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 ended March 31,September 30, 2019
OR
[  ]  ☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to____________
Commission file number 1-38681Commission file number 1-15973
nwnholdingshza03.jpg
nwn4chza02.jpg
NORTHWEST NATURAL HOLDING COMPANYNORTHWEST NATURAL GAS COMPANY
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter) 
Oregon82-4710680Oregon93-0256722
(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.)
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 HOLDING COMPANY Yes [ X ]  No [   ]NORTHWEST NATURAL GAS 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 HOLDING COMPANY Yes [ X ]  No [   ]NORTHWEST NATURAL GAS COMPANY Yes [ X ]  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 COMPANYNORTHWEST NATURAL GAS COMPANY
Large Accelerated Filer [ X ]Large Accelerated Filer [  ]
Accelerated Filer [    ]Accelerated Filer [    ]
Non-accelerated Filer [ ]Non-accelerated Filer [ X ]   
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 [ X ]NORTHWEST NATURAL GAS COMPANY Yes [   ]  No [ X ]
Securities registered pursuant to Section 12(b) of the Act:
RegistrantTitle of each classTrading Symbol
Name of each Exchange
on Which Registered
NORTHWEST NATURAL HOLDING COMPANYCommon StockNWNNew York Stock Exchange
NORTHWEST NATURAL GAS COMPANYNone
Commission file number1-38681 Commission file number1-15973
nwnholdingshza24.jpg
 
nwn4chza22.jpg
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) 
Oregon82-4710680 Oregon93-0256722
(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.)
220 N.W. Second Avenue    220 N.W. Second Avenue   
 PortlandOregon97209  PortlandOregon97209
(Address of principal executive offices)  (Zip Code) (Address of principal executive offices)  (Zip Code)
Registrant’s telephone number:(503)226-4211 Registrant’s telephone number:(503)226-4211
 
Securities registered pursuant to Section 12(b) of the Act:
RegistrantTitle of each classTrading Symbol
Name of each exchange
on which registered
NORTHWEST NATURAL HOLDING COMPANYCommon StockNWNNew York Stock Exchange
NORTHWEST NATURAL GAS COMPANYNone  
 
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 COMPANYYes☒No☐ NORTHWEST NATURAL GAS COMPANYYes☒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 COMPANYYes☒No☐ NORTHWEST NATURAL GAS COMPANYYes☒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 COMPANYYes☐No☒ NORTHWEST NATURAL GAS COMPANYYes☐No☒
 

At April 26,October 25, 2019, 28,965,72330,435,575 shares of Northwest Natural Holding Company's Common Stock (the only class of Common Stock) were outstanding. All shares of Northwest Natural Gas Company's Common Stock (the only class of Common Stock) outstanding were held by Northwest Natural Holding Company.
 

This combined Form 10-Q is separately filed by Northwest Natural Holding Company and Northwest Natural Gas Company. Information contained in this document relating to Northwest Natural Gas Company is filed by Northwest Natural Holding Company and separately by Northwest Natural Gas Company. Northwest Natural Gas Company makes no representation as to information relating to Northwest Natural Holding Company or its subsidiaries, except as it may relate to Northwest Natural Gas Company and its subsidiaries.
 



NORTHWEST NATURAL GAS COMPANY
NORTHWEST NATURAL HOLDING COMPANY
For the Quarterly Period Ended March 31,September 30, 2019


TABLE OF CONTENTS
PART 1.FINANCIAL INFORMATIONPage
   
 
Forward-Looking Statements
4
   
Item 1.
Unaudited Financial Statements: 
 
Consolidated Statements of Comprehensive Income of Northwest Natural Holding Company for the three and nine months ended March 31,September 30, 2019 and 2018
6
 
Consolidated Balance Sheets of Northwest Natural Holding Company at March 31,September 30, 2019 and 2018 and December 31, 2018
7
 
Consolidated Statements of Shareholders' Equity of Northwest Natural Holding Company for the three and nine months ended March 31,September 30, 2019 and 2018
9
 
Consolidated Statements of Cash Flows of Northwest Natural Holding Company for the threenine months ended March 31,September 30, 2019 and 2018
10
 
Consolidated Statements of Comprehensive Income of Northwest Natural Gas Company for the three and nine months ended March 31,September 30, 2019 and 2018
11
 
Consolidated Balance Sheets of Northwest Natural Gas Company at March 31,September 30, 2019 and 2018 and December 31, 2018
12
 
Consolidated Statements of Shareholder's Equity of Northwest Natural Gas Company for the three and nine months ended March 31,September 30, 2019 and 2018
14
 
Consolidated Statements of Cash Flows of Northwest Natural Gas Company for the threenine months ended March 31,September 30, 2019 and 2018
15
 
Notes to Unaudited Consolidated Financial Statements
16
   
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
3847
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
5872
   
Item 4.
Controls and Procedures
5872
   
PART II.OTHER INFORMATION 
   
Item 1.
Legal Proceedings
5973
   
Item 1A.
Risk Factors
5973
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
5973
   
Item 6.
Exhibits
5973
   
 
Signature
6175





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, intends, plans, seeks, believes, estimates, expects, and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements regarding the following:
plans, projections and predictions;
objectives, goals or strategies;
assumptions, generalizations and estimates;
ongoing continuation of past practices or patterns;
future events or performance;
trends;
risks;
uncertainties;
timing and cyclicality;
earnings and dividends;
capital expenditures and allocation;
capital or organizational structure;
climate change and our role in a low-carbon, renewable-energy future;
growth;
customer rates;
labor relations and workforce succession;
commodity costs;
gas reserves;
operational performance and costs;
energy policy, infrastructure and preferences;
public policy approach and involvement;
efficacy of derivatives and hedges;
liquidity, financial positions, and planned securities issuances;
valuations;
project and program development, expansion, or investment;
business development efforts, including acquisitions and integration thereof;
implementation and execution of our water strategy;
pipeline capacity, demand, location, and reliability;
adequacy of property rights and headquarter development;
technology implementation and cybersecurity practices;
competition;
procurement and development of gas (including renewable natural gas) and water supplies;
estimated expenditures;
costs of compliance;
customers bypassing our infrastructure;
credit exposures;
rate or regulatory outcomes, recovery or refunds;
impacts or changes of laws, rules and regulations;
tax liabilities or refunds, including effects of tax reform;
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 retirement plans;
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.



4

Table of Contents




Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. We therefore caution you against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in NW Holdings' and NW Natural's 2018 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,” and in Part I, 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.

4

Table of Contents






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




5


Table of Contents








ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS


NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)


Three Months Ended March 31,
Three Months Ended September 30, Nine Months Ended September 30,
In thousands, except per share data 2019 2018 2019 2018 2019 2018
            
Operating revenues $285,348
 $263,635
 $90,317
 $91,239
 $499,108
 $479,441
            
Operating expenses:            
Cost of gas 105,457
 108,106
 22,603
 25,538
 163,167
 175,697
Operations and maintenance 51,482
 39,523
 40,886
 37,569
 131,854
 115,120
Environmental remediation 8,947
 4,624
 967
 1,022
 7,258
 7,528
General taxes 9,027
 9,474
 7,993
 7,589
 24,899
 24,792
Revenue taxes 11,926
 12,429
 3,534
 3,522
 19,956
 20,731
Depreciation and amortization 21,572
 20,875
 23,375
 21,485
 67,334
 63,507
Other operating expenses 892
 853
 593
 625
 2,131
 2,157
Total operating expenses 209,303
 195,884
 99,951
 97,350
 416,599
 409,532
Income from operations 76,045
 67,751
Income (loss) from operations (9,634) (6,111) 82,509
 69,909
Other income (expense), net (13,747) (834) (2,267) (312) (18,782) (1,139)
Interest expense, net 10,205
 9,274
 10,948
 9,006
 31,807
 27,051
Income before income taxes 52,093
 57,643
Income tax expense 8,675
 15,632
Net income from continuing operations 43,418
 42,011
Income (loss) before income taxes (22,849) (15,429) 31,920
 41,719
Income tax (benefit) expense (4,343) (4,285) 4,957
 11,191
Net income (loss) from continuing operations (18,506) (11,144) 26,963
 30,528
Loss from discontinued operations, net of tax (217) (474) (795) (650) (1,968) (1,783)
Net income 43,201
 41,537
Net income (loss) (19,301) (11,794) 24,995
 28,745
Other comprehensive income:            
Amortization of non-qualified employee benefit plan liability, net of taxes of $41 and $55 for the three months ended March 31, 2019 and 2018, respectively 115
 154
Comprehensive income $43,316
 $41,691
Amortization of non-qualified employee benefit plan liability, net of taxes of $43 and $55 for the three months ended and $125 and $166 for the nine months ended September 30, 2019 and 2018, respectively 114
 154
 344
 461
Comprehensive income (loss) $(19,187) $(11,640) $25,339
 $29,206
Average common shares outstanding:            
Basic 28,906
 28,753
 30,429
 28,815
 29,563
 28,787
Diluted 28,970
 28,803
 30,429
 28,815
 29,628
 28,846
Earnings from continuing operations per share of common stock:    
Earnings (loss) from continuing operations per share of common stock:        
Basic $1.50
 $1.46
 $(0.61) $(0.39) $0.91
 $1.06
Diluted 1.50
 1.46
 (0.61) (0.39) 0.91
 1.06
Loss from discontinued operations per share of common stock:            
Basic $(0.01) $(0.02) $(0.02) $(0.02) $(0.07) $(0.06)
Diluted (0.01) (0.02) (0.02) (0.02) (0.07) (0.06)
Earnings per share of common stock:    
Earnings (loss) per share of common stock:        
Basic $1.49
 $1.44
 $(0.63) $(0.41) $0.84
 $1.00
Diluted 1.49
 1.44
 (0.63) (0.41) 0.84
 1.00


See Notes to Unaudited Consolidated Financial Statements




6


Table of Contents








NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 March 31, March 31, December 31, September 30, September 30, December 31,
In thousands 2019 2018 2018 2019 2018 2018
            
Assets:            
Current assets:            
Cash and cash equivalents $12,817
 $11,215
 $12,633
 $10,522
 $29,965
 $12,633
Accounts receivable 93,617
 77,897
 66,970
 29,617
 25,125
 66,970
Accrued unbilled revenue 36,147
 38,752
 57,827
 17,934
 16,351
 57,827
Allowance for uncollectible accounts (1,301) (1,112) (977) (180) (394) (977)
Regulatory assets 46,317
 45,900
 41,930
 47,996
 41,241
 41,930
Derivative instruments 7,890
 1,130
 9,001
 5,987
 2,871
 9,001
Inventories 19,540
 34,399
 44,149
 41,230
 53,064
 44,149
Gas reserves 16,157
 15,124
 16,647
 16,392
 16,916
 16,647
Income taxes receivable 6,000
 —
 6,000
 —
 —
 6,000
Other current assets 20,293
 16,877
 28,472
 18,617
 20,376
 28,472
Discontinued operations current assets (Note 17) 14,632
 1,512
 13,269
Discontinued operations current assets (Note 18) 14,612
 12,644
 13,269
Total current assets 272,109
 241,694
 295,921
 202,727
 218,159
 295,921
Non-current assets:            
Property, plant, and equipment 3,439,460
 3,251,075
 3,414,490
 3,416,718
 3,370,388
 3,414,490
Less: Accumulated depreciation 1,005,117
 972,773
 993,118
 1,027,330
 996,994
 993,118
Total property, plant, and equipment, net 2,434,343
 2,278,302
 2,421,372
 2,389,388
 2,373,394
 2,421,372
Gas reserves 61,907

80,560
 66,197
 51,978

70,556
 66,197
Regulatory assets 327,194
 343,037
 371,786
 313,890
 333,917
 371,786
Derivative instruments 541
 1,148
 725
 1,610
 861
 725
Other investments 63,829
 66,709
 63,558
 63,018
 65,113
 63,558
Operating lease right of use asset 6,163
 —
 —
 3,917
 —
 —
Assets under sales-type leases 147,918
 —
 —
Goodwill 8,954
 —
 8,954
 49,333
 6,563
 8,954
Other non-current assets 16,077
 7,030
 14,149
 27,839
 12,844
 14,149
Discontinued operations non-current assets (Note 17) —
 10,859
 —
Total non-current assets 2,919,008
 2,787,645
 2,946,741
 3,048,891
 2,863,248
 2,946,741
Total assets $3,191,117
 $3,029,339
 $3,242,662
 $3,251,618
 $3,081,407
 $3,242,662


See Notes to Unaudited Consolidated Financial Statements




7


Table of Contents








NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 March 31, March 31, December 31, September 30, September 30, December 31,
In thousands 2019 2018 2018
In thousands, including share information 2019 2018 2018
            
Liabilities and equity:            
Current liabilities:            
Short-term debt $176,391
 $50,000
 $217,620
 $65,580
 $100,500
 $217,620
Current maturities of long-term debt 104,158
 74,785
 29,989
 94,671
 84,940
 29,989
Accounts payable 103,207
 77,860
 115,878
 76,197
 80,143
 115,878
Taxes accrued 11,004
 12,018
 11,023
 13,382
 13,074
 11,023
Interest accrued 9,233
 9,262
 7,306
 10,406
 9,453
 7,306
Regulatory liabilities 46,770
 34,946
 47,436
 37,573
 37,504
 47,436
Derivative instruments 2,845
 17,607
 12,381
 4,156
 8,828
 12,381
Operating lease liabilities 4,656
 —
 —
 3,171
 —
 —
Other current liabilities 54,543
 39,166
 54,492
 39,873
 35,497
 54,492
Discontinued operations current liabilities (Note 17) 13,282
 1,209
 12,959
Discontinued operations current liabilities (Note 18) 13,399
 13,003
 12,959
Total current liabilities 526,089
 316,853
 509,084
 358,408
 382,942
 509,084
Long-term debt 632,484
 683,497
 706,247
 806,014
 724,654
 706,247
Deferred credits and other non-current liabilities:            
Deferred tax liabilities 293,662
 283,129
 280,463
 284,625
 274,315
 280,463
Regulatory liabilities 600,698
 600,442
 611,560
 615,813
 606,175
 611,560
Pension and other postretirement benefit liabilities 220,732
 221,732
 221,886
 215,007
 212,249
 221,886
Derivative instruments 1,161
 2,355
 3,025
 2,998
 3,016
 3,025
Operating lease liabilities 1,495
 —
 —
 732
 —
 —
Other non-current liabilities 120,569
 137,147
 147,763
 123,352
 140,475
 147,763
Discontinued operations non-current liabilities (Note 17) —
 11,979
 —
Total deferred credits and other non-current liabilities 1,238,317
 1,256,784
 1,264,697
 1,242,527
 1,236,230
 1,264,697
Commitments and contingencies (Note 16) 

 

 

Commitments and contingencies (Note 17) 


 


 


Equity:            
Common stock - no par value; authorized 100,000 shares; issued and outstanding 28,962, 28,781, and 28,880 at March 31, 2019 and 2018, and December 31, 2018, respectively 459,932
 450,408
 457,640
Common stock - no par value; authorized 100,000 shares; issued and outstanding 30,435, 28,844, and 28,880 at September 30, 2019 and 2018, and December 31, 2018, respectively 556,623
 455,499
 457,640
Retained earnings 342,734
 330,081
 312,182
 296,256
 290,059
 312,182
Accumulated other comprehensive loss (8,439) (8,284) (7,188) (8,210) (7,977) (7,188)
Total equity 794,227
 772,205
 762,634
 844,669
 737,581
 762,634
Total liabilities and equity $3,191,117
 $3,029,339
 $3,242,662
 $3,251,618
 $3,081,407
 $3,242,662


See Notes to Unaudited Consolidated Financial Statements






8


Table of Contents








NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
In thousands, except per share amounts Three Months Ended March 31, Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018 2019 2018
Total shareholders' equity, beginning balances $762,634
 $742,776
 $876,746
 $759,526
 $762,634
 $742,776
            
Common stock:            
Beginning balances 457,640
 448,865
 555,052
 452,195
 457,640
 448,865
Stock-based compensation 1,245
 1,172
 485
 237
 2,309
 2,161
Shares issued pursuant to equity based plans 1,047
 371
 1,082
 2,487
 3,718
 3,893
Issuance of common stock, net of issuance costs 4
 —
 92,956
 —
Cash purchase of shares for business combination —
 (7,945) —
 (7,945)
Value of shares transferred for business combination —
 8,525
 —
 8,525
Ending balances 459,932
 450,408
 556,623
 455,499
 556,623
 455,499
            
Retained earnings:            
Beginning balances 312,182
 302,349
 330,018
 315,462
 312,182
 302,349
Net income 43,201
 41,537
Net income (loss) (19,301) (11,794) 24,995
 28,745
Dividends on common stock (14,015) (13,805) (14,461) (13,609) (42,287) (41,035)
Reclassification of tax effects from the TCJA 1,366
 —
 —
 —
 1,366
 —
Ending balances 342,734
 330,081
 296,256
 290,059
 296,256
 290,059
            
Accumulated other comprehensive income (loss):            
Beginning balances (7,188) (8,438) (8,324) (8,131) (7,188) (8,438)
Other comprehensive income 115
 154
 114
 154
 344
 461
Reclassification of tax effects from the TCJA (1,366) —
 —
 —
 (1,366) —
Ending balances (8,439) (8,284) (8,210) (7,977) (8,210) (7,977)
            
Total shareholders' equity, ending balances $794,227
 $772,205
 $844,669
 $737,581
 $844,669
 $737,581
            
Dividends per share of common stock $0.4750
 $0.4725
 $0.4750
 $0.4725
 $1.4250
 $1.4175




See Notes to Unaudited Consolidated Financial Statements




9


Table of Contents








NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NORTHWEST NATURAL HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months Ended March 31, Nine Months Ended September 30,
In thousands 2019 2018 2019 2018
        
Operating activities:        
Net income $43,201
 $41,537
 $24,995
 $28,745
Adjustments to reconcile net income to cash provided by operations:        
Depreciation and amortization 21,572
 20,875
 67,334
 63,507
Regulatory amortization of gas reserves 4,780
 4,073
 14,474
 12,056
Deferred income taxes 6,306
 13,327
 2,471
 3,954
Qualified defined benefit pension plan expense 3,499
 1,435
 10,464
 4,450
Contributions to qualified defined benefit pension plans (1,490) (1,720) (7,810) (11,690)
Deferred environmental expenditures, net (3,685) (1,280) (10,992) (10,547)
Amortization of environmental remediation 8,947
 4,624
 7,258
 7,528
Regulatory revenue recovery deferral from the TCJA 450
 6,424
 742
 6,983
Regulatory disallowance of pension costs 10,500
 —
 10,500
 —
Other 3,171
 879
 9,058
 1,541
Changes in assets and liabilities:        
Receivables, net (4,891) 10,552
 80,205
 83,194
Inventories 21,108
 13,144
 (3,293) (5,134)
Income and other taxes 7,406
 (6,865) 21,510
 (5,809)
Accounts payable (14,883) (19,042) (31,767) (22,929)
Interest accrued 1,927
 2,489
 3,100
 2,680
Deferred gas costs (19,182) 3,519
 (47,085) 2,372
Decoupling mechanism 7,903
 5,431
 11,095
 2,915
Other, net 8,894
 3,963
 (6,713) (6,503)
Discontinued operations (739) 1,156
 (255) 1,216
Cash provided by operating activities 104,794
 104,521
 155,291
 158,529
Investing activities:        
Capital expenditures (48,764) (57,329) (152,993) (158,795)
Acquisitions, net of cash acquired (56,189) 136
Other (1,991) (58) (15,460) (1,797)
Discontinued operations (301) (101) (648) (619)
Cash used in investing activities (51,056) (57,488) (225,290) (161,075)
Financing activities:        
Proceeds from stock options exercised 1,546
 —
 1,723
 1,368
Proceeds from common stock issued 93,182
 —
Long-term debt issued 175,000
 50,000
Long-term debt retired —
 (22,000) (10,000) (22,000)
Change in short-term debt (41,229) (4,200) (152,040) 46,300
Cash dividend payments on common stock (12,935) (12,781) (39,605) (38,387)
Stock purchases related to acquisitions —
 (7,951)
Other (936) (309) (372) (291)
Cash used in financing activities (53,554) (39,290)
Increase in cash and cash equivalents 184
 7,743
Cash provided by financing activities 67,888
 29,039
Increase (decrease) in cash and cash equivalents (2,111) 26,493
Cash and cash equivalents, beginning of period 12,633
 3,472
 12,633
 3,472
Cash and cash equivalents, end of period $12,817
 $11,215
 $10,522
 $29,965
        
Supplemental disclosure of cash flow information:        
Interest paid, net of capitalization $7,976
 $6,261
 $27,736
 $22,821
Income taxes paid (refunded), net (90) 9,800
 (6,096) 22,047
See Notes to Unaudited Consolidated Financial Statements


10


Table of Contents








NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 Three Months Ended March 31, Three Months Ended September 30, Nine Months Ended September 30,
In thousands, except per share data 2019 2018
In thousands 2019 2018 2019 2018
            
Operating revenues $284,846
 $263,635
 $87,592
 $91,227
 $494,680
 $479,425
            
Operating expenses:            
Cost of gas 105,513
 108,164
 22,659
 25,593
 163,335
 175,864
Operations and maintenance 50,434
 39,500
 37,710
 37,709
 125,436
 115,108
Environmental remediation 8,947
 4,624
 967
 1,022
 7,258
 7,528
General taxes 8,988
 9,459
 7,881
 7,584
 24,695
 24,764
Revenue taxes 11,926
 12,429
 3,534
 3,522
 19,956
 20,731
Depreciation and amortization 21,504
 20,868
 23,074
 21,454
 66,821
 63,412
Other operating expenses 890
 853
 586
 624
 2,114
 2,156
Total operating expenses 208,202
 195,897
 96,411
 97,508
 409,615
 409,563
Income from operations 76,644
 67,738
Income (loss) from operations (8,819) (6,281) 85,065
 69,862
Other income (expense), net (13,768) (815) (2,323) (320) (18,905) (1,168)
Interest expense, net 10,133
 9,274
 10,459
 9,007
 30,979
 27,052
Income before income taxes 52,743
 57,649
Income tax expense 8,848
 15,635
Net income from continuing operations 43,895
 42,014
Income (loss) before income taxes (21,601) (15,608) 35,181
 41,642
Income tax (benefit) expense (4,013) (4,333) 5,820
 11,174
Net income (loss) from continuing operations (17,588) (11,275) 29,361
 30,468
Loss from discontinued operations, net of tax —
 (477) —
 (519) —
 (1,723)
Net income 43,895
 41,537
Net income (loss) (17,588) (11,794) 29,361
 28,745
Other comprehensive income:            
Amortization of non-qualified employee benefit plan liability, net of taxes of $41 and $55 for the three months ended March 31, 2019 and 2018, respectively 115
 154
Comprehensive income $44,010
 $41,691
Amortization of non-qualified employee benefit plan liability, net of taxes of $43 and $55 for the three months ended and $125 and $166 for the nine months ended September 30, 2019 and 2018, respectively 114
 154
 344
 461
Comprehensive income (loss) $(17,474) $(11,640) $29,705
 $29,206


See Notes to Unaudited Consolidated Financial Statements




11


Table of Contents








NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 March 31, March 31, December 31, September 30, September 30, December 31,
In thousands 2019 2018 2018 2019 2018 2018
            
Assets:            
Current assets:            
Cash and cash equivalents $6,833
 $10,904
 $7,947
 $6,274
 $8,886
 $7,947
Accounts receivable 93,502
 77,898
 66,824
 29,065
 25,003
 66,824
Accrued unbilled revenue 36,085
 38,752
 57,773
 17,843
 16,351
 57,773
Receivables from affiliates 4,247
 422
 4,166
 1,106
 388
 4,166
Allowance for uncollectible accounts (1,300) (1,113) (975) (178) (392) (975)
Regulatory assets 46,317
 45,900
 41,930
 47,996
 41,241
 41,930
Derivative instruments 7,890
 1,130
 9,001
 5,987
 2,871
 9,001
Inventories 19,528
 34,399
 44,126
 41,148
 53,047
 44,126
Gas reserves 16,157
 15,124
 16,647
 16,392
 16,916
 16,647
Other current assets 19,474
 16,821
 25,347
 17,519
 20,321
 25,347
Discontinued operations current assets (Note 17) —
 5,731
 —
Discontinued operations current assets (Note 18) —
 26,227
 —
Total current assets 248,733
 245,968
 272,786
 183,152
 210,859
 272,786
Non-current assets:            
Property, plant, and equipment 3,435,304
 3,250,700
 3,410,439
 3,397,053
 3,366,896
 3,410,439
Less: Accumulated depreciation 1,004,812
 972,573
 992,855
 1,026,631
 996,780
 992,855
Total property, plant, and equipment, net 2,430,492
 2,278,127
 2,417,584
 2,370,422
 2,370,116
 2,417,584
Gas reserves 61,907
 80,560
 66,197
 51,978
 70,556
 66,197
Regulatory assets 327,194
 343,037
 371,786
 313,890
 333,917
 371,786
Derivative instruments 541
 1,148
 725
 1,610
 861
 725
Other investments 50,212
 53,018
 49,922
 49,503
 51,459
 49,922
Operating lease right of use asset 5,903
 —
 —
 3,745
 —
 —
Assets under sales-type leases 147,918
 —
 —
Other non-current assets 15,646
 7,017
 13,736
 27,423
 12,740
 13,736
Discontinued operations non-current assets (Note 17) —
 24,738
 —
Discontinued operations non-current assets (Note 18) —
 35,079
 —
Total non-current assets 2,891,895
 2,787,645
 2,919,950
 2,966,489
 2,874,728
 2,919,950
Total assets $3,140,628
 $3,033,613
 $3,192,736
 $3,149,641
 $3,085,587
 $3,192,736


See Notes to Unaudited Consolidated Financial Statements


12


Table of Contents








NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 March 31, March 31, December 31, September 30, September 30, December 31,
In thousands 2019 2018 2018 2019 2018 2018
            
Liabilities and equity:            
Current liabilities:            
Short-term debt $176,300
 $50,000
 $217,500
 $45,500
 $100,500
 $217,500
Current maturities of long-term debt 104,084
 74,785
 29,989
 94,633
 84,940
 29,989
Accounts payable 102,232
 77,590
 114,937
 75,126
 79,608
 114,937
Payables to affiliates 1,385
 3,613
 523
 4,185
 3,235
 523
Taxes accrued 10,869
 11,984
 10,990
 12,941
 13,034
 10,990
Interest accrued 9,225
 9,262
 7,273
 10,405
 9,453
 7,273
Regulatory liabilities 46,770
 34,946
 47,436
 37,573
 37,504
 47,436
Derivative instruments 2,845
 17,607
 12,381
 4,156
 8,828
 12,381
Operating lease liabilities 4,477
 —
 —
 3,075
 —
 —
Other current liabilities 53,155
 39,180
 53,027
 38,328
 34,403
 53,027
Discontinued operations current liabilities (Note 17) —
 2,160
 —
Discontinued operations current liabilities (Note 18) —
 3,769
 —
Total current liabilities 511,342
 321,127
 494,056
 325,922
 375,274
 494,056
Long-term debt 630,370
 683,497
 704,134
 768,995
 723,820
 704,134
Deferred credits and other non-current liabilities:            
Deferred tax liabilities 307,704
 299,526
 294,739
 298,039
 289,012
 294,739
Regulatory liabilities 600,698
 600,442
 611,560
 615,813
 606,175
 611,560
Pension and other postretirement benefit liabilities 220,732
 221,732
 221,886
 215,007
 212,249
 221,886
Derivative instruments 1,161
 2,355
 3,025
 2,998
 3,016
 3,025
Operating lease liabilities 1,413
 —
 —
 654
 —
 —
Other non-current liabilities 120,465
 137,059
 147,668
 123,259
 140,390
 147,668
Discontinued operations - non-current liabilities (Note 17) —
 (4,330) —
Discontinued operations - non-current liabilities (Note 18) —
 (1,930) —
Total deferred credits and other non-current liabilities 1,252,173
 1,256,784
 1,278,878
 1,255,770
 1,248,912
 1,278,878
Commitments and contingencies (Note 16)      
Commitments and contingencies (Note 17)      
Equity:            
Common stock 226,452
 450,408
 226,452
 319,634
 455,499
 226,452
Retained earnings 528,730
 330,081
 496,404
 487,530
 290,059
 496,404
Accumulated other comprehensive loss (8,439) (8,284) (7,188) (8,210) (7,977) (7,188)
Total equity 746,743
 772,205
 715,668
 798,954
 737,581
 715,668
Total liabilities and equity $3,140,628
 $3,033,613
 $3,192,736
 $3,149,641
 $3,085,587
 $3,192,736


See Notes to Unaudited Consolidated Financial Statements




13


Table of Contents








NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED)
In thousands Three Months Ended March 31, Three Months Ended September 30, Nine Months Ended September 30,
 2019 2018 2019 2018 2019 2018
Total shareholder's equity, beginning balances $715,668
 $742,776
 $830,115
 $759,526
 $715,668
 $742,776
            
Common stock:            
Beginning balances 226,452
 448,865
 319,634
 452,195
 226,452
 448,865
Stock-based compensation(1)
 —
 1,172
 —
 237
 —
 2,161
Additional paid-in capital pursuant to employee stock purchase plan —
 371
 —
 2,487
 —
 3,893
Capital contribution from parent —
 —
 93,182
 —
Cash purchase of shares for business combination —
 (7,945) —
 (7,945)
Value of shares transferred for business combination —
 8,525
 —
 8,525
Ending balances 226,452
 450,408
 319,634
 455,499
 319,634
 455,499
   

   

    
Retained earnings:            
Beginning balances 496,404
 302,349
 518,805
 315,462
 496,404
 302,349
Net income 43,895
 41,537
Net income (loss) (17,588) (11,794) 29,361
 28,745
Dividends on common stock (12,935) (13,805) (13,687) (13,609) (39,601) (41,035)
Reclassification of tax effects from the TCJA 1,366
 —
 —
 —
 1,366
 —
Ending balances 528,730
 330,081
 487,530
 290,059
 487,530
 290,059
            
Accumulated other comprehensive income (loss):            
Beginning balances (7,188) (8,438) (8,324) (8,131) (7,188) (8,438)
Other comprehensive income 115
 154
 114
 154
 344
 461
Reclassification of tax effects from the TCJA (1,366) —
 —
 —
 (1,366) —
Ending balances (8,439) (8,284) (8,210) (7,977) (8,210) (7,977)
            
Total shareholder's equity, ending balances $746,743
 $772,205
 $798,954
 $737,581
 $798,954
 $737,581


(1) Stock-based compensation is based on stock awards ofto NW Natural employees to be issued in shares of NW Holdings.


