
| | (56,925 | ) |
| Industrial sales and transportation | | 104,730 |
| | 109,064 |
| | 347,420 |
| | 369,954 |
| | (4,334 | ) | | (22,534 | ) |
| Total utility volumes sold and delivered | | 162,098 |
| | 163,621 |
| | 786,444 |
| | 865,903 |
| | (1,523 | ) | | (79,459 | ) |
| Utility operating revenues: | | | | | | |
| Residential and commercial sales | | $ | 68,768 |
| | $ | 69,294 |
| | $ | 420,878 |
| | $ | 466,867 |
| | $ | (526 | ) | | $ | (45,989 | ) |
| Industrial sales and transportation | | 12,780 |
| | 13,488 |
| | 43,572 |
| | 47,182 |
| | (708 | ) | | (3,610 | ) |
| Other revenues | | 3,529 |
| | 606 |
| | (2,925 | ) | | 3,149 |
| | 2,923 |
| | (6,074 | ) |
Less: Revenue taxes(1) | | — |
| | 2,262 |
| | — |
| | 13,251 |
| | 2,262 |
| | 13,251 |
|
| Total utility operating revenues | | 85,077 |
| | 81,126 |
| | 461,525 |
| | 503,947 |
| | 3,951 |
| | (42,422 | ) |
| Less: Cost of gas | | 25,593 |
| | 27,239 |
| | 175,864 |
| | 223,855 |
| | 1,646 |
| | 47,991 |
|
| Less: Environmental remediation expense | | 1,022 |
| | 1,355 |
| | 7,528 |
| | 10,920 |
| | 333 |
| | 3,392 |
|
Less: Revenue taxes(1) | | 3,522 |
| | — |
| | 20,731 |
| | — |
| | (3,522 | ) | | (20,731 | ) |
| Utility margin | | $ | 54,940 |
| | $ | 52,532 |
| | $ | 257,402 |
| | $ | 269,172 |
| | $ | 2,408 |
| | $ | (11,770 | ) |
Utility margin:(2) | | | | | | | | | | | | |
| Residential and commercial sales | | $ | 44,069 |
| | $ | 44,612 |
| | $ | 236,559 |
| | $ | 241,617 |
| | $ | (543 | ) | | $ | (5,058 | ) |
| Industrial sales and transportation | | 7,283 |
| | 7,272 |
| | 22,625 |
| | 23,529 |
| | 11 |
| | (904 | ) |
| Miscellaneous revenues | | 1,167 |
| | 606 |
| | 3,604 |
| | 3,144 |
| | 561 |
| | 460 |
|
| Gain (loss) from gas cost incentive sharing | | 80 |
| | 102 |
| | 1,088 |
| | 940 |
| | (22 | ) | | 148 |
|
Other margin adjustments(5) | | 2,341 |
| | (60 | ) | | (6,474 | ) | | (58 | ) | | 2,401 |
| | (6,416 | ) |
| Utility margin | | $ | 54,940 |
| | $ | 52,532 |
| | $ | 257,402 |
| | $ | 269,172 |
| | $ | 2,408 |
| | $ | (11,770 | ) |
Degree days(3) | | | | | | | | | | | | |
Average(4) | | 10 |
| | 10 |
| | 1,637 |
| | 1,637 |
| | — |
| | — |
|
Actual(6) | | — |
| | 14 |
| | 1,449 |
| | 2,037 |
| | NM |
| | (29 | )% |
Percent colder (warmer) than average weather(6) | | NM |
| | NM |
| | (11 | )% | | 24 | % | | | | |
| | | | | | | | | | | | | |
| | | As of September 30, | | | | | | | | |
| Customers - end of period: | | 2018 | | 2017 | | Change | | Growth | | | | |
| Residential customers | | 674,167 |
| | 662,555 |
| | 11,612 |
| | 1.8% | | | | |
| Commercial customers | | 68,192 |
| | 67,248 |
| | 944 |
| | 1.4% | | | | |
| Industrial customers | | 1,027 |
| | 1,021 |
| | 6 |
| | 0.6% | | | | |
| Total number of customers | | 743,386 |
| | 730,824 |
| | 12,562 |
| | 1.7% | | | | |
| |
(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 utility margin results. For additional information, see Note 2. |
| |
(2)
| Amounts reported as margin for each category of customers are total operating revenues less cost of gas, environmental remediation expense, and revenue tax expense. |
| |
(3)
| 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. |
| |
(4)
| Average weather represents the 25-year average of heating degree days, over the period 1986 - 2010, as determined in NW Natural's 2012 Oregon general rate case. |
| |
(5)
| Other margin adjustments include the net reduction of the revenue deferral of $2.2 million for the three months ended September 30, 2018 and $7.0 million regulatory revenue deferral for the nine months ended September 30, 2018 associated with the decline of the U.S. federal corporate income tax rate. |
| |
(6)
| NM indicates that the calculated value is not meaningful. |
Residential and Commercial Sales
Residential and commercial sales highlights include:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTR Change | | YTD Change |
| In thousands | | 2018 | | 2017 | | 2018 | | 2017 | | |
| Volumes (therms): | | | | | | | | | | | | |
| Residential sales | | 30,758 |
| | 29,308 |
| | 269,643 |
| | 307,655 |
| | 1,450 |
| | (38,012 | ) |
| Commercial sales | | 26,610 |
| | 25,249 |
| | 169,381 |
| | 188,294 |
| | 1,361 |
| | (18,913 | ) |
| Total volumes | | 57,368 |
| | 54,557 |
| | 439,024 |
| | 495,949 |
| | 2,811 |
| | (56,925 | ) |
| Operating revenues: | | | | | | | | | | | | |
| Residential sales | | $ | 43,119 |
| | $ | 43,290 |
| | $ | 279,350 |
| | $ | 308,416 |
| | $ | (171 | ) | | $ | (29,066 | ) |
| Commercial sales | | 25,649 |
| | 26,004 |
| | 141,528 |
| | 158,451 |
| | (355 | ) | | (16,923 | ) |
| Total operating revenues | | $ | 68,768 |
| | $ | 69,294 |
| | $ | 420,878 |
| | $ | 466,867 |
| | $ | (526 | ) | | $ | (45,989 | ) |
| Utility margin: | | | | | | | | | | | | |
| Residential: | | | | | | | | | | | | |
| Sales | | $ | 28,563 |
| | $ | 28,628 |
| | $ | 160,699 |
| | $ | 178,998 |
| | $ | (65 | ) | | $ | (18,299 | ) |
| Alternative revenue: | | | | | | | | | | | | |
| Weather normalization | | — |
| | 1 |
| | 2,985 |
| | (11,779 | ) | | (1 | ) | | 14,764 |
|
| Decoupling | | 824 |
| | 1,187 |
| | (326 | ) | | 54 |
| | (363 | ) | | (380 | ) |
| Amortization of alternative revenue | | 133 |
| | — |
| | 1,184 |
| | — |
| | 133 |
| | 1,184 |
|
| Total residential utility margin | | 29,520 |
| | 29,816 |
| | 164,542 |
| | 167,273 |
| | (296 | ) | | (2,731 | ) |
| Commercial: | | | | | | | | | | | | |
| Sales | | 13,512 |
| | 12,593 |
| | 70,575 |
| | 70,824 |
| | 919 |
| | (249 | ) |
| Alternative revenue: | | | | | | | | | | | | |
| Weather normalization | | — |
| | — |
| | 1,004 |
| | (4,511 | ) | | — |
| | 5,515 |
|
| Decoupling | | 1,982 |
| | 2,203 |
| | 6,699 |
| | 8,031 |
| | (221 | ) | | (1,332 | ) |
| Amortization of alternative revenue | | (945 | ) | | — |
| | (6,261 | ) | | — |
| | (945 | ) | | (6,261 | ) |
| Total commercial utility margin | | 14,549 |
| | 14,796 |
| | 72,017 |
| | 74,344 |
|
| (247 | ) | | (2,327 | ) |
| Total utility margin | | $ | 44,069 |
| | $ | 44,612 |
| | $ | 236,559 |
| | $ | 241,617 |
| | $ | (543 | ) | | $ | (5,058 | ) |
THREE MONTHS ENDED SEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. Residential and commercial utility margin decreased slightly reflecting lower contributions from NW Natural's gas reserve investments, which decreased due to regular amortization, partially offset by customer growth in both the residential and commercial sectors.
NINE MONTHS ENDEDSEPTEMBER 30, 2018 COMPARED TO SEPTEMBER 30, 2017. The primary factor contributing to the $5.1 million decrease in residential and commercial utility margin is a decline in usage from colder than average weather in the prior period, and the effect on customers that opt out of NW Natural's weather normalization mechanism in Oregon and customers in Washington that do not haveas reductions in rates through the annual PGA filing in November.
During the first quarter of 2022, NW Natural refunded an interstate storage and asset management sharing credit of approximately $41.1 million to Oregon customers over three equal installments in January, February and March. This includes revenue generated for the November 2020 through October 2021 PGA year. A majority of this mechanism. Partially offsetting this decline was higher customer growth.revenue is from the cold weather event in February 2021 disclosed above. Credits are given to customers in Washington as reductions in rates through the annual PGA filing in November. Credits to Oregon and Washington customers in 2021 were approximately $9.1 million and $3.1 million, respectively.
Industrial Sales and Transportation
Industrial sales and transportation highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | |
| Volumes (therms) | | | | | | | | | | | | |
| Firm and interruptible sales | | 22,606 | | | 18,353 | | | 75,795 | | | 64,598 | | | 4,253 | | | 11,197 | |
| Firm and interruptible transportation | | 82,026 | | | 87,279 | | | 284,402 | | | 285,577 | | | (5,253) | | | (1,175) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Total volumes - sales and transportation | | 104,632 | | | 105,632 | | | 360,197 | | | 350,175 | | | (1,000) | | | 10,022 | |
| NGD margin | | | | | | | | | | | | |
| Firm and interruptible sales | | $ | 2,671 | | | $ | 2,735 | | | $ | 9,561 | | | $ | 9,033 | | | $ | (64) | | | $ | 528 | |
| Firm and interruptible transportation | | 4,396 | | | 4,560 | | | 14,497 | | | 14,423 | | | (164) | | | 74 | |
| Total margin - sales and transportation | | $ | 7,067 | | | $ | 7,295 | | | $ | 24,058 | | | $ | 23,456 | | | $ | (228) | | | $ | 602 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTR Change | | YTD Change |
| In thousands | | 2018 | | 2017 | | 2018 | | 2017 | | |
| Volumes (therms): | | | | | | | | | | | | |
| Industrial - firm sales | | 8,203 |
| | 7,870 |
| | 26,069 |
| | 25,883 |
| | 333 |
| | 186 |
|
| Industrial - firm transportation | | 34,846 |
| | 33,826 |
| | 118,590 |
| | 121,452 |
| | 1,020 |
| | (2,862 | ) |
| Industrial - interruptible sales | | 9,871 |
| | 10,207 |
| | 37,851 |
| | 40,388 |
| | (336 | ) | | (2,537 | ) |
| Industrial - interruptible transportation | | 51,810 |
| | 57,161 |
| | 164,910 |
| | 182,231 |
| | (5,351 | ) | | (17,321 | ) |
| Total volumes | | 104,730 |
| | 109,064 |
| | 347,420 |
| | 369,954 |
| | (4,334 | ) | | (22,534 | ) |
| Utility margin: | | | | | | | | | | | | |
| Industrial - firm and interruptible sales | | $ | 2,921 |
| | $ | 2,755 |
| | $ | 8,626 |
| | $ | 8,870 |
| | $ | 166 |
| | $ | (244 | ) |
| Industrial - firm and interruptible transportation | | 4,362 |
| | 4,517 |
| | 13,999 |
| | 14,659 |
| | (155 | ) | | (660 | ) |
| Industrial - sales and transportation | | $ | 7,283 |
| | $ | 7,272 |
| | $ | 22,625 |
| | $ | 23,529 |
| | $ | 11 |
| | $ | (904 | ) |
THREE MONTHS ENDEDSEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. Sales2021.Industrial sales and transportation volumesmargin decreased by 4.3$0.2 million compared to the prior period. Volumes decreased 1.0 million therms or 4%, with minimal impactprimarily due to industrial margin aslower usage from multiple customers, most notably in the volume of lower margin therms decreased.plastic manufacturing and food processing industries, partially offset by higher usage from customers in the primary metals industry.
NINE MONTHS ENDEDSEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. Sales2021.Industrial sales and transportation volumes decreased by 22.5margin increased $0.6 million compared to the prior period. Volumes increased 10.0 million therms or 6%, and industrial utility margin decreased by $0.9 millionprimarily due to warmer than average weatherhigher usage from multiple customers, most notably in 2018 compared to colder than average weatherthe light manufacturing, primary metals, and electric manufacturing industries, partially offset by lower usage from customers in 2017.the plastic manufacturing industry.
Cost of Gas
Cost of gas highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | |
| Cost of gas | | $ | 36,258 | | | $ | 25,322 | | | $ | 261,678 | | | $ | 178,837 | | | $ | 10,936 | | | $ | 82,841 | |
Volumes sold (therms)(1) | | 76,535 | | | 73,950 | | | 571,098 | | | 520,486 | | | 2,585 | | | 50,612 | |
| Average cost of gas (cents per therm) | | $ | 0.47 | | | $ | 0.34 | | | $ | 0.46 | | | $ | 0.34 | | | $ | 0.13 | | | $ | 0.12 | |
Loss from gas cost incentive sharing(2) | | $ | (420) | | | $ | (546) | | | $ | (2,868) | | | $ | (3,032) | | | $ | 126 | | | $ | 164 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTR Change | | YTD Change |
| Dollars and therms in thousands | | 2018 | | 2017 | | 2018 | | 2017 | | |
| Cost of gas | | $ | 25,593 |
| | $ | 27,239 |
| | $ | 175,864 |
| | $ | 223,855 |
| | $ | (1,646 | ) | | $ | (47,991 | ) |
Volumes sold (therms)(1) | | 75,442 |
| | 72,634 |
| | 502,944 |
| | 562,220 |
| | 2,808 |
| | (59,276 | ) |
| Average cost of gas (cents per therm) | | $ | 0.34 |
| | $ | 0.38 |
| | $ | 0.35 |
| | $ | 0.40 |
| | $ | (0.04 | ) | | $ | (0.05 | ) |
Gain (loss) from gas cost incentive sharing(2) | | $ | 80 |
| | $ | 102 |
| | $ | 1,088 |
| | $ | 940 |
| | $ | (22 | ) | | $ | 148 |
|
| |
(1)
| This calculation excludes volumes delivered to industrial transportation customers. |
| |
(2)
| For additional information regarding NW Natural's gas cost incentive sharing mechanism, see Part II, Item 7 "Results of Operations—Regulatory Matters—Rate Mechanisms—Gas Reserves" in NW Natural's 2017 Form 10-K. |
(1)This calculation excludes volumes delivered to industrial transportation customers.
(2) For additional information regarding NW Natural's gas cost incentive sharing mechanism, see Part II, Item 7 "Results of Operations—Regulatory Matters—Rate Mechanisms—Gas Reserves" in NW Natural's 2021 Form 10-K.
THREE MONTHS ENDEDSEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. 2021. Cost of gas decreased $1.6increased $10.9 million or 6%, primarily due to an 11% decreasea 38% increase in average cost of gas due to lower naturalwith the majority of these higher gas prices, slightly offsetcosts embedded in the PGA, and customer growth. Volumes sold increased 2.6 million therms driven by a 4% increase in volumes sold associated with customer growth.higher usage from industrial sales customers.
NINE MONTHS ENDEDSEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. 2021. Cost of gas decreased $48.0increased $82.8 million or 21%, primarily due to a 13% decrease35% increase in average cost of gas from lowerwith the majority of these higher gas costs embedded in the PGA, and customer growth. Volumes sold increased 50.6 million therms driven by 3% warmer than average weather in the first nine months of 2022 compared to 12% warmer than average weather in the prior period.
Other Regulated Services Margin
Other regulated services margin highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | |
| North Mist storage services | | $ | 4,858 | | | $ | 4,716 | | | $ | 14,573 | | | $ | 14,147 | | | $ | 142 | | | $ | 426 | |
| Other services | | 44 | | | 53 | | | 145 | | | 169 | | | (9) | | | (24) | |
| Total other regulated services | | $ | 4,902 | | | $ | 4,769 | | | $ | 14,718 | | | $ | 14,316 | | | $ | 133 | | | $ | 402 | |
THREE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Other regulated services margin was relatively flat when compared to the prior period. The North Mist expansion facility did not experience any significant fluctuations in storage service revenue. See Note 7 for information regarding North Mist expansion lease accounting.
NINE MONTHS ENDEDSEPTEMBER 30, 2022 COMPARED TO SEPTEMBER 30, 2021. Other regulated services margin increased $0.4 million compared to the prior period due to scheduled rate increases in storage service revenue.
Other
Other activities aggregated and reported as other at NW Holdings include NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); NW Natural Renewables Holdings, LLC and its non-regulated renewable natural gas pricesactivities; NWN Water, which owns and an 11% decreasecontinues to pursue investments in volumes sold, partially offset by customer growth.
Other
During the second quarter of 2018, we reevaluated our reportable segmentswater sector; and concluded that the remaining gas storageNWN Water's investment in Avion Water Company, Inc. (Avion Water). Other activities no longer meet the requirements to beaggregated and reported as a segment. The ongoing non-utility gasother at NW Natural include the non-NGD storage activity at Mist is nowas well as asset management services and the appliance retail center operations. See Note 4 for further discussion of our business segment and other, as well as our direct and indirect wholly-owned subsidiaries. See Note 13 for information on our Avion Water investment.
The following table presents the results of activities aggregated and reported as other for both NW Holdings and all prior periods presented reflect this change and the removal of our discontinued operation, Gill Ranch Storage.NW Natural:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD Change | | YTD Change |
| In thousands, except EPS data | | 2022 | | 2021 | | 2022 | | 2021 | | |
| NW Natural other - net income | | $ | 4,210 | | | $ | 2,279 | | | $ | 8,812 | | | $ | 10,435 | | | $ | 1,931 | | | $ | (1,623) | |
| Other NW Holdings activity | | (781) | | | 363 | | | (2,976) | | | (1,544) | | | (1,144) | | | (1,432) | |
| NW Holdings other - net income | | $ | 3,429 | | | $ | 2,642 | | | $ | 5,836 | | | $ | 8,891 | | | $ | 787 | | | $ | (3,055) | |
| Diluted EPS - NW Holdings - other | | $ | 0.10 | | | $ | 0.09 | | | $ | 0.17 | | | $ | 0.29 | | | $ | 0.01 | | | $ | (0.12) | |
Other primarily consists of our non-utility gas storage operations at Mist; asset management services using our utility and non-utility storage and transportation capacity; our appliance retail center operations; NNG Financial's investment in KB Pipeline; an equity investment in TWH, which has invested in the Trail West pipeline project; costs associated with our water sector strategy and holding company activities; our regulated water operations; and other non-utility investments and business development activities.
Other highlights include:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTR Change | | YTD Change |
| In thousands, except EPS data | | 2018 | | 2017 | | 2018 | | 2017 | | |
| Other net income | | $ | 839 |
| | $ | 2,462 |
| | $ | 5,598 |
| | $ | 5,605 |
| | $ | (1,623 | ) | | $ | (7 | ) |
| EPS - other | | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.19 |
| | $ | 0.20 |
| | $ | (0.06 | ) | | $ | (0.01 | ) |
THREE MONTHS ENDEDSEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017.2021.Other net income decreased $1.6increased $0.8 million at NW Holdings and $1.9 million at NW Natural. The increase at NW Natural was primarily due to an increase in costs associated with business development activities,asset management revenues. The increase at NW Holdings was driven by the increase at NW Natural, partially offset by increased income from our non-utility gas storage operationshigher interest expense at Mist.the holding company.
NINE MONTHS ENDEDSEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017.2021.Other net income remained flatdecreased $1.6 million at NW Natural and $3.1 million at NW Holdings. The decrease at NW Natural was primarily due to several offsetting factors including increased income from our non-utility gas storage operationslower asset management revenue mainly related to the 2021 cold weather event that did not recur in the current year. The decrease at Mist offsetNW Holdings was driven by an increase inthe decrease at NW Natural, higher interest expense at the holding company, and costs associated with business developmentnon-regulated renewable natural gas activities.
See Note 4 and Note 12 for further details on other activities and the investment in TWH, respectively.
Consolidated Operations
Operations and Maintenance
Operations and maintenance highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural | | $ | 45,858 | | | $ | 43,768 | | | $ | 148,614 | | | $ | 137,894 | | | $ | 2,090 | | | $ | 10,720 | |
| Other NW Holdings operations and maintenance | | 4,887 | | | 3,561 | | | 12,791 | | | 11,673 | | | 1,326 | | | 1,118 | |
| NW Holdings | | $ | 50,745 | | | $ | 47,329 | | | $ | 161,405 | | | $ | 149,567 | | | $ | 3,416 | | | $ | 11,838 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| In thousands | | 2018 | | 2017 | | 2018 | | 2017 | | QTR Change | | YTD Change |
| Operations and maintenance | | $ | 37,569 |
| | $ | 34,267 |
| | $ | 115,120 |
| | $ | 106,710 |
| | $ | 3,302 |
| | $ | 8,410 |
|
THREE MONTHS ENDED SEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. 2021. Operations and maintenance expense increased $3.3$3.4 millionreflecting at NW Holdings and $2.1 million at NW Natural. The increase at NW Natural was driven by the following:
•$0.9 million increase in amortization expense related to cloud computing arrangements;
•$0.5 million increase in professional service fees; and
•$0.4 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects.
The $1.3 million increase in other NW Holdings operations and maintenance expense primarily reflects costs associated with non-regulated renewable natural gas activities and higher utility payroll and benefits due to additional headcount and general salary increases, as well as higher professional services.business development costs at the holding company.
NINE MONTHS ENDEDSEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. 2021.Operations and maintenance expense increased$8.411.8 millionreflecting higher utility payroll at NW Holdings and benefits due$10.7 million at NW Natural. The increase at NW Natural was driven by the following:
•$4.1 million increase in contract labor for safety and reliability and contracted support for information technology and corporate projects;
•$2.3 million increase in amortization expense related to additional headcountcloud computing arrangements;
•$1.5 million increase in professional service fees;
•$1.2 million increase in information technology maintenance and general salary increases, as well as higher professional services.support; and
•$1.0 million increase related to employee expenses.
The $1.1 million increase in other NW Holdings operations and maintenance expense primarily reflects costs associated with non-regulated renewable natural gas activities.
Depreciation and Amortization
Depreciation and amortization highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural | | $ | 28,201 | | | $ | 27,719 | | | $ | 83,166 | | | $ | 82,418 | | | $ | 482 | | | $ | 748 | |
| Other NW Holdings depreciation | | 825 | | | 719 | | | 2,399 | | | 2,261 | | | 106 | | | 138 | |
| NW Holdings | | $ | 29,026 | | | $ | 28,438 | | | $ | 85,565 | | | $ | 84,679 | | | $ | 588 | | | $ | 886 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| In thousands | | 2018 | | 2017 | | 2018 | | 2017 | | QTR Change | | YTD Change |
| Depreciation and amortization | | $ | 21,485 |
| | $ | 20,352 |
| | $ | 63,507 |
| | $ | 60,529 |
| | $ | 1,133 |
| | $ | 2,978 |
|
THREE MONTHS ENDED SEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. 2021. Depreciation and amortization expense increased $1.1$0.6 million and $0.5 million at NW Holdings and NW Natural, respectively, primarily due to utility plant additions that includedadditional capital investments in NW Natural's natural gas transmission andthe distribution system facility upgrades, and enhanced technology.Mist storage, as well as renovation and construction of resource and operations service centers. In addition, we placed two significant information technology projects into service in September 2022. The increase was partially offset by the amortization of cloud computing arrangements, which are recorded within operations and maintenance expenses beginning in 2022.
NINE MONTHS ENDEDSEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. 2021. Depreciation and amortization expense increased $3.0$0.9 million and $0.7 million at NW Holdings and NW Natural, respectively, primarily due to utility plant additions that includedadditional capital investments in NW Natural's natural gas transmission andthe distribution system, facility upgrades,Mist storage, and enhanced technology.information technology systems, as well as renovation and construction of resource and operations service centers. The increase was partially offset by the amortization of cloud computing arrangements, which are recorded within operations and maintenance expenses beginning in 2022.
Other Income (Expense), Net
Other income (expense), net highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural other income (expense), net | | $ | 1,161 | | | $ | (2,295) | | | $ | 197 | | | $ | (8,526) | | | $ | 3,456 | | | $ | 8,723 | |
| Other NW Holdings activity | | 475 | | | 79 | | | 711 | | | 171 | | | 396 | | | 540 | |
| NW Holdings other income (expense), net | | $ | 1,636 | | | $ | (2,216) | | | $ | 908 | | | $ | (8,355) | | | $ | 3,852 | | | $ | 9,263 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| In thousands | | 2018 | | 2017 | | 2018 | | 2017 | | QTR Change | | YTD Change |
| Other income (expense), net | | $ | (312 | ) | | $ | 139 |
| | $ | (1,139 | ) | | $ | (624 | ) | | $ | (451 | ) | | $ | (515 | ) |
THREE MONTHS ENDED SEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. NW Natural's net income position in 2017 in 2021.Other income (expense), net switched to a net expense position in 2018 by $0.5changed $3.9 million and $3.5 million at NW Holdings and NW Natural, respectively, primarily due to slightly higher overall expense activitylower pension non-service costs. Costs related to our defined benefit pension plan for 2022 are expected to decrease compared to the prior year due to changes in assumptions and adecrease ingains on plan assets. The change at other NW Holdings was driven by the change at NW Natural. Other income (expense), net primarily consists of regulatory interest, income, partially offset by an increase in the equity portion of AFUDC.pension and other postretirement non-service costs, gains from company-owned life insurance, and donations.
NINE MONTHS ENDEDSEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. 2021.Other income (expense), net changed $9.3 million and $8.7 million at NW Natural's net expense position increased $0.5 millionHoldings and NW Natural, respectively, primarily due to an increaselower pension non-service costs. Costs related to our defined benefit pension plan for 2022 are expected to decrease compared to the prior year due to changes in higher overall expense activityassumptions and a $0.4 million decrease in regulatory interest income, partially offsetgains on plan assets. The change at other NW Holdings was driven by a $1.4 millionincrease in the equity portion of AFUDC.change at NW Natural.