See Notes to Unaudited Consolidated Financial Statements




14


Table of Contents








NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NORTHWEST NATURAL GAS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Three Months Ended March 31, Nine Months Ended September 30,
In thousands 2019 2018 2019 2018
        
Operating activities:        
Net income $43,895
 $41,537
 $29,361
 $28,745
Adjustments to reconcile net income to cash provided by operations:        
Depreciation and amortization 21,504
 20,868
 66,821
 63,412
Regulatory amortization of gas reserves 4,780
 4,073
 14,474
 12,056
Deferred income taxes 6,072
 12,862
 (5) 2,349
Qualified defined benefit pension plan expense 3,499
 1,435
 10,464
 4,450
Contributions to qualified defined benefit pension plans (1,490) (1,720) (7,810) (11,690)
Deferred environmental expenditures, net (3,685) (1,280) (10,992) (10,547)
Amortization of environmental remediation 8,947
 4,624
 7,258
 7,528
Regulatory revenue deferral from the TCJA 450
 6,424
 742
 6,983
Regulatory disallowance of pension costs 10,500
 —
 10,500
 —
Other 3,117
 854
 7,903
 1,909
Changes in assets and liabilities:        
Receivables, net (4,995) 10,552
 83,581
 83,116
Inventories 21,097
 13,144
 (3,321) (5,504)
Income and other taxes 5,037
 (6,860) 13,505
 (5,810)
Accounts payable (15,337) (18,645) (30,281) (22,738)
Interest accrued 1,952
 2,489
 3,132
 2,680
Deferred gas costs (19,182) 3,519
 (47,085) 2,372
Decoupling mechanism 7,903
 5,431
 11,095
 2,915
Other, net 10,639
 3,963
 (4,878) (6,368)
Discontinued operations —
 1,301
 —
 2,077
Cash provided by operating activities 104,703
 104,571
 154,464
 157,935
Investing activities:        
Capital expenditures (48,658) (57,329) (151,915) (158,795)
Other (1,991) (57) (15,460) (2,797)
Discontinued operations —
 (101) —
 (19,606)
Cash used in investing activities (50,649) (57,487) (167,375) (181,198)
Financing activities:        
Proceeds from stock options exercised —
 1,368
Capital contribution from parent 93,182
 —
Long-term debt issued 140,000
 50,000
Long-term debt retired —
 (22,000) (10,000) (22,000)
Change in short-term debt (41,200) (4,200) (172,000) 46,300
Cash dividend payments on common stock (12,935) (12,781) (39,601) (38,387)
Other (1,033) (309) (343) (291)
Cash used in financing activities (55,168) (39,290)
Increase in cash and cash equivalents (1,114) 7,794
Discontinued operations —
 (7,951)
Cash provided by financing activities 11,238
 29,039
Increase (decrease) in cash and cash equivalents (1,673) 5,776
Cash and cash equivalents, beginning of period 7,947
 3,110
 7,947
 3,110
Cash and cash equivalents, end of period $6,833
 $10,904
 $6,274
 $8,886
        
Supplemental disclosure of cash flow information:        
Interest paid, net of capitalization $7,889
 $6,261
 $26,927
 $22,821
Income taxes paid (refunded), net (90) 9,800
 (6,096) 22,047
See Notes to Unaudited Consolidated Financial Statements



15


Table of Contents










NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1. ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
On October 1, 2018, we completed a reorganization into a holding company structure. In this reorganization, shareholders of NW Natural (the predecessor publicly held parent company) became shareholders of NW Holdings on a one-for-one basis; maintaining the same number of shares and ownership percentage as held in NW Natural immediately prior to the reorganization. NW Natural became a wholly-owned subsidiary of NW Holdings. Additionally, certain subsidiaries of NW Natural were transferred to NW Holdings. This reorganization was accounted for as a transaction among entities under common control. As required under accounting guidance, these subsidiaries are presented in this report as discontinued operations in the consolidated results of NW Natural. See Note 1718 for additional information.


The accompanying consolidated financial statements represent the respective, consolidated financial results of NW Holdings and NW Natural and all respective companies that each registrant directly or indirectly controls, either through majority ownership or otherwise. This is a combined report of NW Holdings and NW Natural, which includes separate consolidated financial statements for each registrant.


NW Natural's regulated natural gas distribution activities are reported in the natural gas distribution (NGD) segment. The NGD segment is NW Natural's core operating business and serves residential, commercial, and industrial customers in Oregon and southwest Washington. The NGD segment is the only reportable segment for NW Holdings and NW Natural. All other activities, water businesses, and other investments are aggregated and reported as other at their respective registrant.


In addition, NW Holdings has reported discontinued operations results related to the pending sale of Gill Ranch Storage, LLC (Gill Ranch). All prior period amounts have been retrospectively adjusted to reflect thethis change both in operational results and reportable segments the designation of Gill Ranch as a discontinued operation for NW Holdings and the designation of subsidiaries previously owned by NW Natural, that are now owned by NW Holdings as discontinued operations for NW Natural.respectively. These reclassifications and the reorganization activities described above had no effect on the prior year’s consolidated results of operations, financial condition, or cash flows. See Note 1718 for additional information.


NW Holdings' direct and indirect wholly-owned subsidiaries as of the filing date of this report include:


Northwest Natural Gas Company (NW Natural);
Northwest Energy Corporation (Energy Corp);
NWN Gas Reserves LLC (NWN Gas Reserves);
NW Natural Energy, LLC (NWN Energy);
NW Natural Gas Storage, LLC (NWN Gas Storage);
▪Gill Ranch Storage, LLC (Gill Ranch), which is presented as a discontinued operation;
NNG Financial Corporation (NNG Financial);
KB Pipeline Company (KB);
NW Natural Water Company, LLC (NWN Water);
▪Falls Water Co., Inc. (Falls Water);
▪Salmon Valley Water Company;
▪NW Natural Water of Oregon, LLC (NWN Water of Oregon);
Sunstone Water, LLC;
Sunstone Infrastructure, LLC;
Sunriver Water, LLC (Sunriver Water);
Sunriver Environmental, LLC (Sunriver Environmental);
▪NW Natural Water of Washington, LLC (NWN Water of Washington);
Cascadia Infrastructure, LLC;
Cascadia Water, LLC (Cascadia);
▪NW Natural Water of Idaho, LLC (NWN Water of Idaho); and
Gem State Water Company, LLC (Gem State);

Gem State Infrastructure, LLC; and
▪NW Natural Water of Texas, LLC (NWN Water of Texas).

Investments in corporate joint ventures and partnerships that NW Holdings does not directly or indirectly control, and for which it is not the primary beneficiary, include NNG Financial's investment in Kelso-Beaver Pipeline and NWN Energy's investment in Trail West Holdings, LLC (TWH), which are accounted for under the equity method. 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.



16

Table of Contents




Information presented in these interim consolidated financial statements is unaudited, but includes all material adjustments management considers necessary for a fair statement of the results for each period reported including normal recurring accruals. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in NW Holdings' and NW Natural's combined 2018 Annual Report on Form 10-K (2018 Form 10-K). A significant part of NW Holdings' and NW Natural's business is of a seasonal nature; therefore, NW Holdings and NW Natural results of operations for interim periods are not necessarily indicative of full year results. Seasonality affects the comparability of the results of other operations across quarters but not across years.

16

Table of Contents






During the second quarter of 2018, we moved forward with our long-term strategic plans, which include a shift away from the California gas storage business. In June 2018, NWN Gas Storage, a wholly-owned subsidiary of NW Natural at the time and now a wholly-owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement that 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, the results of Gill Ranch have been presented as a discontinued operation for NW Holdings for all periods presented and for NW Natural up until the holding company reorganization was effective on October 1, 2018 on the consolidated statements of comprehensive income and cash flows, and the assets and liabilities associated with Gill Ranch have been classified as discontinued operations assets and liabilities on the NW Holdings consolidated balance sheet. See Note 1718 for additional information. Additionally, we reevaluated reportable segments and concluded that the remaining gas storage activities no longer meetmet the requirements to be separately reported as a segment. Interstate Storage Services is now reported in Other under NW Natural and NW Holdings as applicable, and all prior periods reflect this change. See Note 4, which provides segment information.


Notes to the consolidated financial statements reflect the activity of continuing operations for both NW Holdings and NW Natural for all periods presented, unless otherwise noted.
2. SIGNIFICANT ACCOUNTING POLICIES

Significant accounting policies are described in Note 2 of the 2018 Form 10-K. There were no material changes to those accounting policies during the threenine months ended March 31,September 30, 2019 other than those set forth in this Note 2. The following are current updates to certain critical accounting policy estimates and new accounting standards.
  
Industry Regulation
In applying regulatory accounting principles, NW Holdings and NW Natural capitalize or defer certain costs and revenues as regulatory assets and liabilities pursuant to orders of the Oregon Public Utilities Commission (OPUC), Washington Utilities and Transportation Commission (WUTC) or Idaho Public Utilities Commission (IPUC), 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.

17

Table of Contents




Amounts deferred as regulatory assets and liabilities were as follows:


Regulatory Assets
  September 30, December 31,
In thousands 2019 2018 2018
Current:      
Unrealized loss on derivatives(1)
 $4,156
 $8,828
 $12,381
Gas costs 21,094
 461
 2,873
Environmental costs(2)
 5,100
 5,633
 5,601
Decoupling(3)
 413
 11,990
 9,140
Pension balancing(4)
 5,215
 —
 —
Income taxes 2,209
 2,217
 2,218
Other(5)
 9,809
 12,112
 9,717
Total current $47,996
 $41,241
 $41,930
Non-current:      
Unrealized loss on derivatives(1)
 $2,998
 $3,016
 $3,025
Pension balancing(4)
 50,019
 72,291
 74,173
Income taxes 17,758
 19,267
 19,185
Pension and other postretirement benefit liabilities 164,709
 165,741
 174,993
Environmental costs(2)
 69,250
 63,464
 76,149
Gas costs 921
 14
 9,978
Decoupling(3)
 —
 829
 2,545
Other(5)
 8,235
 9,295
 11,738
Total non-current $313,890
 $333,917
 $371,786


Regulatory Assets
  March 31, December 31,
In thousands 2019 2018 2018
Current:      
Unrealized loss on derivatives(1)
 $2,845
 $17,569
 $12,381
Gas costs 17,927
 591
 2,873
Environmental costs(2)
 5,090
 5,818
 5,601
Decoupling(3)
 3,937
 9,578
 9,140
Pension balancing(4)
 4,955
 —
 —
Income taxes 2,209
 2,218
 2,218
Other(5)
 9,354
 10,126
 9,717
Total current $46,317
 $45,900
 $41,930
Non-current:      
Unrealized loss on derivatives(1)
 $1,161
 $2,355
 $3,025
Pension balancing(4)
 50,408
 63,940
 74,173
Income taxes 17,758
 19,267
 19,185
Pension and other postretirement benefit liabilities 171,565
 175,505
 174,993
Environmental costs(2)
 66,612
 66,730
 76,149
Gas costs 8,919
 49
 9,978
Decoupling(3)
 250
 2,663
 2,545
Other(5)
 10,521
 12,528
 11,738
Total non-current $327,194
 $343,037
 $371,786


17
  Regulatory Liabilities
  September 30, December 31,
In thousands 2019 2018 2018
Current:      
Gas costs $3,204
 $20,716
 $17,182
Unrealized gain on derivatives(1)
 5,720
 2,862
 8,740
Decoupling(3)
 2,007
 1,697
 2,264
Income taxes 7,763
 —
 —
Other(5)
 18,879
 12,229
 19,250
Total current $37,573
 $37,504
 $47,436
Non-current:      
Gas costs $50
 $1,409
 $552
Unrealized gain on derivatives(1)
 1,610
 861
 725
Decoupling(3)
 80
 119
 —
Income taxes(6)
 206,572
 223,841
 225,408
Accrued asset removal costs(7)
 396,418
 375,257
 380,464
Other(5)
 11,083
 4,688
 4,411
Total non-current $615,813
 $606,175
 $611,560

Table of Contents




  Regulatory Liabilities
  March 31, December 31,
In thousands 2019 2018 2018
Current:      
Gas costs $11,126
 $17,798
 $17,182
Unrealized gain on derivatives(1)
 7,284
 1,120
 8,740
Decoupling(3)
 2,055
 2,501
 2,264
Income taxes 7,763
 —
 —
Other(5)
 18,542
 13,527
 19,250
Total current $46,770
 $34,946
 $47,436
Non-current:      
Gas costs $1,421
 $5,639
 $552
Unrealized gain on derivatives(1)
 541
 1,148
 725
Decoupling(3)
 614
 1,253
 —
Income taxes(6)
 202,692
 219,795
 225,408
Accrued asset removal costs(7)
 384,702
 365,363
 380,464
Other(5)
 10,728
 7,244
 4,411
Total non-current $600,698
 $600,442
 $611,560

(1) 
Unrealized gains or losses on derivatives are non-cash items and therefore do not earn a rate of return or a carrying charge. These amounts are recoverable through NGD rates as part of the annual Purchased Gas Adjustment (PGA) mechanism when realized at settlement.
(2) 
Refer to footnote (3) of the Deferred Regulatory Asset table in Note 1617 for a description of environmental costs.
(3) 
This deferral represents the margin adjustment resulting from differences between actual and expected volumes. 
(4) 
Refer to Note 910 for information regarding the deferral of pension expenses.
(5) 
Balances consist of deferrals and amortizations under approved regulatory mechanisms and typically earn a rate of return or carrying charge.
(6) 
This balance represents estimated amounts associated with the Tax Cuts and Jobs Act. See Note 10.11.
(7) 
Estimated costs of removal on certain regulated properties are collected through rates.


We believe all costs incurred and deferred at March 31,September 30, 2019 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

18

Table of Contents




assets or liabilities no longer meet the criteria for continued application of regulatory accounting, then NW Natural would be required to write-off the net unrecoverable balances in the period such determination is made.


New Accounting Standards
We 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
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 but do not require a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA and require certain disclosures about stranded tax effects. NW Natural adopted and applied the standard in the first quarter of 2019. NW Natural elected to reclassify the stranded tax effects of the TJCATCJA of $1.4 million from accumulated other comprehensive loss to retained earnings in the period of adoption. Going forward, our policy is that, in the event that regulation changes result in stranded tax effects, such amounts will be reclassified from accumulated other comprehensive income (loss) to retained earnings in the final period that the related deferred tax balance remeasurement is expected to impact income from continuing operations.


DERIVATIVES AND HEDGING. On August 28, 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities." 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

18

Table of Contents




accounting. The amendments in this update were effective beginning January 1, 2019 and were applied prospectively to hedging instruments. The adoption did not have an impact on the financial statements or disclosures of NW Holdings or NW Natural.


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 exceed 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 quarter ended September 30, 2018. The adoption of this ASU did not materially affect the financial statements and disclosures of NW Holdings or NW Natural.


LEASES. On February 25, 2016, the FASB issued ASU 2016-02, "Leases," which revises the existing lease accounting guidance. Pursuant to the new standard (“ASC 842”), lessees are required to recognize all leases, including operating leases that are greater than 12 months at lease commencement, on the balance sheet and record corresponding right of use assets and lease liabilities. Lessor accounting will remain substantially the same under the new standard. Quantitative and qualitative disclosures are also required for users of the financial statements to have a clear understanding of the nature of our leasing activities.


We elected the alternative prospective transition approach for adoption beginning January 1, 2019. All comparative periods prior to January 1, 2019 will retain the financial reporting and disclosure requirements of ASC 840 “Leases” (“ASC 840”). There was no0 cumulative effect adjustment to the opening balance of retained earnings recorded as of January 1, 2019 for adoption as there were no0 initial direct costs or other capitalized costs related to the legacy leases that needed to be derecognized upon adoption of ASC 842. 


We elected the land easement optional practical expedient to not evaluate existing or expired land easements that were not previously accounted for as leases under the ASC 840 lease guidance. For the existing lease portfolio, we did not elect the optional practical expedient package to retain the legacy lease accounting conclusions upon adoption; we re-assessed our existing contracts under the new leasing standard including whether the contract meets the definition of a lease and lease classification. As a result, we determined that most of our underground gas storage contracts no longer meet the definition of a lease under the new lease standard. Our lease portfolio under the new standard consists primarily of our current leased headquarters, which expires in 2020. 



19

Table of Contents




In October 2017, NW Natural entered into a 20-year operating lease agreement commencing in 2020 for a new headquarters location in Portland, Oregon. The lease was analyzed under ASC 840 in consideration of build-to-suit lease accounting guidance with the conclusion that NW Natural was the accounting owner of the asset during construction.construction for accounting purposes. Under the new lease standard, ASC 842, NW Natural is no longer considered the accounting owner of the asset during construction.construction for accounting purposes. As such, in January 2019 we derecognized the build-to-suit asset and liability balances of $26.0 million as of December 31, 2018 that were previously recorded within property, plant and equipment and other non-current liabilities in the consolidated balance sheet.


Upon adoption on January 1, 2019, NW Holdings recorded an operating lease right of use asset and an associated operating lease liability of approximately $7.3 million, of which $7.0 million was recorded at NW Natural. Lease liabilities are measured using NW Natural's incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments. See Note 6.7.


CLOUD COMPUTING. On August 29, 2018, the FASB issued ASU 2018-15, "Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." The purpose of the amendment is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update are effective for us beginning January 1, 2020. Early adoption is permitted, and NW Holdings and NW Natural early adopted ASU 2018-15 in the quarter ended March 31, 2019 utilizing the prospective application methodology. The adoption of this ASU did not materially affect the financial statements and disclosures of NW Holdings or NW Natural.


Recently Issued Accounting Pronouncements
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 assessingdo not expect this ASU to materially affect the effectfinancial statements and disclosures of this standard on disclosures.NW Holdings or NW Natural.


FAIR VALUE MEASUREMENT. On August 28, 2018, the FASB issued ASU 2018-13, "Changes to the Disclosure Requirements for Fair Value Measurement." The purpose of the amendment is to modify the disclosure requirements for fair value measurements. The amendments in this update are effective for us beginning January 1, 2020. Early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied

19

Table of Contents




prospectively. All other amendments should be applied retrospectively. We are currently assessingNW Holdings and NW Natural do not have either Level 3 fair value measurements or transfers between Level 1 or Level 2 in their current portfolios, and therefore, we do not expect this ASU to have an impact on the effectfinancial statements and disclosures of this standard on disclosures.NW Holdings or NW Natural.


CREDIT LOSSES. On June 16, 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments," which applies to financial assets subject to credit losses and measured at amortized cost. The new standard will require financial assets measured at amortized cost to be presented at the net amount expected to be collected and the allowance for credit losses is to be recorded as a valuation account that is deducted from the amortized cost basis. The amendments in this update are effective beginning January 1, 2020. Early adoption is permitted for fiscal years beginning after December 15, 2018. WeThe majority of NW Holdings' and NW Natural's financial assets are currently assessing the effect ofshort-term in nature, such as trade receivables, and therefore, we do not expect this standard onASU to materially affect our financial statements and disclosures.

20

Table of Contents




3. EARNINGS PER SHARE
Basic earnings per share are computed using NW Holdings' net income 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 per common share.


NW Holdings' diluted earnings or loss per share are calculated as follows:
  Three Months Ended September 30, Nine Months Ended September 30,
In thousands, except per share data 2019 2018 2019 2018
Net income (loss) from continuing operations $(18,506) $(11,144) $26,963
 $30,528
Loss from discontinued operations, net of tax (795) (650) (1,968) (1,783)
Net income (loss) $(19,301) $(11,794) $24,995
 $28,745
Average common shares outstanding - basic 30,429
 28,815
 29,563
 28,787
Additional shares for stock-based compensation plans (See Note 8) —
 —
 65
 59
Average common shares outstanding - diluted 30,429
 28,815
 29,628
 28,846
Earnings (loss) from continuing operations per share of common stock:        
Basic $(0.61) $(0.39) $0.91
 $1.06
Diluted $(0.61) $(0.39) $0.91
 $1.06
Loss from discontinued operations per share of common stock:        
Basic $(0.02) $(0.02) $(0.07) $(0.06)
Diluted $(0.02) $(0.02) $(0.07) $(0.06)
Earnings (loss) per share of common stock:        
Basic $(0.63) $(0.41) $0.84
 $1.00
Diluted $(0.63) $(0.41) $0.84
 $1.00
Additional information:        
Anti-dilutive shares 69
 73
 1
 4
  Three Months Ended March 31,
In thousands, except per share data 2019 2018
Net Income from continuing operations $43,418
 $42,011
Loss from discontinued operations, net of tax (217) (474)
Net income $43,201
 $41,537
Average common shares outstanding - basic 28,906
 28,753
Additional shares for stock-based compensation plans (See Note 7) 64
 50
Average common shares outstanding - diluted 28,970
 28,803
Earnings from continuing operations per share of common stock:    
Basic $1.50
 $1.46
Diluted $1.50
 $1.46
Loss from discontinued operations per share of common stock:    
Basic $(0.01) $(0.02)
Diluted $(0.01) $(0.02)
Earnings per share of common stock:    
Basic $1.49
 $1.44
Diluted $1.49
 $1.44
Additional information:    
Antidilutive shares 5
 16

4. SEGMENT INFORMATION
We primarily operate in one1 reportable business segment, which is NW Natural's local gas distribution business and is referred to as the NGD segment. During the second quarter of 2018, we moved forward with long-term strategic plans, which include a shift away from the California gas storage business, by entering into a Purchase and Sale Agreement that provides for the sale of all of the membership interests in Gill Ranch, subject to various regulatory approvals and closing conditions. As such, we reevaluated reportable segments and concluded that the remaining gas storage activities no longer meet the requirements of a reportable segment. Interstate Storage Services and asset management activities at the Mist gas storage facility, are now reported as other under NW Natural. NW Natural and NW Holdings also have investments and business activities not specifically related to the NGD, which are aggregated and reported as other and described below for each entity.


Natural Gas Distribution
NW Natural's local gas distribution segment is a regulated utility principally engaged in the purchase, sale, and delivery of natural gas and related services to customers in Oregon and southwest Washington. In addition to NW Natural's local gas distribution business, the NGD segment also includes the portion of the Mist underground storage facility used to serve NGD customers, the North Mist gas storage expansion in Oregon, and NWN Gas Reserves, which is a wholly-owned subsidiary of Energy Corp.


20

Table of Contents





NW Natural
NW Natural's activities in Other include Interstate Storage Services and third-party asset management services for the Mist facility in Oregon, appliance retail center operations, and corporate operating and non-operating revenues and expenses that cannot be allocated to NGD operations.


Earnings from Interstate Storage Services assets are primarily related to firm storage capacity revenues. Earnings from the Mist facility also include revenue, net of amounts shared with NGD customers, from management of NGD assets at Mist and upstream pipeline capacity when not needed to serve NGD customers. Under the Oregon sharing mechanism, NW Natural retains 80% of the pre-tax income from these services when the costs of the capacity were not included in NGD rates, or 10% of the pre-tax income when the costs have been included in these rates. The remaining 20% and 90%, respectively, are recorded in a deferred regulatory account for crediting back to NGD customers.



21

Table of Contents




NW Holdings
NW Holdings' activities in Other include all remaining activities not associated with NW Natural, specificallyspecifically: NWN Water, which consolidates the water and wastewater operations and is pursuing other investments in the water sector through itself and through its wholly-owned subsidiaries,subsidiaries; NWN Gas Storage, a wholly-owned subsidiary of NWN Energy,Energy; NWN Energy's equity investment in TWH, which is pursuing development of a cross-Cascades transmission pipeline project (TWP),; and other pipeline assets in NNG Financial. For more information on TWP, see Note 13.14. Other also includes corporate revenues and expenses that cannot be allocated to other operations, including certain business development activities.


All prior period amounts have been retrospectively adjusted to reflect the change in reportable segments and the designation of Gill Ranch as a discontinued operation for NW Holdings, and the designation of subsidiaries previously owned by NW Natural that are now owned by NW Holdings as discontinued operations for NW Natural.


Segment Information Summary
Inter-segment transactions were immaterial for the periods presented. The following table presents summary financial information concerning the reportable segmentssegment and other of continuing operations. See Note 1718 for information regarding discontinued operations for NW Holdings and NW Natural.
 Three Months Ended March 31, Three Months Ended September 30,
In thousands NGD 
Other
(NW Natural)
 NW Natural 
Other
(NW Holdings)
 NW Holdings NGD 
Other
(NW Natural)
 NW Natural 
Other
(NW Holdings)
 NW Holdings
2019                    
Operating revenues $279,041
 $5,805
 $284,846
 $502
 $285,348
 $83,063
 $4,529
 $87,592
 $2,725
 $90,317
Depreciation and amortization 21,249
 255
 21,504
 68
 21,572
 22,830
 244
 23,074
 301
 23,375
Income (loss) from operations 72,898
 3,746
 76,644
 (599) 76,045
 (11,580) 2,761
 (8,819) (815) (9,634)
Net income (loss) from continuing operations 41,206
 2,689
 43,895
 (477) 43,418
 (19,570) 1,982
 (17,588) (918) (18,506)
Capital expenditures
48,606
 52
 48,658
 106
 48,764
 60,596
 644
 61,240
 606
 61,846
Total assets at March 31, 2019(1)
 3,091,062
 49,566
 3,140,628
 35,857
 3,176,485
2018                    
Operating revenues $257,933
 $5,702
 $263,635
 $—
 $263,635
 $85,077
 $6,150
 $91,227
 $12
 91,239
Depreciation and amortization 20,543
 325
 20,868
 7
 20,875
 21,127
 327
 21,454
 31
 21,485
Income from operations 64,756
 2,982
 67,738
 13
 67,751
Income (loss) from operations (9,780) 3,499
 (6,281) 170
 (6,111)
Net income (loss) from continuing operations 39,883
 2,131
 42,014
 (3) 42,011
 (11,983) 708
 (11,275) 131
 (11,144)
Capital expenditures 56,894
 435
 57,329
 —
 57,329
 55,914
 511
 56,425
 —
 56,425
Total assets at March 31, 2018(1)
 2,952,294
 50,850
 3,003,144
 13,824
 3,016,968
Total assets at December 31, 2018(1)
 3,141,969
 50,767
 3,192,736
 36,657
 3,229,393

  Nine Months Ended September 30,
In thousands NGD 
Other
(NW Natural)
 NW Natural 
Other
(NW Holdings)
 NW Holdings
2019          
Operating revenues $480,088
 $14,592
 $494,680
 $4,428
 $499,108
Depreciation and amortization 66,071
 750
 66,821
 513
 67,334
Income (loss) from operations 75,975
 9,090
 85,065
 (2,556) 82,509
Net income (loss) from continuing operations 22,848
 6,513
 29,361
 (2,398) 26,963
Capital expenditures
151,114
 801
 151,915
 1,078
 152,993
Total assets at September 30, 2019(1)
 3,101,372
 48,269
 3,149,641
 87,365
 3,237,006
2018          
Operating revenues $461,525
 $17,900
 $479,425
 $16
 $479,441
Depreciation and amortization 62,436
 976
 63,412
 95
 63,507
Income from operations 59,521
 10,341
 69,862
 47
 69,909
Net income from continuing operations 24,930
 5,538
 30,468
 60
 30,528
Capital expenditures 156,609
 2,186
 158,795
 —
 158,795
Total assets at September 30, 2018(1)
 2,972,395
 51,886
 3,024,281
 44,482
 3,068,763
Total assets at December 31, 2018(1)
 3,141,969
 50,767
 3,192,736
 36,657
 3,229,393

(1)
Total assets for NW Holdings exclude assets related to discontinued operations of $14.6 million, $12.4$12.6 million, and $13.3 million as of March 31,September 30, 2019, March 31,September 30, 2018, and December 31, 2018, respectively. Total assets for NW Natural exclude assets related to discontinued operations of $30.5$61.3 million as of March 31,September 30, 2018.



22

Table of Contents




Natural Gas Distribution Margin
NGD margin is a financial measure used by the Chief Operating Decision Maker (CODM), consisting of NGD operating revenues, reduced by the associated cost of gas, environmental remediation expense, and revenue taxes. The cost of gas purchased for NGD customers is generally a pass-through cost in the amount of revenues billed to regulated NGD customers. Environmental remediation expense represents collections received from customers through the environmental recovery mechanism in Oregon as well as adjustments for the environmental earnings test.test when applicable. This is offset by environmental remediation expense presented in in operating expenses. Revenue taxes are collected from NGD customers and remitted to taxing authorities. The collections from customers are offset by the expense recognition of the obligation to the taxing authority. By subtracting cost of gas, environmental remediation expense, and revenue taxes from NGD operating revenues, NGD margin provides a key metric used by the CODM in assessing the performance of the NGD segment.

21

Table of Contents






The following table presents additional segment information concerning NGD margin:
  Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2019 2018 2019 2018
NGD margin calculation:        
NGD distribution revenues $77,916
 $84,965
 $472,691
 $461,306
Other regulated services 5,147
 112
 7,397
 219
Total NGD operating revenues 83,063
 85,077
 480,088
 461,525
Less: NGD cost of gas 22,659
 25,593
 163,335
 175,864
          Environmental remediation 967
 1,022
 7,258
 7,528
Revenue taxes 3,534
 3,522
 19,956
 20,731
NGD margin $55,903
 $54,940
 $289,539
 $257,402
  Three Months Ended March 31,
In thousands 2019 2018
NGD margin calculation:    
NGD operating revenues $279,041
 $257,933
Less: NGD cost of gas 105,513
 108,164
          Environmental remediation expense 8,947
 4,624
Revenue taxes 11,926
 12,429
NGD margin $152,655
 $132,716

5. COMMON STOCK
During June 2019, NW Holdings completed an equity issuance consisting of an offering of 1,250,000 shares of its common stock along with a 30-day option for the underwriters to purchase an additional 187,500 shares. The offering closed on June 7, 2019 and resulted in a total issuance of 1,437,500 shares as both the initial offering and the underwriter option were fully executed. All shares were issued on June 7, 2019 at an offering price of $67.00 per share. The issuance resulted in proceeds to NW Holdings, net of $0.2 million in expenses, of $93.0 million. The issuance was executed to raise funds for general corporate purposes, including for NW Holdings’ subsidiaries, that are reflected as equity transfers on occurrence. Contributions received by NW Natural were also used, in part, to repay short-term indebtedness.


23

Table of Contents




6. REVENUE
The following table presentstables present disaggregated revenue from continuing operations:

 Three Months Ended March 31, Three Months Ended September 30,
In thousands NGD 
Other
(NW Natural)
 NW Natural 
Other
(NW Holdings)
 NW Holdings NGD 
Other
(NW Natural)
 NW Natural 
Other
(NW Holdings)
 NW Holdings
2019                    
Natural gas sales $296,186
 $—
 $296,186
 $—
 $296,186
 $80,480
 $—
 $80,480
 $—
 $80,480
Gas storage revenue, net —
 2,783
 2,783
 —
 2,783
 —
 2,333
 2,333
 —
 2,333
Asset management revenue, net —
 1,506
 1,506
 —
 1,506
 —
 1,208
 1,208
 —
 1,208
Appliance retail center revenue —
 1,516
 1,516
 —
 1,516
 —
 988
 988
 —
 988
Other revenue —
 —
 —
 502
 502
 247
 —
 247
 2,725
 2,972
Revenue from contracts with customers 296,186
 5,805
 301,991
 502
 302,493
 80,727
 4,529
 85,256
 2,725
 87,981
                    
Alternative revenue (17,253) —
 (17,253) —
 (17,253) (2,607) —
 (2,607) —
 (2,607)
Leasing revenue 108
 —
 108
 —
 108
 4,943
 —
 4,943
 —
 4,943
Total operating revenues $279,041
 $5,805
 $284,846
 $502
 $285,348
 $83,063
 $4,529
 $87,592
 $2,725
 $90,317
                    
2018                    
Natural gas sales $258,229
 $—
 $258,229
 $—
 $258,229
 $82,358
 $—
 $82,358
 $—
 $82,358
Gas storage revenue, net —
 2,577
 2,577
 —
 2,577
 —
 2,415
 2,415
 —
 2,415
Asset management revenue, net —
 1,579
 1,579
 —
 1,579
 —
 2,714
 2,714
 —
 2,714
Appliance retail center revenue —
 1,546
 1,546
 —
 1,546
 —
 1,021
 1,021
 —
 1,021
Other revenue —
 —
 —
 —
 —
 —
 —
 —
 12
 12
Revenue from contracts with customers 258,229
 5,702
 263,931
 —
 263,931
 82,358
 6,150
 88,508
 12
 88,520
                    
Alternative revenue (372) —
 (372) —
 (372) 1,994
 —
 1,994
 —
 1,994
Leasing revenue 76
 —
 76
 —
 76
 725
 —
 725
 —
 725
Total operating revenues $257,933
 $5,702
 $263,635
 $—
 $263,635
 $85,077
 $6,150
 $91,227
 $12
 $91,239


24

Table of Contents





  Nine Months Ended September 30,
In thousands NGD 
Other
(NW Natural)
 NW Natural 
Other
(NW Holdings)
 NW Holdings
2019          
Natural gas sales $488,681
 $—
 $488,681
 $—
 $488,681
Gas storage revenue, net —
 7,856
 7,856
 —
 7,856
Asset management revenue, net —
 3,174
 3,174
 —
 3,174
Appliance retail center revenue —
 3,562
 3,562
 —
 3,562
Other revenue 351
 —
 351
 4,428
 4,779
    Revenue from contracts with customers 489,032
 14,592
 503,624
 4,428
 508,052
           
Alternative revenue (16,126) —
 (16,126) —
 (16,126)
Leasing revenue 7,182
 —
 7,182
 —
 7,182
    Total operating revenues $480,088
 $14,592
 $494,680
 $4,428
 $499,108
           
2018          
Natural gas sales $455,312
 $—
 $455,312
 $—
 $455,312
Gas storage revenue, net —
 7,189
 7,189
 —
 7,189
Asset management revenue, net —
 6,974
 6,974
 —
 6,974
Appliance retail center revenue —
 3,737
 3,737
 —
 3,737
Other revenue —
 —
 —
 16
 16
    Revenue from contracts with customers 455,312
 17,900
 473,212
 16
 473,228
           
Alternative revenue 5,285
 —
 5,285
 —
 5,285
Leasing revenue 928
 —
 928
 —
 928
    Total operating revenues $461,525
 $17,900
 $479,425
 $16
 $479,441

NW Natural's revenue represents substantially all of NW Holdings' revenue and is recognized for both registrants when the obligation to customers is satisfied and in the amount expected to be received in exchange for transferring goods or providing services. Revenue from contracts with customers contains one performance obligation that is generally satisfied over time, using the output method based on time elapsed, due to the continuous nature of the service provided. The transaction price is determined by a set price agreed upon in the contract or dependent on regulatory tariffs. Customer accounts are settled on a monthly basis or paid at time of sale and based on historical experience. It is probable that we will collect substantially all of the consideration to which we are entitled.


NW Holdings and NW Natural do not have any material contract assets, as net accounts receivable and accrued unbilled revenue balances are unconditional and only involve the passage of time until such balances are billed and collected. NW Holdings and NW Natural do not have any material contract liabilities.


Revenue-based taxes are primarily franchise taxes, which are collected from NGD customers and remitted to taxing authorities. Beginning January 1, 2018, revenue taxes are included in operating revenues with an equal and offsetting expense recognized in operating expenses in the consolidated statements of comprehensive income.

22

Table of Contents






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


We applied the significant financing practical expedient and have not adjusted the consideration NW Natural expects to receive from NGD customers for the effects of a significant financing component as all payment arrangements are settled annually. Due to the election of the right to invoice practical expedient, we do not disclose the value of unsatisfied performance obligations as of March 31,September 30, 2019.


25

Table of Contents





Alternative revenue. Weather normalization (WARM) and decoupling mechanisms are considered to be alternative revenue programs. Alternative revenue programs are considered to be contracts between NW Natural and its regulator and are excluded from revenue from contracts with customers.


Leasing revenue. Leasing revenue primarily consists of revenues from NW Natural's North Mist Storage contract with Portland General Electric (PGE) in support of PGE's gas-fired electric power generation facilities under an initial 30-year contract with options to extend, totaling up to an additional 50 years upon mutual agreement of the parties. The facility is accounted for as a sales-type lease with regulatory accounting deferral treatment. The investment is included in rate base under an established cost-of-service tariff schedule, with revenues recognized according to the tariff schedule and as such, profit upon commencement was deferred and will be amortized over the lease term. Leasing revenue also contains rental revenue forfrom small leases of property owned by NW Natural to third parties. The majority of thethese 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 6.7.


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


Asset management revenue. Asset management revenue is generally 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 management services of the storage assets and pipeline capacity provided, net of the profit sharing amount refunded to NGD customers. Asset management accounts are settled on a monthly basis.


As of March 31,September 30, 2019, unrecognized revenue for the fixed component of the transaction price related to gas storage and asset management revenue was approximately $52.2$54.7 million. Of this amount, approximately $10.2$3.7 million will be recognized during the remainder of 2019, $11.7$13.7 million in 2020, $10.7$12.8 million in 2021, $7.0$9.1 million in 2022, $5.8$7.8 million in 2023 and $6.8$7.6 million thereafter. The amounts presented here are calculated using current contracted rates.


Appliance retail center revenue. NW Natural owns and operates an appliance store that is open to the public, where customers can purchase natural gas home appliances. Revenue from the sale of appliances is recognized at the point in time in which the appliance is transferred to the third party responsible for delivery and installation services and when the customer has legal title to the appliance. It is required that the sale be paid for in full prior to transfer of legal title. The amount of consideration received and recognized as revenue varies with changes in marketing incentives and discounts offered to customers.


NW Holdings Other
NW Holdings' primary source of other revenue is providing water distributionand wastewater services to customers. Water distribution 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 Oregon, Washington and Idaho tariffs. Customer accounts are to be paid in full each month, and there is no right of return or warranty for services provided.


We applied the significant financing practical expedient and have not adjusted the consideration we expect to receive from water distribution customers for the effects of a significant financing component as all payment arrangements are settled annually. Due to the election of the right to invoice practical expedient, we do not disclose the value of unsatisfied performance obligations as of March 31,September 30, 2019.

6. 7. LEASES
Lease Revenue
Leasing revenue primarily consists of rentalNW 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 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

26

Table of Contents




comprehensive income. There are 0 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 0 variable payments or residual value guarantees. The selling profit computed upon lease commencement was not significant.

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

Our lessor portfolio also contains a sales-type lease for specialized compressor facilities to provide high pressure gas service. 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 gain computed upon lease commencement was not significant.


The components of lease revenue at NW Natural were as follows:
In thousands Three months ended September 30, 2019 Nine months ended September 30, 2019
Lease revenue    
Operating leases $48
 $143
Sales-type leases 4,895
 7,039
Total lease revenue $4,943
 $7,182

In thousands Three months ended March 31, 2019
Lease revenue  
Operating leases $48
Sales-type leases 60
Total lease revenue $108


Total future minimum lease payments to be received under non-cancelable leases at NW Natural at March 31,September 30, 2019 are as follows:
In thousands Operating Sales-Type Total
Remainder of 2019 $18
 $4,841
 $4,859
2020 61
 18,229
 18,290
2021 49
 17,518
 17,567
2022 45
 17,026
 17,071
2023 45
 16,557
 16,602
Thereafter 138
 280,937
 281,075
Total lease revenue $356
 $355,108
 $355,464
Less: imputed interest   205,596
  
Total leases receivable   $149,512
  

In thousands Operating Sales-Type Total
2019 (excluding the three months ended March 31, 2019) $94
 $286
 $380
2020 61
 212
 273
2021 49
 198
 247
2022 45
 186
 231
2023 45
 173
 218
Thereafter 138
 478
 616
Total lease revenue $432
 $1,533
 $1,965
Less: imputed interest   459
  
Total lease receivable   $1,074
  


The total leaseleases receivable above is reported under the NGD segment and the short- and long-term portions are included in “Other non-current assets” inwithin other current assets and assets under sales-type leases on the consolidated balance sheet.sheets, respectively. The total amount of unguaranteed residual assets at September 30, 2019 was $3.9 million and is included in assets under sales-type leases on the consolidated balance sheets. Additionally, under regulatory accounting, the imputed interest on the sales-type lease is recorded as depreciation expenserevenues and expenses associated with these agreements are presented on the consolidated statementstatements of comprehensive income.income such that their presentation aligns with similar regulated activities at NW Natural.

North Mist Gas Storage Expansion Project
In 2016, NW Natural began expanding its gas storage facility near Mist, Oregon to provide long-term, no-notice underground gas storage service to support gas-fired electric generating facilities that are intended to facilitate the integration of more wind power into the region's electric generation mix. This expansion project is in support of a local electric company’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.

When the expansion is placed into service during the spring of 2019, the investment will be accounted for as a sales-type lease with regulatory accounting deferral treatment. The investment will be included in rate base under an established tariff schedule already approved by the OPUC, with revenues recognized consistent with the schedule. Billing rates will be updated annually to the current depreciable asset level, forecasted operating expenses, and for differences between actual and expected costs incurred.


Lease Expense
Operating Leases
We have operating leases for land, buildings and equipment. Our primary lease is for NW Natural's headquarters. Our leases have remaining lease terms of one year to 11 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.


23

Table of Contents





As most of our leases do not provide an implicit rate and are entered into by NW Natural, we use NW Natural's incremental borrowing rate based on information available at the lease commencement date in determining the present value of lease payments.



27

Table of Contents




The components of lease expense, a portion of which is capitalized, were as follows:
  Three months ended September 30, 2019
In thousands NW Natural Other
(NW Holdings)		 NW Holdings
Operating lease expense $1,158
 $47
 $1,205
Short-term lease expense 323
 —
 323
       
  Nine months ended September 30, 2019
In thousands NW Natural Other
(NW Holdings)		 NW Holdings
Operating lease expense $3,455
 $139
 $3,594
Short-term lease expense 814
 —
 814

  Three months ended March 31, 2019
In thousands NW Natural Other
(NW Holdings)		 NW Holdings
Operating lease expense $1,142
 $46
 $1,188
Short-term lease expense 160
 —
 160


Supplemental balance sheet information related to operating leases as of March 31,September 30, 2019 is as follows:
In thousands NW Natural Other
(NW Holdings)		 NW Holdings
Operating lease right of use asset $3,745
 $172
 $3,917
       
Operating lease liabilities - current liabilities $3,075
 $96
 $3,171
Operating lease liabilities - non-current liabilities 654
 78
 732
Total operating lease liabilities $3,729
 $174
 $3,903

In thousands NW Natural Other
(NW Holdings)		 NW Holdings
Operating lease right of use asset $5,903
 $260
 $6,163
       
Operating lease liabilities - current liabilities $4,477
 $179
 $4,656
Operating lease liabilities - non-current liabilities 1,413
 82
 1,495
Total operating lease liabilities $5,890
 $261
 $6,151


As of March 31,September 30, 2019, the weighted average remaining lease term for the operating leases is 1.3 yearsless than one year for NW Natural. The weighted average discount rate used in the valuation of the operating lease right of use assets over the remaining lease term is 3.79%3.86% for NW Natural.


Maturities of operating lease liabilities at March 31,September 30, 2019 were as follows:
In thousands NW Natural Other
(NW Holdings)		 NW Holdings
Remainder of 2019 $1,157
 $48
 $1,205
2020 2,013
 102
 2,115
2021 126
 28
 154
2022 93
 —
 93
2023 71
 —
 71
Thereafter 497
 —
 497
Total lease payments 3,957
 178
 4,135
Less: imputed interest 228
 4
 232
Total lease obligations 3,729
 174
 3,903
Less: current obligations 3,075
 96
 3,171
Long-term lease obligations $654
 $78
 $732

In thousands NW Natural Other
(NW Holdings)		 NW Holdings
2019 (excluding the three months ended March 31, 2019) $3,462
 $139
 $3,601
2020 1,980
 102
 2,082
2021 101
 28
 129
2022 93
 —
 93
2023 71
 —
 71
Thereafter 497
 —
 497
Total lease payments 6,204
 269
 6,473
Less: imputed interest 314
 8
 322
Total lease obligations 5,890
 261
 6,151
Less: current obligations 4,477
 179
 4,656
Long-term lease obligations $1,413
 $82
 $1,495


Significant Lease Not Yet Commenced
In October 2017, NW Natural entered into a 20-year operating lease agreement for a new headquarters in Portland, Oregon in anticipation of the expiration of the current headquarters lease in 2020. The lease is expected to commence when construction of the asset is completed in late 2019 or early 2020.2020 upon substantial completion of the landlord's work. Total estimated base rent payments over the life of the lease are approximately $160 million. There is an option to extend the term of the lease for two additional seven-year periods.periods of seven years.



28

Table of Contents




Cash Flow Information
Supplemental cash flow information related to leases was as follows:
  Three months ended September 30, 2019
In thousands NW Natural Other
(NW Holdings)		 NW Holdings
Cash paid for amounts included in the measurement of lease liabilities      
Operating cash flows from operating leases $1,113
 $45
 $1,158
       
  Nine months ended September 30, 2019
  NW Natural Other
(NW Holdings)		 NW Holdings
Cash paid for amounts included in the measurement of lease liabilities      
Operating cash flows from operating leases $3,319
 $132
 $3,451
Right of use assets obtained in exchange for lease obligations      
Operating leases $7,054
 $304
 $7,358

  Three months ended March 31, 2019
In thousands NW Natural Other
(NW Holdings)		 NW Holdings
Cash paid for amounts included in the measurement of lease liabilities      
Operating cash flows from operating leases $1,091
 $43
 $1,134
Right of use assets obtained in exchange for lease obligations      
Operating leases $6,987
 $304
 $7,291

24

Table of Contents






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 asset for finance leases was $0.2$0.3 million at March 31,September 30, 2019.


Lease Disclosures Related to Periods Prior to the First Quarter of 2019
Land, buildings, and equipment are leased under agreements that expire in various years, including a 99-year land lease that extends through 2108. Rental costs for continuing operations were $5.9 million, $7.3 million, and $5.9 million for the years ended December 31, 2018, 2017, and 2016, respectively, a portion of which was capitalized.


The following table reflects NW Natural's future minimum lease payments due under non-cancelable operating leases for continuing operations at December 31, 2018. These commitments relate principally to the lease of the office headquarters and underground gas storage facilities.
In thousands Minimum lease payments
2019 $5,368
2020 4,812
2021 7,077
2022 7,223
2023 7,304
Thereafter 149,881
   Total $181,665
In thousands Minimum lease payments
2019 $5,368
2020 4,812
2021 7,077
2022 7,223
2023 7,304
Thereafter 149,881
   Total $181,665

7. 8. STOCK-BASED COMPENSATION

Stock-based compensation plans are designed to promote stock ownership in NW Holdings by employees and officers. These compensation plans include a Long Term Incentive Plan (LTIP), an Employee Stock Purchase Plan (ESPP), and a Restated Stock Option Plan. For additional information on stock-based compensation plans, see Note 7 in the 2018 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 threenine months ended March 31,September 30, 2019, no0 performance-based shares were granted under the LTIP for accounting purposes. In February 2019 and 2018, 2019 and 2018, LTIP shares were awarded to participants; however, the agreements allow for one of the performance factors to remain variable until the first quarter of the third year of the award period. As the performance factor will not be approved until the first quarters of 2021 and 2020, respectively, there is not a mutual understanding of the awards' key terms and conditions between NW Holdings and the participants as of March 31,September 30, 2019, and therefore, no0 expense was recognized for the 2019 and 2018 awards. NW Holdings will calculate the grant date fair value and NW Natural and other subsidiaries will recognize expense over the remaining service period for each award once the final performance factor has been approved.



29

Table of Contents




For the 2019 and 2018 LTIP awards, share payouts range from a threshold of 0% to a maximum of 200% based on achievement of pre-established goals. The performance criteria for the 2019 and 2018 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 Index over the three-year performance period of three years for each respective award. If the targets were achieved for the 2019 and 2018 awards, NW Holdings would grant 36,25035,170 and 33,16331,825 shares in the first quarters of 2021 and 2020, respectively.


As of March 31,September 30, 2019, there was $0.8$0.4 million of unrecognized compensation cost associated with the 2017 LTIP grants, which is expected to be recognized through 2019.


Restricted Stock Units
During the threenine months ended March 31,September 30, 2019, 28,88433,458 RSUs were granted, net of forfeitures, under the LTIP with a weighted-average grant date fair value of $64.26$65.32 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 obligatesgrants 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 common stock on the grant date. As of March 31,September 30, 2019, there was $4.0$3.7 million of unrecognized compensation cost from grants of RSUs, which is expected to be recognized by NW Natural and other subsidiaries over a period extending through 2023.2024.

25

Table of Contents




8. 9. DEBT

Short-Term Debt
At March 31,September 30, 2019, NW Holdings had short-term debt outstanding of $176.4$65.6 million substantially all of which was recorded atand NW Natural and was comprised primarilyhad $45.5 million of NW Natural's commercial paper.paper outstanding, respectively. The carrying cost of commercial paper approximates fair value using Level 2 inputs. See Note 2 in the 2018 Form 10-K for a description of the fair value hierarchy. At March 31,September 30, 2019, NW Natural's commercial paper had a maximum remaining maturity of 33eight days and average remaining maturity of 17four days.


Long-Term Debt
At March 31,September 30, 2019, NW Holdings and NW Natural had long-term debt outstanding of $736.6$900.7 million substantially all ofand $863.6 million, respectively, which was recorded at NW Natural and included $5.2$6.1 million of unamortized debt issuance costs.costs at NW Natural. NW Natural's long-term debt consists of first mortgage bonds (FMBs) with maturity dates ranging from 2019 through 2048,2049, interest rates ranging from 2.822% to 9.050%, and a weighted average couponinterest rate of 5.009%4.745%.


In June 2019, NW Natural issued $90.0 million of FMBs with an interest rate of 3.869%, due in 2049 and $50.0 million of FMBs with an interest rate of 3.141%, due in 2029. In September 2019, NW Natural retired $10.0 million of FMBs with an interest rate of 8.310%.

In June 2019, NW Natural Water, a wholly-owned subsidiary of NW Holdings, entered into a new two-year term loan agreement for $35.0 million, due in 2021. The loan carried an interest rate of 2.65% at September 30, 2019, which is based upon the three-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, 2019, with a consolidated indebtedness to total capitalization ratio of 53.4%.

Fair Value of Long-Term Debt
NW Holdings' and NW Natural's outstanding debt does not trade in active markets. The fair value of long-term debt is estimated using the value of outstanding debt at natural gas distribution companies with similar credit ratings, terms, and remaining maturities to NW Holdings' and NW Natural's debt that actively trade in public markets. Substantially all outstanding debt at NW Holdings is comprised of NW Natural debt. These valuations are based on Level 2 inputs as defined in the fair value hierarchy. See Note 2 in the 2018 Form 10-K for a description of the fair value hierarchy.



30

Table of Contents




The following table provides an estimate of the fair value of NW Holdings' long-term debt, including current maturities of long-term debt, using market prices in effect on the valuation date:
  NW Holdings
  September 30, December 31,
In thousands 2019 2018 2018
Gross long-term debt $906,757
 $815,534
 $741,813
Unamortized debt issuance costs (6,072) (5,940) (5,577)
Carrying amount $900,685
 $809,594
 $736,236
Estimated fair value(1)
 $997,096
 $834,796
 $762,335
(1) Estimated fair value does not include unamortized debt issuance costs.


The following table provides an estimate of the fair value of NW Natural's long-term debt, including current maturities of long-term debt, using market prices in effect on the valuation date:
  NW Natural
  September 30, December 31,
In thousands 2019 2018 2018
Gross long-term debt $869,700
 $814,700
 $739,700
Unamortized debt issuance costs (6,072) (5,940) (5,577)
Carrying amount $863,628
 $808,760
 $734,123
Estimated fair value(1)
 $959,906
 $833,962
 $760,222

  March 31, December 31,
In thousands 2019 2018 2018
Gross long-term debt $739,700
 $764,700
 $739,700
Unamortized debt issuance costs (5,246) (6,418) (5,577)
Carrying amount $734,454
 $758,282
 $734,123
Estimated fair value(1)
 $775,590
 $807,288
 $760,222
(1) Estimated fair value does not include unamortized debt issuance costs.
9. 10. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS

NW Natural maintains a qualified non-contributory defined benefit 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 qualified defined benefit pension plan and Retirement K Savings Plan have plan assets, which are held in qualified trusts to fund retirement benefits.