Interest Expense, Net
Interest expense, net highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural | | $ | 11,128 | | | $ | 10,850 | | | $ | 32,558 | | | $ | 32,336 | | | $ | 278 | | | $ | 222 | |
| Other NW Holdings interest expense, net | | 1,926 | | | 325 | | | 3,598 | | | 993 | | | 1,601 | | | 2,605 | |
| NW Holdings | | $ | 13,054 | | | $ | 11,175 | | | $ | 36,156 | | | $ | 33,329 | | | $ | 1,879 | | | $ | 2,827 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| In thousands | | 2018 | | 2017 | | 2018 | | 2017 | | QTR Change | | YTD Change |
| Interest expense, net | | $ | 9,006 |
| | $ | 9,208 |
| | $ | 27,051 |
| | $ | 28,311 |
| | $ | (202 | ) | | $ | (1,260 | ) |
THREE MONTHS ENDED SEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017.2021. Interest expense, net decreased $0.2increased $1.9 million and $0.3 million at NW Holdings and NW Natural, respectively. Interest expense, net at NW Natural increased $1.2 million due to a $0.6 million increase in thehigher interest expense on short and long-term debt, portion of AFUDC, partially offset by a $0.4$0.9 million of higher Allowance for Funds Used During Construction (AFUDC) debt interest income. The increase inat NW Holdings is primarily due to higher interest expense fromon the Holdings' credit facility as a result of higher long-term debt balances as of September 30, 2018 compared to the prior period.outstanding and higher interest rates.
NINE MONTHS ENDEDSEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. 2021. Interest expense, net decreased $1.3increased $2.8 million and $0.2 million at NW Holdings and NW Natural, respectively. Interest expense, net at NW Natural increased $2.1 million due to higher interest expense on short and long-term debt, partially offset by $1.9 million of higher AFUDC debt interest income. The increase at NW Holdings is primarily due to a $1.9 million increase in the debt portion of AFUDC, partially offset by a $0.7 million increase inhigher interest expense fromon Holdings' credit facility as a result of higher long-term debt balances as of September 30, 2018 compared to the prior period.outstanding and higher interest rates.
Income Tax Expense (Benefit)
Income tax expense (benefit) highlights include:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | QTD | | YTD |
| In thousands | | 2022 | | 2021 | | 2022 | | 2021 | | Change | | Change |
| NW Natural income tax expense (benefit) | | $ | (6,455) | | | $ | (7,212) | | | $ | 13,678 | | | $ | 13,628 | | | $ | 757 | | | $ | 50 | |
| NW Holdings income tax expense (benefit) | | $ | (6,758) | | | $ | (7,127) | | | $ | 12,635 | | | $ | 13,117 | | | $ | 369 | | | $ | (482) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | | | |
| In thousands | | 2018 | | 2017 | | 2018 | | 2017 | | QTR Change | | YTD Change |
| Income tax expense (benefit) | | $ | (4,285 | ) | | $ | (5,722 | ) | | $ | 11,191 |
| | $ | 24,456 |
| | $ | 1,437 |
| | $ | (13,265 | ) |
THREE MONTHS ENDED SEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. 2021. Income tax benefits decreased $1.4expense increased $0.8 million at NW Natural and $0.4 million at NW Holdings. The increase in income tax expense is primarily due to the lower tax benefit in loss periods from the decline of the U.S. federal corporatea higher pre-tax income tax rate to 21% in 2018 from 35% in the current period compared to the prior period and changes in pre-tax loss.year.
NINE MONTHS ENDEDSEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. 2021. Income tax expense increased $0.1 million at NW Natural and decreased $13.3$0.5 million at NW Holdings. The decrease in income tax expense at NW Holdings is primarily due to the benefit from the decline of the U.S. federal corporatea decrease in pre-tax income tax rate to 21% in 2018 from 35% in the current period compared to the prior period,year.
Regulatory Matters
For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the 2021 Form 10-K.
Regulation and Rates
NATURAL GAS DISTRIBUTION.NW Natural's natural gas distribution business is subject to regulation by the OPUC and WUTC with respect to, among other matters, rates and terms of service, systems of accounts, and issuances of securities by NW Natural. At September 30, 2022, approximately 88% of NGD customers were located in Oregon, with the remaining 12% in Washington. Earnings and cash flows from natural gas distribution operations are largely determined by rates set in general rate cases and other proceedings in Oregon and Washington. They are also affected by weather, the local economies in Oregon and Washington, the pace of customer growth in the residential, commercial, and industrial markets, legislation and policy, 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 well as lower pre-tax income.approved by each agency in their last regulatory filing. The OPUC Schedule 80 rates are tied to the FERC rates, and are updated whenever NW Natural modifies FERC maximum rates.
Pending saleOTHER. The wholly owned regulated water businesses of Gill Ranch Storage
On June 20, 2018, NWN Gas Storage,Water, a wholly owned subsidiary of NW Holdings, are subject to regulation by the utility commissions in the states in which they are located, which currently includes Oregon, Washington, Idaho, and Texas.
Most Recent Completed Rate Cases
OREGON.On December 17, 2021, NW Natural filed a request for a general rate case (Rate Case) with the OPUC. On May 31, 2022, NW Natural, the OPUC staff, the Oregon Citizens' Utility Board (CUB), the Alliance of Western Energy Consumers (AWEC), and the Small Business Utility Advocates (SBUA), which comprise some of the parties to the Rate Case, filed a stipulation with the OPUC addressing a number of issues in the Rate Case as well as a second docket, which was consolidated with the Rate Case (First Stipulation).
The First Stipulation provided for a total revenue requirement increase of $62.65 million over revenues from existing rates, subject to adjustment for capital additions and revenues related to new customers added in the test year and completion of capital projects identified as being placed into service prior to the rate effective date. The revenue requirement is based on the following assumptions:
•Capital structure of 50% common equity and 50% long-term debt;
•Return on equity (ROE) of 9.4%;
•Cost of capital of 6.836%; and
•Average rate base of $1.77 billion or an increase of $337 million compared to the last rate case.
On June 29, 2022, NW Natural, the OPUC staff, the Oregon CUB, AWEC, and the Coalition of Communities of Color, Climate Solutions, Verde, Columbia Riverkeeper, Oregon Environmental Council, Community Energy Project, and Sierra Club, which comprise some of the parties to the Rate Case, filed a second stipulation with the OPUC addressing a number of issues in the Rate Case that were not addressed in the First Stipulation (Second Stipulation). The Second Stipulation addressed the following:
•Elimination of deposits for new residential customers;
•Updates to the Oregon low-income energy efficiency program; and
•Recovery of the COVID-19 deferral over two years starting November 1, 2022.
On August 19, 2022, NW Natural, the OPUC Staff, Oregon CUB, and AWEC, which comprise some of the parties to the Rate Case, filed a third stipulation with the OPUC addressing the amortization period, interest accrual rate, and certain proposed tax adjustments related to NW Natural’s Lexington renewable natural gas (RNG) project (Third Stipulation and together with the First Stipulation and Second Stipulation, the Rate Case Stipulations).
On October 24, 2022, the OPUC issued an order approving the Rate Case Stipulations. After adjustments provided in the order and compliance with the First Stipulation, 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 also ordered an adjustment 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 costs NW Natural 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 1st, with a mechanism for NW Natural to defer the difference between forecasted and actual RNG costs, subject to an earnings test that includes deadbands at 50 basis points below and above NW Natural’s authorized ROE.
New rates authorized by the OPUC order were effective November 1, 2022.
From November 1, 2020 through October 1, 2018, entered into31, 2022, the OPUC authorized rates to customers based on an ROE of 9.4% and a Purchasecost of capital of 6.965% with a capital structure of 50% common equity and Sale Agreement (the Agreement) that50% 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 earnings due to reductions in sales volumes.
WASHINGTON.On October 21, 2021, the WUTC issued an order concluding NW Natural's general rate case filed in December 2020 (WUTC Order). The WUTC Order provides for an annual revenue requirement increase over two years, consisting of a 6.4% or $5.0 million increase in the salefirst 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 NWN Gas Storagethe 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 all9.4% and an overall rate of return of 7.161% with a capital structure of 50.0% long-term debt, 1.0% short-term debt, and 49.0% common equity. The WUTC also authorized the recovery of environmental remediation expenses allocable to Washington customers through an Environmental Cost Recovery Mechanism (ECRM) and directed NW Natural to provide federal tax reform benefits to customers. See "Rate Mechanisms - Environmental Cost Deferral and Recovery - Washington ECRM" below.
FERC.NW Natural is required under its Mist interstate storage certificate authority and rate approval orders to file every five years either a petition for rate approval or a cost and revenue study to change or justify maintaining the existing rates for its interstate storage services. On October 12, 2018, NW Natural filed a rate petition with FERC for revised cost-based maximum rates, which incorporated the new federal corporate income tax rate. The revised rates were effective beginning November 1, 2018.
NW Natural continuously evaluates the need for rate cases in its jurisdictions.
Rate Mechanisms
During 2022 and 2021, NW Natural's key approved rates and recovery mechanisms for each service area included:
| | | | | | | | | | | | | | | | | | | | |
| Oregon | | Washington |
| 2020 Rate Case (effective 11/1/2020) | 2022 Rate Case (effective 11/1/2022) | | 2019 Rate Case (effective 11/1/2019) | | 2021 Rate Case (effective 11/1/2021) |
| Authorized Rate Structure: | | | | | | |
| Return on Equity | 9.4% | 9.4% | | 9.4% | | ** |
| Rate of Return | 7.0% | 6.8% | | 7.2% | | 6.8% |
| Debt/Equity Ratio | 50%/50% | 50%/50% | | 51%/49% | | ** |
| | | | | | |
| Key Regulatory Mechanisms: | | | | | | |
| Purchased Gas Adjustment (PGA) | X | X | | X | | X |
| Gas Cost Incentive Sharing | X | X | | | | |
| Decoupling | X | X | | | | |
| Weather Normalization (WARM) | X | X | | | | |
| Environmental Cost Recovery | X | X | | X | | X |
| Interstate Storage and Asset Management Sharing | X | X | | X | | X |
** The WUTC Order does not specify the underlying inputs to the cost of capital, including capital structure and return on equity.
PURCHASED GAS ADJUSTMENT. Rate changes are established for NW Natural each year under PGA mechanisms in Oregon and Washington to reflect changes in the expected cost of natural gas commodity purchases. The PGA filings include gas costs under spot purchases as well as contract supplies, gas cost hedges, gas costs from the withdrawal of storage inventories, the production of gas reserves, interstate pipeline demand costs, temporary rate adjustments, which amortize balances of deferred regulatory accounts, and the removal of temporary rate adjustments effective for the previous year.
Each year, NW Natural hedges gas prices on a portion of NW Natural's annual sales requirement based on normal weather, including both physical and financial hedges. As of September 30, 2022, NW Natural's forecasted sales volume was hedged at approximately 80% in total for the 2022-23 gas year. The total hedged for Oregon was also approximately 80%, including 63% in financial hedges and 17% in physical gas supplies. The total hedged for Washington was approximately 79%, including 66% in financial hedges and 13% in physical gas supplies. During 2021 and 2022, there was increased volatility and pricing in the current and forward gas markets. In response to higher than normal volatility in forward gas markets in 2022, we are planning to hedge at higher levels for the 2022-23 gas year. In 2021, NW Natural increased its hedging level for the 2021-22 PGA year in Oregon to 82% compared to 74% in the 2020-21 PGA year.
NW Natural is also hedged between 20% and 80% for annual requirements over the subsequent three gas years, which consists of between 23% and 80% in Oregon and between 0% and 79% 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 membership interests in Gill Ranch. Gill Ranch owns a 75% interest ingas, and/or storage recall by NW Natural. As 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. NW Holdings expects the transaction to close within 12 months of signing and in 2019. The closing of the transaction is subject to approval by the CPUC and other customary closing conditions. In July 2018, Gill Ranch filed an application with the CPUC for approval of this transaction.
The results of Gill Ranch Storage have been determined to be discontinued operations and are presented separately, net of tax, from the results of continuing operations for all periods presented. See Note 16 for more information on the Agreement and the results of discontinued operations.
The CPUC regulates Gill Ranch under a market-based rate model which allowsplans for the 2022-23 gas year, gas price of storage services to be set by the marketplace. The CPUC also regulates the issuance of securities, system of accounts,volatility has remained high with current and regulates intrastate storage services. The California Department of Oil Gas and Geothermal Resources (DOGGR) regulations forforward gas storage wells were finalizedprices increasing substantially 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 are expected to be finalized during 2019 and increase costs for all storage providers.2022. We will continue to monitor gas prices as we begin to fill storage and assesslook at hedging plans for future gas years. Gas purchases and hedges entered into for the coming winter are included in the Company’s PGA filings in Oregon and Washington.
In September 2022, NW Natural filed its annual PGA and received OPUC and WUTC approval in October 2022.
Included in the 2022-23 PGA, the OPUC and WUTC approved a new temporary bill credit for NW Natural’s residential customers, beginning November 1, 2022. As a result, NW Natural will defer some of the rate impact to warmer months when customers typically see lower bills. PGA rate changes were effective November 1, 2022. Rates may vary between states due to different rate structures, rate mechanisms and hedging policies.
Under the current PGA mechanism in Oregon, there is an incentive sharing provision whereby NW Natural is required to select each year an 80% deferral or a 90% deferral of higher or lower actual gas costs compared to estimated PGA prices, such that the impact on NW Natural's current earnings from the incentive sharing is either 20% or 10% of the difference between actual and estimated gas costs, respectively. For the 2022-23 and 2021-22 gas years, NW Natural selected the 90% deferral option. Under the Washington PGA mechanism, NW Natural defers 100% of the higher or lower actual gas costs, and those gas cost differences are passed on to customers through the annual PGA rate adjustment.