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







2631


Table of Contents








The following table provides the components of net periodic benefit cost for the pension and other postretirement benefit plans:
  Three Months Ended September 30, Nine Months Ended September 30,
  Pension Benefits 
Other Postretirement
Benefits
 Pension Benefits 
Other
Postretirement
Benefits
In thousands 2019 2018 2019 2018 2019 2018 2019 2018
Service cost $1,516
 $1,757
 $67
 $80
 $4,549
 $5,371
 $202
 $239
Interest cost 4,662
 4,336
 281
 241
 13,985
 12,702
 845
 723
Expected return on plan assets (5,207) (5,143) —
 —
 (15,621) (15,444) —
 —
Amortization of prior service costs 1
 11
 (117) (117) 5
 32
 (351) (351)
Amortization of net actuarial loss 3,604
 5,650
 97
 110
 10,810
 14,697
 290
 332
Net periodic benefit cost 4,576
 6,611
 328
 314
 13,728
 17,358
 986
 943
Amount allocated to construction (608) (659) (25) (27) (1,790) (2,026) (72) (82)
Amount deferred to regulatory balancing account —
 (3,878) —
 —
 —
 (9,381) —
 —
Net periodic benefit cost charged to expense 3,968
 2,074
 303
 287
 11,938
 5,951
 914
 861
Regulatory pension disallowance —
 —
 —
 —
 10,500
 —
 —
 —
Amortization of regulatory balancing account 675
 —
 —
 —
 14,467
 —
 —
 —
Net amount charged to expense $4,643
 $2,074
 $303
 $287
 $36,905
 $5,951
 $914
 $861

  Three Months Ended March 31,
  Pension Benefits 
Other
Postretirement
Benefits
In thousands 2019 2018 2019 2018
Service cost $1,517
 $1,807
 $68
 $80
Interest cost 4,662
 4,183
 281
 241
Expected return on plan assets (5,207) (5,151) —
 —
Amortization of prior service costs 2
 11
 (117) (117)
Amortization of net actuarial loss 3,603
 4,523
 97
 110
Net periodic benefit cost 4,577
 5,373
 329
 314
Amount allocated to construction (586) (682) (24) (27)
Amount deferred to regulatory balancing account —
 (2,756) —
 —
Net periodic benefit cost charged to expense 3,991
 1,935
 305
 287
Regulatory pension disallowance 10,500
 —
 —
 —
Amortization of regulatory balancing account 12,511
 —
 —
 —
Net amount charged to expense $27,002
 $1,935
 $305
 $287


The service cost component of net periodic benefit costs is reduced by amounts capitalized to NGD plant based on an approximately 25% to 35% payroll overhead charge. In addition, a certain amount of net periodic benefit costs were recorded to the regulatory balancing account, representing net periodic pension expense for the qualified plan above the amount set in rates, as approved by the OPUC, from 2011 through October 31, 2018.


In March 2019, the OPUC issued an order concluding the NW Natural 2018 Oregon rate case whichcase. The Order allowed for the application of certain deferred revenues and tax benefits from the TCJA againstto reduce NW Natural's pension regulatory balancing account. A corresponding total of $12.5 million in pension expenses were recognized in operating and maintenance expense and other income (expense), net in the consolidated statements of comprehensive income in the first quarter of 2019, with offsetting benefits recorded within operating revenues and income taxes. The Order also directed NW Natural to reduce the balancing account by an additional $10.5 million, which was also charged to operating and maintenance expense and other income (expense), net in the consolidated statements of comprehensive income. Amortization of the remaining amount of the balancing account began in the second quarter of 2019 in accordance with the Order.


The following table presents amounts recognized in accumulated other comprehensive loss (AOCL) and the changes in AOCL related to non-qualified employee benefit plans:
  Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2019 2018 2019 2018
Beginning balance $(8,324) $(8,131) $(7,188) $(8,438)
Amounts reclassified from AOCL:        
Amortization of actuarial losses 157
 209
 469
 627
Reclassification of stranded tax effects(1)
 —
 —
 (1,366) —
Total reclassifications before tax 157
 209
 (897) 627
Tax (benefit) expense (43) (55) (125) (166)
Total reclassifications for the period 114
 154
 (1,022) 461
Ending balance $(8,210) $(7,977) $(8,210) $(7,977)
  Three Months Ended March 31,
In thousands 2019 2018
Beginning balance $(7,188) $(8,438)
Amounts reclassified from AOCL:    
Amortization of actuarial losses 156
 209
Reclassification of stranded tax effects(1)
 (1,366) —
Total reclassifications before tax (1,210) 209
Tax (benefit) expense (41) (55)
Total reclassifications for the period (1,251) 154
Ending balance $(8,439) $(8,284)

(1)
Reclassification of $1.4 million of income tax effects resulting from the TCJA from accumulated other comprehensive loss to retained earnings was made pursuant to the adoption of ASU 2018-02. See Note 2.


Employer Contributions to Company-Sponsored Defined Benefit Pension Plans
For the threenine months ended March 31,September 30, 2019, NW Natural made cash contributions totaling $1.5$7.8 million to qualified defined benefit pension plans. NW Natural expects further plan contributions of $9.5$3.2 million during the remainder of 2019.


32

Table of Contents





Defined Contribution Plan
The Retirement K Savings Plan is a qualified defined contribution plan under Internal Revenue Code Sections 401(a) and 401(k). Employer contributions totaled $2.1$5.3 million and $2.0$5.0 million for the threenine months ended March 31,September 30, 2019 and 2018, respectively.


27

Table of Contents





See Note 9 in the 2018 Form 10-K for more information concerning these retirement and other postretirement benefit plans.
10. 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 rates due to the following:
  Three Months Ended September 30,
  NW Holdings NW Natural
In thousands 2019 2018 2019
2018
Income taxes at statutory rates (federal and state) $(6,507) $(4,136) $(6,177) $(4,183)
Increase (decrease):        
Differences required to be flowed-through by regulatory commissions 2,090
 (266) 2,090
 (266)
Other, net 74
 117
 74
 116
Total provision for income taxes on continuing operations $(4,343) $(4,285) $(4,013) $(4,333)
Effective tax rate for continuing operations 19.0% 27.8% 18.6% 27.8%
         
  Nine Months Ended September 30,
  NW Holdings NW Natural
In thousands 2019 2018 2019 2018
Income taxes at statutory rates (federal and state) $8,500
 $11,097
 $9,363
 $11,081
Increase (decrease):        
Differences required to be flowed-through by regulatory commissions (3,207) 569
 (3,207) 569
Other, net (336) (475) (336) (476)
Total provision for income taxes on continuing operations $4,957
 $11,191
 $5,820
 $11,174
Effective tax rate for continuing operations 15.5% 26.8% 16.5% 26.8%

  Three Months Ended March 31,
  NW Holdings NW Natural
Dollars in thousands 2019 2018 2019
2018
Income taxes at statutory rates (federal and state) $14,313
 $15,368
 $14,485
 $15,372
Increase (decrease):        
Differences required to be flowed-through by regulatory commissions (5,260) 849
 (5,260) 849
Other, net (378) (585) (377) (586)
Total provision for income taxes on continuing operations $8,675
 $15,632
 $8,848
 $15,635
Effective tax rate for continuing operations 16.7% 27.1% 16.8% 27.1%



The NW Holdings and NW Natural effective income tax raterates for the three and nine months ended March 31,September 30, 2019 compared to the same periodperiods in 2018 changed primarily as a result of regulatory amortization of deferred TCJA benefits as approved in the March 2019 OPUC order. See "U.S."U.S. Federal TCJA Matters" below and Note 10 in the 2018 Form 10-K for more detail on income taxes and effective tax rates.


The IRS Compliance Assurance Process (CAP) examination of the 2017 tax year was completed during the first quarter of 2019. There were no material changes to the return as filed. The 2018 tax year is subject to examination under CAP and the 2019 tax year CAP application has been accepted by the IRS. The Oregon State examination of tax years 2015, 2016, and 2017 was completed in January 2019. There were no material changes to the returns as originally filed.


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 included specific provisions related to regulated public utilities that provide for the continued deductibility of interest expense and the elimination of bonus tax depreciation for property both acquired and placed into service on or after January 1, 2018. See Note 10 in the 2018 Form 10-K.


NW Natural previously filed applications with the OPUC and WUTC to defer the NGD net income tax benefits resulting from the TCJA. In March 2019, the OPUC issued an order addressing the regulatory amortization of the income tax benefits from the TCJA that NW Natural deferred for Oregon customers in December of 2017. Under the order, NW Natural will provide the benefit of these TCJA income tax deferrals to Oregon customers through ongoing annual credits to customer base rates and as a one-time recovery of a portion of the pension balancing account regulatory asset balance. On an annualized basis, it is anticipated

33

Table of Contents




that the income tax benefits from the provision of these TCJA benefits to customers should approximate the reduction to pretax income that occurs as a result of the customer base rate credits and one-time recovery of a portion of the pension balancing account. The resolution

In October 2019, the WUTC issued an order addressing the regulatory amortization of deferred TCJAthe income tax benefits from the TCJA that NW Natural deferred for Washington customers is expected later this year as partin December of 2017. Under the order, NW Natural's Washington generalNatural will provide deferred income tax benefits from the TCJA to customers through base rate case.credits for a five-year period beginning November 1, 2019.

28

Table of Contents




11. 12. PROPERTY, PLANT, AND EQUIPMENT

The following table sets forth the major classifications of property, plant, and equipment and accumulated depreciation of continuing operations:
  September 30, December 31,
In thousands 2019 2018 2018
NW Natural:      
NGD plant in service $3,236,227
 $3,068,235
 $3,134,122
NGD work in progress 91,302
 227,200
 204,978
Less: Accumulated depreciation 1,007,742
 978,446
 974,252
NGD plant, net 2,319,787
 2,316,989
 2,364,848
Other plant in service 63,360
 65,957
 66,009
Other construction work in progress 6,164
 5,505
 5,330
Less: Accumulated depreciation 18,889
 18,335
 18,603
Other plant, net (1)
 50,635
 53,127
 52,736
Total property, plant, and equipment $2,370,422
 $2,370,116
 $2,417,584
       
Other (NW Holdings):      
Other plant in service $19,665
 $3,491
 $4,051
Less: Accumulated depreciation 699
 213
 263
Other plant, net (1)
 $18,966
 $3,278
 $3,788
       
NW Holdings:      
Total property, plant, and equipment $2,389,388
 $2,373,394
 $2,421,372
       
NW Natural and NW Holdings:      
Capital expenditures in accrued liabilities $35,461
 $27,692
 $23,676
  March 31, December 31,
In thousands 2019 2018 2018
NW Natural:      
NGD plant in service $3,159,754
 $3,003,962
 $3,134,122
NGD work in progress 204,938
 177,133
 204,978
Less: Accumulated depreciation 985,961
 954,858
 974,252
NGD plant, net 2,378,731
 2,226,237
 2,364,848
Other plant in service 65,283
 65,353
 66,009
Other construction work in progress 5,329
 4,252
 5,330
Less: Accumulated depreciation 18,851
 17,715
 18,603
Other plant, net (1)
 51,761
 51,890
 52,736
Total property, plant, and equipment $2,430,492
 $2,278,127
 $2,417,584
       
Other (NW Holdings):      
Other plant in service $4,156
 $375
 $4,051
Less: Accumulated depreciation 305
 200
 263
Other plant, net (1)
 $3,851
 $175
 $3,788
       
NW Holdings:      
Total property, plant, and equipment $2,434,343
 $2,278,302
 $2,421,372
       
NW Natural and NW Holdings:      
Capital expenditures in accrued liabilities $25,035
 $21,855
 $23,676

(1)
NW Natural previously reported other balances were restated due to certain assets and liabilities now being classified as discontinued operations assets and liabilities in its balance sheets. See Note 1718 for further discussion.


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


NW Natural
Other plant balances include long-lived assets not related to NGD.


In October 2017, NW Natural entered into a 20-year operating lease agreement commencingexpected to commence in 2020 for its new headquarters location in Portland, Oregon. Under the new lease standard, NW Natural is no longer considered the accounting owner of the asset during construction. As such, the build to suit asset and liability balances at December 31, 2018 of $26.0 million were derecognized in January 2019. The previous build to suit balances were recorded under ASC 840 within property, plant and equipment and other non-current liabilities in the consolidated balance sheet. See Note 16 in the 2018 Form 10-K.

In May 2019, NW Natural placed its North Mist gas storage expansion project into service and commenced storage services to the facility's single customer, Portland General Electric (PGE). Under U.S. GAAP, this agreement is classified as a sales-type lease and qualifies for regulatory accounting deferral treatment. Accordingly, the project was de-recognized from property, plant and equipment upon lease commencement and the investment balance is presented net of the current portion of scheduled billings within assets under sales-type leases on the consolidated balance sheets. A total of $146.0 million was de-recognized from plant on the lease commencement date. See Note 7 for information regarding leases, including North Mist.

34

12.
Table of Contents




13. GAS RESERVES
NW Natural has invested $188 million through the gas reserves program in the Jonah Field located in Wyoming as of March 31,September 30, 2019. 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 NGD customers through the original agreement with Encana Oil & Gas (USA) Inc. under which NW Natural invested $178 million and the amended agreement with Jonah Energy LLC under which an additional $10 million was invested.


The cost of gas, including a carrying cost for the rate base investment, is included in the annual Oregon PGA filing, which allows NW Natural to recover these costs through customer rates. The investment under the original agreement, less accumulated amortization and deferred taxes, earns a rate of return. See Note 12 in the 2018 Form 10-K.


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.



29

Table of Contents




The following table outlines NW Natural's net gas reserves investment:
  September 30, December 31,
In thousands 2019 2018 2018
Gas reserves, current $16,392
 $16,916
 $16,647
Gas reserves, non-current 170,915
 170,391
 170,660
Less: Accumulated amortization 118,937
 99,835
 104,463
Total gas reserves(1)
 68,370
 87,472
 82,844
Less: Deferred taxes on gas reserves 13,293
 19,377
 20,071
Net investment in gas reserves $55,077
 $68,095
 $62,773
  March 31, December 31,
In thousands 2019 2018 2018
Gas reserves, current $16,157
 $15,124
 $16,647
Gas reserves, non-current 171,150
 172,412
 170,660
Less: Accumulated amortization 109,243
 91,852
 104,463
Total gas reserves(1)
 78,064
 95,684
 82,844
Less: Deferred taxes on gas reserves 19,638
 22,115
 20,071
Net investment in gas reserves $58,426
 $73,569
 $62,773

(1)
The net investment in additional wells included in total gas reserves was $4.5$4.0 million, $5.6$5.0 million and $4.8 million at March 31,September 30, 2019 and 2018 and December 31, 2018, respectively.


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

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 NGD system. NWN Energy, a wholly-owned subsidiary of NW Holdings, owns 50% of TWH, 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 Holdings' investment in TWP reported under equity method accounting. It has been determined that NW Holdings 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 NW Holdings a disproportionate influence over it. Investments in TWH and TWP are included in other investments in NW Holdings' balance sheet. If this investment is not developed, then the maximum loss exposure related to TWH is limited to NW Holdings' equity investment balance, less its share of any cash or other assets available to NW Holdings as a 50% owner. The investment balance in TWH was $13.4 million at March 31,September 30, 2019 and 2018 and December 31, 2018. See Note 13 in the 2018 Form 10-K.


Other Investments
Other investments include financial investments in life insurance policies, which are accounted for at cash surrender value, net of policy loans. See Note 13 in the 2018 Form 10-K.
14. 15. BUSINESS COMBINATIONS
There2019 Business Combinations
Sunriver
On May 31, 2019, NWN Water of Oregon, a wholly-owned indirect subsidiary of NW Holdings, completed the acquisition of Sunriver Water, LLC and Sunriver Environmental, LLC (collectively referred to as Sunriver), a privately-owned water utility and wastewater treatment company located in Sunriver, Oregon that serves approximately 9,400 connections. The acquisition-date fair value of the total consideration transferred, after closing adjustments, was approximately $55.0 million in cash consideration. The transaction aligns with NW Holdings' water sector strategy as it continues to expand its water utility service territory in the Pacific Northwest and begins to pursue wastewater investment opportunities.


35

Table of Contents




The Sunriver acquisition met the criteria of a business combination, and as such a preliminary allocation of the consideration to the acquired assets based on their estimated fair value as of the acquisition date was performed. In accordance with U.S. GAAP, the fair value determination was made using existing market and regulatory conditions as well as standard valuation approaches in order to allocate value as determined by an independent third party assessor for certain assets, with the remaining difference from the consideration transferred being recorded as goodwill. This allocation is considered preliminary as of September 30, 2019, as facts and circumstances that existed as of the acquisition date may be discovered as we continue to integrate Sunriver. As a result, subsequent adjustments to the preliminary valuation of tangible assets, contract assets and liabilities, tax positions, and goodwill may be required. Subsequent adjustments are not expected to be significant, and any such adjustments are expected to be completed within the one-year measurement period. The acquisition costs were noexpensed as incurred.

Preliminary goodwill of $39.9 million was recognized from this acquisition. The goodwill recognized is attributable to Sunriver's regulated water utility service territory, experienced workforce, and the strategic benefits for both the water utility and wastewater services expected from growth in its service territory. NaN intangible assets aside from goodwill were acquired. The total amount of goodwill that is expected to be deductible for income tax purposes is approximately $50.2 million.

The preliminary purchase price for the acquisition has been allocated to the net assets acquired as of the acquisition date and is as follows:
In thousands May 31, 2019
Current assets $222
Property, plant and equipment 14,009
Goodwill 39,912
Deferred tax assets 828
Current liabilities (22)
Total net assets acquired $54,949


The amount of Sunriver revenues included in NW Holdings' consolidated statements of comprehensive income is $1.7 million and $2.3 million for the three and nine months ended September 30, 2019, respectively. Earnings from Sunriver activities for the three and nine months ended September 30, 2019 were not material to the results of NW Holdings.

Other Acquisitions
During the nine months ended September 30, 2019, NWN Water completed 2 additional acquisitions qualifying as business combinations. The aggregate fair value of the preliminary consideration transferred for these acquisitions was approximately $1.4 million. These business combinations completed in the first quarterwere not significant to NW Holdings' results of 2019.operations.


2018 Business Combinations
Falls Water
On September 13, 2018, NWN Water, then a wholly-owned subsidiary of NW Natural and now a wholly-owned subsidiary of NW Holdings, completed the acquisition of Falls Water Co., Inc. (Falls Water), 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.stock, which were converted to NW Holdings common stock in our October 1, 2018 reorganization. Falls Water became a wholly-owned subsidiary of NWN Water and marked its first acquisition in the water utility sector. This acquisition aligns with NW Holdings' water sector strategy as the acquisition provides NWN Water entry into Idaho, expands service area, and opens further opportunity for growth. Falls Water is based in Idaho Falls, Idaho and servesserved approximately 5,300 connections.connections at the time of acquisition.


Through the purchase of all of the outstanding shares of Falls Water, NWN Water acquired the net assets and 100% control of Falls Water. We determined that the Falls Water acquisition met the criteria of a business combination, and as such performed a preliminary allocation of the consideration to the acquired assets and assumed liabilities based on their fair value as of the acquisition date, the majority of which was allocated to goodwill. The allocation is considered preliminary as of December 31, 2018, and is primarily associated with certain tax positions and goodwill. Subsequent adjustments are not expected to be significant, and any such adjustments are expected to be completed within a one-year measurement period. The acquisition costs were insignificant and were expensed as incurred. The results of Falls Water are not material to the consolidated financial results of NW Holdings.


Preliminary goodwillGoodwill of $6.4$6.2 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. NW Holdings has included this goodwill in other for segment reporting purposes, and it is not deductible for income tax purposes. NoNaN intangible assets aside from goodwill were acquired.


Other Acquisitions
During 2018, in addition to the Falls Water acquisition, NWN Water completed three3 acquisitions qualifying as business combinations. The aggregate fair value of the preliminary consideration transferred for these acquisitions was approximately $2.8 million. These business combinations, both individually and in aggregate, were not significant to NW Holdings' results of operations.



36

Table of Contents




Goodwill
We allocateNW Holdings allocates goodwill to reporting units based on the expected benefit from the business combination. We perform an annual impairment assessment of goodwill at the reporting unit level, or more frequently if events and circumstances indicate that goodwill might be impaired. An impairment loss is recognized if the carrying value of a reporting unit’s goodwill exceeds its fair value.


As a result of all acquisitions completed, in 2018, total goodwill was $49.3 million as of September 30, 2019 and $9.0 million as of March 31, 2019 and December 31, 2018. The increase in the goodwill balance was due to additions associated with our acquisitions in the water sector. All of our goodwill is related to water and wastewater acquisitions and is included in the other category for segment reporting purposes. The annual impairment assessment of goodwill occurs in the fourth quarter of each year. There have been no0 impairments recognized to date.
15. 16. DERIVATIVE INSTRUMENTS
NW Natural enters into financial derivative contracts to hedge a portion of the NGD segment's natural gas sales requirements. These contracts include swaps, options and combinations of option contracts. These derivative financial instruments are primarily used to manage commodity price variability. A small portion of NW Natural's derivative hedging strategy involves foreign currency exchange contracts.


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


In the normal course of business, NW Natural also enters into indexed-price physical forward natural gas commodity purchase contracts and options to meet the requirements of NGD customers. These contracts qualify for regulatory deferral accounting treatment.


NW Natural also enters into exchange contracts related to the third-party asset management of its gas portfolio, some of which are derivatives that do not qualify for hedge accounting or regulatory deferral, but are subject to NW Natural's regulatory sharing agreement. These derivatives are recognized in operating revenues, net of amounts shared with NGD customers.


Notional Amounts
The following table presents the absolute notional amounts related to open positions on NW Natural derivative instruments:
  September 30, December 31,
In thousands 2019 2018 2018
Natural gas (in therms):      
Financial 752,090
 513,850
 408,850
Physical 751,950
 760,925
 472,275
Foreign exchange $6,446
 $7,184
 $6,936

  March 31, December 31,
In thousands 2019 2018 2018
Natural gas (in therms):      
Financial 255,550
 326,080
 408,850
Physical 422,825
 420,200
 472,275
Foreign exchange $7,241
 $7,611
 $6,936


Purchased Gas Adjustment (PGA)
Derivatives entered into by NW Natural for the procurement or hedging of natural gas for future gas years generally receive regulatory deferral accounting treatment. In general, commodity hedging for the current gas year is completed prior to the start of the gas year, and hedge prices are reflected in weighted-average cost of gas in the PGA filing. Hedge contracts entered into after the start of the PGA period are subject to the PGA incentive sharing mechanism in Oregon. NW Natural entered the 2018-19 and 2017-18 gas yearyears with forecasted sales volumes hedged at 48% and 49% in financial swap and option contracts, and 24% and 26% in physical gas supplies, respectively. Hedge contracts entered into prior to the PGA filing in September 2018 were included in the PGA for the 2018-19 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.




3037


Table of Contents








Unrealized and Realized Gain/Loss
The following table reflects the income statement presentation for the unrealized gains and losses from NW Natural's derivative instruments, which also represents all derivative instruments at NW Holdings:
 Three Months Ended March 31, Three Months Ended September 30,
 2019 2018 2019 2018
In thousands Natural gas commodity Foreign exchange Natural gas commodity Foreign exchange Natural gas commodity Foreign exchange Natural gas commodity Foreign exchange
Benefit (expense) to cost of gas $7,007
 $(89) $(5,747) $(154) $2,391
 $(133) $4,473
 $210
Operating revenues (expense) 2,367
 —
 (227) —
 2,002
 —
 (286) —
Amounts deferred to regulatory accounts on balance sheet
 (9,029) 89
 5,895
 154
 (4,102) 133
 (4,285) (210)
Total gain (loss) in pre-tax earnings $345
 $—
 $(79) $—
 $291
 $—
 $(98) $—


  Nine Months Ended September 30,
  2019 2018
In thousands Natural gas commodity Foreign exchange Natural gas commodity Foreign exchange
Benefit (expense) to cost of gas $4,255
 $24
 $1,384
 $—
Operating revenues (expense) 36
 —
 (122) —
 Amounts deferred to regulatory accounts on balance sheet
 (4,284) (24) (1,305) —
Total gain (loss) in pre-tax earnings $7
 $—
 $(43) $—

UNREALIZED GAIN/LOSS. Outstanding derivative instruments related to regulated NGD operations are deferred in accordance with regulatory accounting standards. The cost of foreign currency forward and natural gas derivative contracts are recognized immediately in the cost of gas; however, costs above or below the amount embedded in the current year PGA are subject to a regulatory deferral tariff and therefore, are recorded as a regulatory asset or liability.


REALIZED GAIN/LOSS. NW Natural realized net losses of $1.1 million and net gains of $11.3$9.2 million for the three and nine months ended March 31,September 30, 2019, from the settlement of natural gas financial derivative contracts. Whereas,contracts, whereas, net losses of $9.0$1.9 million and $15.6 million were realized for the three and nine months ended March 31,September 30, 2018. Realized gains and losses offset the higher or lower cost of gas purchased resulting in no incremental amounts to collect or refund to customers.


Credit Risk Management of Financial Derivatives Instruments
NoNaN collateral was posted with or by NW Natural counterparties as of March 31,September 30, 2019 or 2018. NW Natural attempts to minimize the potential exposure to collateral calls by counterparties to manage liquidity risk. Counterparties generally allow a certain credit limit threshold before requiring NW Natural to post collateral against loss positions. Given NW Natural's counterparty credit limits and portfolio diversification, it was not subject to collateral calls in 2019 or 2018. The collateral call exposure is set forth under credit support agreements, which generally contain credit limits. NW Natural could also be subject to collateral call exposure where it has agreed to provide adequate assurance, which is not specific as to the amount of credit limit allowed, but could potentially require additional collateral in the event of a material adverse change.


Based upon current commodity financial swap and option contracts outstanding, which reflect unrealized losses of $0.5$2.3 million at March 31,September 30, 2019, 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 $—
 $—
 $—
 $—
 $(1,476)
Without Adequate Assurance Calls —
 —
 —
 —
 (1,476)

    Credit Rating Downgrade Scenarios
In thousands (Current Ratings) A+/A3 BBB+/Baa1 BBB/Baa2 BBB-/Baa3 Speculative
With Adequate Assurance Calls $—
 $—
 $—
 $—
 $604
Without Adequate Assurance Calls —
 —
 —
 —
 185


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.



38

Table of Contents




If netted by counterparty, NW Natural's physical and financial derivative position would result in an asset of $6.4$4.3 million and a liability of $2.0$3.9 million as of March 31,September 30, 2019, an asset of $2.2$1.9 million and a liability of $19.9$10.1 million as of March 31,September 30, 2018, and an asset of $3.6 million and a liability of $9.3 million as of December 31, 2018.


NW Natural is exposed to derivative credit and liquidity risk primarily through securing fixed price natural gas commodity swaps to hedge the risk of price increases for natural gas purchases made on behalf of customers. See Note 15 in the 2018 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 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

31

Table of Contents




adjustments for all outstanding derivatives was immaterial to the fair value calculation at March 31,September 30, 2019. Using significant other observable or Level 2 inputs, the net fair value was an asset of $4.4$0.4 million, a liability of $17.7$8.1 million, and a liability of $5.7 million as of March 31,September 30, 2019 and 2018, and December 31, 2018, respectively. No Level 3 inputs were used in our derivative valuations, and there were no transfers between Level 1 or Level 2 during the threenine months ended March 31,September 30, 2019 and 2018. See Note 2 in the 2018 Form 10-K.
16. 17. ENVIRONMENTAL MATTERS
NW Natural owns, or previously owned, properties that may require environmental remediation or action. The range of loss for environmental liabilities is estimated based on current remediation technology, enacted laws and regulations, industry experience gained at similar sites, and an assessment of the probable level of involvement and financial condition of other potentially responsible parties (PRPs). When amounts are prudently expended related to site remediation of those sites described herein, NW Natural has a recovery mechanismmechanisms in place to collect 96.68% of remediation costs allocable to Oregon customers and NW Natural is allowed3.32% 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 Portland Harbor" below.    