EARNINGS TEST REVIEW. NW Natural is subject to an annual earnings review in Oregon to determine if the NGD business is earning above its authorized ROE threshold. If NGD business earnings exceed a specific ROE level, then 33% of the amount above that level is required to be deferred or refunded to customers. Under this provision, if NW Natural selects the 80% deferral gas cost option, then NW Natural retains all earnings up to 150 basis points above the currently authorized ROE. If NW Natural selects the 90% deferral option, then it retains all earnings up to 100 basis points above the currently authorized ROE. For the
2020-21 and 2021-22 gas years, NW Natural selected the 90% deferral option. The ROE threshold is subject to adjustment annually based on movements in long-term interest rates. For calendar year 2021, the ROE threshold was 10.40%. NW Natural filed the 2021 earnings test in April 2022 indicating no customer refund adjustment, and the filing was approved in July 2022. NW Natural does not expect a customer refund adjustment for 2022 based on results.
GAS RESERVES. In 2011, the OPUC approved the Encana gas reserves transaction to provide long-term gas price protection for NGD business customers and determined costs under the agreement would be recovered on an ongoing basis through the annual PGA mechanism. Gas produced from NW Natural's interests is sold at then prevailing market prices, and revenues from such sales, net of associated operating and production costs and amortization, are included in cost of gas. The cost of gas, including a carrying cost for the rate base investment made under the original agreement, is included in NW Natural's annual Oregon PGA filing, which allows NW Natural to recover these costs through customer rates. The net investment under the original agreement earns a rate of return.
In 2014, NW Natural amended the original gas reserves agreement in response to Encana's sale of its interest in the Jonah field located in Wyoming to Jonah Energy. Under the amended agreement with Jonah Energy, NW Natural has the option to invest in additional wells on a well-by-well basis with drilling costs and resulting gas volumes shared at the amended proportionate working interest for each well in which NW Natural invests. Volumes produced from the additional wells drilled after the amended agreement are included in NW Natural's Oregon PGA at a fixed rate of $0.4725 per therm. NW Natural has not participated in additional wells since 2014.
DECOUPLING. In Oregon, NW Natural has a decoupling mechanism. Decoupling is intended to break the link between earnings and the quantity of gas consumed by customers, removing any financial incentive to discourage customers’ efforts to conserve energy. The Oregon decoupling baseline usage per customer was reset in the 2020 Oregon general rate case. The Order in the 2020 Oregon general rate case also approved extending NW Natural’s decoupling calculation for the months of November and May to the month of April. This mechanism employs a use-per-customer decoupling calculation, which adjusts margin revenues to account for the difference between actual and expected customer volumes. The margin adjustment resulting from differences between actual and expected volumes under the decoupling component is recorded to a deferral account, which is included in the annual PGA filing.
WARM.In Oregon, NW Natural has an approved weather normalization mechanism (WARM), which is applied to residential and small commercial customer bills. This mechanism is designed to help stabilize the collection of fixed costs by adjusting residential and small commercial customer billings based on temperature variances from average weather, with rate decreases when the weather is colder than average and rate increases when the weather is warmer than average. The mechanism is applied to bills from December through mid-May of each heating season. The mechanism adjusts the margin component of customers’ rates to reflect average weather, which uses the 25-year average temperature for each day of the billing period. Daily average temperatures and 25-year average temperatures are based on a set point temperature of 59 degrees Fahrenheit for residential customers and 58 degrees Fahrenheit for commercial customers. The collections of any unbilled WARM amounts due to tariff caps and floors are deferred and earn a carrying charge until collected, or returned, in the PGA the following year. Residential and small commercial customers in Oregon are allowed to opt out of the weather normalization mechanism, and as of September 30, 2022, 7% of total eligible customers had opted out. NW Natural does not have a weather normalization mechanism approved for Washington customers, which account for about 12% of total customers. See "Business Segment—Natural Gas Distribution" below.
INDUSTRIAL TARIFFS. The OPUC and WUTC have approved tariffs covering NGD service to major industrial customers, which are intended to give NW Natural certainty in the level of gas supplies needed to serve this customer group. The approved terms include, among other things, an annual election period, special pricing provisions for out-of-cycle changes, and a requirement that industrial customers complete the term of their service election under NW Natural's annual PGA tariff.
ENVIRONMENTAL COST DEFERRAL AND RECOVERY. NW Natural has authorizations in Oregon and Washington to defer costs related to remediation of properties that are owned or were previously owned by NW Natural. In Oregon, a Site Remediation and Recovery Mechanism (SRRM) is currently in place to recover prudently incurred costs allocable to Oregon customers, subject to an earnings test. Effective beginning November 1, 2019, the WUTC authorized an Environmental Cost Recovery Mechanism (ECRM) for recovery of prudently incurred costs allocable to Washington customers.
Oregon SRRM
Under the Oregon SRRM collection process there are three types of deferred environmental remediation expense:
•Pre-review - This class of costs represents remediation spend that has not yet been deemed prudent by the OPUC. Carrying costs on these remediation expenses are recorded at NW Natural's authorized cost of capital. NW Natural anticipates the prudence review for annual costs and approval of the earnings test prescribed by the OPUC to occur by the third quarter of the following year.
•Post-review - This class of costs represents remediation spend that has been deemed prudent and allowed after applying the earnings test, but is not yet included in amortization. NW Natural earns a carrying cost on these amounts at a rate equal to the five-year treasury rate plus 100 basis points.
•Amortization - This class of costs represents amounts included in current customer rates for collection and is calculated as one-fifth of the post-review deferred balance. NW Natural earns a carrying cost equal to the amortization rate determined annually by the OPUC, which approximates a short-term borrowing rate. NW Natural included $6.3 million and $4.2 million of deferred remediation expense approved by the OPUC for collection during the 2021-22 and 2020-21 PGA years, respectively.
In addition, the SRRM also provides for the annual collection of $5.0 million from Oregon customers through a tariff rider. As it collects amounts from customers, NW Natural recognizes these collections as revenue net of any earnings test adjustments and separately amortizes an equal and offsetting amount of the deferred regulatory asset balance through the environmental remediation operating expense line shown separately in the operating expenses section of the Consolidated Statements of Comprehensive Income (Loss). For additional information, see Note 17 in the 2021 Form 10-K.
The SRRM earnings test is an annual review of adjusted NGD ROE compared to authorized NGD ROE. To apply the earnings test NW Natural must first determine what if any costs are subject to the test through the following calculation:
| | |
| Annual spend |
| Less: $5.0 million base rate rider |
Prior year carry-over(1) |
| $5.0 million insurance + interest on insurance |
| Total deferred annual spend subject to earnings test |
| Less: over-earnings adjustment, if any |
Add: deferred interest on annual spend(2) |
| Total amount transferred to post-review |
(1) Prior year carry-over results when the prior year amount transferred to post-review is negative. The negative amount is carried over to offset annual spend in the following year.
(2) Deferred interest is added to annual spend to the extent the spend is recoverable.
To the extent the NGD business earns at or below its authorized ROE as defined in the SRRM, the total amount transferred to post-review is recoverable through the SRRM. To the extent more than authorized ROE is earned in a year, the amount transferred to post-review would be reduced by those earnings that exceed its authorized ROE.
NW Natural concluded there was no earnings test adjustment for 2021 based on the environmental earnings test that was submitted in April 2022.
Washington ECRM
The ECRM established by the WUTC order effective November 1, 2019 permits NW Natural’s recovery of environmental remediation expenses allocable to Washington customers. These expenses represent 3.32% of costs associated with remediation of sites that historically served both Oregon and Washington customers. The order allows for recovery of past deferred and future prudently incurred remediation costs allocable to Washington through application of insurance proceeds and collections from customers. Prudently incurred costs that were deferred from the initial deferral authorization in February 2011 through June 2019 were fully offset with insurance proceeds, with any remaining insurance proceeds to be amortized over a 10.5 year period. On an annual basis NW Natural will file for a prudence determination and a request to recover remediation expenditures in excess of insurance amortizations in the following year's customer rates. After insurance proceeds are fully amortized, if in a particular year the request to collect deferred amounts exceeds one percent of Washington normalized revenues, then the excess will be collected over three years with interest.
INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING.On an annual basis, NW Natural credits amounts to Oregon and Washington customers as part of a regulatory incentive sharing mechanism related to net revenues earned from Mist gas storage and asset management activities. Previously, amounts were credited to Oregon customers in June. Starting in 2021, Oregon customers received this credit in February per the 2020 Oregon rate case order. Credits are given to customers in Washington as reductions in rates through the annual PGA filing in November.
During the first quarter of 2022, NW Natural refunded an interstate storage and asset management sharing credit of approximately $41.1 million to Oregon customers over three equal installments in January, February and March. This includes revenue generated for the November 2020 through October 2021 PGA year. A majority of this revenue is from the cold weather event in February 2021 disclosed above. Credits are given to customers in Washington as reductions in rates through the annual PGA filing in November. Credits to Oregon and Washington customers in 2021 were approximately $9.1 million and $3.1 million, respectively.
Regulatory Proceeding Updates
During 2022, NW Natural was involved in the regulatory activities discussed below. For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the 2021 Form 10-K.
COVID-19 DEFERRAL DOCKETS.During 2020, Oregon and Washington approved our applications to defer certain COVID-19 related costs. Costs that may be recoverable include, but are not limited to, the following: personal protective equipment, cleaning supplies and services, bad debt expense, financing costs to secure liquidity, and certain lost revenue, net of offsetting direct expense reductions associated with COVID-19. As of September 30, 2022, we believe that approximately $18.9 million of the financial effects related to COVID-19 are recoverable and deferred to a regulatory asset approximately $15.1 million for incurred costs. In addition, we expect to recognize revenue in a future period for an additional $3.8 million related to forgone late fee revenue. As part of the 2022 Oregon general rate case, we received approval from the OPUC to recover the 2020 and 2021 COVID-19 deferral totaling $10.9 million over two years starting November 1, 2022.
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 Revenues | | 1% of Retail Revenues |
** Date is pending a Commission review of its existing credit and collection practices that is expected to be completed over the next year.
ARREARAGE MANAGEMENT PROGRAMS.As part of the approved term sheets, NW Natural established programs in Oregon and Washington to identify and mitigate residential customer arrearages associated with COVID-19. Under the Washington program, income-eligible customers may receive up to $2,500 per year. In March 2022, the Oregon program was expanded to include additional funding and a low-income focus. Under the Oregon program, NW Natural can provide a one-time grant of up to $1,600 per eligible residential customer. AMP is funded by NW Natural with recovery facilitated through the COVID-19 deferral dockets. As of September 30, 2022, the amount granted and deferred to a regulatory asset related to AMP was $9.4 million of the total funds available of $9.9 million. The programs 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 at four discount tier levels based on household income compared to SMI, with higher discounts given for lower income levels. Participating customers can self-certify their income and household size to qualify for the program directly with NW Natural or their local Community Action Agency. The program was available for qualifying customers starting November 1, 2022. Costs for the bill discount program include simultaneous recovery from all customers. Start-up and administrative costs of the program are authorized to be deferred for later inclusion in rates.
| | | | | | | | | | | |
| Total Household Income | | Bill Discount Percentage |
| Tier 0 | At or below 15% SMI | | 40% |
| Tier 1 | 16% - 30% of SMI | | 25% |
| Tier 2 | 31% - 45% of SMI | | 20% |
| Tier 3 | 46% - 60% of SMI | | 15% |
RENEWABLE NATURAL GAS.On June 19, 2019, the Oregon legislature passed Senate Bill 98 (SB 98), which enables natural gas utilities to procure or develop RNG on behalf of their Oregon customers. The bill was signed into law by the governor in July 2019, and subsequently, the OPUC opened a docket in August 2019 regarding the rules for the 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% RNG 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 regulations until the sale is complete,law supports all forms of renewable natural gas including renewable hydrogen, which is made from excess wind, solar and hydro power. Renewable hydrogen can be used for the transportation system, industrial use or blended into the natural gas pipeline system.
Pursuant to the 2022 Oregon general rate case, the OPUC 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 RNG project costs to be added to rates annually on November 1st, with a mechanism for NW Natural to defer the difference between the forecasted and actual RNG costs, subject to an earnings test that includes deadbands at 50 basis points below and above NW Natural's authorized ROE.
WATER UTILITIES. NW Natural Water currently serves over 150,000 people through approximately 61,000 connections across five states.
Water Acquisitions
NWN Water closed the following acquisitions during 2022:
•Belle Oaks Water and Sewer Co., Inc was acquired by NWN Water of Texas in May 2022
•NWN Water increased its ownership stake in Avion Water Company to 40.3% in July 2022
•Northwest Water Services, LLC was acquired by NWN Water of Washington in August 2022
•Aquarius Utilities, LLC was acquired by NWN Water of Washington in August 2022
•Far West Water & Sewer, Inc. was acquired by NWN Water in October 2022
In the first quarter of 2022, NWN Water signed two additional purchase agreements for water utilities, representing approximately 900 connections in Texas also near its existing Blue Topaz Utilities. Applications for approval of these purchase agreements were filed in the first quarter of 2022 with the PUCT and decisions are expected in 2019.late 2022 or 2023.
Water General Rate Cases
For our acquired water utilities, we have been executing general rate cases. In February 2022, the OPUC adopted a comprehensive stipulation in Sunriver Water's rate case with new rates effective May 2022. In January 2022, we filed a general rate case for Suncadia Water and the WUTC allowed rates to go into effect in May 2022 by operation of law. In June 2022, Avion Water Company filed a general rate case with the OPUC; and in July 2022, Gem State Water Company filed a general rate case with the IPUC. Decisions in both cases are expected in the first half of 2023.
INTEGRATED RESOURCE PLAN (IRP). NW Natural generally files a full IRP biennially for Oregon and Washington with the OPUC and WUTC, respectively. NW Natural jointly filed its 2022 IRP for both Oregon and Washington on September 23, 2022. The 2022 IRP outlines scenarios of future requirements based on a range of outcomes that would provide the least-cost resources to meet future demand. In our most recent filing, we included certain demand and supply side projects that we included in our action plan which will be evaluated by the OPUC and WUTC. NW Natural anticipates that approval from both the OPUC and WUTC will come in either the second or third quarter of 2023.
PIPELINE SECURITY. In May and July 2021, the Department of Homeland Security’s (DHS) Transportation Security Administration (TSA) released two security directives applicable to certain notified owners and operators of natural gas pipeline facilities (including local distribution companies) that TSA has determined to be critical. The first security directive required notified owners/operators to implement cybersecurity incident reporting to the DHS, designate a cybersecurity coordinator, and perform a gap assessment of current entity cybersecurity practices against certain voluntary TSA security guidelines and report relevant results and proposed mitigation to applicable DHS agencies. The second security directive requires notified entities to implement a significant number of specified cyber security controls and processes. The TSA recently released a third security directive, which replaces the second directive. The third security directive provides a framework based on risk and outcome objectives and is effective until July 2023. NW Natural is currently in the process of evaluating and implementing the security directives while ensuring safe and reliable operations. NW Natural is providing frequent updates to the TSA on NW Natural's progress on achieving the security directives. NW Natural filed requests with the OPUC and WUTC to defer the costs associated with complying with the second security directive and plans to seek recovery of these costs in future ratemaking proceedings. As of September 30, 2022, NW Natural has deferred to a regulatory asset $5.0 million of costs incurred and $31.3 million was invested in information technology to date. 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.
ERP UPGRADE DEFERRALS. In the fourth quarter of 2020, NW Natural filed requests to defer expenses pertaining to a project to upgrade the existing enterprise resource planning (ERP) system with the OPUC and WUTC. A stipulation supported by all parties in the Oregon docket was filed and approved by the OPUC in the third quarter of 2021. Under the settlement agreement, NW Natural can recover 100% of costs incurred up to the $8.55 million estimate of Oregon-allocated costs provided in the docket. For costs that exceed $8.55 million up to $12 million, 80% may be recovered from customers. For costs that exceed $12 million, 50% may be recovered. Approval of the Washington deferral was resolved as part of the most recent general rate case. As of September 30, 2022, NW Natural deferred to a regulatory asset $8.6 million of expenses incurred to date. NW Natural placed its new ERP system into service in September 2022.
INFLATION REDUCTION ACT. The Inflation Reduction Act of Contents2022 (IRA) was signed into law in August 2022 and includes a number of energy related provisions. The IRA includes new or enhanced incentives for renewable and clean energy, carbon capture, energy storage, alternative transportation fuels, residential energy efficiency, and manufacturing of advanced energy projects. The renewable and clean energy incentives include support for renewable natural gas, hydrogen, wind, solar, nuclear, and geothermal. The residential energy efficiency incentives include tax credits for high efficiency water heating and heating powered by electricity, natural gas, propane, or oil, as well as federal Department of Energy grants to states and tribes for rebates for electric appliances, insulation, and upgraded electric panels that provide the greatest benefit to families earning less than 80 percent of the median family income. The incentive credits for energy production are scaled and increase when the investments meet prevailing wage, apprenticeship, domestic content, or certain location requirements. These incentives are generally in the form of income tax credits limited in their use to a taxpayer’s federal tax liability, but in certain circumstances they may be monetized through a sale to unrelated parties or be refundable through a new direct pay election.
The IRA also includes funding for the Environmental Protection Agency (EPA) to improve greenhouse gas (GHG) reporting and enforcement, imposes a methane charge associated with excess emissions from petroleum and natural gas production, processing, transmission, and storage, 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.
Environmental, Legislation and Regulation 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, 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 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 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. We are assessing effects of the IRA 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 through changes in their regulatory oversight approach, policies and rules.
Additionally, in March 2022, the Securities and Exchange Commission (SEC) proposed new rules relating to the disclosure of a range of climate-related matters. These include corporate governance and risk management, disaggregated financial disclosure
in the notes to audited financial statements, and detailed disclosure concerning GHG emissions. We are currently assessing these proposed rules. We cannot predict what any final rules adopted by the SEC may require, nor can we predict the time periods for compliance, the costs of implementation, or any potential impacts resulting from any final climate-related rules that may be adopted. To the extent these rules are finalized as proposed or in modified form, we or our customers could incur increased costs related to the assessment and disclosure of climate-related risks. These could include internal costs as well as external costs such as the cost of independent experts to provide attestation reports on our GHG emissions data and increased audit costs.
Short-term liquidity
Washington State
In 2021, Washington comprised approximately 11% of NW Natural’s revenues, as well as 1.5% and 25.5% of new meters from commercial and residential customers, respectively. Effective February 1, 2021, building codes in Washington state require new residential homes to achieve higher levels of energy efficiency based on specified carbon emissions assumptions, which calculate electric appliances to have lower on-site GHG emissions than comparable gas appliances. This increases the cost of new home construction incorporating natural gas depending on a number of factors including home size, equipment configurations, and building envelope measures. Additionally, the Washington State Building Code Council (SBCC) voted in April 2022 to include updates in the state commercial building energy code that 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 Gill Ranchnatural gas-fired heat pumps and hybrid fuel systems. If final actions expected in late November occur, the SBBC commercial and residential rules are expected to become effective July 1, 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 currently expect that the building code changes will be subject to legal challenge if they become final.
Washington has also enacted the Climate Commitment Act (CCA), which establishes a comprehensive program that includes an overall limit for GHG emissions from major sources in the state that declines yearly beginning on January 1, 2023, resulting in an overall reduction of GHG emissions to 95% below 1990 levels by 2050. The Washington Department of Ecology has 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 or obtain allowances and approved offset credits to cover any remaining emissions. NW Natural is supportedsubject to the CCA and intends to pursue inclusion of CCA compliance costs in rates.
NW Natural continues to work with policymakers and a coalition of utilities, labor groups and business coalitions in Washington to communicate the role of direct use natural gas, and in the coming years renewable natural gas and hydrogen, can play in pursuing more effective policies to reduce GHGs while preserving reliability, resiliency, energy choice, equity, and energy affordability.
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 cash balances, internal cash flow2035 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 operations,transportation fuels and all other liquid and gaseous fuels, including natural gas, adopt building energy efficiency goals for new building construction, reduce methane gas emissions from landfills and food waste, and submit a proposal for adoption of state goals for carbon sequestration and storage by Oregon’s forest, wetlands and agricultural lands. The OPUC is charged with carrying out the EO to the extent it is consistent with its statutory authority and duties, and in doing so to focus on equitable impacts to low-income customers.
In December 2021, the ODEQ concluded its rulemaking process and issued final cap and reduce rules for its Climate Protection Program (CPP), which became effective in January of 2022. The CPP outlines GHG emissions reduction goals of 50% by 2035 and 90% by 2050 from a 1990 baseline. The first three-year compliance period is 2022 through 2024. NW Natural is subject to the CPP, and pursuant to this rule, is required to make its first compliance filing in 2025. We intend to pursue inclusion of compliance costs for the CPP in rates. The CPP has been subject to legal challenge by a number of utilities, companies and organizations, including NW Natural.
NW Natural is also engaged in an OPUC Fact-Finding (“Fact-Finding Docket”), opened in response to the EO for the purpose of analyzing the potential natural gas utility bill impacts that may result from the ODEQ’s CPP and to identify appropriate regulatory tools to mitigate potential customer impacts. The OPUC Staff has indicated that the ultimate goal of the Fact-Finding Docket is to inform future policy decisions and other key analyses to be considered in 2022, or thereafter, after the CPP is in place. We expect the Oregon Commission to issue a final report in the last half of 2022.
NW Natural is working with policymakers and a coalition of utilities in Oregon to help stakeholders understand the role direct use natural gas, and in the coming years renewable natural gas and hydrogen, can play in pursuing more effective policies to reduce greenhouse gases while preserving reliability, resiliency, energy choice, equity, contributionsand energy affordability.
Local Jurisdictions and Other Advocacy
In addition to legislative activities at the state level, ballot measures may be proposed by advocacy groups. Some local and county governments in the United States also have been proposing or passing renewable energy resolutions, restrictions, taxes, or fees with advocates seeking to accelerate climate action goals. A number of cities across the country, and several in our service territory are currently considering actions such as limitations or bans on the use of natural gas in new construction or otherwise. For example, in July 2022, the Eugene City Council passed several motions, including one directing the city manager to draft an ordinance that could prohibit the use of natural gas in low rise residential buildings beginning with permits submitted after June of 2023, to allow the Eugene City Council an opportunity to consider one or more draft ordinances or actions, and to hear further from the citizens of Eugene regarding such actions. NW Natural is actively engaged with such cities, local governments, and other advocates, including, among others the cities of Eugene and Milwaukie, Oregon, in our service territory and is working with these communities to help them understand the ways in which the natural gas system, and renewable fuels, can help them meet their decarbonization goals.
NW Natural Decarbonization Initiatives & Actions
Our customers are currently paying less for their natural gas today than they did 15 years ago. We expect that compliance with any form of regulation of GHG emissions, including the CPP in Oregon and CCA in Washington as well as voluntary actions under SB 98, will require additional resources and compliance tools. The developing and changing carbon credit markets and other compliance tool options, decades-long timeframes for compliance, likely changing and evolving laws and energy policy, and evolving technological advancements, all make it difficult to accurately predict long-term tools for and costs of compliance. While we have modeled our integrated resource planning, given recency of the adoption of the final CPP and CCA rules, our compliance obligations and expected costs are uncertain and subject to significant change over the nearly 30-year time horizon. It is our current expectation that costs associated with compliance generally would be recovered in rates and would result in an increase in the prices charged to customers. The CPP in Oregon is largely tied to the volume of natural gas consumed and as such, we currently expect that CPP cost impacts will be the lowest among residential customers because they generally consume less and highest among industrial customers that use significantly higher volumes of natural gas, with cost increases for commercial customers falling between residential and industrial customers. The projected customer bill impact of the CPP varies significantly based on forecasting assumptions related to permitted levels of rate recovery, available technologies and equipment, weather patterns and gas usage, customer growth or attrition, allocation of fixed costs among classes of customers, energy efficiency levels, availability, use and cost of renewables, feasibility of broad-scale hydrogen in the natural gas system, and a number of other assumptions used in the complex analysis of integrated resource planning.
We are not currently able to quantify the extent to which current and prospective building code changes, 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 substantially increase the cost of energy for electric customers in our service territory. We are not able to determine at this time whether increased electricity costs will make natural gas use more or less competitive on a relative basis.
We expect these and other trends to drive innovation of, and demand for, technological developments and innovative new products that reduce GHG emissions. Research and development are occurring across the energy sector, including in the gas sector with work being conducted on gas-fired heat pumps, higher efficiency water and space heating appliances including hybrid systems, carbon capture utilization and storage developments, continued development of technologies related to RNG, and various forms of hydrogen for different applications, among others.
NW Natural continues to take proactive steps in seeking to reduce GHG emissions in our region and is proactively communicating with local, state, and federal governments and communities about those steps. NW Natural has been a leader among gas utilities in innovative programs. Notable programs have included a decoupling rate structure designed to weaken the link between earnings and gas consumption by customer adopted in 2007, and establishment of a voluntary Smart Energy carbon offset program for customers established in 2007, and removal of all known cast iron and bare steel to create one of the tightest and most modern distribution systems in the country. We continue to believe that NW Natural has an important role in
providing affordable and equitable energy to the communities we serve. NW Natural is an important provider of energy to families and businesses in Oregon and southwest Washington. Natural gas sales to our residential and commercial customers account for approximately 6% of Oregon’s GHG emissions according to data for recent years from the State of Oregon Department of Environmental Quality In-Boundary GHG Inventory. We intend to continue to provide this necessary energy to our communities with the goal of using our modern pipeline system to help the Pacific Northwest transition to a clean energy future.
In 2016, NW Natural initiated a multi-pronged, multi-year strategy to accelerate and deliver greater GHG emission reductions in the communities we serve. Key components of this strategy include customer energy efficiency, continued adoption of NW Natural's voluntary Smart Energy carbon offset program, and seeking to incorporate RNG and hydrogen into our gas supply. RNG is produced from organic materials including food, agricultural and forestry waste, wastewater, or landfills. We believe RNG has 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 we also explore the development of renewable hydrogen through power to gas. To that end, in 2020 and 2021, NW Natural announced several agreements and investments to procure RNG for its parent company,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 if necessary, additional external financing.planned to be commissioned in early 2023. To date, NW Natural has signed agreements with options to purchase or develop RNG for utility customers totaling about 3% of NW Natural’s annual sales volume in Oregon.
FINANCIAL CONDITION
Capital Structure
One of ourNW Holdings' long-term goalsgoal is to maintain a strong and balanced consolidated capital structure withstructure. NW Natural targets a long-term target utilityregulatory capital structure of 50% common stockequity and 50% long-term debt, at NW Natural. 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"Liquidity and Capital Resources" below and Note 7.
9. Achieving theour target capital structure and maintaining sufficient liquidity to meet operating requirements areis necessary to maintain attractive credit ratings and provide access to the capital markets at reasonable costs.