39

Table of Contents




Environmental Sites
The following table summarizes information regarding liabilities related to environmental sites, which are recorded in other current liabilities and other noncurrent liabilities in NW Natural's balance sheet:
  Current Liabilities Non-Current Liabilities
  September 30, December 31, September 30, December 31,
In thousands 2019 2018 2018 2019 2018 2018
Portland Harbor site:            
Gasco/Siltronic Sediments $5,976
 $2,471
 $5,117
 $43,861
 $44,410
 $44,351
Other Portland Harbor 2,211
 1,392
 2,600
 5,331
 3,540
 6,273
Gasco/Siltronic Upland site 8,202
 8,847
 13,983
 42,267
 44,310
 44,830
Central Service Center site 5
 25
 10
 —
 —
 —
Front Street site 6,009
 6,011
 11,402
 5,024
 5,342
 3
Oregon Steel Mills —
 —
 —
 179
 179
 179
Total $22,403

$18,746
 $33,112
 $96,662
 $97,781
 $95,636

  Current Liabilities Non-Current Liabilities
  March 31, December 31, March 31, December 31,
In thousands 2019 2018 2018 2019 2018 2018
Portland Harbor site:            
Gasco/Siltronic Sediments $4,595
 $2,797
 $5,117
 $44,427
 $45,015
 $44,351
Other Portland Harbor 2,299
 1,769
 2,600
 5,958
 3,928
 6,273
Gasco/Siltronic Upland site 11,951
 11,408
 13,983
 43,800
 46,769
 44,830
Central Service Center site 10
 25
 10
 —
 —
 —
Front Street site 11,288
 764
 11,402
 —
 10,720
 3
Oregon Steel Mills —
 —
 —
 179
 179
 179
Total $30,143

$16,763
 $33,112
 $94,364
 $106,611
 $95,636



32

Table of Contents




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 hundred100 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-upcleanup of the Portland Harbor site (Portland Harbor ROD). The Portland Harbor ROD estimates the present value total cost at approximately $1.05 billion with an accuracy between -30% and +50% of actual costs. NW Natural is actively pursuing clarification and flexibility under the Portland Harbor ROD in order to better understand its obligations. 

NW Natural's potential liability is a portion of the costs of the remedy for the entire Portland Harbor Superfund site. The cost of that remedy is expected to be allocated among more than 100 PRPs. 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 the liability related to the Superfund site as two2 distinct remediation projects: the Gasco/Siltronic Sediments and Other Portland Harbor projects.


Gasco/Siltronic 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. At this time, 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 $49.0$49.8 million to $350 million. NW Natural has recorded a liability of $49.0$49.8 million for the sediment clean-up,cleanup, which reflects the low end of the range. At this time, NW Natural believes sediments at this site represent the largest portion of its liability related to the Portland Harbor site discussed above. 


Other Portland Harbor. While we believe liabilities associated with the Gasco/Siltronic sediments site represent NW Natural's largest exposure, there 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)contamination in the navigation channel), 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. OneNaN 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 two2 amended complaints addressing certain pleading defects and dismissing the State of Oregon. The Magistrate Judge has recommended grantingOn the motion of NW Natural and certain other defendants' motion to staydefendants the case.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.



40

Table of Contents




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,Remedial Action (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 to incorporate a portion of the Siltronic property adjacent to the Gasco site formerly owned by Portland Gas & Coke between 1939 and 1960 into the Gasco RA and FS, excluding the uplands for Siltronic. 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

33

Table of Contents




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 Gasco sediment exposure.


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.The Front Street site was the former location of a gas manufacturing plant NW Natural operated (the former Portland Gas Manufacturing site, or PGM). At ODEQ’s request, NW Natural conducted a sediment and source control investigation and provided findings to ODEQ. In December 2015, an FS on the former Portland Gas Manufacturing site was completed. 


In July 2017, ODEQ issued the PGM ROD. The ROD specifies the selected remedy, which requires a combination of dredging, capping, treatment, and natural recovery. In addition, the selected remedy also requires institutional controls and long-term inspection and maintenance. NW Natural revised the liability in the second quarter of 2017 to incorporate the estimated undiscounted cost of approximately $10.5 million for the selected remedy. Further, NW Natural has recognized an additional liability of $0.8$0.5 million for additional studies and design costs as well as regulatory oversight throughout the clean-up.cleanup. NW Natural plans to complete the remedial design in early 2019 and currently expects to construct the remedy during 2019.in 2020.


Oregon Steel Mills site. Refer to the “Legal Proceedings,”"Legal Proceedings" below.
 
Site Remediation and Recovery Mechanism (SRRM)
NW Natural has an SRRM through which it tracks and has the ability to recover past deferred and future prudently incurred environmental remediation costs allocable to Oregon, subject to an earnings test, for those sites identified therein. See Note 17 in the 2018 Form 10-K for a description of the SRRM collection process.



41

Table of Contents




The following table presents information regarding the total regulatory asset deferred:
  September 30, December 31,
In thousands 2019 2018 2018
Deferred costs and interest (1)
 $36,392
 $40,578
 $41,883
Accrued site liabilities (2)
 118,699
 116,150
 128,369
Insurance proceeds and interest (80,741) (87,631) (88,502)
Total regulatory asset deferral(1)
 $74,350
 $69,097
 $81,750
Current regulatory assets(3)
 5,100
 5,633
 5,601
Long-term regulatory assets(3)
 69,250
 63,464
 76,149
  March 31, December 31,
In thousands 2019 2018 2018
Deferred costs and interest (1)
 $36,874
 $44,686
 $41,883
Accrued site liabilities (2)
 124,133
 122,962
 128,369
Insurance proceeds and interest (89,305) (95,100) (88,502)
Total regulatory asset deferral(1)
 $71,702
 $72,548
 $81,750
Current regulatory assets(3)
 5,090
 5,818
 5,601
Long-term regulatory assets(3)
 66,612
 66,730
 76,149

(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 2019 and $0.4 million in 2018, 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, neither the cash paid nor insurance proceeds received accrue a carrying charge related to deferred amounts will be determined in a future proceeding.charge. Current environmental costs represent remediation costs management expects to collect from customers in the next 12 months. Amounts included in this estimate are still subject to a prudence and earnings test review by the OPUC and do not include the $5.0 million tariff rider. The amounts allocable to Oregon are recoverable through NGD rates, subject to an earnings test.


ENVIRONMENTAL EARNINGS TEST. To the extent NW Natural earns at or below its authorized Return on Equity (ROE) as defined by the SRRM, remediation expenses and interest in excess of the $5.0 million tariff rider and $5.0 million insurance proceeds are recoverable through the SRRM. To the extent that NW Natural earns more than its authorized ROE in a year, it is required to cover environmental expenses and interest on expenses greater than the $10.0 million with those earnings that exceed its authorized ROE. At March 31, 2019 NW Natural reserved approximately $4.4 million related to this mechanism.


34

Table of Contents





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. Cost On October 21, 2019 the WUTC issued an order in the Washington rate case proceeding allowing a recovery and carrying charges on amountsmechanism for deferred forenvironmental costs associated with services providedallocable costs to Washington customers will be determined in a future proceeding.commencing November 1, 2019.


Legal Proceedings
Other than the matters discussed above and ordinary course claims and litigation noted below, NW Holdings is not currently party to any direct claims or litigation, though in the future it may be subject to further 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. Although the final outcome of any of these legal proceedings cannot be predicted with certainty, including the matter described below, NW Natural and NW Holdings do not expect that the ultimate disposition of any of these matters will have a material effect on financial condition, results of operations or cash flows. See also Part II, Item 1, “Legal Proceedings".


OREGON STEEL MILLS SITE.See Note 17 in the 2018 Form 10-K.


For additional information regarding other commitments and contingencies, see Note 16 in the 2018 Form 10-K.
17. 18. DISCONTINUED OPERATIONS
NW Holdings
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 CPUC regulates Gill Ranch under a market-based rate model which allows for the price of storage services to be set by the marketplace. The CPUC also regulates the issuance of securities, system of accounts, and regulates intrastate storage services.



42

Table of Contents




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.


We expect the transaction to close in 2019. The closing of the transaction is subject to approval by the CPUC, and other customary closing conditions. conditions and covenants, including the requirement that all of the representations and warranties be true and correct as of the closing date except, as would not, in the case of certain representations and warranties, be reasonably expected to have a material adverse effect on Gill Ranch. The agreement is currently subject to termination by either party if the transaction has not closed by December 20, 2019. The parties are considering an extension of this date in the event CPUC approval is not obtained by that time.

In July 2018, Gill Ranch filed an application with the CPUC for approval of this transaction. On February 14, 2019, the active parties to the CPUC proceeding filed a settlement agreement with the CPUC. The CPUC is expectedOne of the parties to rule on the settlement agreement, within 90 daysthe CPUC's Office of its filing, but may grant further time for public comment. We expect an order on this matterthe Safety Advocate, has filed to withdraw from the settlement and currently opposes approval of the application. On October 31, 2019, the CPUC Administrative Law Judge issued a proposed decision approving the transaction, which must be approved by the end of June 2019.CPUC to be effective. A CPUC ruling on the proposed decision is expected in late 2019 or early 2020. We continue to strive to close this transaction.


As a result of the strategic shift away from the California gas storage market and the significance of Gill Ranch's financial results in 2017, we concluded that the pending sale of Gill Ranch qualified it 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, net of tax, as discontinued operations separately 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 NW Holdings' continuing operations.


35

Table of Contents





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:
 
NW Holdings
Discontinued Operations
 
NW Holdings
Discontinued Operations
 March 31, December 31, September 30, December 31,
In thousands 2019 2018 2018 2019 2018 2018
Assets:            
Accounts receivable $1,277
 $193
 $390
 $907
 $395
 $390
Inventories 627
 736
 685
 712
 661
 685
Other current assets 337
 583
 333
 45
 107
 333
Property, plant, and equipment 12,033
 10,812
 11,621
 12,589
 11,241
 11,621
Less: Accumulated depreciation 7
 4
 7
 6
 7
 7
Operating lease right of use asset 118
 —
 —
 118
 —
 —
Other non-current assets 247
 51
 247
 247
 247
 247
Discontinued operations - current assets (1)
 14,632
 1,512
 13,269
Discontinued operations - non-current assets (1)
 —
 10,859
 —
Total discontinued operations assets $14,632
 $12,371
 $13,269
Total discontinued operations assets - current assets (1)
 $14,612
 $12,644
 $13,269
            
Liabilities:            
Accounts payable $1,102
 $462
 $873
 $1,375
 $751
 $873
Taxes accrued 59
 334
 —
Other current liabilities 300
 413
 307
 342
 405
 307
Operating lease liabilities 111
 —
 —
 114
 —
 —
Other non-current liabilities 11,710
 11,979
 11,779
 11,568
 11,847
 11,779
Discontinued operations - current liabilities (1)
 13,282
 1,209
 12,959
Discontinued operations - non-current liabilities (1)
 —
 11,979
 —
Total discontinued operations liabilities $13,282
 $13,188
 $12,959
Total discontinued operations liabilities - current liabilities (1)
 $13,399
 $13,003
 $12,959
(1)
The total assets and liabilities of Gill Ranch are classified as current as of March 31,September 30, 2019 and December 31, 2018 because it is probable that the sale will be completed within one year.

43

Table of Contents




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:
  
NW Holdings
Discontinued Operations
  Three Months Ended September 30, Nine Months Ended September 30,
In thousands, except per share data 2019 2018 2019 2018
Revenues $1,410
 $748
 $4,879
 $2,831
Expenses:        
Operations and maintenance 2,113
 1,549
 6,377
 4,139
General taxes 40
 (261) 159
 419
Depreciation and amortization 105
 106
 317
 324
Other expenses and interest 233
 237
 699
 371
Total expenses 2,491
 1,631
 7,552
 5,253
Loss from discontinued operations before income taxes (1,081) (883) (2,673) (2,422)
Income tax benefit (286) (233) (705) (639)
Loss from discontinued operations, net of tax $(795) $(650) $(1,968) $(1,783)
  

 

    
Loss from discontinued operations per share of common stock:        
Basic $(0.02) $(0.02) $(0.07) $(0.06)
Diluted $(0.02) $(0.02) $(0.07) $(0.06)


44

Table of Contents



  
NW Holdings
Discontinued Operations
  Three Months Ended March 31,
In thousands, except per share data 2019 2018
Revenues $1,721
 $1,077
Expenses:    
Operations and maintenance 1,613
 1,036
General taxes 59

334
Depreciation and amortization 106
 110
Other expenses and interest 237
 241
Total expenses 2,015
 1,721
Loss from discontinued operations before income taxes (294) (644)
Income tax benefit (77) (170)
Loss from discontinued operations, net of tax $(217) $(474)
     
Loss from discontinued operations per share of common stock:    
Basic $(0.01) $(0.02)
Diluted (0.01) (0.02)

NW Natural
As a result of the holding company reorganization in October 2018, NWN Energy, NWN Gas Storage, Gill Ranch, NNG Financial, NWN Water, and NW Holdings, which were direct and indirect subsidiaries of NW Natural prior to the reorganization, are no longer subsidiaries of NW Natural. As a result, NW Natural's financial statements reflect amounts related to these entities as discontinued operations for all periods presented. The expenses included in the results of discontinued operations are the

36

Table of Contents




direct operating expenses incurred by the entities that may be reasonably segregated from the costs of NW Natural's continuing operations.


The following table presents the carrying amounts of the major components of NWN Energy, NWN Gas Storage, Gill Ranch, NNG Financial, NWN Water, and NW Holdings that are classified as discontinued operations assets and liabilities on NW Natural's consolidated balance sheets:
  
NW Natural
Discontinued Operations
In thousands September 30, 2018
Assets:  
Cash $21,079
Accounts receivable 517
Receivables from affiliates 3,791
Inventories 679
Other current assets 161
Property, plant, and equipment 14,732
Less: Accumulated depreciation 221
Other investments 13,654
Goodwill 6,563
Other non-current assets 351
Discontinued operations - current assets 26,227
Discontinued operations - non-current assets 35,079
Total discontinued operations assets $61,306
   
Liabilities:  
Accounts payable $1,292
Taxes accrued 99
Payables to affiliates 939
Other current liabilities 1,439
Long-term debt 834
Deferred tax liabilities (14,696)
Other non-current liabilities 11,932
Discontinued operations - current liabilities 3,769
Discontinued operations - non-current liabilities (1,930)
Total discontinued operations liabilities $1,839



45

Table of Contents



  
NW Natural
Discontinued Operations
In thousands March 31, 2018
Assets:  
Cash $311
Accounts receivable 193
Receivables from affiliates 3,852
Inventories 736
Other current assets 639
Property, plant, and equipment 11,186
Less: Accumulated depreciation 203
Other investments 13,691
Other non-current assets 64
Discontinued operations - current assets 5,731
Discontinued operations - non-current assets 24,738
Total discontinued operations assets $30,469
   
Liabilities:  
Accounts payable $731
Taxes accrued 368
Payables to affiliates 660
Other current liabilities 401
Deferred tax liabilities (16,397)
Other non-current liabilities 12,067
Discontinued operations - current liabilities 2,160
Discontinued operations - non-current liabilities (4,330)
Total discontinued operations liabilities $(2,170)


The following table presents the operating results prior to the holding company reorganization effective October 1, 2018 of NWN Energy, NWN Gas Storage, Gill Ranch, NNG Financial, NWN Water, and NW Holdings, which were historically reported within the gas storage segment and other, and is presented net of tax on NW Natural's consolidated statements of comprehensive income:
  NW Natural
Discontinued Operations
  Three Months Ended September 30, Nine Months Ended September 30,
In thousands 2018 2018
Revenues $818
 $3,016
Expenses:    
Operations and maintenance 1,408
 4,151
General taxes, net (255) 448
Depreciation and amortization 138
 420
Other expenses and interest 232
 342
Total expenses 1,523
 5,361
Loss from discontinued operations before income taxes (705) (2,345)
Income tax benefit (186) (622)
Loss from discontinued operations, net of tax $(519) $(1,723)

  
NW Natural
Discontinued Operations
  Three Months Ended March 31,
In thousands, except per share data 2018
Revenues $1,133
Expenses:  
Operations and maintenance 1,059
General taxes 347
Depreciation and amortization 117
Other expenses and interest 260
Total expenses 1,783
Loss from discontinued operations before income taxes (650)
Income tax benefit (173)
Loss from discontinued operations, net of tax $(477)




3746


Table of Contents








ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


The following is management’s assessment of NW Holdings' and NW Natural's financial condition, including the principal factors that affect results of operations. The discussion refers to the consolidated results from continuing operations for the three and nine months ended March 31,September 30, 2019 and 2018 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 and nine month periods are not necessarily indicative of expected fiscal year results. Therefore, this discussion should be read in conjunction with NW Holdings' and NW Natural's 2018 Annual Report on Form 10-K, as applicable (2018 Form 10-K).
 
NW Holdings' direct and indirect wholly-owned subsidiaries include:
Northwest Natural Gas Company (NW Natural);
◦Northwest Energy Corporation (Energy Corp);
▪NWN Gas Reserves LLC (NWN Gas Reserves);
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);
NW Natural Gas Storage, LLC (NWN Gas Storage);
▪Gill Ranch Storage, LLC (Gill Ranch), which is presented as a discontinued operation;
NNG Financial Corporation (NNG Financial);
◦
KB Pipeline Company (KB);
NW Natural Water Company, LLC (NWN Water);
◦▪Falls Water Co., Inc. (Falls Water);
◦▪Salmon Valley Water Company;
◦▪NW Natural Water of Oregon, LLC (NWN Water of Oregon);
Sunstone Water, LLC;
Sunstone Infrastructure, LLC;
Sunriver Water, LLC (Sunriver Water);
Sunriver Environmental, LLC (Sunriver Environmental);
▪Sunstone Water, LLC;
◦NW Natural Water of Washington, LLC (NWN Water of Washington);
Cascadia Infrastructure, LLC;
Cascadia Water, LLC (Cascadia);
▪Cascadia Water, LLC (Cascadia);
◦NW Natural Water of Idaho, LLC (NWN Water of Idaho); and
Gem State Water Company, LLC (Gem State);
Gem State Infrastructure, LLC; and
▪Gem StateNW Natural Water Company,of Texas, LLC (Gem State)(NWN Water of Texas).
On October 1, 2018, we completed a reorganization into a holding company structure. We believe that our holding company structure is an agile and efficient platform from which to pursue, finance, and oversee new opportunities, such as in the water sector, while also providing legal separation between regulated natural gas distribution operations and other businesses. In this reorganization, shareholders of NW Natural (the predecessor publicly held parent company) became shareholders of NW Holdings, on a one-for-one basis, with the same number of shares and same ownership percentage as they held in NW Natural immediately prior to the reorganization. NW Natural became a wholly-owned subsidiary of NW Holdings. Additionally, certain subsidiaries of NW Natural were transferred to NW Holdings. As required under accounting guidance, these subsidiaries are presented as discontinued operations in the consolidated results of NW Natural within this report.


NW Natural's natural gas distribution activities are reported in the natural gas distribution (NGD) segment. The NGD segment includes our NW Natural local gas distribution business, NWN Gas Reserves, which is a wholly-owned subsidiary of Energy Corp, and the NGD-portion of NW Natural's Mist storage facility in Oregon. Other activities aggregated and reported as other at NW Natural include the non-NGD storage activity at Mist as well as asset management services and the appliance retail center operations. Other activities aggregated and reported as other at NW Holdings include NWN Energy's equity investment in Trail West Holding, LLC (TWH), which is pursuing the development of a proposed natural gas pipeline through its wholly-owned subsidiary, Trail West Pipeline, LLC (TWP); NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); and NWN Water, which through itself or its subsidiaries owns and continues to pursue investments in the water sector. See Note 4 for further discussion of our business segment and other, as well as our direct and indirect wholly-owned subsidiaries.
 
NON-GAAP FINANCIAL MEASURES. In addition to presenting the results of operations and earnings amounts in total, certain financial measures are expressed in cents per share, which are non-GAAP financial measures. All references in this section to earnings per share (EPS) are on the basis of diluted shares. We use such non-GAAP financial measures to analyze our financial performance because we believe they provide useful information to our investors 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.




3847


Table of Contents








EXECUTIVE SUMMARY
We manage our business and strategic initiatives with a long-term view of providing natural gas service safely and reliably to customers, working with regulators on key policy initiatives, and remaining focused on growing our business. See "2019 Outlook" in the 2018 Form 10-K for more information. Current operational highlights include:
NGD business added over 12,50012,000 meters during the past twelve months for a growth rate of 1.7%1.6% at March 31,September 30, 2019;
invested $48.8$151.1 million in the NGD distribution system and facilities for growth, safety, and reliability; and
receivedranked first in the nation for the seventh time in a final OPUC orderdecade among large gas utilities in Marchthe 2019 concludingJ.D. Power Gas Utility Residential Customer Satisfaction Study.

Key quarter-to-date financial highlights for NW Holdings include:
  Three Months Ended September 30,  
  2019 2018 QTD
In thousands, except per share data AmountPer Share AmountPer Share Change
Net loss from continuing operations $(18,506)$(0.61) $(11,144)$(0.39) $(7,362)
Loss from discontinued operations, net of tax (795)(0.02) (650)(0.02) (145)
Consolidated net loss $(19,301)$(0.63) $(11,794)$(0.41) $(7,507)
NGD margin $55,903
  $54,940
  $963

Key quarter-to-date financial highlights for NW Natural include:
  Three Months Ended September 30,  
  2019 2018 QTD
In thousands Amount Amount Change
Net loss from continuing operations $(17,588) $(11,275) $(6,313)
Loss from discontinued operations, net of tax —
 (519) 519
Consolidated net loss $(17,588) $(11,794) $(5,794)
NGD margin $55,903
 $54,940
 $963

THREE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. Net loss from continuing operations increased $7.4 million and $6.3 million at NW Holdings and NW Natural, respectively. The increase was primarily due to the remaining two open items ineffects of implementing of the 2018 Oregon general rate case. See "Resultscase with regard to pension costs and tax reform.

Beginning April 1, 2019 volumetric base rates for Oregon customers were reduced to reflect the benefit of Operations - Regulatory Matters - Regulatory Proceeding Updates - Oregon General Rate Case" belowexcess deferred income taxes as a result of the Tax Cuts and Note 9 for more information.Jobs Act (TCJA). Net income is unaffected on an annual basis due to an equivalent reduction in income tax expense. However, recognition timing differences resulted in a detriment of $2.7 million in the current period compared to the prior period. Beginning November 1, 2018 there is also a timing variance with regard to pension expense and recovery, with pension costs recovered volumetrically in base rates, while corresponding expenses are incurred evenly throughout the year. This resulted in a pre-tax decrease of $1.4 million in the current period compared to the prior period.

In addition, net loss from continuing operations increased due to higher interest expense of $1.9 million and $1.5 million at NW Holdings and NW Natural, respectively, driven by higher long-term debt balances. The increases were partially offset by a $1.0 million increase in NGD margin and higher tax benefits from higher pretax loss.

48

Table of Contents





Key year-to-date financial highlights for NW Holdings include:
 Three Months Ended March 31,   Nine Months Ended September 30,  
 2019 2018 QTD 2019 2018 YTD
In thousands, except per share data AmountPer Share AmountPer Share Change AmountPer Share AmountPer Share Change
Net income from continuing operations $43,418
$1.50
 $42,011
$1.46
 $1,407
 $26,963
$0.91
 $30,528
$1.06
 $(3,565)
Loss from discontinued operations, net of tax (217)(0.01) (474)(0.02) 257
 (1,968)(0.07) (1,783)(0.06) (185)
Consolidated net income $43,201
$1.49
 $41,537
$1.44
 $1,664
 $24,995
$0.84
 $28,745
$1.00
 $(3,750)
NGD margin $152,655
  $132,716
  $19,939
 $289,539
  $257,402
  $32,137
Key year-to-date financial highlights for NW Natural include:
 Three Months Ended March 31,   Nine Months Ended September 30,  
 2019 2018 QTD 2019 2018 YTD
In thousands, except per share data Amount Amount Change
In thousands Amount Amount Change
Net income from continuing operations $43,895
 $42,014
 $1,881
 $29,361
 $30,468
 $(1,107)
Loss from discontinued operations, net of tax —
 (477) 477
 —
 (1,723) 1,723
Consolidated net income $43,895
 $41,537
 $2,358
 $29,361
 $28,745
 $616
NGD margin $289,539
 $257,402
 $32,137
THREENINE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. Net income from continuing operations increased $1.4decreased $3.6 million and $1.9$1.1 million at NW Holdings and NW Natural, respectively. As mentioned above, in
In March 2019, the OPUC issued an order resolving the remaining open items from NW Natural's 2018 Oregon general rate case regarding recovery of the pension balancing account and treatment of the benefits associated with the TCJA. As a result of the order, in the first quarter of 2019, NW Natural recorded a disallowance and several benefits and expenses through the consolidated statementstatements of comprehensive income as follows:
Pension balancing account. Approximately $12.5 million in previously deferred pension expenses were recognized of which approximately $4.6 million was recorded in operations and maintenance expense and $7.9 million was recorded in other income (expense), net. These charges were offset with a corresponding increase in revenue of $7.1 million and in income tax benefits of $2.7 million as the order required the offset of certain deferred TCJA benefits against the pension balancing account. Additional TCJA income tax benefits will be realized throughout 2019 to offset the remainder of the $12.5 million charge. NW Natural also recognized a regulatory pension disallowance of $10.5 million with approximately $3.9 million recognized in operations and maintenance expense and $6.6 million recognized in other income (expense), net, partially offset by related discrete income tax benefits of $1.1 million. Lastly, NW Natural realized $3.8 million of deferred regulatory interest accrued on the pension balancing account.


Deferred TCJA benefits and timing variance. In addition, the OPUC ordered the return of approximately $6.3 million of excess deferred income taxes associated with plant and gas reserves beginning April 1, 2019. As a result, NW Natural recognized approximately $2.0 million in income tax benefits in the first quarter of 2019. Reductions to customer billings commenced April 1, 2019 and will offset these income tax benefits in total by the end of 2019 and in subsequent years until all benefits have been returned.


The main drivers contributing to the increase$3.6 million and $1.1 million decreases in net income from continuing operations of $1.4 million and $1.9 million at NW Holdings and NW Natural, respectively, was primarily due to the following factors, all of which occurred at NW Natural:
a $19.9 million increasein NGD margin driven by a $14.0 million increase from new customer rates in Oregon from NW Natural's 2018 rate case, customer growth, and colder than average weather in 2019 compared to warmer than average weather in 2018; the remaining increase primarily relates to $7.1 million in revenues which were offset by pension expenses as discussed above;
•
a $32.1 million increasein NGD margin driven by a $14.0 million increase from new customer rates in Oregon from NW Natural's 2018 rate case and a $7.2 million increase from the commencement of storage services at the North Mist expansion facility as well as increases from customer growth and colder weather in 2019 compared to 2018; the remaining increase primarily relates to $7.1 million in revenues which were offset by pension expenses as discussed above;
a $4.1$5.0 million decrease in NGD income tax expense primarily due to $2.0 million in benefits related to additional excess deferredthe income tax implications of the March 2019 OPUC order, including commencement of deferred TCJA benefit recognition relatedcredits to base rate credits, $1.1 million in discrete benefits related tocustomers and the Oregon general rate case order, and lower pretax income;

39

Table of Contents




regulatory pension disallowance;
a $3.8$5.2 million increase in deferred regulatory interest income in other income (expense), net, asof which $4.4 million relates to interest recognized in association with the OPUC order discussed above; partially offset by
a $10.5 million regulatory pension disallowance with $3.9 million reflected in operations and maintenance expense and $6.6 million recorded in other income (expense), net, as discussed above;


49

Table of Contents




a $3.2$11.3 million increase in expenses related to higher non-service pension costs within operations and maintenance expense and other income (expense), net, as NW Natural began collecting costs through customer rates on November 1, 2018 rather than deferring a portion to the pension balancing account,account;
a $3.6 million increase in NGD depreciation expense due to plant additions; and
a $3.3 million decrease in NGD AFUDC interest income due to placing the North Mist expansion project into service;
a $3.1 million increase in NGD interest expense fromdue to higher short-termcommercial paper and long term debt balances; and
a $3.1 million increasedecrease in revenues from non-NGD gas storage operations at Mist due to increased revenue sharing with NGD customers.

In addition to the drivers described above, the decrease in NW Holdings net income from continuing operations was primarily due to increases in professional service costs, business development costs, and maintenance expenseexpenses associated with general salary and benefit increases.integrating the water business.


See the "Resultsdiscussion in "Results of Operations" discussionOperations" below for additional detail regarding all significant activity that occurred during the firstthird quarter of 2019.


DIVIDENDS
Dividend highlights include:  
 Three Months Ended March 31,   Three Months Ended September 30, Nine Months Ended September 30, 
QTD
Change
 
YTD
Change
Per common share 2019 2018 QTR Change 2019 2018 2019 2018  
Dividends paid $0.4750
 $0.4725
 $0.0025
 $0.4750
 $0.4725
 $1.4250
 $1.4175
 $0.0025
 $0.0075


In AprilOctober 2019, the Board of Directors of NW Holdings declared a quarterly dividend on NW Holdings common stock of $0.4750$0.4775 per share.share, an increase from the prior quarter's dividend. The dividend is payable on MayNovember 15, 2019, to shareholders of record on April 30,October 31, 2019, reflecting an annual indicated dividend rate of $1.90$1.91 per share.


RESULTS OF OPERATIONS


Regulatory Matters
For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" in the 2018 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. In 2018, approximately 89% of NGD customers were located in Oregon, with the remaining 11% 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, and NW Natural's ability to remain price competitive, control expenses, and obtain reasonable and timely regulatory recovery of its natural gas distribution-related costs, including operating expenses and investment costs in plant and other regulatory assets. See "Most Recent Completed General Rate Cases" below.


MIST INTERSTATE GAS STORAGE. NW Natural's interstate storage activity at Mist is subject to regulation by the OPUC, WUTC, and FERCthe Federal Energy Regulatory Commission (FERC) with respect to, among other matters, rates and terms of service. The OPUC also regulates the intrastate storage services at Mist, while FERC regulates the interstate storage services at Mist. The FERC uses a maximum cost of service model which allows for gas storage prices to be set at or below the cost of service as approved by each agency in their last regulatory filing. The OPUC Schedule 80 rates are tied to the FERC rates, and are updated whenever NW Natural modifies FERC maximum rates.


OTHER. In June 2018, 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 is subject to approval by the CPUC and other customary closing conditions. See Note 1718 for more information. The wholly-owned regulated water businesses of NW Natural Water are subject to regulation by the OPUC, WUTC, and IPUC, as applicable.



50

Table of Contents




Most Recent Completed General Rate Cases
OREGON. Effective November 1,On October 26, 2018, the OPUC authorizedissued an order regarding NW Natural's general rate case (Order) originally filed in December 2017 and approved the following items effective beginning November 1, 2018:
Annual revenue requirement increase of $23.4 million or 3.72% over NW Natural's revenue from existing rates, to customers basedwhich 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 an ROEequity (ROE) of 9.4%,;
Cost of capital of 7.317%;
Rate base of $1.186 billion, or an overallincrease of $300 million since the last rate case in 2012;
Pension expenses will be recovered through rates with an increase of $8.1 million to revenue requirement; and
The sharing of asset management revenues related to utility pipeline and storage assets will be 90%/10% with 90% being credited to customers. Previously customers received 67% of these revenues.

After further settlement negotiations directed by the OPUC, in March 2019 the OPUC issued an order resolving the remaining rate case items. As a result, the following items were recorded in the first quarter of 2019:
Applied $7.1 million of TCJA benefits deferred from January 1, 2018 to October 31, 2018, as a reduction against the pension balancing account;
Credited to customers' benefit $5.4 million of deferred income taxes as a reduction against the pension balancing account;
Reduced the amount of the frozen balancing account by an additional $10.5 million; and
Reduced the interest rate on the pension balancing account from NW Natural's authorized rate of return of 7.317%7.317 percent to 4.3 percent.

The items above resulted in the recovery of $12.5 million of deferred pension expenses by applying deferred tax benefits against the pension balancing account. Recognition of these items resulted in higher operations and maintenance expense and other income (expense), net with offsetting benefits recognized in operating revenues and income tax expense. Additional pension expenses of $10.5 million from the regulatory disallowance were also recognized in operations and maintenance expense and other income (expense), net. Deferred regulatory interest income of $3.8 million was also realized in other income (expense), net.

Commencing April 1, 2019, the OPUC also ordered the following:
Provide an annual credit to base rates of $3.4 million for excess deferred income taxes to all customers, subject to the average rate assumption method;
Provide an additional annual credit of $3.0 million to sales service customers for five years;
Collect the remainder of the pension balancing account over ten years in a capital structurecustomer tariff of 50% common equity$7.3 million per year; and 50% long-term debt. For additional information, see "Regulatory Proceeding Updates" below.

An increase in rate base of $15.4 million, and corresponding increase to revenue requirement of $1.4 million.

If NW Natural files a general rate case within five years of the date of the Pension Order, this revenue requirement may be adjusted as part of that general rate case.

WASHINGTON. Effective From January 1, 2009, through October 31, 2019, the WUTC authorized rates to customers based on an ROE of 10.1% and an overall rate of return of 8.4% with a capital structure of 51% common equity, 5% short-term debt, and 44% long-term debt.



40

Table of Contents




On December 31, 2018, NW Natural filed a general rate case in Washington requestingEffective November 1, 2019, the WUTC authorized rates to customers based on an ROE of 10.3%,9.40% and an overall rate of return of 7.63%, and7.161% with a capital structure of 49.5%49% common equity, 49.5% long-term1% short-term debt, and 1% short-term50% long-term debt. For additional information, see "Regulatory"Regulatory Proceeding Updates" Updates— Washington General Rate Case"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 maximum cost-based rates, which incorporated the new federal corporate income tax rate. The revised rates were effective beginning November 1, 2018.


NW Natural continuously evaluates the need for rate cases in its jurisdictions. For additional information, see "Regulatory Proceeding Updates—Rate Case" below.Currently, we are contemplating filing an Oregon rate case in late 2019.



51

Table of Contents




Rate Mechanisms
During 2019, NW Natural's key approved rates and recovery mechanisms for each service area included:
Oregon WashingtonOregon Washington Washington
2018 Rate Case
(effective 11/1/2018)
 2009 Rate Case
2018 Rate Case
(effective 11/1/2018)
 2009 Rate Case 
2019 Rate Case
(effective 11/1/2019)
Authorized Rate Structure:  
ROE9.4% 10.1%9.4% 10.1% 9.4%
ROR7.3% 8.4%7.3% 8.4% 7.2%
Debt/Equity Ratio50%/50% 49%/51%50%/50% 49%/51% 51%/49%
  
Key Regulatory Mechanisms:  
PGAX X
Purchased Gas Adjustment (PGA)X X X
Gas Cost Incentive SharingX X 
DecouplingX X 
WARMX 
Weather Normalization (WARM)X 
Environmental Cost DeferralX XX X X
SRRMX 
Environmental Cost RecoveryX X
Interstate Storage and Asset Management SharingX XX 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. The PGA filings include gas costs under spot purchases as well as contract supplies, gas costs hedged with financial derivatives, 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.


EachTypically, each year NW 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. NW Natural entered the 2018-19 gas year with its forecasted sales volumes hedged at 48% in financial swap and option contracts and 24% in physical gas supplies for Oregon and Washington.


As of March 31,September 30, 2019, NW Natural was also hedged in future gas years at approximately 17%66% for the 2019-20 gas year and between 1% and 8%28% for annual requirements over the subsequent five gas years. 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.


In September 2018,2019, NW Natural filed its annual PGA and received OPUC and WUTC approval in October 2018.2019. PGA rate changes were effective November 1, 2018.2019. Rates between states can vary due to different rate structures 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. The plan calls for a flexible hedging approach that reacts to changes in market conditions as those changes occur. NW Naturalincorporated and expects to begin implementing risk-responsive hedging strategies for the 2019-20 PGA for its Washington gas supplies.


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

41

Table of Contents




and estimated gas costs, respectively. For the 2017-182018-19 and 2018-192019-20 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 2017-18 and 2018-19 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 2018, the ROE threshold was 10.48%. NW Natural filed the 2018 earnings test in May 2019, and doesit was approved by the Commission in July 2019. As a result, we were not expectsubject to a customer refund adjustment for 2018 based on results.2018.


52

Table of Contents





GAS RESERVES. In 2011, the OPUC approved the Encana gas reserves transaction to provide long-term gas price protection for NGD business customers and determined costs under the agreement would be recovered on an ongoing basis through the annual PGA mechanism. Gas produced from NW Natural's interests is sold at then prevailing market prices, and revenues from such sales, net of associated operating and production costs and amortization, are included in cost of gas. The cost of gas, including a carrying cost for the rate base investment made under the original agreement, is included in NW Natural's annual Oregon PGA filing, which allows NW Natural to recover these costs through customer rates. The net investment under the original agreement earns a rate of return.


In 2014, NW Natural amended the original gas reserves agreement in response to Encana's sale of its interest in the Jonah field located in Wyoming to Jonah Energy. Under the amended agreement with Jonah Energy, NW Natural has the option to invest in additional wells on a well-by-well basis with drilling costs and resulting gas volumes shared at the amended proportionate working interest for each well in which NW Natural invests. Volumes produced from the additional wells drilled after the amended agreement are included in NW Natural's Oregon PGA at a fixed rate of $0.4725 per therm. NW Natural did not participate in additional wells during the threenine months ended March 31,September 30, 2019.


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 mechanism was reauthorized and the baseline expected usage per customer was reset in the 2018 Oregon general rate case. 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. However, NW Natural's general rate case filed in Washington on December 31, 2018, requests that such a tariff be implemented that would adjust for variances in both weather and usage. See "Regulatory Proceeding Updates— - Washington General Rate Case" Case" below.


WARM. In Oregon, NW Natural has an approved weather normalization mechanism, which is applied to residential and commercial customer bills. This mechanism is designed to help stabilize the collection of fixed costs by adjusting residential and 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 commercial customers in Oregon are allowed to opt out of the weather normalization mechanism, and as of March 31,September 30, 2019, 8% 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% of total customers. See "Business SegmentsSegment—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 SRRM. 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 SRRM through which it tracksSite Remediation and has the abilityRecovery 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. On October 21, 2019 the WUTC authorized a Environmental Cost Recovery Mechanism (ECRM) for recovery of prudently incurred costs allocable to Washington customers beginning November 1, 2019.


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.


4253


Table of Contents








•
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 $6.1 million and $7.4 million of deferred remediation expense approved by the OPUC for collection during the 2018-19 and 2017-18 PGA years, respectively.
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 $6.1 million and $7.4 million of deferred remediation expense approved by the OPUC for collection during the 2018-19 and 2017-18 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. For additional information, see Note 17 in the 2018 Form 10-K.


The SRRM earnings test is an annual review of adjusted NGD ROE compared to authorized NGD ROE. For 2018, the first ten months will bewere weighted at 9.5% and the last two months at 9.4%, reflecting the ROE change from NW Natural's most recent rate case effective November 1, 2018. To apply the earnings test NW Natural must first determine what if any costs are subject to the test through the following calculation:
Annual spend
Less: $5.0 million base rate rider
          Prior year carry-over(1)
          $5.0 million insurance + interest on insurance
Total deferred annual spend subject to earnings test
Less: over-earnings adjustment, if any
Add: deferred interest on annual spend(2)
Total amount transferred to post-review
(1)
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 2018 based on the environmental earnings test that was submitted in May 2019, and is pendingapproved by the Commission approval.in July 2019.

Washington ECRM
The ECRM established by the WUTC order on October 21, 2019 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 deferred from the initial deferral authorization in February 2011 through June 2019 are to be fully offset with insurance proceeds. The remaining insurance proceeds will be amortized over a 10.5 year period. On an annual basis NW Natural has recordedwill file for a reserve inprudence determination and a request to amortize costs to the first quarter of 2019 for an anticipated adjustment for fiscal year 2019. See Note 16.

The WUTC has also previously authorizedextent that remediation expenses exceed the deferral of environmental costs,insurance amortization. After insurance proceeds have been fully amortized, if any, that are appropriately allocated to Washington customers. This Order was effective in January 2011 with cost recovery and carrying charges on amounts deferred for costs associated with services provided to Washington customers to be determined 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 portionparticular year the request to collect deferred amounts exceeds one percent of these regulatory assets no longer meetWashington normalized revenues, then the criteria for continued application of regulatory accounting, then NW Natural wouldexcess will be required to write-off the net unrecoverable balances against earnings in the period such a determination was made.collected over three years with interest. See "Regulatory Proceeding Updates - Washington General Rate Case" below.
 
PENSION COST DEFERRAL AND PENSION BALANCING ACCOUNT. From 2011 through October 2018, the OPUC authorized a regulatory mechanism in which NW Natural deferred annual pension expenses above the amount set in rates, with recovery of these deferred amounts through the implementation of a balancing account, which included the expectation of higher and lower pension expenses in future years. During this period the mechanism permitted for NW Natural to accrue interest on the account balance at the NGD business' authorized rate of return. The means by which the account would be recovered by NW Natural was determined by an OPUC order issued in NW Natural's general rate case in March 2019. Pension expense deferrals, excluding interest, were $2.8$9.4 million during the threenine months ended March 31,September 30, 2018. Deferred pension expense recoveries were $12.5$14.5 million during the threenine months ended March 31,September 30, 2019. See "Regulatory Proceeding Updates-Updates - Oregon General Rate Case" below.



43

Table of Contents




INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING. On an annual basis, NW Natural credits amounts to Oregon and Washington customers as part of a regulatory incentive sharing mechanism related to net revenues earned from Mist gas storage and asset management activities. Generally, amounts are credited to Oregon customers in June, while credits are given to customers in Washington as reductions in rates through the annual PGA filing in November.



54

Table of Contents




In 2019, NW Natural received regulatory approval to refund an interstate storage credit of $16.1 million to Oregon customers. Of this amount, $14.2 million was reflected in customers' June bills and substantially all of the remaining credit was reflected in customers' July bills. Bill credits to Oregon and Washington customers in 2018 were approximately $11.7 million and $1.0 million, respectively.

Regulatory Proceeding Updates
During 2019, NW Natural was involved in the regulatory activities discussed below. For additional information, see Part II, Item 7 "Results of Operations—Regulatory Matters" Matters" in the 2018 Form 10-K.


INTERSTATE STORAGE AND ASSET MANAGEMENT SHARING. NW Natural received an Order from the OPUC in March 2015 on their review of the current revenue sharing arrangement that allocates a portion of the net revenues generated from non-NGD Mist storage services and third-party asset management services to NGD business 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 filed with the OPUC in February 2018. The OPUC concluded on this matter in the Oregon general rate case proceeding. For additional information, see "Oregon"Most Recent Completed General Rate CaseCases - Oregon" below.above.


HOLDING COMPANY REORGANIZATION. In On October 1, 2018, we completed the reorganization to a holding company structure. There 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 following formation of a holding company, 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 was given in conjunction with the PGA filings, with the rate adjustments commencing on November 1, 2018.


TAX REFORM DEFERRAL. In December 2017, NW Natural filed applications with the OPUC and WUTC to defer the overall net benefit associated with the TCJA that was enacted on December 22, 2017. Through the Oregon general rate case, in October 2018 the OPUC issued an order directing NW Natural and the other parties to the rate case to engage in further regulatory proceedings to resolve open issues with respect to the treatment of the 10-month deferral period of benefits associated with the TCJA. On February 4, 2019, NW Natural and the other parties to the rate case agreed upon terms by which the deferred benefits would be returned to customers via a joint stipulation filed with the OPUC. On March 25, 2019, the OPUC approved the terms in their entirety. See "Most Recent Completed General Rate Cases - Oregon" above for more information.

On October 21, 2019 the WUTC issued an order dictating the means by which deferred tax reform benefits would be returned to customers beginning November 1, 2019. See "Regulatory Proceeding Updates-Oregon - Washington General Rate Case" below for more information.below.


NW Natural is working with the WUTC regarding the Washington deferral for the TCJA as part of the general rate case filed in Washington on December 31, 2018, and is currently deferring all amounts for the benefit of Washington customers.

WATER BUSINESS. In 2019, NW Holdings, through its water subsidiaries, continued implementation of its water strategy and entered into the following agreements which require or required regulatory approval:
•
Sunriver Water, LLC and Sunriver Environmental, LLC — NWN Water of Oregon filed an application for regulatory approval from the OPUC for the Sunriver Water, LLC acquisition in October 2018. We received OPUC approval for the transaction in April 2019. Sunriver Environmental, LLC is not subject to the OPUC's jurisdiction. The transaction closed in May 2019.
•
Spirit Lake East Water Company and Lynnwood Water — Gem State filed an application for regulatory approval from the IPUC for these Coeur d'Alene, Idaho acquisitions in February 2019. The transaction closed in July 2019.
•
Estates Water Systems Inc. and Monterra Inc. — Cascadia filed an application for regulatory approval from the WUTC for these Sequim, Washington acquisitions in February 2019, and received approval in April 2019. The transaction closed in May 2019.
•
Suncadia Water Company, LLC and Suncadia Environmental, LLC — NWN Water of Washington signed an agreement in October 2019 for the purchase of Suncadia Water Company, LLC (Suncadia Water), a water utility, and Suncadia Environmental, LLC (Suncadia Environmental), a wastewater company. The closing of the transaction is subject to customary closing conditions, including regulatory approval from the WUTC for the Suncadia Water acquisition. Suncadia Environmental is not subject to the WUTC's jurisdiction. The transaction is expected to close in 2020.
•
T&W Water Service Company — NWN Water of Texas signed an agreement in October 2019 for the purchase of T&W Water Service Company, a water utility in Conroe, Texas. The closing of the transaction is subject to customary closing conditions, including regulatory approval from the Public Utility Commission of Texas. The transaction is expected to close in 2020.
Sunriver Water, LLC and Sunriver Environmental, LLC — NWN Water of Oregon filed an application for regulatory approval from the OPUC for the Sunriver Water, LLC acquisition in October 2018. We received OPUC approval for the transaction in April 2019. Sunriver Environmental, LLC is not subject to the OPUC's jurisdiction. The transaction is expected to close in the first half of 2019.
Spirit Lake East Water Company and Lynnwood Water - Gem State filed an application for regulatory approval from the IPUC for these Coeur d'Alene, Idaho acquisitions in February 2019. We expect the transaction to close in the summer of 2019.
Estates Water Systems Inc. and Monterra Inc - Cascadia filed an application for regulatory approval from the WUTC for these Sequim, Washington acquisitions in February 2019, and received approval in April 2019. The transaction closed in May 2019.


The acquisitions described above, combined with NW Holdings' other water acquisitions to date, are expected to represent approximately $70$110 million of aggregate investment.


OREGONWASHINGTON GENERAL RATE CASE.On October 26, As previously disclosed, on December 31, 2018, the OPUC issued an order regarding NW Natural'sNatural filed a general rate case (Order) originally filed in December 2017 and approved the following items effective beginning November 1, 2018:
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;
ReturnWashington. Also as previously disclosed, on equity of 9.4%;
Cost of capital of 7.317%;
Rate base of $1.186 billion, or an increase of $300 million since the last rate case in 2012;
Pension expenses will be recovered through rates with an increase of $8.1 million to revenue requirement; and
The sharing of asset management revenues related to utility pipeline and storage assets will be 90%/10% with 90% being credited to customers. Previously customers received 67% of these revenues.

The Order also froze NW Natural’s pension balancing account as of October 31, 2018 and directedMay 23, 2019, NW Natural and the other parties to the rate case to engage in further regulatory proceedings to resolve open issues with respect to the recovery of the pension balancing account, and treatment of the 10-month deferral period benefits associatedproceeding filed two settlements with the TCJA.Washington Utilities and Transportation Commission (WUTC); a general joint settlement agreement, and a multi-party settlement agreement on NW Natural’s proposed decoupling tariff. On October 21, 2019, the WUTC issued a final order approving the general joint settlement and rejecting the multiparty settlement on decoupling (Order).



4455


Table of Contents









In MarchUnder the Order, effective November 1, 2019, the OPUC issued an order resolving the remainingNW Natural is authorized to implement base rate case items. As a result,changes designed to increase annual revenues from its Washington customers by approximately $5.14 million. The rate increases are based on the following items were recorded in the first quarter of 2019:assumptions:
Applied $7.1 million of TCJA benefits deferred from January 1, 2018 and October 31, 2018, as a reduction against the pension balancing account;
Credited to customers' benefit $5.4 million of deferred income taxes as a reduction against the pension balancing account;
Reduced the amount of the frozen balancing account by an additional $10.5 million; and
Reduced the interest rate on the pension balancing account from NW Natural's authorized rate of return of 7.317 percent to 4.3 percent.

The items above resulted in the recovery of $12.5 million of deferred pension expenses by applying deferred tax benefits against the pension balancing account. Recognition of these items resulted in higher operations and maintenance expense and other income (expense), net with offsetting benefits recognized in operating revenues and income tax expense. Additional pension expenses of $10.5 million from the regulatory disallowance were also recognized in operations and maintenance expense and other income (expense), net. Deferred regulatory interest income of $3.8 million was also realized in other income (expense), net.

Commencing April 1, 2019, the OPUC also ordered the following:
Provide an annual credit to base rates of $3.4 million for excess deferred income taxes to all customers, subject to the average rate assumption method;
Provide an additional annual credit of $3.0 million to sales service customers for five years;
Collect the remainder of the pension balancing account over ten years in a customer tariff of $7.3 million per year; and
An increase in rate base of $15.4 million, and corresponding increase to revenue requirement of $1.4 million.

If NW Natural files a general rate case within five years of the date of the Pension Order, this revenue requirement may be adjusted as part of that general rate case.

WASHINGTON GENERAL RATE CASE. On December 31, 2018, NW Natural filed for a general rate case in the state of Washington. The requested increase, the first in approximately 10 years, is intended to recover operating costs and investments made in the Washington distribution system and is based upon the following assumptions or requests:
Capital structure of 49.5%50.0% long-term debt, 1.0% short-term debt, and 49.5%49.0% common equity;
Return on equity of 10.3%9.40%;
Cost of capital of 7.63%7.161%; and
Rate base of $186.5$173.7 million, an increase of $58.7$46 million since the last rate case.


The filing also includes a proposalOrder authorizes NW Natural to provide federal tax reform benefits to customers related to the TCJA.Tax Cuts and Jobs Act enacted in December 2017. The Order directs NW Natural estimates the tax reform benefits for Washingtonto provide customers to be approximately $20.2 million, which is comprisedwith a rate reduction of excess deferred income taxes of $18.1 million, including a gross up for income taxes, and an estimated $2.1 million associated with interimover one year to reflect the benefit of the lower federal corporate income tax benefits accumulatedrate accumulating from January 1, 2018 through October 31, 2019, and provides an additional annual rate reduction initially set at approximately $0.5 million to November 30, 2019.reflect a benefit from the remeasurement of deferred tax liabilities of approximately $15.0 million.

The Order also permits NW Natural is requesting that the benefitNatural’s recovery of the excess deferred income taxes be provided to customers as annual base rate credits. NW Natural is requesting that the interim tax benefit be provided to customers over two years.

In addition, NW Natural is requesting a decoupling tariff for Washington customers, which is intended to allow the NGD business to continue encouraging customers to conserve energy without adversely affecting earnings due to reductions in sales volumes. The proposed decoupling tariff would also adjust for any deviation from normal usage, including weather.
Finally, NW Natural is requesting that the WUTC review costsenvironmental remediation expenses allocable to Washington related tocustomers for 3.32 percent of environmental remediation expense associated with remediation sites for which costs are shared between Oregon and Washington. The Order disallows approximately $1.5 million of deferred environmental remediation expenses, and consider a mechanism for recovery of these costs. The requested costs are estimatedbut permits insurance proceeds to be applied to offset deferred environmental remediation expenses of approximately 3.32%$3.0 million for a period commencing in February 2011 through November 2018 with additional application of total costs associatedinsurance proceeds for a ten and one-half year period ending December 31, 2029. The order approves an environmental cost recovery mechanism tariff, with those sites relatedannual adjustments, to serving Washington customers.collect prudent environmental remediation expenditures made in the prior year, less that year’s allocation of insurance proceeds. NW Natural expects to recognize an after-tax charge of approximately $1.1 million in the fourth quarter of 2019 as a result of this order.

NW Natural's filing will be reviewed by the WUTC and other stakeholders. The process is anticipated to take up to 11 months. The new rates are expected to take effect December 1, 2019.

INTEGRATED RESOURCE PLAN (IRP). NW Natural files a full IRP biennially for Oregon and Washington with the OPUC and WUTC, respectively. NW Natural filed its 2018 Oregon and Washington IRPs in August 2018, and received both a letter of compliance from the WUTC and acknowledgment by the OPUC in February 2019. The 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
RENEWABLE NATURAL GAS. On June 19, 2019, the Oregon legislature passed Senate Bill 98 (SB98), which enables natural gas utilities to procure or develop renewable natural gas (RNG) on behalf of their Oregon customers. Renewable natural gas is produced from local organic materials like food, agricultural and forestry waste, wastewater, or landfills. Methane is captured from these local organic materials as they decompose and conditioned to pipeline quality, so it can be added into the existing natural gas system thereby reducing the carbon content of the energy supply.

SB98 outlines the following parameters for the RNG program including: setting out broad targets for gas utilities to have as much as 30% of the state's pipeline system be carrying RNG by 2050; allowing gas utilities to invest in RNG infrastructure for the production, processing, pipeline interconnection and distribution of RNG to their customers; and creating a limit of 5% of a utility's revenue requirement that can be used to cover the incremental cost of RNG to protect utilities and ratepayers from excessive costs as the RNG market develops.

The bill was signed into law by the governor in July 2019. The OPUC regulations, NW Naturalopened a docket in August to begin the rulemaking process for the bill, which is requiredexpected to conclude with the OPUC adopting rules by July 31, 2020.

CORPORATE ACTIVITY TAX. The State of Oregon enacted a Corporate Activity Tax (CAT) that is applicable to all businesses with annual Oregon sourced gross revenue in excess of $1 million. The CAT is in addition to the state's corporate income tax and imposes a 0.57% tax on certain gross receipts sourced to Oregon less a reduction for a portion of cost of goods sold or labor. The CAT legislation became effective September 29, 2019 and applies to calendar years beginning January 1, 2020. We expect 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 studyan application with the OPUC. In September 2017, the partiesOPUC to the docket filed a settlementallow us to defer this additional expense, with the Commission requesting approvalrecovery of updated depreciation rates. In January 2018, the OPUC issued an order adopting the stipulation. A corresponding docket was filed and approved in Washington for the same depreciation rates. FERC also adopted the new depreciation rates which werethese deferred amounts to be determined through future rate case proceedings.  



4556


Table of Contents







included in the rate petition described in Regulation and Rates - FERC above. The new depreciation rates were effective and implemented as of November 1, 2018 for Oregon, Washington, and FERC regulated customers. The new depreciation rates did not materially change NW Natural's depreciation rates and did not have a material impact on financial results.


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 because a significant portion of NGD margin is derived from natural gas sales to residential and commercial customers. 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—Rate Mechanisms" Mechanisms" in NW Natural's 2018 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 in Oregon, and NWN Gas Reserves, which is a wholly-owned subsidiary of Energy Corp.


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 March 31, QTD Change Three Months Ended September 30, Nine Months Ended September 30, QTD Change YTD Change
Dollars and therms in thousands, except EPS data 2019 2018 
NGD net income $41,206
 $39,883
 $1,323
In thousands, except EPS data 2019 2018 2019 2018 QTD Change YTD Change
NGD net income (loss) $(19,570) $(11,983) $22,848
 $24,930
  
EPS - NGD segment $1.42
 $1.39
 $0.03
 $(0.64) $(0.42) $0.77
 $0.86
 $(0.22) $(0.09)
Gas sold and delivered (in therms) 447,738
 406,953
 40,785
 168,023
 162,098
 829,808
 786,444
 5,925
 43,364
NGD margin(1)
 $152,655
 $132,716
 $19,939
 $55,903
 $54,940
 $289,539
 $257,402
 $963
 $32,137
(1) See Natural Gas Distribution Margin Table below for additional detail


THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. NGD net loss increased $7.6 million, or $0.22 per share. The primary factors contributingincrease was driven by the timing effects of the implementation of the 2018 Oregon general rate case with regard to pension costs and tax reform, which resulted in a $4.1 million increase in pre-tax loss for the period. See "Executive Summary" above.

In addition, net loss increased due to the $1.3following factors:

•
a$1.7 million increase in depreciation expense due to NGD plant additions; and
a $1.4 million or $0.03 per share, increase in NGD net income were as follows:interest expense on long-term debt balances; partially offset by
a $19.9$1.0 million increase in NGD margin primarily due to:
a $10.3$0.7 million increase from customer growth;
a $5.1 million increase from lease revenue generated from NW Natural's North Mist storage contract which commenced service in May 2019; partially offset by
a $3.8 million decrease due to an adjustment to the tax reform deferral estimate in the third quarter of 2018;
a $1.2 million decrease from higher decoupling deferrals partially offset by new Oregon customer rates from the 2018 Oregon rate case.