NW Holdings' consolidated capital structure, excluding short-term debt, was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| | 2022 | | 2021 | | 2021 |
| Common equity | | 45.6 | % | | 49.3 | % | | 47.2 | % |
| Long-term debt (including current maturities) | | 54.4 | | | 50.7 | | | 52.8 | |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % |
NW Natural's consolidated capital structure, excluding short-term debt, was as follows:
| | | | | | | | | | | | | | | | | | | | |
| | September 30, | | December 31, |
| | 2022 | | 2021 | | 2021 |
| Common equity | | 50.6 | % | | 49.3 | % | | 49.8 | % |
| Long-term debt (including current maturities) | | 49.4 | | | 50.7 | | | 50.2 | |
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Including short-term debt balances, as of September 30, 2022 and 2021, and December 31, 2021, NW Holdings' consolidated capital structure included common equity of 43.1%, 40.4% and 39.5%; long-term debt of 49.5%, 41.5% and 44.0%; and short-term debt including current maturities of long-term debt of 7.4%, 18.1% and 16.5%, respectively. As of September 30, 2022 and 2021, and December 31, 2021, NW Natural's consolidated capital structure included common equity of 49.4%, 40.5%, and 44.2%; long-term debt of 46.2%, 41.5% and 44.7%; and short-term debt including current maturities of long-term debt of 4.4%, 18.0%, and 11.1%, respectively.
|
| | | | | | | | | |
| | | September 30, | | December 31, |
| | | 2018 | | 2017 | | 2017 |
| Common stock equity | | 44.8 | % | | 52.1 | % | | 47.1 | % |
| Long-term debt | | 44.0 |
| | 46.6 |
| | 43.3 |
|
| Short-term debt, including current maturities of long-term debt | | 11.2 |
| | 1.3 |
| | 9.6 |
|
| Total | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Liquidity and Capital Resources
At September 30, 2018,2022 and 2021, NW Holdings had approximately $108.6 million and $19.5 million, and NW Natural had $30.0approximately $11.4 million and $9.7 million of cash and cash equivalents, compared to $15.8 million at September 30, 2017.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. In addition, itNW Holdings and NW Natural may also pre-fund utilitytheir respective capital expenditures when long-term fixed rate environments are attractive. NW Holdings and NW Natural expect to have ample liquidity in the form of cash on hand and from operations and available credit capacity under credit facilities to support funding needs.
NW Natural Holdings and NW Natural continue to monitor interest rates and financing options for all of its businesses. Interest rates have increased in 2022 resulting from actions taken by the U.S. Federal Reserve to increase short-term rates as inflation rates remain elevated. NW Natural recovers interest expense on its long-term debt through its authorized cost of capital and capital.
Equity Issuance
On April 1, 2022, NW Holdings issued and sold 2,875,000 shares of its common stock pursuant to a registration statement on Form S-3 and related prospectus supplement. NW Holdings received net offering proceeds, after deducting the underwriter's discounts and commissions and expenses payable by NW Holdings of approximately $138.6 million. The proceeds were used for general corporate purposes, including repayment of its short-term indebtedness and/or making equity contributions to NW Holdings' subsidiaries, NW Natural, NW Natural Water and NW Natural Renewables. Contributions to NW Natural, NW Natural Water and NW Natural Renewables are to be used for general corporate purposes. Of the contributions received by NW Natural, $130.0 million was used to repay its short-term indebtedness.
ATM Equity Program
In August 2021, NW Holdings initiated an at-the-market (ATM) equity program by entering into an equity distribution agreement under which NW Holdings may issue and sell from time to time shares of common stock, no par value, having an aggregate gross sales price of up to $200 million. NW Holdings is under no obligation to offer and sell common stock under the ATM equity program, which expires in August 2024. Any shares of common stock offered under the ATM equity program are registered on NW Holdings’ universal shelf registration statement filed with the SEC. During the three months ended September 30, 2022, NW Holdings issued and sold 327,221 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $16.7 million, net of fees and commissions paid to agents of $0.3 million. During the nine months ended September 30, 2022, NW Holdings issued and sold 1,005,322 shares of common stock pursuant to the ATM equity program resulting in cash proceeds of $51.9 million, net of fees and commissions paid to agents of $1.0 million. As of September 30, 2022, NW Holdings had $129.2 million of equity available for issuance under the program. The ATM equity program was initiated to raise funds for general corporate purposes, including equity contributions to NW Holdings’ subsidiaries, NW Natural and NW Natural Water. Contributions to NW Natural and NW Natural Water will be used for general corporate purposes.
NW Holdings
For NW Holdings, short-term liquidity is primarily provided by cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a regulated entity,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 2022 through 2024, we estimate NW Holdings’ and NW Natural's combined incremental capital needs to be in the range of $600 million to $700 million. NW Holdings borrowed a $100 million term loan in September 2022 and has issued more than $190 million of equity through October 2022. In September 2022, NW Natural received the proceeds from a $140 million private placement FMB and NW Natural Water borrowed a $50 million term loan. 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 equity securities and most forms of debt securities are subject to approval by the OPUC and WUTC. However, its use of retained earnings is not subject to those same restrictions, andregulation by state public utility commissions, but the dividends from NW Natural to NW Holdings is notare subject to eitherregulatory ring-fencing provisions. NW Holdings guarantees the debt of these restrictions. Effective October 1, 2018, underits 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's ring-fencing provisions,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 subjectrequired to certain dividend restrictions based on its credit ratingnotify the OPUC, and if the common equity levels.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 September 30, 2022, NW Natural satisfied the ring-fencing provisions described above.
Based on several factors, including current cash reserves, committed credit facilities, its ability to receive dividends from its operating subsidiaries, in particular NW Natural, and an expected ability to issue long-term debt and equity securities in the capital markets, NW Holdings believes its liquidity is sufficient to meet anticipated near-term cash requirements, including all contractual obligations, investing, and financing activities as discussed in "Cash Flows" below.
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
For the utilityNGD business segment, the short-term borrowing requirements typically peak during colder winter months when the utilityNGD business borrows money to cover the lag between natural gas purchases and bill collections from customers. Short-term liquidity for the utilityNGD 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-ownedcompany-owned life insurance policies, the sale of long-term debt, and equity contributions from NW Natural's parent companyHoldings. NW Natural Holdings as of October 1, 2018. UtilityNatural's long-term debt proceeds and equity contributions from NW Holdings are primarily used to finance utilityNGD capital expenditures, refinance maturing debt, of the utility, and provide temporary funding for other general corporate purposes of the utility. 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. See "Credit Ratings" below.rates. In the event NW Natural is not able to issue new long-term debt due to adverse market conditions or other reasons, itNW 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 utility segment, drawing upon itsa committed credit facility. NW Natural also has a universal shelf registration statement filed with the SEC for the issuance of secured and unsecured debt subject to market conditions and certain regulatory approvals, and for secured debt, the provisions of its mortgage.securities.
In the event NW Natural'sNatural senior unsecured long-term debt ratings are downgraded, or its outstanding derivative position exceedspositions 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 result in exposureexpose NW Natural to additional cash requirements and may trigger increases in short-term borrowings while in a net loss position. NW Natural was not required to post collateral at September 30, 2018. However, if the credit risk-related contingent features underlying these contracts were triggered on September 30, 2018, assuming NW Natural's long-term debt ratings dropped to non-investment grade levels, it could have been required to post $7.0 million in collateral with counterparties.2022. See "Credit Ratings" below and Note 14.15.
In October 2017, NW Natural entered into a 20-year operating lease agreement for the new headquarters location in Portland, Oregon. The existing headquarters lease expires in 2020, and payments under the new lease are expected to commence in 2020. Total estimated base rent payments over the life of the lease are approximately $160.0 million. NW Natural has the option to extend the term of the lease for two additional seven-year periods. See Note 10.
Other items that may have a significant impact on NW Natural's liquidity and capital resources include NW Natural's pension contribution requirements bonus depreciation,and environmental expenditures, dividend policy, and off-balance sheet arrangements.expenditures. For additional information, see Part II, Item 7 "Financial Condition""Financial Condition"in NW Natural's 2017the 2021 Form 10-K.
Based on several factors, including
Short-Term Debt
The primary source of short-term liquidity for NW Natural's currentHoldings is cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a multi-year credit ratings, the commercial paper program, current cash reserves, committedfacility, and short-term credit facilities and expected abilityit may enter into from time to issue anticipated amountstime.
The primary source of long-term debt in the capital markets,short-term liquidity for NW Natural believes its liquidity is sufficient to meet anticipated near-term cash requirements, including all contractual obligations, investing, and financing activities discussed below.
SHORT-TERM DEBT. The primary sources of NW Natural short-term liquidity arefrom the sale of commercial paper, available cash from a multi-year credit facility, and bank loans.short-term credit 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 utility capital requirements. CommercialFor NW Natural, commercial paper and bank loans are periodically refinanced through the sale of long-term debt or equity securities. Whencontributions from NW Natural hasHoldings. Commercial paper, when outstanding, commercial paper, which is sold through two commercial banks under an issuing and paying agency agreement itand is supported by one or more unsecured revolving credit facilities. See “Credit Agreements” below.
At September 30, 2018,2022 and 2021, NW Holdings had short-term debt outstanding of $141.0 million and $399.5 million, respectively. At September 30, 2022 and 2021, NW Natural had $100.5 million short-term debt outstanding due to the saleof $53.0 million and $370.5 million, respectively. NW Holdings' short-term debt at September 30, 2022 consisted of $88.0 million in revolving credit agreement loans at NW Holdings and$53.0 million of commercial paper compared to none outstanding at September 30, 2017.NW Natural. The weighted average interest rate on short-term debt outstandingthe revolving credit agreement at September 30, 20182022 was 2.3%.
CREDIT AGREEMENTS. As4.7% at NW Holdings. The weighted average interest rate of September 30, 2018, NW Natural had a $300.0 million credit agreement (Prior Credit Agreement), with a feature that allowed NW Natural to request increases in the total commitment amount, up to a maximum of $450.0 million. The maturity date of the agreement was December 20, 2019.
All lenders under the Prior Credit Agreement were major financial institutions with committed balances and investment grade credit ratings as of September 30, 2018 as follows:
|
| | | |
| In millions | |
| Lender rating, by category | Loan Commitment |
| AA/Aa | $ | 201 |
|
| A/A1 | 99 |
|
| Total | $ | 300 |
|
In October 2018, NW Natural entered into a new multi-year credit agreement for unsecured revolving loans totaling $300.0 million, with a feature that allows NW Natural to request increases in the total commitment amount, up to a maximum of $450.0 million, and with a maturity date of October 2, 2023 with an available extension of commitments for two additional one-year periods, subject to lender approval (New Credit Agreement). The Prior Credit Agreement was terminated upon the closing of the New Credit Agreement.
All lenders under the New Credit Agreement are major financial institutions with committed balances and investment grade credit as follows:
|
| | | |
| In millions | |
| Lender rating, by category | Loan Commitment |
| AA/Aa | $ | 300 |
|
| A/A1 | — |
|
| 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, we do not believe this risk to be imminent due to the lenders' strong investment-grade credit ratings.
The New Credit Agreement permits the issuance of letters of credit in an aggregate amount of up to $60.0 million. The principal amount of borrowings under the New Credit Agreement is due and payable on the maturity date. There were no outstanding balances under the Prior Credit Agreementcommercial paper at September 30, 2018 or 2017. The Prior 2022 was 3.3% at NW Natural.
Credit Agreement and New Credit Agreement require NW Natural to maintain a consolidated indebtedness to total capitalization ratio of 70% or less. Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and accelerate the maturity of all amounts outstanding. NW Natural was in compliance with this covenant at September 30, 2018 and 2017, with consolidated indebtedness to total capitalization ratios of 55.2% and 47.9%, respectively.
The Prior Credit Agreement and New Credit Agreement also require NW Natural to maintain credit ratings with Standard & Poor's (S&P) and Moody's Investors Service, Inc. (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 New 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 agreements when ratings are changed. See "Credit Ratings" below.
CREDIT RATINGS. NW Natural's credit ratings are a factor of its 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- | | A1 |
Senior unsecured (long-term debt) | | n/a | | A3 |
Corporate credit rating | | A+ | | n/a |
Ratings outlook | | Stable | | Negative |
In January 2018, Moody's revised NW Natural's ratings outlook from "stable" to "negative". This revision was a result of their view of the potential negative impact that the TCJA could have on NW Natural's regulated utility cash flow metrics. An increase in cash taxes in the near term as a result of the elimination of bonus depreciation on regulated utilities is expected. However, NW Natural expects to see a net increase in cash flows as a result of the TCJA over the longer term, as taxes are a pass through to customers and lower deferred tax liabilities are expected to increase regulatory returns.
The above credit ratings 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 Natural securities. Each rating should be evaluated independently of any other rating.
LONG-TERM DEBT. NW Natural retired $22.0 million of FMBs with a coupon rate of 6.60% in March 2018 and issued $50.0 million of FMBs with a coupon rate of 4.11% in September 2018. No other debt was retired or issued in the nine months ended September 30, 2018. Over the next twelve months, $75.0 million of FMBs with a coupon rate of 1.545% will mature in December 2018 and $10.0 million of FMBs with a coupon rate of 8.310% will mature in September 2019.
See Part II, Item 7, "Financial Condition—Contractual Obligations" in NW Natural's 2017 Form 10-K for long-term debt maturing over the next five years.