For the three months ended September 30, 2019, total NGD volumes sold and delivered increased 4% over the same period in 2018.

NINE MONTHS ENDEDSEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. The primary factors contributing to the $2.1 million, or $0.09 per share, decrease in NGD net income were as follows:

pension expenses of $12.5 million recognized in operations and maintenance expenses and other income (expense), net from recoveries of NW Natural's pension balancing account, which are primarily offset within NGD margin and tax expense;
a $11.3 million increase in expenses related to higher pension costs within operations and maintenance expense and other income (expense), net, as NW Natural began collecting costs through customer rates on November 1, 2018 rather than deferring a portion to the pension balancing account;
a $10.5 million regulatory disallowance of NW Natural's pension balancing account reflected within operations and maintenance expenses and other income (expense), net;
•
a $4.1 million increase in interest expense driven by $1.7 millionhigher interest on long term debt, $1.5 million higher commercial paper interest, and $0.8 million in lower AFUDC debt interest;
a $3.6 million increase in depreciation expense due to NGD plant additions; and
a $2.5 million decrease in AFUDC equity interest.


57

Table of Contents




The decreases were partially offset by:
•
a $32.1 millionincrease in NGD margin due to:
a $14.0 million increase due to new Oregon customer rates from the 2018 Oregon rate case;
a $4.4 million increase from customer growth;
a $7.1 million increase due to revenues recognized in association with recoveries of NW Natural's pension balancing account, which are entirely offset by pension expenses within operations and maintenance and other income (expense), net;
a $2.4$4.5 million increase from customer growth; and
a$1.3 million increase due todriven by colder than average weather in the current period compared to warmer than average weather in 2018,first quarter of 2019 coupled with higher fee revenues from interruptible customers as a result of system restrictions, partially offset by an estimated reserve for environmental cost sharing;
restrictions; and
a $7.2 million decreaseincrease from lease revenue generated from NW Natural's North Mist storage contract which commenced service in NGD income tax expense primarily due to:May 2019; partially offset by
a $2.7$3.8 million decrease from excess deferred incomedue to an adjustment to the tax amortization related to pension balancing account recovery, which was offset by pension expense within operations and maintenance and other income (expense), net;reform deferral estimate in the third quarter of 2018;
a $2.0$5.2 million decrease from additional excessincrease in deferred regulatory interest income taxes amortization related to base rate credits;
a $1.1 million decrease related to the Oregon general rate case order; and
lower pretax income.
These increases were partially offset by:
pension expenses of $12.5 million recognized in operations and maintenance expenses and other income (expense), net, from recoveries of NW Natural's pension balancing account, which are primarily offset within NGD margin and tax expense;
a $10.5$4.4 million regulatory disallowance of NW Natural's pension balancing account reflected within operations and maintenance expenses and other income (expense), net;relates to equity interest recognized in association with the OPUC order discussed above; and
a $3.1$5.0 million increasedecrease in NGD general operations and maintenance expenses associated with increased headcount and general salary increases.income tax expense driven by the return of deferred TCJA benefits to customers through rates.


See "Results of Operations - Regulatory Matters - Regulatory Proceeding Updates" above and Note 910 for more information regarding the pension balancing account.

For the threenine months ended March 31,September 30, 2019, total NGD volumes sold and delivered increased 10%6% over the same period in 2018.


In May 2019, the Office and Professional Employees International Union, Local 11 (OPEIU) filed a notification of intent to negotiate its current collective bargaining agreement with NW Natural. The current agreement expires November 30, 2019. Negotiations between the OPEIU and NW Natural commenced during the second quarter of 2019.

4658


Table of Contents








NATURAL GAS DISTRIBUTION MARGIN TABLE. The following table summarizes the composition of NGD gas volumes, revenues, and cost of sales:
 Three Months Ended March 31, 
Favorable/
(Unfavorable)
 Three Months Ended September 30, Nine Months Ended September 30, 
Favorable/
(Unfavorable)
In thousands, except degree day and customer data 2019 2018 QTD Change 2019 2018 2019 2018 QTD Change YTD Change
NGD volumes (therms):                  
Residential and commercial sales 318,103
 278,019
 40,084
 60,427
 57,368
 480,987
 439,024
 3,059
 41,963
Industrial sales and transportation 129,635
 128,934
 701
 107,596
 104,730
 348,821
 347,420
 2,866
 1,401
Total NGD volumes sold and delivered 447,738
 406,953
 40,785
 168,023
 162,098
 829,808
 786,444
 5,925
 43,364
NGD operating revenues:      
Operating Revenues            
Residential and commercial sales $251,118
 $245,584
 $5,534
 $65,206
 $68,768
 $419,502
 $420,878
 $(3,562) $(1,376)
Industrial sales and transportation 16,021
 17,389
 (1,368) 12,280
 12,780
 40,511
 43,572
 (500) (3,061)
Other revenues 11,902
 (5,040) 16,942
Total NGD operating revenues 279,041
 257,933
 21,108
Other distribution revenues 430
 3,417
 12,678
 (3,144) (2,987) 15,822
Other regulated services 5,147
 112
 7,397
 219
 5,035
 7,178
Total operating revenues 83,063
 85,077
 480,088
 461,525
 (2,014) 18,563
Less: Cost of gas 105,513
 108,164
 2,651
 22,659
 25,593
 163,335
 175,864
 2,934
 12,529
Less: Environmental remediation expense 8,947
 4,624
 (4,323) 967
 1,022
 7,258
 7,528
 55
 270
Less: Revenue taxes 11,926
 12,429
 503
 3,534
 3,522
 19,956
 20,731
 (12) 775
NGD margin $152,655
 $132,716
 $19,939
 $55,903
 $54,940
 $289,539
 $257,402
 $963
 $32,137
NGD margin:(1)
      
            
Margin:(1)
            
Residential and commercial sales $132,946
 $128,454
 $4,492
 $42,859
 $44,069
 $246,680
 $236,559
 $(1,210) $10,121
Industrial sales and transportation 8,556
 8,304
 252
 7,309
 7,283
 23,488
 22,625
 26
 863
Miscellaneous revenues 3,366
 1,358
 2,008
 521
 1,167
 4,412
 3,604
 (646) 808
Gain from gas cost incentive sharing (769) 880
 (1,649)
Gain (loss) from gas cost incentive sharing 150
 80
 (696) 1,088
 70
 (1,784)
Other margin adjustments(2)
 8,556
 (6,280) 14,836
 (82) 2,229
 8,262
 (6,693) (2,311) 14,955
NGD margin $152,655
 $132,716
 $19,939
Distribution margin $50,757
 $54,828
 $282,146
 $257,183
 $(4,071) $24,963
Other regulated services 5,146
 112
 7,393
 219
 5,034
 7,174
NGD Margin $55,903
 $54,940
 $289,539
 $257,402
 $963
 $32,137
            
Degree days(3)
                  
Average(4)
 1,329
 1,316
 13
 9
 10
 1,646
 1,637
 (1) 9
Actual 1,450
 1,223
 19%
Percent colder (warmer) than average weather 9% (7)%  
Actual(5)
 28
 —
 1,638
 1,449
 NM
 13%
Percent colder (warmer) than average weather(5)
 NM
 NM
 — % (11)%    
                  
 As of March 31, Change As of September 30,        
NGD Meters - end of period: 2019 2018   2019 2018 Change Growth    
Residential meters 683,796
 672,570
 11,226
 685,556
 674,167
 11,389
 1.7%    
Commercial meters 69,611
 68,322
 1,289
 68,892
 68,192
 700
 1.0%    
Industrial meters 1,040
 1,028
 12
 1,010
 1,027
 (17) (1.7)%    
Total number of meters 754,447
 741,920
 12,527
 755,458
 743,386
 12,072
 1.6%    
Meter growth:      
Residential meters 1.7%    
Commercial meters 1.9%    
Industrial meters 1.2%    
Total meter growth 1.7%    


(1) 
Amounts reported as margin for each category of meters are operating revenues, which are net of revenue taxes, less cost of gas and environmental remediation expense, subject to earnings test considerations.considerations, as applicable.
(2) 
Other margin adjustments include net revenue deferrals of $0.1 million and $2.2 million for the quarters ended September 30, 2019 and 2018, respectively, and net revenue recoveries of $6.6$6.3 million and revenue deferrals of $6.4$7.0 million for the quartersnine months ended March 31,September 30, 2019 and March 31, 2018, respectively, associated with the decline of the U.S. federal corporate income tax rate.
(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. Through October 31, 2018, average weather is calculated over the period 1986 - 2010, as determined in NW Natural's 2012 Oregon general rate case. Beginning November 1, 2018, average weather is calculated over the period May 31, 1992 through May 30, 2017, as determined in NW Natural's 2018 Oregon general rate case.
(5)
NM indicates that the calculated value is not meaningful.



4759


Table of Contents








Residential and Commercial Sales
Residential and commercial sales highlights include:
 Three Months Ended March 31, QTD Change Three Months Ended September 30, Nine Months Ended September 30, QTD Change YTD Change
In thousands 2019 2018  2019 2018 2019 2018 
Volumes (therms):                  
Residential sales 203,551
 177,971
 25,580
 32,088
 30,758
 295,106
 269,643
 1,330
 25,463
Commercial sales 114,552
 100,048
 14,504
 28,339
 26,610
 185,881
 169,381
 1,729
 16,500
Total volumes 318,103
 278,019
 40,084
 60,427
 57,368
 480,987
 439,024
 3,059
 41,963
Operating revenues:                  
Residential sales $173,817
 $166,587
 $7,230
 $41,989
 $43,119
 $285,432
 $279,350
 $(1,130) $6,082
Commercial sales 77,301
 78,997
 (1,696) 23,217
 25,649
 134,070
 141,528
 (2,432) (7,458)
Total operating revenues $251,118
 $245,584
 $5,534
 $65,206
 $68,768
 $419,502
 $420,878
 $(3,562) $(1,376)
NGD margin:                  
Residential:                  
Sales $105,013
 $90,529
 $14,484
 $30,526
 $28,563
 $181,790
 $160,699
 $1,963
 $21,091
Alternative revenue:                  
Weather normalization (6,781) 1,843
 (8,624) —
 —
 (3,459) 2,985
 —
 (6,444)
Decoupling (2,277) (2,409) 132
 (896) 824
 (1,922) (326) (1,720) (1,596)
Amortization of alternative revenue 1,063
 783
 280
 164
 133
 1,537
 1,184
 31
 353
Total residential NGD margin 97,018
 90,746
 6,272
 29,794
 29,520
 177,946
 164,542
 274
 13,404
Commercial:                  
Sales 45,186
 38,297
 6,889
 14,940
 13,512
 81,016
 70,575
 1,428
 10,441
Alternative revenue:                  
Weather normalization (2,221) 593
 (2,814) —
 —
 (1,192) 1,004
 —
 (2,196)
Decoupling (2,027) 2,594
 (4,621) (728) 1,982
 (3,186) 6,699
 (2,710) (9,885)
Amortization of alternative revenue (5,010) (3,776) (1,234) (1,147) (945) (7,904) (6,261) (202) (1,643)
Total commercial NGD margin 35,928
 37,708
 (1,780) 13,065
 14,549
 68,734
 72,017

(1,484) (3,283)
Total NGD margin $132,946
 $128,454
 $4,492
 $42,859
 $44,069
 $246,680
 $236,559
 $(1,210) $10,121


THREE MONTHS ENDEDMARCH 31, SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. The $4.5 million increase in residentialResidential and commercial NGD margin decreased $1.2 million. The decrease was driven by an$4.4 million higher decoupling deferrals primarily due to the change in the pattern of baseline usage in the current period as a result of the 2018 Oregon rate case. This was partially offset by new Oregon customer rates and customer growth.

NINE MONTHS ENDEDSEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. Residential and commercial margin increased $10.1 million. The increase in usagewas driven by new Oregon customer rates from the 2018 Oregon rate case, customer growth, and higher residential volumes due to colder than average weather in the current period compared to warmer than average weather in the prior period, and customer growth.partially offset by higher decoupling deferrals in the current period.



60

Table of Contents




Industrial Sales and Transportation
Industrial sales and transportation highlights include:
 Three Months Ended March 31, QTR Change Three Months Ended September 30, Nine Months Ended September 30, QTD Change YTD Change
In thousands 2019 2018  2019 2018 2019 2018 
Volumes (therms):                  
Industrial - firm sales 9,892
 10,008
 (116) 9,277
 8,203
 26,623
 26,069
 1,074
 554
Industrial - firm transportation 50,366
 45,376
 4,990
 37,123
 34,846
 127,678
 118,590
 2,277
 9,088
Industrial - interruptible sales 13,784
 15,605
 (1,821) 9,064
 9,871
 34,081
 37,851
 (807) (3,770)
Industrial - interruptible transportation 55,593
 57,945
 (2,352) 52,132
 51,810
 160,439
 164,910
 322
 (4,471)
Total volumes 129,635
 128,934
 701
 107,596
 104,730
 348,821
 347,420
 2,866
 1,401
NGD margin:                  
Industrial - firm and interruptible sales $3,116
 $3,237
 $(121) $2,777
 $2,921
 $8,853
 $8,626
 $(144) $227
Industrial - firm and interruptible transportation 5,440
 5,067
 373
 4,532
 4,362
 14,635
 13,999
 170
 636
Industrial - sales and transportation $8,556
 $8,304
 $252
 $7,309
 $7,283
 $23,488
 $22,625
 $26
 $863



48

Table of Contents




THREE MONTHS ENDEDMARCH 31, SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. Sales and transportation margin remained flat due to rate increases from the 2018 Oregon rate case and an increase in volumes of 2.9 million therms, or 3%, partially offset by interruptible customers switching from industrial to commercial rate schedules.

NINE MONTHS ENDEDSEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. Industrial sales and transportation margin increased $0.9 million driven by rate increases from the 2018 Oregon rate case and an increase in volumes increased by 0.7of 1.4 million therms, or 1%, andpartially offset by interruptible customers switching from industrial NGD margin increased by $0.3 million primarily due to colder than average weather in 2019 compared to warmer than average weather in 2018.commercial rate schedules.


Cost of Gas
Cost of gas highlights include:
 Three Months Ended March 31, QTD Change Three Months Ended September 30, Nine Months Ended September 30, QTD Change YTD Change
Dollars and therms in thousands 2019 2018 
In thousands 2019 2018 2019 2018 QTD Change YTD Change
Cost of gas $105,513
 $108,164
 $(2,651) $22,659
 $25,593
 $163,335
 $175,864
 
Volumes sold (therms)(1)
 341,779
 303,632
 38,147
 78,768
 75,442
 541,691
 502,944
 3,326
 38,747
Average cost of gas (cents per therm) $0.31
 $0.36
 $(0.05) $0.29
 $0.34
 $0.30
 $0.35
 $(0.05) $(0.05)
Gain (loss) from gas cost incentive sharing(2)
 $(769) $880
 $(1,649) $150
 $80
 $(696) $1,088
 $70
 $(1,784)
(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"Reserves" in NW Natural's 2018 Form 10-K.


THREE MONTHS ENDEDMARCH 31, SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. Cost of gas decreased $2.7$2.9 million, or 2%11%, primarily due to a 15% decrease in average cost of gas due to lower natural gas prices within the PGA, partially offset by a 4% increase in volumes sold.

NINE MONTHS ENDEDSEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. Cost of gas decreased $12.5 million, or 7%, primarily due to a 14% decrease in average cost of gas from lower gas costs within the PGA, partially offset by a 13%an 8% increase in volumes sold driven by customer growth and colder than average weather in 2019 compared to warmer than average weather in 2018.2018 compared to average weather in the current period.


Other Regulated Services
Other regulated services highlights include:
  Three Months Ended September 30, Nine Months Ended September 30, QTD Change YTD Change
In thousands 2019 2018 2019 2018  
North Mist storage services $5,088
 $—
 $7,221
 $—
 $5,088
 $7,221
Other services 58
 112
 172
 219
 (54) (47)
Total other regulated services $5,146
 $112
 $7,393
 $219
 $5,034
 $7,174

61

Table of Contents





THREE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. Other regulated services margin increased $5.0 million primarily due to the commencement of storage services at the North Mist expansion facility in May 2019. See Note 7 for information regarding North Mist expansion lease accounting.

NINE MONTHS ENDEDSEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. Other regulated services margin increased $7.2 million primarily due to the commencement of storage services at the North Mist expansion facility in May 2019. See Note 7 for information regarding North Mist expansion lease accounting.

Other
Other activities aggregated and reported as other at NW Natural include the non-NGD storage activity at Mist as well as asset management services and the appliance retail center operations. Other activities aggregated and reported as other at NW Holdings include NWN Energy's equity investment in Trail West Holding, LLC (TWH), which is pursuing the development of a proposed natural gas pipeline through its wholly-owned subsidiary, Trail West Pipeline, LLC (TWP); NNG Financial's investment in Kelso-Beaver Pipeline (KB Pipeline); and NWN Water, which owns and continues to pursue investments in the water sector. See Note 4 for further discussion of our business segment and other, as well as our direct and indirect wholly-owned subsidiaries, and Note 1314 for further details on our investment in TWH.


The following table presents the results of activities aggregated and reported as other for both NW Holdings and NW Natural:
 
Three Months Ended
March 31,
 QTD Change Three Months Ended September 30, Nine Months Ended September 30, QTD Change 
YTD
Change
In thousands, except EPS data 2019 2018  2019 2018 2019 2018 
NW Natural other - net income $2,689
 $2,131
 $558
 $1,982
 $708
 $6,513
 $5,538
 $1,274
 $975
Other NW Holdings activity (477) (3) (474) (918) 131
 (2,398) 60
 (1,049) (2,458)
NW Holdings other - net income $2,212
 $2,128
 $84
 $1,064
 $839
 $4,115
 $5,598
 $225
 $(1,483)
EPS - NW Holdings - other $0.08
 $0.07
 $0.01
 $0.03
 $0.03
 $0.14
 $0.20
 $—
 $(0.06)


THREE MONTHS ENDEDMARCH 31, SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. Overall other net income remained flat at NW Holdings and increased by $1.3 million at NW Natural. The increase at NW Natural was primarily due to lower operations and maintenance costs and other benefits, partially offset by a decrease in revenues from non-NGD gas storage operations at Mist. NW Holdings other net income remained flat due to the increase at NW Natural, offset by increases in professional service costs, business development costs, and expenses associated with integrating the water business.

NINE MONTHS ENDEDSEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. Other net income increased by $0.1decreased $1.5 million at NW Holdings and increased by $0.6$1.0 million at NW Natural. The increase at NW Natural was primarily due to lower operations and maintenance costs and other benefits, partially offset by a decrease in revenues from non-NGD gas storage operations at Mist. The decrease at NW Holdings was due to the increase at NW Natural, offset by increases in professional service costs, business development costs, and expenses associated with integrating the water business.

See Note 4 and Note 13 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 March 31,   Three Months Ended September 30, Nine Months Ended September 30, QTD YTD
In thousands 2019 2018 QTD Change 2019 2018 2019 2018 Change Change
NW Natural $50,434
 $39,500
 $10,934
 $37,710
 $37,709
 $125,436
 $115,108
 $1
 $10,328
Other NW Holdings operations and maintenance 1,048
 23
 1,025
 3,176
 (140) 6,418
 12
 3,316
 6,406
NW Holdings $51,482
 $39,523
 $11,959
 $40,886
 $37,569
 $131,854
 $115,120
 $3,317
 $16,734


THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. Operations and maintenance expense increased increased by $12.0$3.3 million at NW Holdings and remained flat at NW Natural. The increase at NW Holdings was primarily due to increases in professional service costs, business development costs, and expenses associated with integrating the water business.

NINE MONTHS ENDEDSEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. Operations and maintenance expense increasedby $16.7 million and $10.9$10.3 million at NW Holdings and NW Natural, respectively, primarily due to the following:following which occurred at NW Natural:


4962


Table of Contents










a $4.6 million increase in pension expenses (service cost component) due to recovery of amounts in NW Natural's pension balancing account, which was primarily offset within NGD margin and income tax benefits;
a $3.9 million regulatory pension disallowance (service cost component) as a result of the March 2019 OPUC order in the Oregon general rate case; and
a $3.1$2.9 million increase from higher pension costs (service cost component) as NW Natural began collecting costs through customer rates on November 1, 2018 rather than deferring a portion to the pension balancing account.

The $6.4 million increase in other NW Holdings operations and maintenance expense was primarily due to increases in professional service costs, business development costs, and expenses associated with general NGD salary and benefit increases.integrating the water business.


See "Results of Operations - Regulatory Matters - Regulatory Proceeding Updates" above and Note 910 for more information regarding the pension balancing account.


Depreciation and Amortization
Depreciation and amortization highlights include:
 Three Months Ended March 31,   Three Months Ended September 30, Nine Months Ended September 30, QTD YTD
In thousands 2019 2018 QTD Change 2019 2018 2019 2018 Change Change
NW Natural $21,504
 $20,868
 $636
 $23,074
 $21,454
 $66,821
 $63,412
 $1,620
 $3,409
Other NW Holdings depreciation and amortization 68
 7
 61
 $301
 $31
 513
 95
 270
 418
NW Holdings $21,572
 $20,875
 $697
 $23,375
 $21,485
 $67,334
 $63,507
 $1,890
 $3,827


THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. Depreciation and amortization expense increased $0.7$1.9 million at both NW Holdings and $1.6 million at NW Natural primarily due to NGD plant additions.


NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. Depreciation and amortization expense increased $3.8 million and $3.4 million at NW Holdings and NW Natural, respectively, primarily due to NGD plant additions.

Other Income (Expense), Net
Other income (expense), net highlights include:
 Three Months Ended March 31,   Three Months Ended September 30, Nine Months Ended September 30, QTD YTD
In thousands 2019 2018 QTD Change 2019 2018 2019 2018 Change Change
NW Natural other income (expense), net $(13,768) $(815) $(12,953) $(2,323) $(320) $(18,905) $(1,168) $(2,003) $(17,737)
Other NW Holdings activity 21
 (19) 40
 56
 8
 123
 29
 48
 94
NW Holdings other income (expense), net $(13,747) $(834) $(12,913) $(2,267) $(312) $(18,782) $(1,139) $(1,955) $(17,643)


THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. Other income (expense), net decreased $13.0$2.0 million at both NW Holdings and NW Natural. The decrease was primarily due to the following factors:
a $3.5 million decrease from higher pension costs (non-service cost component) as NW Natural began collecting costs through customer rates on November 1, 2018 rather than deferring a portion to the pension balancing account; and
a $1.0 million decrease from lower NGD AFUDC equity interest income primarily driven by placing the North Mist expansion project into service in May 2019; partially offset by
a $1.8 million increase from lower pension costs (non-service cost component) from lower net periodic benefit costs incurred in the current period in comparison to the prior period; and
a $0.4 million increase in regulatory interest income primarily relating to higher deferred gas costs in the current period in comparison to the prior period.

NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. Other income (expense), net decreased $17.6 million and $12.9$17.7 million at NW Holdings and NW Natural, respectively. The decrease was primarily due to the following factors:
a $8.4 million decrease from higher pension costs (non-service cost component) as NW Natural began collecting costs through customer rates on November 1, 2018 rather than deferring a portion to the pension balancing account;
a $7.9 million decrease from higher pension costs (non-service cost component) related to the recovery of NW Natural's pension balancing account, which is largely offset within NGD margin and tax expense;
a $6.6 million regulatory pension disallowance (non-service cost component) as a result of the March 2019 OPUC order in the Oregon general rate case; and
a $2.0$2.5 million decrease from higher pension costs (non-service cost component) as NW Natural began collecting costs through customer rates on November 1, 2018 rather than deferring a portion toin NGD AFUDC equity interest income primarily driven by placing the pension balancing account;North Mist expansion project into service in May 2019; partially offset by

63

Table of Contents




a $3.8$5.2 million increase in regulatory interest income, of which $4.4 million is related to the realization of the equity interest component of financing costs accrued on the pension balancing account as recovery of the deferral began in March 2019.2019; and

a $2.7 million increase from lower pension costs (non-service cost component) from lower net periodic benefit costs incurred in the current period in comparison to the prior period.

See "Results of Operations - Regulatory Matters - Regulatory Proceeding Updates" above and Note 910 for more information regarding the pension balancing account.


Interest Expense, Net
Interest expense, net highlights include:
 Three Months Ended March 31,   Three Months Ended September 30, Nine Months Ended September 30, QTD YTD
In thousands 2019 2018 QTD Change 2019 2018 2019 2018 Change Change
NW Natural $10,133
 $9,274
 $859
 $10,459
 $9,007
 $30,979
 $27,052
 $1,452
 $3,927
Other NW Holdings interest expense, net 72
 —
 72
 $489
 $(1) 828
 (1) 490
 829
NW Holdings $10,205
 $9,274
 $931
 $10,948
 $9,006
 $31,807
 $27,051
 $1,942
 $4,756


THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. Interest expense, net increased $0.9$1.9 million and $1.5 million at both NW Holdings and NW Natural, respectively, primarily due to an increase of $1.2$1.4 million in NGD interest on higher long-term debt balances and a $0.5 million decrease in the debt portion of AFUDC due to the placement of the North Mist expansion project into service in May 2019, partially offset by a decrease of $0.4 million in NGD commercial paper interest expense on lower short-term debt balances.

NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. Interest expense, net increased $4.8 million and$3.9 million at NW Holdings and NW Natural, respectively, primarily due to an increase of $1.7 million in NGD interest on higher long-term debt balances and an increase of $1.5 million in NGD commercial paper interest expense from higher short-term debt balances partially offset byas well as a $0.2$0.8 million increasedecrease in the debt portion of AFUDC.AFUDC due to the placement of the North Mist expansion project into service in May 2019.



50

Table of Contents




Income Tax Expense
Income tax expense highlights include:
  Three Months Ended March 31,  
In thousands 2019 2018 QTD Change
NW Holdings income tax expense $8,675
 $15,632
 $(6,957)
NW Natural income tax expense $8,848
 $15,635
 $(6,787)
  Three Months Ended September 30, Nine Months Ended September 30, QTD YTD
In thousands 2019 2018 2019 2018 Change Change
NW Holdings income tax (benefit) expense $(4,343) $(4,285) $4,957
 $11,191
 $(58) $(6,234)
NW Natural income tax (benefit) expense $(4,013) $(4,333) $5,820
 $11,174
 $320
 $(5,354)


THREE MONTHS ENDED MARCH 31,SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. Income tax benefits increased $0.1 million and decreased $0.3 million at NW Holdings and NW Natural, respectively. Increases in income tax benefits were primarily due to a higher pretax loss in the current period, offset by decreases due to the timing of tax benefits and expenses recognized in association with the return of tax reform benefits to customers. See "Executive Summary - Deferred TCJA benefits and timing variance" above.

NINE MONTHS ENDED SEPTEMBER 30, 2019 COMPARED TO SEPTEMBER 30, 2018. Income tax expense decreased $7.0$6.2 million and $6.8$5.4 million at NW Holdings and NW Natural, respectively. The decrease was primarily related to the income tax implications of the March 2019 OPUC order, including commencement of the return of deferred TCJA benefits to customers and the regulatory pension disallowance, $2.7 million from excess deferredas well as lower pretax income tax amortization related toin the pension balancing account recovery which was offset by pension expense related to the pension balancing account, and $2.0 million of excess deferred income tax amortization related to base rate credits. The remaining decrease was primarily attributable to a decrease in pre-tax NGD operating income.current period.
 
See "Results of Operations - Regulatory Matters - Regulatory Proceeding Updates" above, Note 9,10, and Note 1011 for information regarding the application of excess deferred income tax benefits.


Pending sale of Gill Ranch Storage
On June 20, 2018, NWN Gas Storage, a wholly owned subsidiary of NW Holdings, entered into a Purchase and Sale Agreement (the Sale Agreement) that provides for the sale by NWN Gas Storage of all of its membership interests in Gill Ranch. Gill Ranch owns a 75% interest in the natural gas storage facility located near Fresno, California known as the Gill Ranch Gas Storage Facility. PG&E owns the remaining 25% interest in the Gill Ranch Facility.


In the Sale Agreement, NWN Gas Storage makes representations and warranties concerning, among other things, Gill Ranch, the Gill Ranch Facility and Gill Ranch’s business and contractual relationships, and agrees to cause Gill Ranch to conduct its business and maintain its properties in the ordinary course, consistent with material agreements and past practice.

64

Table of Contents




The Sale 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.
The closing of the transaction is subject to approval by the CPUC, other customary closing conditions and covenants, including the requirement that all of the representations and warranties be true and correct as of the closing date except, as would not, in the case of certain representations and warranties, be reasonably expected to have a material adverse effect on Gill Ranch. The agreement is currently subject to termination by either party if the transaction has not closed by JuneDecember 20, 2019, subject to automatic2019. The parties are considering an extension for six months ifof this date in the event CPUC hasapproval is not issued an order approving the transactionobtained by that date.time.
In July 2018, Gill Ranch filed an application with the CPUC for approval of this transaction. On February 14, 2019, the active parties to the CPUC proceeding filed a settlement agreement with the CPUC. The CPUC is expectedOne of the parties to rule on the settlement agreement, within 90 daysthe CPUC's Office of its filing, but may grant further time for public comment. We expect an order on this matterthe Safety Advocate, has filed to withdraw from the settlement and currently opposes approval of the application. On October 31, 2019, the CPUC Administrative Law Judge issued a proposed decision approving the transaction, which must be approved by the end of June.CPUC to be effective. A CPUC ruling on the proposed decision is expected in late 2019 or early 2020. We continue to strive to close this transaction.
On January 29, 2019, PG&E filed voluntary petitions for relief under chapter 11 bankruptcy. Although we do not currently anticipate that the PG&E filing will affect the sale of Gill Ranch, we cannot fully predict the course of the bankruptcy proceedings or the impact on the sale and will continue to monitor the situation closely. We will continue to seek to close the transaction in the first half of 2019.
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 of NW Holdings for all periods presented. See Note 1718 for more information on the Sale Agreement and the results of our discontinued operations.
The CPUC regulates Gill Ranch under a market-based rate model which allows for the price of storage services to be set by the marketplace. The CPUC also regulates the issuance of securities, system of accounts, and regulates intrastate storage services. The California Department of Oil Gas and Geothermal Resources (DOGGR) regulations for gas storage wells were finalized in June 2018, and the U.S. Department of Transportation's Pipeline and Hazardous Materials Safety Administration (PHMSA) proposed new federal regulations for underground natural gas storage facilities, which are expected to be finalized during 2019 and increase costs for all storage providers. NW Holdings will continue to monitor and assess the new regulations until the sale is complete.


Short-term liquidity for Gill Ranch is supported by cash balances, internal cash flow from operations, equity contributions from its parent company, and, if necessary, additional external financing.



51

Table of Contents




FINANCIAL CONDITION
Capital Structure
One of our long-term goals is to maintain a strong consolidated capital structure with a long-term target utility capital structure of 50% common stock and 50% long-term debt at NW Natural. When additional capital is required, debt or equity securities are issued depending on both the target capital structure and market conditions. These sources of capital are also used to fund long-term debt retirements and short-term commercial paper maturities. See "Liquidity and Capital Resources" below and Note 8.9.
Achieving the target capital structure and maintaining sufficient liquidity to meet operating requirements are necessary to maintain attractive credit ratings and provide access to capital markets at reasonable costs.


NW Holdings' consolidated capital structure was as follows:
 March 31, December 31, September 30, December 31,
 2019 2018 2018 2019 2018 2018
Common stock equity 46.5% 48.9% 44.4% 46.6% 44.8% 44.4%
Long-term debt 37.0
 43.2
 41.1
 44.5
 44.0
 41.1
Short-term debt, including current maturities of long-term debt 16.5
 7.9
 14.5
 8.9
 11.2
 14.5
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%



65

Table of Contents




NW Natural's consolidated capital structure was as follows:
 March 31, December 31, September 30, December 31,
 2019 2018 2018 2019 2018 2018
Common stock equity 45.1% 48.9% 42.9% 46.8% 44.8% 42.9%
Long-term debt 38.0
 43.2
 42.2
 45.0
 44.0
 42.2
Short-term debt, including current maturities of long-term debt 16.9
 7.9
 14.9
 8.2
 11.2
 14.9
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%


Liquidity and Capital Resources
At March 31,September 30, 2019 and March 31, 2018, NW Holdings had approximately $12.8$10.5 million and $11.2$30.0 million, and NW Natural had approximately $6.8$6.3 million and $10.9$8.9 million of cash and cash equivalents, respectively. In order to maintain sufficient liquidity during periods when capital markets are volatile, NW Holdings and NW Natural may elect to maintain higher cash balances and add short termshort-term borrowing capacity. NW Holdings and NW Natural may also pre-fund their respective capital expenditures when long-term fixed rate environments are attractive.
 
NW Holdings
For NW Holdings, short-term liquidity is primarily provided by cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a multi-year credit facility, and short-term credit facilities. NW Holdings also has a universal shelf registration statement filed with the SEC for the issuance of debt and equity securities. NW Holdings' long-term debt, if any, and equity issuances are primarily used to provide equity contributions to NW Holdings’ operating subsidiaries for operating and capital expenditures and other corporate purposes. NW Holdings' issuance of securities is not subject to regulation by state public utility commissions, but the dividends from NW Natural to NW Holdings are subject to regulatory ring-fencing provisions.


As part of the ring-fencing conditions agreed upon with the OPUC and WUTC in connection with the holding company reorganization, NW Natural may not pay dividends or make distributions to NW Holdings if NW Natural’s credit ratings and common equity ratio 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%. 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 (common equity and long-term debt excluding imputed debt or debt-like lease obligations), NW Natural is required to notify the OPUC, and if the common equity ratio falls below 44%, file a plan with the OPUC to restore its equity ratio to 44%. This condition is designed to ensure NW Natural continues to be adequately capitalized under the holding company structure. Under the WUTC order, the average common equity ratio must not exceed 56%.


52

Table of Contents





At March 31,September 30, 2019, NW Natural satisfied the ring-fencing provisions described above.


NW HOLDINGS DIVIDEND POLICY. 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.


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


NW Natural
For the NGD business segment, short-term borrowing requirements typically peak during colder winter months when the NGD business borrows money to cover the lag between natural gas purchases and bill collections from customers. Short-term liquidity for the NGD business is primarily provided by cash balances, internal cash flow from operations, proceeds from the sale of commercial paper notes, as well as available cash from multi-year credit facilities, short-term credit facilities, company-owned life insurance policies, the sale of long-term debt, and equity contributions from NW Holdings. NW Natural's long-term debt and contributions from NW Holdings are primarily used to finance NGD capital expenditures, refinance maturing debt, and provide temporary funding for other general corporate purposes of the NGD business.

66

Table of Contents




Based on NW Natural's current debt ratings (see "Credit Ratings" below), it 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. In the event NW Natural is not able to issue new debt due to adverse market conditions or other reasons, NW Natural expects that near-term liquidity needs can be met using internal cash flows, issuing commercial paper, receiving equity contributions from NW Holdings, or, for the NGD segment, drawing upon a committed credit facility. NW Natural also has a universal shelf registration statement filed with the SEC for the issuance of secured and unsecured debt securities.


In the event senior unsecured long-term debt ratings are downgraded, or outstanding derivative positions exceed a certain credit threshold, counterparties under derivative contracts could require NW Natural to post cash, a letter of credit, or other forms of collateral, which could expose NW Natural to additional cash requirements and may trigger increases in short-term borrowings while in a net loss position. NW Natural was not required to post collateral at March 31,September 30, 2019. If the credit risk-related contingent features underlying these contracts were triggered on March 31,September 30, 2019, assuming NW Natural's long-term debt ratings dropped to non-investment grade levels, it could have been required to post $0.6$1.5 million in collateral with counterparties. See "Credit Ratings" below and Note 15.16.


Other items that may have a significant impact on NW Natural's liquidity and capital resources include pension contribution requirements and environmental expenditures. For additional information, see Part II, Item 7 "Financial Condition""Financial Condition"in the 2018 Form 10-K.


SHORT-TERM DEBT. The primary source of short-term liquidity for NW Holdings is cash balances, dividends from its operating subsidiaries, in particular NW Natural, available cash from a multi-year credit facility, and short-term credit facilities it may enter into from time to time.


The primary source of short-term liquidity for NW Natural is from the sale of commercial paper and bank loans. NW Holdings and NW Natural have separate bank facilities, and NW Natural has a commercial paper program. In addition to issuing commercial paper or bank loans to meet working capital requirements, including seasonal requirements to finance gas purchases and accounts receivable, short-term debt may also be used to temporarily fund capital requirements. For NW Natural, commercial paper and bank loans are periodically refinanced through the sale of long-term debt or equity contributions from NW Holdings. Commercial paper, when outstanding, is sold through two commercial banks under an issuing and paying agency agreement and is supported by one or more unsecured revolving credit facilities. See “Credit Agreements” below.


At March 31,September 30, 2019 and 2018, NW Holdings had short-term debt outstanding of $176.4$65.6 million and $50.0$100.5 million, respectively,respectively. At September 30, 2019 and 2018, NW Natural had short-term debt outstanding of $176.3$45.5 million and $50.0$100.5 million, respectively. The weighted average interest rate on short-term debt outstanding at March 31,September 30, 2019 was 2.7%.3.4% and 2.1% at NW Holdings and NW Natural, respectively.


Credit Agreements
NW Holdings
NW Holdings has a $100.0 million credit agreement, with a feature that allows it 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.


53

Table of Contents





All lenders under the agreement are major financial institutions with committed balances and investment grade credit ratings as of March 31,September 30, 2019 as follows:
In millions 
Lender rating, by categoryLoan Commitment
AA/Aa$100
A/A1—
Total$100


Based on credit market conditions, it is possible one or more lending commitments could be unavailable to NW Holdings if the lender defaulted due to lack of funds or insolvency; however, NW Holdings does not believe this risk to be imminent due to the lenders' strong investment-grade credit ratings.


The credit agreement permits the issuance of letters of credit in an aggregate amount of up to $40.0 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 March 31,September 30, 2019, with a consolidated indebtedness to total capitalization ratio of 53.5%53.4%.



67

Table of Contents




The 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.

NW Holdings had $2.8 million of letters of credit issued and outstanding, separate from the aforementioned credit agreement, at March 31, 2019.


NW Natural
NW Natural has a $300.0 million credit agreement, with a feature that allows it to request increases in the total commitment amount up to a maximum of $450.0 million. The maturity date of the agreement is October 2, 2023.


All lenders under the agreement are major financial institutions with committed balances and investment grade credit ratings as of March 31,September 30, 2019 as follows:

In millions 
Lender rating, by categoryLoan 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, NW Natural does not believe this risk to be imminent due to the lenders' strong investment-grade credit ratings.


The NW Natural credit agreement permits the issuance of letters of credit in an aggregate amount of up to $60.0 million. The principal amount of borrowings under the credit agreement is due and payable on the maturity date. There were no outstanding balances under this credit agreement or the prior credit agreement at March 31,September 30, 2019 or 2018. 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 March 31,September 30, 2019 and 2018, with consolidated indebtedness to total capitalization ratios of 54.9%53.2% and 51.1%55.2%, respectively.


The 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

54

Table of Contents




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.


CREDIT RATINGS. NW Holdings does not currently maintain ratings with S&P or Moody's. NW Natural's credit ratings are a factor of liquidity, potentially affecting access to the capital markets including the commercial paper market. NW Natural's credit ratings also have an impact on the cost of funds and the need to post collateral under derivative contracts. The following table summarizes NW Natural's current credit ratings:
  S&P Moody's
Commercial paper (short-term debt) A-1 P-2
Senior secured (long-term debt) AA- A1A2
Senior unsecured (long-term debt) n/a A3Baa1
Corporate credit rating A+ n/a
Ratings outlook Stable NegativeStable


In May 2019, Moody's revised NW Natural's ratings outlook from negative to stable. In addition, the senior secured (long-term debt) rating changed from A1 to A2 and the senior unsecured (long-term debt) rating was revised from A3 to Baa1.

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


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


68

Table of Contents





LONG-TERM DEBT. In June 2019, NW Natural did not retireWater, a wholly-owned subsidiary of NW Holdings, entered into a new two-year term loan agreement for $35.0 million. The loan carried an interest rate of 2.65% at September 30, 2019, which is based upon the three-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 issue long termless. 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, 2019, with a consolidated indebtedness to total capitalization ratio of 53.4%.

In June 2019, NW Natural issued $50 million and $90 million of first mortgage bonds (FMBs) with interest rates of 3.141% and 3.869% and maturity dates of June 2029 and June 2049, respectively. In September 2019, NW Natural retired $10.0 million of FMBs with an interest rate of 8.310%. No other long-term debt was retired or issued during the threenine months ended March 31,September 30, 2019. Over the next twelve months, $10.0 million of FMBs with a coupon rate of 8.310% will mature in November 2019, $20.0 million of FMBs with a couponan interest rate rate of 7.630% will mature in December 2019 and $75.0 million of FMBs with a couponan interest rate of 5.370% will mature in February 2020.


See Part II, Item 7, "Financial Condition—Contractual Obligations" in the 2018 Form 10-K for long-term debt maturing over the next five years.


BANKRUPTCY RING-FENCING RESTRICTIONS. As part of the ring-fencing conditions agreed upon with the OPUC and WUTC in connection with the holding company reorganization, NW Natural is required to have one director who is independent from NW Natural management and from NW Holdings and to issue one share of NW Natural preferred stock to an independent third party. NW Natural was in compliance with both of these ring-fencing provisions as of March 31,September 30, 2019. 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, changes in working capital requirements, and other cash and non-cash adjustments to operating results.


Operating activity highlights include:
 Three Months Ended March 31,   Nine Months Ended September 30,  
In thousands 2019 2018 QTD Change 2019 2018 YTD Change
NW Holdings cash provided by operating activities $104,794
 $104,521
 $273
 $155,291
 $158,529
 $(3,238)
NW Natural cash provided by operating activities $104,703
 $104,571
 $132
 $154,464
 $157,935
 $(3,471)


THREENINE MONTHS ENDEDMARCH 31,SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. The significant factors contributing to the $0.3$3.2 million and $0.1$3.5 million increasedecrease in cash flows provided by operating activities at NW Holdings and NW Natural, respectively, were as follows:
an increase of $9.9 million due to an income tax refund of $0.1 million in the current period compared to payments of $9.8 million in the prior period;
an increase of approximately $8.2 million in cash receipts from higher volumes sold from comparatively colder than average weather in 2019;
an increase of $2.5 million from collections from customers to be returned through the next year's PGA as part of NW Natural's decoupling mechanism; and
an increase of $1.4 million from higher recoveries of noncash expenses for depreciation and amortization; partially offset by

55

Table of Contents




a decrease of $22.7$49.5 million in cash flow benefits from changes in deferred gas cost balances primarily due to higher gas costs than in the PGA in 2019 compared to lower gas costs than in the PGA in the prior year.year; partially offset by

an increase of $28.1 million due to income tax refunds received of $6.1 million in the current period compared to payments of $22.0 million in the prior period;
an increase of $8.2 million from collections from customers to be returned through the next year's PGA as part of NW Natural's decoupling mechanism;
an increase of approximately $7.3 million in cash receipts from collections of both current and deferred pension expenses as a result of NW Natural's Oregon rate case; and
an increase of $3.9 million from lower contributions to NW Natural's qualified defined benefit pension plan.

During the threenine months ended March 31,September 30, 2019, NW Natural contributed $1.5$7.8 million to the NGD segment's qualified defined benefit pension plan, compared to $1.7$11.7 million for the same period in 2018. 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 9.10.


NW Holdings and NW Natural have lease and purchase commitments relating to their operating activities that are financed with cash flows from operations. For additional information, see Part II, Item 7 "Financial Condition—Contractual Obligations" and Note 16 in the 2018 Form 10-K.




69

Table of Contents




Investing Activities
Investing activity highlights include:
 Three Months Ended March 31,   Nine Months Ended September 30,  
In thousands 2019 2018 QTD Change 2019 2018 YTD Change
NW Holdings cash used in investing activities $(51,056) $(57,488) $6,432
 $(225,290) $(161,075) $(64,215)
NW Holdings capital expenditures supporting continuing operations (48,764) (57,329) 8,565
 (152,993) (158,795) 5,802
NW Natural cash used in investing activities $(50,649) $(57,487) $6,838
 $(167,375) $(181,198) $13,823
NW Natural capital expenditures supporting continuing operations (48,658) (57,329) 8,671
 (151,915) (158,795) 6,880


THREENINE MONTHS ENDEDMARCH 31,SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. The $6.4 million decrease and $6.8 million decrease in cashCash used in investing activities increased $64.2 million at NW Holdings and decreased $13.8 million at NW Natural. The decrease at NW Natural respectively, was primarily due to lower expenditures related to NW Natural'sthe North Mist Expansion Projectexpansion project in 2019, partially offset by increases2019. The increase at NW Holdings was primarily due to $56.2 million in capital expenditures for system reinforcement and customer growth at NW Natural.acquisitions, net of cash acquired.


NW Holdings' largest subsidiary, NW Natural, expects to make a significant level of investments in its NGD segment in 2019 and through 2023. Over the five-year period from 2019 to 2023, the NGD segment is expected to invest $820 millionto $910 million million in capital expenditures to support system reliability, customer growth, and operate effective technology for the business. In 2019, NW Natural anticipates several significant projects for the NGD segment, including completing the replacement of end of life equipment at the Mist gas storage facility, and renovating several resource facilities across NW Natural's service territory. ProjectsRemaining projects in 2019 also include leasehold improvements and technology for the new headquarters in Portland, Oregon and the completion of the North Mist gas storage expansion project.other system reliability and improvement projects, mainly around Mist.


NW Holdings' wholly-owned water subsidiaries expect to invest in their facilities to support growth and upgrade their systems with $30 million to $40 million expected to be invested from 2019 to 2023. NW Holdings expects an immaterial amount of non-NGD capital investments for Gill Ranch and other activities in 2019 and through 2023.


Investments in our infrastructure during and after 2019 beyond the amounts provided below will depend largely on additional regulations, growth, and expansion opportunities.


For 2019, capital expenditures are estimated, on an accrual basis, to be as follows:
 One-Year Outlook
 2019
In millionsLowHigh
NGD  
Core capital expenditures$150
$165
Significant projects:  
Growth & reliability15
25
Facilities & technology42
57
North Mist expansion18
18
Total projects75
100
Total NGD225
265
   
Other5
5
   
Total$230
$270


56

Table of Contents





Required funds for the investments are expected to be internally generated and/or financed with long-term debt or equity, as appropriate.


70

Table of Contents





Financing Activities
Financing activity highlights include:
 Three Months Ended March 31,   Nine Months Ended September 30,  
In thousands 2019 2018 QTD Change 2019 2018 YTD Change
NW Holdings cash used in financing activities $(53,554) $(39,290) $(14,264)
NW Holdings cash provided by financing activities $67,888
 $29,039
 $38,849
NW Holdings proceeds from common stock issued 93,182
 —
 93,182
NW Holdings change in short-term debt (41,229) (4,200) (37,029) (152,040) 46,300
 (198,340)
NW Holdings change in long-term debt —
 (22,000) 22,000
 165,000
 28,000
 137,000
NW Natural cash used in financing activities $(55,168) $(39,290) $(15,878)
NW Natural cash provided by financing activities $11,238
 $29,039
 $(17,801)
NW Natural capital contribution from parent 93,182
 —
 93,182
NW Natural change in short-term debt (41,200) (4,200) (37,000) (172,000) 46,300
 (218,300)
NW Natural change in long-term debt —
 (22,000) 22,000
 130,000
 28,000
 102,000


THREENINE MONTHS ENDEDMARCH 31,SEPTEMBER 30, 2019 COMPARED TO MARCH 31,SEPTEMBER 30, 2018. The $14.3Cash provided by financing activities increased $38.8 million increase and $15.9decreased $17.8 million increase in cash used in financing activities at NW Holdings and NW Natural, respectively,respectively.

The decrease in cash provided by financing activities at NW Natural was primarily due todriven by $218.3 million in higher repayments of $37.0 million of short-term debt compared to the prior period, partially offset by lower repaymentsnet issuances of $22.0$130.0 million of long-termin long term debt compared to net issuances of $28.0 million in the prior period.period and a capital contribution from NW Holdings to NW Natural of $93.2 million.


The increase at NW Holdings was primarily due the issuance of $35.0 million of debt at NW Natural Water, proceeds of $93.2 million from the June 2019 issuance of NW Holdings common stock, and the long-term debt activity at NW Natural described above. These increases were partially offset by higher repayments of short-term debt of $198.3 million, which primarily consists of higher repayments of $218.3 million of short-term debt at NW Natural, partially offset by increases in short-term debt at the holding company.

Contingent Liabilities
Loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of the loss is reasonably estimable in accordance with accounting standards for contingencies. See “Application of Critical Accounting Policies and Estimates” in the 2018 Form 10-K. At March 31,September 30, 2019, NW Natural's total estimated liability related to environmental sites is $124.5$119.1 million. See "Results of Operations—Regulatory Matters—Rate Mechanisms—Environmental Costs" in the 2018 Form 10-K and Note 16.17.


5771


Table of Contents








APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing financial statements in accordance with U.S. GAAP, management exercises judgment in the selection and application of accounting principles, including making estimates and assumptions that affect reported amounts of assets, liabilities, revenues, expenses, and related disclosures in the financial statements. Management considers critical accounting policies to be those which are most important to the representation of financial condition and results of operations and which require management’s most difficult and subjective or complex judgments, including accounting estimates that could result in materially different amounts if reported under different conditions or if they used different assumptions. Our most critical estimates and judgments for both NW Holdings and NW Natural include accounting for:


regulatory accounting;
revenue recognition;
derivative instruments and hedging activities;
pensions and postretirement benefits;
income taxes;
environmental contingencies; and
impairment of long-lived assets and goodwill.


There have been no material changes to the information provided in the 2018 Form 10-K with respect to the application of critical accounting policies and estimates. See Part II, Item 7, "Application of Critical Accounting Policies and Estimates," in the 2018 Form 10-K.


Management has discussed its current estimates and judgments used in the application of critical accounting policies with the Audit Committees of the Boards of NW Holdings and NW Natural. Within the context of critical accounting policies and estimates, management is not aware of any reasonably likely events or circumstances that would result in materially different amounts being reported. For a description of recent accounting pronouncements that could have an impact on financial condition, results of operations or cash flows, see Note 2.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
NW Holdings and NW Natural are exposed to various forms of market risk including commodity supply risk, commodity price risk, interest rate risk, foreign currency risk, credit risk and weather risk. The followingThis section describes NW Holdings' and NW Natural's exposure to these risks, as applicable. Management monitors and manages these financial exposures as an integral part of NW Holdings' and NW Natural's overall risk management program. No material changes have occurred related to disclosures about market risk for the threenine months ended March 31,September 30, 2019. 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 2018 Form 10-K.
  
ITEM 4. CONTROLS AND PROCEDURES
 
(a) Evaluation of Disclosure Controls and Procedures
 
NW Holdings and NW Natural management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, completed an evaluation of the effectiveness of the design and operation of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer of each registrant have concluded that, as of the end of the period covered by this report, disclosure controls and procedures were effective to ensure that information required to be disclosed by each such registrant and included in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission (SEC) rules and forms and that such information is accumulated and communicated to management of each registrant, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
(b) Changes in Internal Control Over Financial Reporting
 
NW Holdings and NW Natural management are responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rule 13a-15(f).
 
There have been no changes in NW Natural's or NW Holdings' internal control over financial reporting that occurred during the quarter ended March 31,September 30, 2019 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting for NW Holdings and NW Natural. The statements contained in Exhibit 31a.,31.1, Exhibit 31b.,31.2, Exhibit 31c.31.3, and Exhibit 31d.31.4 should be considered in light of, and read together with, the information set forth in this Item 4(b). 






5872


Table of Contents








PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS


Other than the proceedings disclosed in Note 1617 and those proceedings disclosed and incorporated by reference in Part I, Item 3, “Legal Proceedings” in the 2018 Form 10-K, we have only routine nonmaterial litigation that occurs in the ordinary course of our business.


ITEM 1A. RISK FACTORS
 
There were no material changes from the risk factors discussed in Part I, Item 1A, "Risk Factors” in the 2018 Form 10-K. In addition to the other information set forth in this report, you should carefully consider those risk factors, which could materially affect our business, financial condition, or results of operations.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
The following table provides information about purchases of NW Holdings' equity securities that are registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, during the quarter ended March 31,September 30, 2019:
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)
 
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
     2,124,528
 $16,732,648
01/01/19-01/31/19 —
 $—
 —
 —
02/01/19-02/2/19 —
 —
 —
 —
03/01/19-03/31/19 8,469
 64.86
 —
 —
07/01/19-07/31/19 —
 $—
 —
 —
08/01/19-08/31/19 591
 70.60
 —
 —
09/01/19-09/30/19 —
 —
 —
 —
Total 8,469
 —
 2,124,528
 $16,732,648
 591
 70.60
 2,124,528
 $16,732,648
(1) 
During the quarter ended March 31,September 30, 2019, 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, 8,469591 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 March 31,September 30, 2019, no shares of NW Holdings common stock were accepted as payment for stock option exercises pursuant to the NW Natural Restated Stock Option Plan.
(2) 
During the quarter ended March 31,September 30, 2019, no shares of NW Holdings common stock were repurchased pursuant to the Board-Approved share repurchase program. In October 2018,May 2019, we received NW Holdings Board Approval to extend the repurchase program through May 2019.2022. For more information on this program, refer to Note 5 in the 2018 Form 10-K.10-K, and the Form 8-K filed by NW Holdings and NW Natural on May 30, 2019.


ITEM 6. EXHIBITS


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




5973


Table of Contents








NORTHWEST NATURAL GAS COMPANY
NORTHWEST NATURAL HOLDING COMPANY
Exhibit Index to Quarterly Report on Form 10-Q
For the Quarter Ended March 31,September 30, 2019
 
Exhibit Index
Exhibit Number
Document
31.1
Certification of Principal Executive Officer of Northwest Natural Gas Company Pursuant to Rule 13a-14(a)/15-d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002.
  
31.2
Certification of Principal Financial Officer of Northwest Natural Gas Company Pursuant to Rule 13a-14(a)/15-d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002.
  
31.3
Certification of Principal Executive Officer of Northwest Natural Holding Company Pursuant to Rule 13a-14(a)/15-d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002.
  
31.4
Certification of Principal Financial Officer of Northwest Natural Holding Company Pursuant to Rule 13a-14(a)/15-d-14(a), Section 302 of the Sarbanes-Oxley Act of 2002.
  
32.1
Certification of Principal Executive Officer and Principal Financial Officer of Northwest Natural Gas Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
32.2
Certification of Principal Executive Officer and Principal Financial Officer of Northwest Natural Holding Company Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  
101.
The following materials formatted in Inline Extensible Business Reporting Language (XBRL)(Inline XBRL):
(i) Consolidated Statements of Income;
(ii) Consolidated Balance Sheets;
(iii) Consolidated Statements of Cash Flows; and
(iv) Related notes.
The instance document does not appear in the interactive data file because XBRL tags are embedded within the Inline XBRL document.
104.The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL.




6074


Table of Contents








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)
Dated:May 7,November 5, 2019  
   /s/ Brody J. Wilson
   Brody J. Wilson
   
Principal Accounting Officer
Vice President, Treasurer, Chief Accounting Officer and Controller


NORTHWEST NATURAL HOLDING COMPANY
(Registrant)
Dated:May 7,November 5, 2019  
   /s/ Brody J. Wilson
   Brody J. Wilson
   
Principal Accounting Officer
Vice President, Treasurer, Chief Accounting Officer and Controller




6175