NW Holdings
CREDIT AGREEMENTS. On October 2, 2018,At September 30, 2022, NW Holdings entered intohad a $100.0$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 $150.0$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 September 30, 2022 as follows:
| | | | | |
| In millions | |
| Lender rating, by category | Loan Commitment |
| AA/Aa | $ | 200 | |
| |
| Total | $ | 200 | |
Based on credit market conditions, it is possible one or more lending commitments could be unavailable to NW Holdings if the lender defaulted due to lack of funds or insolvency; however, NW Holdings does not believe this risk to be imminent due to the lenders' strong investment-grade credit ratings. At September 30, 2022, September 30, 2021 and December 31, 2021, $88.0 million, $29.0 million and $144.0 million were drawn under the NW Holdings Credit Agreement, respectively.
The NW Holdings credit agreement permits the issuance of letters of credit in an aggregate amount of up to $40.0$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 September 30, 2022 and 2021, with consolidated indebtedness to total capitalization ratios of 56.9% and 59.6%, respectively.
The NW Holdings credit agreement also requires NW Holdings to maintain debt ratings (which are defined by a formula using NW Natural's credit ratings in the event NW Holdings does not have a credit rating) with Standard & Poor's (S&P) and Moody's Investors Service, Inc. (Moody’s) and notify the lenders of any change in its senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies. A change in NW Holdings' debt ratings by S&P or Moody’s is not an event of default, nor is the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement. Rather, interest rates on any loans outstanding under the credit agreements are tied to debt ratings and therefore, a change in the debt rating would increase or decrease the cost of any loans under the credit agreements when ratings are changed. NW Holdings does not currently maintain ratings with S&P or Moody's.
The NW Holdings credit agreement also includes a mechanism that can increase or decrease the undrawn interest rate by up to 1 basis point and undrawn interest rate by up to 5 basis points in accordance with NW Holdings’ independently verified achievement of quantifiable metrics related to two goals—one related to carbon savings and one related to in-line inspections of NW Natural’s transmission pipeline. Performance against these metrics is designed to be assessed annually with pricing adjustments, if any, resetting off of primary pricing annually and not cumulatively.
Interest charges on the NW Holdings credit agreement are indexed to the London Interbank Offered Rate (LIBOR). The agreement contains provisions addressing the end of the use of LIBOR as a benchmark rate of interest and a mechanism for determining an alternative benchmark rate of interest without an amendment to the credit agreement. If the provisions are triggered, LIBOR would be replaced by a secured overnight financing rate (SOFR)-based rate, if one can be determined, or, if not, LIBOR may be replaced by a rate selected by NW Holdings and the administrative agent under the agreement. The replacement rate is also subject to a spread adjustment which may be positive, negative or zero.
NW Holdings had no letters of credit issued and outstanding at September 30, 2022 and 2021.
NW Natural
At September 30, 2022, NW Natural had a sustainability-linked multi-year credit agreement for unsecured revolving loans totaling $400 million, with a feature that allows NW Natural to request increases in the total commitment amount, up to a maximum of $600 million. The maturity date of the agreement is November 3, 2026 with an available extension of commitments for two additional one-year periods, subject to lender approval.
All lenders under the NW Natural credit agreement are major financial institutions with committed balances and investment grade credit ratings as of September 30, 2022 as follows:
| | | | | |
| In millions | |
| Lender rating, by category | Loan Commitment |
| AA/Aa | $ | 400 | |
| |
| Total | $ | 400 | |
Based on credit market conditions, it is possible one or more lending commitments could be unavailable to NW Natural if the lender defaulted due to lack of funds or insolvency; however, NW Natural does not believe this risk to be imminent due to the lenders' strong investment-grade credit ratings. NW Natural did not have any outstanding balances drawn under this credit facility at September 30, 2022, September 30, 2021 and December 31, 2021.
The NW Natural credit agreement permits the issuance of letters of credit in an aggregate amount of up to $60 million. The principal amount of borrowings under the credit agreement is due and payable on the maturity date. There were no outstanding balances under this credit agreement at September 30, 2022 or 2021. The credit agreement requires NW Natural to maintain a consolidated indebtedness to total capitalization ratio of 70% or less. Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and accelerate the maturity of all amounts outstanding. NW Natural was in compliance with this covenant at September 30, 2022 and 2021, with consolidated indebtedness to total capitalization ratios of 50.6% and 59.5%, respectively.
The NW Natural credit agreement also requires NW Natural to maintain credit ratings with S&P and Moody’s and notify the lenders of any change in NW Natural's senior unsecured debt ratings or senior secured debt ratings, as applicable, by such rating agencies. A change in NW Natural's debt ratings by S&P or Moody’s is not an event of default, nor is the maintenance of a specific minimum level of debt rating a condition of drawing upon the credit agreement. Rather, interest rates on any loans outstanding under the credit agreement are tied to debt ratings and therefore, a change in the debt rating would increase or decrease the cost of any loans under the credit agreement when ratings are changed. See "Credit Ratings" below.
The NW Natural credit agreement also includes a mechanism that can increase or decrease the undrawn interest rate by up to 1 basis point and undrawn interest rate by up to 5 basis points in accordance with NW Natural’s independently verified achievement of quantifiable metrics related to two goals—one related to carbon savings and one related to in-line inspections of NW Natural’s transmission pipeline. Performance against these metrics is designed to be assessed annually with pricing adjustments, if any, resetting off of primary pricing annually and not cumulatively.
Interest charges on the NW Natural credit agreement are indexed to LIBOR. The agreement contains provisions addressing the end of the use of LIBOR as a benchmark rate of interest and a mechanism for determining an alternative benchmark rate of interest without an amendment to the credit agreement. If the provisions are triggered, LIBOR would be replaced by a secured overnight financing rate (SOFR)-based rate, if one can be determined, or, if not, LIBOR may be replaced by a rate selected by NW Natural and the administrative agent under the agreement. The replacement rate is also subject to a spread adjustment which may be positive, negative or zero.
Credit Ratings
NW Holdings does not currently maintain credit ratings with S&P or Moody's. NW Natural's credit ratings are a factor of liquidity, potentially affecting access to the capital markets including the commercial paper market. NW Natural's credit ratings also have an impact on the cost of funds and the need to post collateral under derivative contracts. The following table summarizes NW Natural's current credit ratings:
| | | | | | | | | | | | | | |
| | S&P | | Moody's |
| Commercial paper (short-term debt) | | A-1 | | P-2 |
| Senior secured (long-term debt) | | AA- | | A2 |
| Senior unsecured (long-term debt) | | n/a | | Baa1 |
| Corporate credit rating | | A+ | | n/a |
| Ratings outlook | | Stable | | Stable |
The above credit ratings and ratings outlook are dependent upon a number of factors, both qualitative and quantitative, and are subject to change at any time. The disclosure of or reference to these credit ratings is not a recommendation to buy, sell or hold NW Holdings or NW Natural securities. Each rating should be evaluated independently of any other rating.
As part of the ring-fencing conditions agreed upon with the OPUC and WUTC in connection with the holding company reorganization, NW Holdings and NW Natural are required to maintain separate credit ratings, long-term debt ratings, and preferred stock ratings, if any.
Long-Term Debt
In September 2022, NW Holdings entered into an 18-month credit agreement for $100.0 million and borrowed the full amount. The loan carried an interest rate of 4.1% at September 30, 2022, which is based on the SOFR. 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 September 30, 2022.
In September 2022, NWN Water entered into an 18-month credit agreement for $50.0 million and borrowed the full amount. The loan carried an interest rate of 4.1% at September 30, 2022, which is based on the SOFR. 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 September 30, 2022.
In July 2022, NW Natural entered into a Bond Purchase Agreement between NW Natural and the institutional investors named as purchasers therein (the Bond Purchase Agreement). The Bond Purchase Agreement provides for the issuance of $140.0 million aggregate principal amount of NW Natural's First Mortgage Bonds due in 2052 (the Bonds). The Bonds were issued on September 30, 2022. The Bonds bear interest at the rate of 4.8% 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 First Mortgage Bonds (FMBs) with an interest rate of 3.08% due in 2051. Issued as a sustainability bond, net proceeds from the sale of the FMBs were added to the general funds of NW Natural and used for general corporate purposes, while an amount equivalent to the net proceeds from the sale of the bonds was or will be allocated to finance and/or refinance, in whole or in part, investments in one or more new or existing projects of NW Natural deemed to be an eligible project in the bond offering. Projects deemed eligible for the FMB offering included expenditures related to RNG and hydrogen generation and infrastructure, programs related to energy efficiency, expenditures related to operations or service centers that have or are expected to receive LEED Gold or Platinum certification, and expenditures and program investments related to enabling opportunities for diverse business enterprises.
In June 2021, NWN Water entered into a five-year term loan agreement for $55.0 million. The loan carried an interest rate of 3.5% at September 30, 2022, which is based upon the one-month LIBOR rate. The loan is guaranteed by NW Holdings and requires NW Holdings to maintain a consolidated indebtedness to total capitalization ratio of 70% or less. Failure to comply with this covenant would entitle the lenders to terminate their lending commitments and accelerate the maturity of all amounts outstanding. NW Holdings was in compliance with this covenant at September 30, 2022, with a consolidated indebtedness to total capitalization ratio of 56.9%.
At September 30, 2022, NW Holdings and NW Natural had long-term debt outstanding of $1,337.6 million and $1,126.5 million, respectively, which included $8.3 million and $8.2 million of unamortized debt issuance costs at NW Holdings and NW Natural, respectively. NW Natural's long-term debt consists of first mortgage bonds (FMBs) with maturity dates ranging from 2023 through 2052, interest rates ranging from 2.8% to 7.9%, and a weighted average interest rate of 4.5%.
$50.0 million of long-term debt is scheduled to mature over the next twelve months as of September 30, 2022 at NW Natural. See Part II, Item 7, "Financial Condition—Long-Term Debt" in the 2021 Form 10-K for long-term debt maturing over the next five years.
Bankruptcy Ring-fencing Restrictions
As part of the ring-fencing conditions agreed upon with the OPUC and WUTC, NW Natural is required to have one director who is independent from NW Natural management and from NW Holdings and to issue one share of NW Natural preferred stock to an independent third party. NW Natural was in compliance with both of these ring-fencing provisions as of September 30, 2022. NW Natural may file a voluntary petition for bankruptcy only if approved unanimously by the Board of Directors of NW Natural, including the independent director, and by the holder of the preferred share.
Cash Flows
Operating Activities
Changes in operating cash flows are primarily affected by net income or loss, changeschanges in working capital requirements, and other cash and non-cash adjustments to operating results.
| | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | | |
| In thousands | | 2022 | | 2021 | | YTD Change | |
| NW Natural cash provided by operating activities | | $ | 162,593 | | | $ | 161,828 | | | $ | 765 | | |
| NW Holdings cash provided by operating activities | | $ | 165,961 | | | $ | 181,724 | | | $ | (15,763) | | |
Operating activity highlights include:
|
| | | | | | | | | | | | |
| | | Nine Months Ended September 30, | | |
| In thousands | | 2018 | | 2017 | | YTD Change |
| Cash provided by operating activities | | $ | 158,529 |
| | $ | 192,856 |
| | $ | (34,327 | ) |
NINE MONTHS ENDEDSEPTEMBER 30, 2018 2022 COMPARED TO SEPTEMBER 30, 2017. 2021.Cash provided by operating activities decreased $15.8 million at NW Holdings and increased $0.8 million at NW Natural. The significant factors contributing to the $34.3decrease at NW Holdings were as follows:
•$32.0 million increase in asset optimization revenue sharing bill credits to customers;
•$23.8 million decrease in cash flows provided by operating activities were as follows:
a net decrease of $0.5 million from changes in working capitalthe regulatory incentive sharing mechanism related to receivables, inventories,revenues earned from Mist gas storage and accounts payable reflecting warmer than average weather in 2018 comparedasset management activities primarily related to the prior period;2021 cold weather event; and
a•$24.2 million increase in inventories due to higher gas prices; partially offset by
•$31.6 million decrease of $11.0 million in cash flow benefits from changes innet deferred gas cost balances primarily due to lower volumes from warmer weather in 2018 compared to the prior year; and
an increase of $10.4 million of cash outflow due to $22.0 million of income taxes paid in 2018 compared to $11.6 million in the prior period;
Duringcosts as gas costs for the nine months ended September 30, 2018, 2021 were 27% above the PGA estimates primarily due to the 2021 cold weather event; and
•$30.9 million increase in accounts receivable and accrued unbilled revenue resulting from higher balances due to colder weather.
NW Natural contributed $11.7 milliondid not make any cash contributions to its utility's qualified defined benefit pension plan,plans during the nine months ended September 30, 2022 compared to $15.4$9.6 million for the same period in 2017.2021. NW Natural does not expect to make any plan contributions during the remainder of 2022. The amount and timing of future contributions will depend on market interest rates and investment returns on the plans' assets. For additional information, see Note 8.10.
Bonus depreciation of 50%The increase in cash provided by operating activities at NW Natural was available for federal and Oregon purposes for most of 2017, which reduced taxableprimarily driven by a benefit from income and provided cash flow benefits. As a result ofother taxes, partially offset by the TCJA, bonus depreciation was eliminated for property acquired after September 27, 2017. Accordingly, we do not anticipate similar cash flow benefits related to bonus depreciation in the future.decrease discussed above.
NW Holdings and NW Natural hashave lease and purchase commitments relating to itstheir operating activities that are financed with cash flows from operations.operations. For additional information on cash flow requirements related to leases and other purchase commitments, see Part II, ItemNote 7 "Financial Condition—Contractual Obligations" and Note 1416 in NW Natural's 2017the 2021 Form 10-K.
Investing Activities
Investing activity highlights include: | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| In thousands | | 2022 | | 2021 | | YTD Change |
| NW Natural cash used in investing activities | | $ | (239,277) | | | $ | (197,169) | | | $ | (42,108) | |
| NW Holdings cash used in investing activities | | $ | (257,004) | | | $ | (203,521) | | | $ | (53,483) | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | |
| | | Nine Months Ended September 30, | | |
| In thousands | | 2018 | | 2017 | | YTD Change |
| Total cash used in investing activities | | $ | (161,075 | ) | | $ | (146,572 | ) | | $ | (14,503 | ) |
| Capital expenditures supporting continuing operations | | (158,795 | ) | | (145,274 | ) | | (13,521 | ) |
NINE MONTHS ENDEDSEPTEMBER 30, 20182022 COMPARED TO SEPTEMBER 30, 2017. 2021. Cash used in investing activities increased $53.5 million at NW Holdings and increased $42.1 million at NW Natural. The $14.5 million increase in cash used in investing activities was primarily due to higheran increase of $39.5 million and $37.1 million in capital expenditures primarily relatedat NW Holdings and NW Natural, respectively.
NW Natural capital expenditures in 2022 (including cloud-based software classified as other assets) are anticipated to system reinforcementbe in the range of $310 million to $350 million and customer growth.
Overfor the five-year period 2018 throughfrom 2022 to 2026 are expected to range from $1.3 billionto $1.5 billion. NW Natural Water is expected to invest approximately $15 million in 2022 related to maintenance capital expenditures for water and wastewater utilities currently owned as of December 31, 2021, and for the five-year period from 2022 to 2026, capital expenditures are estimatedexpected to be between $750 and $850 million. The estimated capital expenditures in this range include, but are not limited to, the following items:
$650 to $700approximately $60 million of core utility capital expenditures that will support continued customer growth, distribution system maintenance and improvements, technology investments, and utility gas storage facility maintenance;
$60 to $70 million related to planned upgradesmillion. Investments in our infrastructure during and refurbishments to utility storage facilitiesafter 2022 will depend largely on additional regulations, growth, and resource centers; and
$20 to $30 million of additional investments in 2018 for the North Mist gas storage facility expansion with a total estimated cost of $144 million for the project and a target in-service date of March 31, 2019.
Most of the requiredopportunities. Required funds for thesethe investments are expected to be internally generated over the five-year period,or financed with short-term and long-term debt andor equity, providing liquidity.as appropriate.
NW Natural's 2018 utility capital expenditures are estimated to be between $190 and $220 million. This range includes $20 to $30 million for the construction of the North Mist gas storage facility expansion. NW Natural expects to invest less than $5 million in non-utility capital investments for gas storage and other activities in 2018. Additional spend for gas storage and other investments during or after 2018 are expected to be paid from working capital and additional equity contributions from NW Natural as needed.
Financing Activities
Financing activity highlights include: | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | | |
| In thousands | | 2022 | | 2021 | | YTD Change |
| NW Natural cash provided by financing activities | | $ | 78,952 | | | $ | 37,469 | | | $ | 41,483 | |
| | | | | | |
| | | | | | |
| | | | | | |
| NW Holdings cash provided by financing activities | | $ | 184,193 | | | $ | 14,015 | | | $ | 170,178 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | |
| | | Nine Months Ended September 30, | | |
| In thousands | | 2018 | | 2017 | | YTD Change |
| Total cash provided by (used in) financing activities | | $ | 29,039 |
| | $ | (34,025 | ) | | $ | 63,064 |
|
| Change in short-term debt | | 46,300 |
| | (53,300 | ) | | 99,600 |
|
| Change in long-term debt | | 28,000 |
| | 60,000 |
| | (32,000 | ) |
NINE MONTHS ENDEDSEPTEMBER 30, 2018 2022 COMPARED TO SEPTEMBER 30, 2017. The $63.1 million increase in cash2021. Cash provided by financing activities increased $170.2 million and $41.5 million at NW Holdings and NW Natural, respectively. The increase at NW Holdings was primarily dueattributable to lower repaymentsnet proceeds from the issuance of $99.6common stock and the ATM equity program of $190.9 million, of short-term debt compared to the prior period, as well as lower repayments of $18.0 million of long-term debt compared to the prior period, partially offset by a $50.0changes in debt. The increase at NW Natural was attributable to cash contributions from NW Holdings of $179.4 million, decreasepartially offset by changes in proceeds from long-term debt compared to the prior period.debt.
Contingent Liabilities
Loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable in accordance with accounting standards for contingencies. See “Application of Critical Accounting Policies and Estimates” in NW Natural's 2017the 2021 Form 10-K. At September 30, 2018,2022, NW Natural's total estimated liability related to environmental sites is $116.5$99.8 million. See "Results of Operations—Regulatory Matters—Rate Mechanisms—Environmental Costs" in NW Natural's 2017the 2021 Form 10-K and Note 15.16.
APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing the 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 we reported under different conditions or if they used different assumptions. NW Natural'sOur 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
business combinations; and
•impairment of long-lived assets.assets and goodwill.
There have been no material changes to the information provided in the 20172021 Form 10-K with respect to the application of critical accounting policies and estimates other than those incorporated in Note 5, Note 13, and Note 16 relating to revenue, business combinations and goodwill, and discontinued operations, respectively.estimates. See Part II, Item 7, "Application of Critical Accounting Policies and Estimates," in the 20172021 Form 10-K.
Management has discussed its current estimates and judgments used in the application of critical accounting policies with the Audit CommitteeCommittees of the Board.Boards of NW Holdings and NW Natural. Within the context of critical accounting policies and estimates, management is not aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. For a description of recent accounting pronouncements that could have an impact on financial condition, results of operations or cash flows, see Note 2.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NW Holdings and NW Natural isare 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. Management monitors and manages these financial exposures as an integral part of ourNW Holdings' and NW Natural's overall risk management program. No material changes have occurred related to our disclosures about market risk for the nine months ended September 30, 2018.2022. For additional information, see Part II, Item 1A, “Risk Factors” in this report and Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” in the 20172021 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The management ofNW Holdings and NW Natural and NW Holdings,management, under the supervision and with the participation of theirthe Chief Executive Officer and Chief Financial Officer, has completed an evaluation of the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer of NW Natural and NW Holdingseach registrant have concluded that, as of the end of the period covered by this report, the disclosure controls and procedures of NW Natural and NW Holdings were effective to ensure that information required to be disclosed by themeach such registrant and included in their reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission (SEC)SEC rules and forms and that such information is accumulated and communicated to management of each registrant, including the Chief Executive Officer and Chief Financial Officer, of NW Natural and NW Holdings, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control Over Financial Reporting
The management ofNW Holdings and NW Natural and NW Holdings ismanagement are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
In September 2022, we implemented a new enterprise resource planning system to replace our legacy system. The implementation was designed to increase the automation of internal controls in areas of purchasing and payables, asset management, financial reporting and consolidation and to improve access security. In connection with this implementation, we performed pre-implementation planning, design and testing of internal controls that became effective in the third quarter of 2022. Management has and will continue to evaluate and monitor NW Holdings’ and NW Natural’s internal controls over financial reporting to verify such controls remain effective as processes and procedures in each of the affected areas continue to evolve.
There have beenwere no other changes in NW Natural'sHoldings' or NW Holdings'Natural's internal control over financial reporting that occurred during the quarter ended September 30, 20182022, that have materially affected, or are reasonably likely to materially affect, their internal control over financial reporting.reporting for NW Holdings and NW Natural. The statements contained in Exhibit 31.1, Exhibit 31.2, Exhibit 31.3, and Exhibit 31.231.4 should be considered in light of, and read together with, the information set forth in this Item 4(b).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than the proceedings disclosed in Note 1516 and those proceedings disclosed and incorporated by reference in Part I, Item 3, “Legal Proceedings” in the 20172021 Form 10-K, we have only routine nonmaterial litigation, or litigation that occurs in the ordinary course of our business.
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors discussed in Part I, Item 1A, "Risk Factors”"Risk Factors” in the 20172021 Form 10-K. In addition to the other information set forth in this report, you should carefully consider those risk factors, which could materially affect our business, financial condition, or results of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about purchases of NW Natural'sHoldings' equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the quarter ended September 30, 2018:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| 07/01/22-07/31/22 | | — | | | — | | | — | | | — | |
| 08/01/22-08/31/22 | | 4,277 | | | 52.19 | | | — | | | — | |
| 09/01/22-09/30/22 | | — | | | $ | — | | | — | | | — | |
| Total | | 4,277 | | | $ | 52.19 | | | 2,124,528 | | | $ | 16,732,648 | |
(1)During the quarter ended September 30, 2022, no shares of common stock were purchased on the open market to meet the requirements of NW Holdings' Dividend Reinvestment and Direct Stock Purchase Plan. However, 4,277 shares of NW Holdings common stock were purchased on the open market to meet the requirements of share-based compensation programs. During the quarter ended September 30, 2022, no shares of NW Holdings common stock were accepted as payment for stock option exercises pursuant to the NW Natural Restated Stock Option Plan.
(2)During the quarter ended September 30, 2022, no shares of NW Holdings common stock were repurchased pursuant to the Board-approved share repurchase program. In May 2019, we received NW Holdings Board approval to extend the repurchase program through May 2022. Effective August 3, 2022, we received NW Holdings Board approval to extend the repurchase program. Such authorization will continue until the program is used, terminated or replaced. For more information on this program, refer to Note 5 in the 2021 Form 10-K.
|
| | | | | | | | | | | | | | |
| 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 |
|
| 07/01/18-07/31/18 | | — |
| | $ | — |
| | — |
| | — |
|
| 08/01/18-08/31/18 | | 126,225 |
| | 63.62 |
| | — |
| | — |
|
| 09/01/18-09/30/18 | | — |
| | — |
| | — |
| | — |
|
| Total | | 126,225 |
| | 63.62 |
| | 2,124,528 |
| | $ | 16,732,648 |
|
| |
(1)
| During the quarter ended September 30, 2018, no shares of NW Natural's common stock were purchased on the open market to meet the requirements of NW Natural's Dividend Reinvestment and Direct Stock Purchase Plan. However, 1,225 shares of NW Natural's common stock were purchased on the open market to meet the requirements of NW Natural's share-based programs. During the quarter ended September 30, 2018, no shares of NW Natural's common stock were accepted as payment for stock option exercises pursuant to NW Natural's Restated Stock Option Plan. An additional 125,000 shares were purchased on the open market to complete the acquisition of Falls Water Co., Inc. |
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(2)
| During the quarter ended September 30, 2018, no shares of NW Natural's common stock were repurchased pursuant to NW Natural's Board-Approved share repurchase program. In May 2018, we received Board Approval to extend the repurchase program, however this program terminated as to NW Natural, but was approved as to NW Holdings as of October 1, 2018. NW Holdings' Board extended this repurchase program through May 31, 2019. For more information on this program, refer to Note 5 in NW Natural's 2017 Form 10-K. |
ITEM 6. EXHIBITS
See the Exhibit Index below, which is incorporated by reference herein.
NORTHWEST NATURAL GAS COMPANY
NORTHWEST NATURAL HOLDING COMPANY
Exhibit Index to Quarterly Report on Form 10-Q
For the Quarter Ended September 30, 20182022
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| Exhibit Index |
Exhibit Number | Document |
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Exhibit Number
| Document |
| Twenty-third supplemental indenture,Twenty-fourth Supplemental Indenture, providing for, among other things, First Mortgage Bonds, 4.11%4.78% Series due 2048,2052, dated as of September 1, 2018,2022, by and between Northwest Natural Gas Company and Deutsche Bank Trust Company-AmericasCompany Americas (incorporated by reference to Exhibit 4(a)4.1 to the Form 8-K filed with the SEC on September 10, 2018, File30, 2022, file No. 1-15473)1-15973). |
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101.101 | The following materials formatted in Inline Extensible Business Reporting Language (Inline XBRL):
(i) Consolidated Statements of Income;
(ii) Consolidated Balance Sheets;
(iii) Consolidated Statements of Cash Flows; and
(iv) Related notes.
The instance document does not appear in the interactive data file because XBRL tags are embedded within the Inline XBRL document. |
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| 104 | The cover page from Northwest Natural Gasthe Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018,2022, formatted in Extensible Business Reporting Language (XBRL):(i) Consolidated Statements of Income;
(ii) Consolidated Balance Sheets;
(iii) Consolidated Statements of Cash Flows; and
(iv) Related notes.
Inline XBRL. |
* Incorporated by reference as indicated.
** Pursuant to Item 601(b)(32)(ii) of Regulation S-K, this certification is furnished and not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
SIGNATURES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company and its subsidiaries.
NORTHWEST NATURAL GAS COMPANY
(Registrant)
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| Dated: | November 8, 2022 | | |
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Dated: | November 6, 2018 | | |
| | | /s/ Brody J. Wilson |
| | | Brody J. Wilson |
| | | Principal Accounting Officer
Vice President, Treasurer, Chief Accounting Officer and Controller
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NORTHWEST NATURAL HOLDING COMPANY
(Registrant)
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| Dated: | November 8, 2022 | | |
| | | |
Dated: | November 6, 2018 | | |
| | | /s/ Brody J. Wilson |
| | | Brody J. Wilson |
| | | Principal Accounting Officer
Vice President, Treasurer, Chief Accounting Officer and Controller
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